Purchase Management Meaning, Definition, Objectives, Types, Functions

Table of Contents:-

    • What is Purchase Management
    • Meaning of Purchasing
    • Definition of Purchasing
    • Objectives of Purchase Management
    • Types of Purchase Management System
    • Purchasing Functions

What is Purchase Management

Purchase management refers to the efficient, effective and economical purchasing of materials to be utilized by the organization for its manufacturing activities.

Purchase management directs the flow of services and goods in a company and handles all data related to contact with suppliers. Effective purchasing management requires knowledge of the supply chain, business and tax laws, invoice and inventory procedures, as well as transportation and logistics issues.

Therefore, it becomes clear from the above definitions that purchasing means decision making about the procurement of the right kind of materials and supplies of the right quantities at the right price and right time. In large business concerns, procurement involves dealing with thousands of suppliers. That is why it is evident that effective purchase management is of vital importance for the business enterprise.

Meaning of Purchasing

Purchasing is the first phase of Materials Management. It refers to the procurement of goods and services from external agencies. Purchasing is one of the most common at the same time a strategic activity of the business. The success of any business activity is contingent upon having materials and parts, stores and supplies, machines and equipment available in proper quantity, with proper quality, at the proper place and time and at the proper price, popularly referred to as the five R’s of efficient procurement.

Definition of Purchasing

According to Alford and Beatty, “Purchasing is the procuring of materials, supplies, machines, tools and services required for equipment, maintenance, and operation of a manufacturing plant”

According to Walters, Purchasing function means “the procurement by purchase of the proper materials, machinery, equipment and supplies for stores used in the manufacture of a product adopted to marketing in the proper quality and quantity at the proper time and at the lowest price, consistent with quality desired”.

Objectives of Purchase Management

The objectives of the purchase management department can be outlined as under:

1) Develop Alternate Sources of Supply

Exploration of alternate sources of supply of materials increases the bargaining ability of the buyer, minimization of cost of materials and increases the ability to meet emergencies.

2) To Avail Materials, Supplies and Equipment at the Minimum Possible Costs

These are the Inputs in the manufacturing operations. The minimization of the input cost increases productivity resulting in the profitability of the operations

3) Ensure Continuous Flow of Production

The purchasing department helps ensure the uninterrupted production flow through a continuous supply of raw materials, components, supplies, tools, etc. and gone equipment with their maintenance services

4) Increase Asset Turnovers

The efforts of the purchase department result in the formation of fixed assets and maintenance of a certain level of investments in inventories. The investments in fixed assets and the inventories should be kept at a minimum about the corresponding volume of sales. This will increase the turnover of the assets, and thus, the profitability of the company will be enhanced

5) Train and Develop the Personnel

The purchasing department is manned with varied types of personnel. The company should try to build an imaginative employee force through  training and development.

6) Achieve Maximum Integration

With Other Departments of the Company. The purchase function is related to the following other departments of the company

i) Production Department: Regarding the material specifications, flow of material specifications, flow of materials, suggested supplies for certain items etc.

ii) Engineering Department: To purchase tools, machines and equipment.

iii) Marketing Department: Regarding the forecast sales and its impact on procurement of materials impact of quality of inputs on quality of outputs and sales.

iv) Finance Department: To maintain levels of materials, pledge and hypothecating the materials for meeting working capital needs, tapping the quantity discount, and scheduling the investments in capital assets such as materials and equipment.

v) Personnel Department: To manage and develop the personnel of the purchasing department, maintain the vendor relationships, etc.

7) Establish and Maintain Good Relations with Suppliers

Maintaining good relations with the supplier helps evolve a favourable image in the business circles. Such relations are always beneficial to the buyer by charging a reasonable price, preferential allocation of materials in case of material shortages, intimation about forthcoming needs, information about the newly designed substitute, prolonged payments in case of a temporary liquidity crisis, etc.

Types of Purchase Management System

The issue of centralization versus decentralization of purchase function is concerned with decisions about the purchasing policies defining the purchasing authorities and the resultant responsibilities.

This issue is highlighted in situations such as a single plant with diversified production, geographically scattered multi-plant with diversified production, geographically scattered multi-plant with single product, scattered multi-plant with diversified products, ubiquitous availability of basic raw materials, etc.

Centralized Purchase Management

In centralized purchasing, there is a central purchasing department. All other departments forward their requirement to the central purchasing department which purchases the materials, equipment etc., required for all departments.

Advantages of Centralisation

The advantages of centralisation are as follows:

1) Concentrated Volume

An obvious benefit is the concentration of purchase volume to enables quantity discounts, cost-effective volume shipments, and other advantageous purchase terms. This is usually referred to as leveraging purchase volume. A centralised system also provides the buying firm more clout and bargaining power. Suppliers are generally more willing to negotiate, give better terms, and share technology due to the higher volume.

2) Avoid Duplication

Centralised purchasing eliminates the duplication of job functions. A corporate buyer can research and issue a large purchase order to cover the same material requested by all units, thus eliminating the repetition of actions. This also results in fewer buyers, reducing labour costs

3) Specialisation

Centralisation allows buyers to specialise in a particular group of items instead of being responsible for all purchased materials and services. It allows buyers to spend more time and resources to research materials for which they are responsible, thus becoming specialised buyers

4) Lower Transportation Costs

Centralisation allows larger shipments to be made to take advantage of truckload shipments, and yet smaller shipments still can be arranged for delivery directly from suppliers to the points of use,

5) No Competition within Units

Under the decentralised system, when different units purchase the same material, a situation may be created in which units compete among themselves, especially when scarce materials are purchased from the same supplier. Centralisation minimises this problem.

6) Common Supply Base

A standard supply base is used, thus making it easier to manage and arrange contracts.

Decentralized Purchase Management

In large firms, there are many branches, sections or departments. If each branch or department buys its materials and equipment, it is known as decentralized purchasing. Decentralized purchasing is applicable where:

1) Different plants of a large organization require quite different types of materials.

2) Branch plants require heavy and bulky items such as oil products, fuels, paints, etc.

3) Purchases are to be made within the local community to promote better public relations.

Advantages of Decentralisation

The advantages of decentralisation are as follows:

1) Closer Knowledge of Requirements: A buyer at the individual unit is more likely to know its exact needs better than a central buyer at the home office.

2) Local Sourcing: If the company aims to support local businesses, it is more likely that a local buyer will have better knowledge of local suppliers. The proximity of local suppliers allows materials to be shipped more frequently in small lot sizes and is conducive to creating closer supplier relationships.

3) Less Bureaucracy: Decentralisation allows quicker response, due to less bureaucracy and closer contact between the user and the buyer. Communication and coordination with operations and other divisions are more efficient.

Purchasing Functions

The functions of purchasing are as follows:

1) Policy Compliance

The purchasing department must also ensure that it complies with all company policies. For example, in a small business, individual staff members may communicate with the purchasing department regarding purchasing needs, such as computers or office supplies. Before making a purchase, the purchasing department must ensure that it follows the proper protocols for purchase and budget approval and must ensure that any items are purchased according to the overall purchasing policy of the organisation.

2) Paperwork and Accounting

Purchasing departments handle all the paperwork involved in buying and the delivery of supplies and materials. Purchasing ensures the timely delivery of materials from retailers, generates and tracks purchase orders, and collaborates with the receiving department and the accounts payable department to ensure that promised deliveries are received in complete and are being paid for on time. In a small business, this means working closely with the accounting department to ensure sufficient capital to buy the items purchased and that cash flows smoothly, with all payments made on time.

3) Procuring Materials

One significant role of the purchasing department is to procure all necessary materials for production. For a manufacturing company, this might include raw materials such as iron, steel, aluminium or plastics, but it also might include tools, machinery, etc. In a retail environment, the purchasing department always ensures an ample supply of products is available on the shelves or warehouses. This keeps customers satisfied and ensures that the store always remains well-stocked. With a small business, it is essential to keep inventory placement at a reasonable level; investing large amounts of money in excess stock could result in storage problems and therefore, a shortage of money for other expenditures, such as advertising or research and development. Purchasing also oversees all the vendors that supply a company with the necessary items to function correctly.

4) Evaluating Price

A purchasing department is also tasked with continuously evaluating whether it receives these materials at the best possible price to maximize profitability. This can be challenging for a small business that may purchase in smaller quantities than a more prominent vendor and receive different bulk discounts. A small business’s purchasing department must conduct thorough market research to find the best vendors at the most reasonable expenses for the company’s particular size orders. The purchasing department staff is responsible for various tasks to optimise procurement processes. These tasks include communicating with alternative vendors, negotiating more favourable pricing for bulk orders, and exploring the potential of acquiring cheaper materials from alternative sources.

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