Purchasing
Purchasing
The Purchasing function plays a crucial role in ensuring that a business has the necessary resources to operate effectively and meet customer needs. This function extends beyond just acquiring products for sale; it encompasses the procurement of all goods and services required for the organization's operations.
Sourcing Products and Raw Materials: Ensure the business can meet customer needs through its sales and production operations.
Procuring Operational Supplies: Source goods and services for the entire organization (e.g., office supplies, equipment).
Managing the Purchasing Mix: Balance four critical factors that impact business performance and success.
The actions of the purchasing function significantly influence the business's performance and success, primarily based on four factors known as the "Purchasing Mix":
If the purchasing function fail to negotiate a cost effective price, this will mean the business’ profit margins will be negatively impacted and they may need to charge customers more or make less profit per sale to remain competitive. However, it’s important they don’t just purchase the lowest price offered in the market, taking into account additional factors such as the reliability of the supplier etc.
Key elements for any business to consider when examining the Price element of the Purchasing mix include the need to:
Negotiate cost-effective prices to maintain profit margins.
Balance between finding the lowest price and considering other factors like supplier reliability.
Impact: Failure to negotiate effectively can lead to:
Negatively impacted profit margins
Need to charge customers more
Reduced profit per sale to remain competitive
The quantity of goods purchased is a very important factor, although buying in bulk usually leads to lower prices and supports availability for the business’ customers, the purchasing function must ensure the business has enough storage space and enough demand to utilise the items purchased.
Key elements for any business to consider when examining the Quality element of the Purchasing mix include the need to:
Determine appropriate purchase quantities.
Balance between bulk buying (for lower prices and better availability) and storage capacity.
Consider:
Storage space availability
Demand forecasts
Utilization of purchased items
If the purchasing function purchase raw materials or products which don’t meet quality standards this can cause a variety of issues such as high wastage in production or increased returns due to products breaking which leads to a poor reputation and mistrust in the brand.
Key elements for any business to consider when examining the Quality element of the Purchasing mix include the need to:
Ensure purchased materials and products meet quality standards.
Impact of poor quality purchases:
High wastage in production
Increased returns due to product failures
Poor reputation and mistrust in the brand
The reliability of the supplier and the lead time on the delivery of goods from them is essential to ensure the business maintains efficient production processes and good availability for its customers
Manage supplier reliability and lead times.
Ensure timely delivery to maintain:
Efficient production processes
Good product availability for customers
An effective purchasing function is critical for:
Maintaining competitive pricing
Ensuring product quality
Managing inventory efficiently
Supporting smooth operations across the organization
Contributing to customer satisfaction through product availability and quality
In conclusion, the purchasing function is a vital component of any successful business strategy. It directly impacts the company's bottom line, product quality, and operational efficiency. By effectively managing the Purchasing Mix, this function helps maintain the business's competitiveness and ensures it can meet customer needs consistently and efficiently.