2.2.2 Purchasing

Lesson Progress

2.2.2 Purchasing

As seen in the standard procurement process shown above, purchasing is indeed a subset of procurement. While procurement is concerned with making all the necessary preparations that precede the acquisition of a resource, purchasing is all about actually executing those plans and acquiring the necessary goods or services. In other words, it is all about negotiating the deal and making the purchase.

Purchasing is the business function responsible for buying raw materials, parts, machinery, supplies, and all other goods and services that are used in the production system – from paper clips to steel bars and industrial robots to computers. Likewise, the purchasing department is responsible for all machinery, raw materials, supplies and services used by an organisation. Without the appropriate strategy, purchasing can become overwhelming, so it is vital to develop a successful purchasing strategy. 

The first step in developing a purchasing strategy is to link it to the organisational objectives. To accomplish this, strategy development must be a formal process. It is suggested that a formal steering committee identify specific steps, such as market analysis, milestones and deliverables. The result will be a strategy with well-defined goals which can then be further developed and implemented with appropriate procedures and processes. 

This strategy of establishing purchasing against organisational goals involves making sure that every staff member in your organisation is familiar with the way things need to operate and that they understand how this strategy will bring about benefits for them. By demonstrating how purchasing strategies are aligned with overall organisational strategies, employees are in a better position to understand why you are doing what you are doing and you are more likely to receive support for the strategies. For instance, let’s say you decide to use a single supplier for all of your office supplies. You can demonstrate how this will reduce shipping costs and result in more significant discounts being offered. As you develop purchasing strategies, you need to carefully consider how they will contribute to organisational objectives. 

This synergy between organisational and purchasing strategy can be quite difficult to achieve. This may be because different functions within an organisation operate with quite different goals but finding a common thread (such as cost reduction) can be the key to this integration. Think, for example, of where your service delivery is aiming to provide higher levels of customer satisfaction. If you can demonstrate that ‘just in time’ purchasing strategies will lead to quicker delivery times, you can link purchasing methods and strategies to your customer service goals and objectives. 

Attempt to build a set of purchasing priorities within the organisation. Look for areas where purchasing strategies can lead to efficiencies in other parts of the organisation. The better you can show the organisation working as a whole rather than as disparate functions, the more you will be able to build commitment towards the specific strategies. 

Working across functions within an organisation (especially for purchasing, which does tend to cross several different functions within any organisation) is very important when determining strategies which can assist multiple functions. Think again about your preferred supplier example; how can this help achieve organisational objectives? By ensuring the supplier that they are your sole supplier, they are more likely to offer a benefit such as premium support.

The major difficulty with such a program of the strategy lies when you are looking at functions where there are not significant links into other functions. Here, you may find it quite challenging to find the strategic advantages associated with cross-functional strategies. 

Linking to Supply Chain Objectives

Once you have found these critical links between overall strategies and the strategies associated with specific purchasing programs, you need to take things one step further and develop these strategies in ways that support the entire supply chain within the organisation. 

Think about how the decisions you make will impact future decision-making. Does your technology purchasing help your office become the office of the future – by having alliances with organisations that will enable you to build systems that are effective in the future? Building these alliances with specific suppliers can be particularly useful in that they allow an organisation to offer you their insights and new offerings, and you can communicate your needs to particular employees within the organisation. Large companies may have the ability to drive product developments in their supplier if there is a strong enough pull from them in terms of their needs.

Success Factors

Like any strategy or plan, purchasing needs to address those factors that it considers critical enough to be seen as being KPIs. How do you know your purchasing strategy is working, and how can you be sure that your purchasing is meeting its cross-functional goals? Look to build solid relationships with suppliers and even the supplier’s suppliers to build this strong relationship and allow you to determine when success is being achieved. 

Success in terms of purchasing is more than just the price you are paying – it is the total cost of your purchasing, including costs associated with freight, wait and lead times, loss of sales, and many other factors. Look at how you will measure success – is it just the cost or will you need to look at the long-term goals before you can show your strategies as being successful? Will you need to look beyond the initial investment in your major purchasing to a point in the future where the plan is completely paid back before success can be properly determined? 

As previously mentioned, purchasing strategies are cross-functional in nature. They involve more than just the purchasing staff; working with other departments is critical. Some of the more common systems and departments that interact with purchasing include: 

  • Human Resources 

The human resources department will provide you with the right people to run your purchasing department. They can assist you in finding people with the right skills, experience and knowledge to drive your purchasing strategies and achieve the desired results. 

  • Information Systems 

Purchasing systems often rely heavily on information technology to be successful – particularly where some systems need to be used by a wide range of users. Bringing your IT department on board to support any such system is critical to success. 

  • Organisational Structure

The structure within your organisation must operate in such a way as to facilitate the acquisition of staff and provide for the flow of information between departments. 

  • Measurement Systems

Success factors need to be carefully considered so that the impact of your purchasing strategy can be monitored.

How Far Will It Go?

Your operational plan will rely on purchasing methods in some form or another. The higher the reliance on resources within a plan, the more critical the success of purchasing strategies will be. Physical resources and purchasing become most vital when you are looking at a manufacturing organisation, where ensuring supplies are available in the right place at the right time can mean the difference between an order being made and an order being lost. 

Purchasing is a process; it needs to have a specific series of steps which must be made for things to happen correctly. You might look at evaluating this process to ensure it runs smoothly within the organisation, or you might try to shift the processes that are currently in place to ensure they meet your overall strategy goals more efficiently. You may need your purchasing staff to work alongside others within the organisation to better understand their specific processes before purchasing processes can be written. Understanding how manufacturing is completed can drive the methods used to purchase inventory, for example. 

Every industry is also different. Lead times vary greatly depending on the type of product or supply you are sourcing and having an understanding of how these are brought to market can be very important in writing supply strategies. Technology is also constantly changing, so understanding the impact specific technologies may have in the process is also important. Think about the difference between purchasing a new computer network and a new desk as an example. One manufacturer is constantly changing their product so staying up to date is extremely important. The other will not change quickly at all.

Types of Purchasing Decisions

Now that you have learned how to develop strategies for purchasing, take a look at the four major types of purchases that you are likely to make. 

1. Small Purchases 

This includes any purchase that is made within a department rather than by a purchasing officer. You will generally pay for these types of purchases using petty cash, and the purchases will generally be for amounts less than about $100 (or whatever your petty cash allowance is). It will be up to the individual manager to decide on a supplier, place the order and manage the process

2. Regular Purchases 

In regular purchases, the buyer in the purchasing department buys goods and services on behalf of the requesting department. Although the procedures for these various classes of purchases generally cover getting the products and services to the requesting departments, the accounting department can pay for the items only after it has been notified by the requesting department how much of the supplied items are of the requested quality.

3. Large Unique Purchase Methods 

One of the key functions of the purchasing department or purchasing officer is building an interface between the technical specialists in the department or workgroup needing a resource and the suppliers who could potentially supply it. In these types of purchases, price is often not the deciding factor in the selection of an appropriate supplier. Instead, you will look at the ability to deliver quality goods and services on a timely basis and to meet the unique technological and business needs of your organisation or specific operational plan. 

4. High Volume Continuous Supply Methods 

When materials are purchased in high volume to be continuously supplied throughout the month or year, purchasing officers tend to issue requests for quotations to several potential suppliers. When a supplier is selected (based on price, quality and ability to supply at desired levels) a blanket purchase order that covers the materials to be purchased for the entire year is issued. The authorisation for this level of purchase should come directly from the need for the materials in the production budget. These are often prepared months in advance and cover long periods.