The purchasing department in any organization acts as an interface between suppliers of materials and the production function. Since materials comprise one of the largest sources of cash outlay in any manufacturing firm, their acquisition requires careful management. The responsibilities of a purchasing department include learning the material needs of the organization, selecting suppliers and negotiating price, ensuring delivery, and monitoring cost, quality, and delivery performance.
Occasionally the term procurement is used to describe the acquisition of goods and services. This is a broader term and includes purchasing, stores, traffic, receiving, and inspection. The principal goals of purchasing are related to quality, service, price, and vendor relations. In addition to the obvious necessity of quality purchased parts, the purchasing department must consider vendor reliability, maintenance and return policies, and other aspects of customer service. Moreover, they must continually seek new vendors and products and be able to evaluate their potential to the company. Also, purchasing seeks the best price that is consistent with company quality standards, in order to lower inventory investment and product cost.
Good relations with vendors are another goal of purchasing, so that such matters as expediting shipments can be easily accomplished when necessary. Within the organization, purchasing must maintain good relations and communication with other departments, such as accounting and finance, where budgets are prepared; engineering, where material specifications are set; production, where timely delivery is essential; and legal, where contracts must be reviewed. To accomplish these goals, purchasing activities are varied.
The principal procedures in a purchasing department can be listed as follows:
- Receive purchase requisitions – It is at this time that purchasing receives the authority to buy required materials. Purchase requisitions are documents generated by production or inventory control that authorize material purchases. Sufficient lead time must be given so that purchasing can seek out alternative vendors or materials, arrange delivery schedules, and so on.
- Review and evaluate requisitions – It is often the case that specific materials or items requested by engineering or production can be substituted with less costly items or perhaps eliminated altogether. Value analysis considers these alternatives by studying the functions of requisitioned material in relation to cost. Value-analysis studies often consider job design and work simplification, as well as the use of alternative materials or components, as means of reducing cost. In addition, such studies may evaluate product appearance and specifications relative to sales appeal. Good communication between salespeople and purchasing agents is necessary to stay abreast of new products and materials.
- Aggregate and place orders – Purchasing must select suppliers based on price, quality, delivery performance, and reliability. Sales contacts, buyers’ conventions, and trade magazines are the most important sources of information. Consideration must be given to quantity discounts and other price breaks. This requires effective communication with inventory control. Aggregating many orders for one supplier can substantially reduce transportation and handling costs. This is an important function of purchasing.
- Follow-up and expediting – It is important that goods are delivered on schedule for production. Entire production lines have been shut down because of delays in securing a part worth only pennies. Purchasing must monitor deliveries and production schedules and expedite deliveries and schedules when necessary.
- Payment authorization – Purchasing must work closely with receiving and accounting to ensure that all ordered goods are delivered before payment is authorized.
- Record-keeping – With thousands of products and materials, hundreds of suppliers, requisitions in various stages of review, order processing, and so on, an accurate information system is essential.
In most organizations, there are three classes o purchased items. The first class of items is those of large capital expense that are either purchased on a one-time basis or very infrequently – for example, machine tools, computing equipment, or transportation vehicles. The second class consists of those items purchased in small quantities, infrequently purchased items, and low-cost items, such as typewriter ribbons and other office supplies and small tools. High-volume-use items such as sheet metal or bulk raw materials constitute the third class. Purchasing procedures often vary, depending on the type of item purchased. For instance, large capital expenditures often require competitive bids based on detailed technical specifications and legal contracts, whereas small items can be ordered by departmental secretaries through catalogs or purchased outright without any formal procedure. In the latter case, payments are usually made from petty-cash funds or small-supplies budgets, thus eliminating unnecessary paper-work and time. High-volume purchases, however, are often handled by blanket contracts. With this type of arrangement, a large quantity is contracted for over a long period of time. In such systems, delivery dates are not specified. Instead, as material is needed, release orders are sent out for delivery, perhaps on a monthly or weekly basis. The buyer can take advantage of quantity discounts and be assured of supply in this way. Often it is good practice to have more than one supplier to protect against strikes, natural disasters, and so on.