What is Purchasing?
Purchasing is the organized acquisition of goods and services on behalf of a buyer. Purchasing activities are necessary to ensure that needed goods are obtained on time and at a reasonable cost. A purchasing department is essential in the manufacturing industry, where large quantities of raw materials and components must be procured on a recurring basis. The primary objectives of the purchasing department are as follows:
To identify suppliers capable of providing goods and services that meet the buyer’s needs. To purchase goods that meet the buyer’s quality specifications. To establish a supply flow to the buyer’s location that minimizes investment in raw material inventory while ensuring goods are available as needed. To minimize the amount of cash tied up in inventory.
Purchasing Activities
Common purchasing activities include the following:
- Receiving and verifying purchase requests from across the company.
- Identifying qualified suppliers capable of meeting the buyer’s needs.
- Preparing and issuing request for proposal (RFP) documents to qualified suppliers.
- Evaluating suppliers’ responses to the RFP, selecting the winning bidder, and negotiating the contract.
- Issue purchase orders to suppliers to authorize the purchase. Master purchase orders can be issued when multiple shipments are planned based on Purchasing settings.
- Manage contracts with longer durations.
- Review open purchases to see if any need to be closed.
Purchasing Functions
There is a tendency for the purchasing function to become bogged down in administrative tasks related to the excessive use of bidding procedures and the issuance of purchase orders. This function can be streamlined by replacing competitive bidding with single-source arrangements for most purchases.
In addition, lower-cost purchases are now made using procurement cards, thereby avoiding the use of purchase orders. This level of streamlining allows the Purchasing department to focus its attention solely on the most expensive and complex expenditures.
Purchasing Systems
The Purchasing Department can operate a standalone purchasing software package, although this system is more effective when integrated into accounts receivable and accounts payable software. An enterprise resource planning system will include a Purchasing module.