Meaning & Definition

Purchasing is the first phase of Materials management. Purchasing means procurement of goods and services from some external agencies. The objective of purchasing department is to arrange the supply of materials, spare parts and services or semi finished goods, required by the organization to produce the desired product, from some agency or source outside the organization. The purchase items should be of specified quality in desired quantity available at the prescribed time at a competitive price. In the words of 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 mean’s “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 time and at the lowest price, consistent with quality desired”.

Thus purchasing is an operation of market exploration to procure goods and services of desired quality, quantity at lowest price and at the desired time. Suppliers who can provide standard items at the competitive price are selected.

Purchasing is an enterprise has now become a specialized function. It was experienced that by giving the purchase responsibility to a specialist, the firm can obtain greater economies in purchasing. Moreover purchasing involves more than 50% of capital expenditure budget by the firm.

According to Westing, Fine and Zenz, “Purchasing is a managerial activity that goes beyond the simple act of buying. It includes research and development for the proper selection of materials and sources, follow up to ensure timely delivery; inspection to ensure both quantity and quality; to control traffic, receiving, storekeeping and accounting operations related to purchases.” The modern thinking is that purchasing is a strategic managerial function and any negligence will ultimately result into decrease in profits.

Objectives Of Purchasing

The objectives of purchasing should confirm with the overall objectives of the organization. It is one activity where reasonable economies can be accomplished. The following are the main objectives of purchasing.

1. To avail the materials, supplies, and equipment at the minimum possible cost

These are the basic inputs in the manufacturing operations. The minimization of the input cost increases the productivity and resultantly the profitability of the operations.

2. To ensure the continuous flow of production

Purchasing department helps in ensuring the uninterrupted production flow through continuous supply of raw materials, components, supplies, tools etc. and good equipment with repair and maintenance service.

3. To increase the asset turnover

The effort of purchase department result in formulation of fixed assets and maintenance of a certain level of investments in inventories. The investments in fixed assets and also in the inventories should be kept at minimum in relation to the corresponding volume of sales. This will increase the turnover of the assets and thus the profitability of the company will get enhanced.

4. To develop the 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 the emergencies.

5. To establish and maintain the good relations with the suppliers

Maintenance of good relations with the supplier helps in evolving a favorable image in the business circles. Such relations are always beneficial to the buyer in terms of charging of reasonable pricing, preferential allocation of materials in case of material shortages, intimation about forthcoming shortages, information about the newly adopted substitute, prolonged payments in case of temperory liquidity crisis, etc.

6. To achieve maximum integration with other departments of the company

The purchase function is related with the following other department of the company.

• Production department regarding the material specifications, flow of materials, suggested supplies for certain items etc.

• Engineering department for the purchase of tools, machines and equipments

• Marketing department regarding the forecast sales and its impact on procurement of materials, impact of quality of inputs on quality of outputs and sales

• Finance department for the purpose of maintaining levels of materials, pledging and hypothecating the materials for meeting working capital needs, tapping the quantity discount, scheduling the investments in the capital assets such as materials and equipment.

• Personnel department for the purpose of manning and developing the personnel of purchase department, maintaining the vendor relationship, etc

7. To train and develop the personnel

Purchasing department is manned with varied types of personnel. The company should try to build the imaginative employees force through training and development. This will ensure management succession and a contended workforce who are provided with an opportunity to fulfil their aspirations through getting promotions on higher positions.

8. Efficient record keeping and management reporting:

Paper processing is inherent in the purchase function. Such paper processing should be standardized so that the record keeping is facilitated.

The periodic reporting to the management about the purchase activities is also one of the important activities which justifies the independent existence of purchase department. The management is interested in knowing the following aspects of the purchase functions which provides them the valuable data for shaping certain important policies.

• To know the volume and value of the purchase broken into raw materials, supplies, spares, components, machines and equipment etc.

• To know the departmental cost of the purchasing department according to the important heads of expenditure

• Analysis of the work performed in the purchase department

• Information about the cash discount and quantity discount earned and lost

• The trend about the price changes in the foreseeable future and its impact on the cost of inventories

• The predictions about the availability of materials and the development of the strategy against such predictions

• The information about the new materials and processes which may reduce the manufacturing cost

• Exploration of new sources of supply

References

• Production management, S A Chunawala,