Purchasing

Purchasing is the process a business or organization uses to acquire goods or services to accomplish its goals. Although there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations.

Purchasing is part of the wider procurement process, which typically also includes expediting, supplier quality, transportation, and logistics.

Purchasing managers/directors, procurement managers/directors, or staff based in an organization's purchasing office, guide the organization's acquisition procedures and standards and operational purchasing activities.

Strategic purchasing

In contrast to procurement and strategic sourcing, purchasing is often treated as an operational activity with no strategic role. Some authors have worked to counter this perspective, for example David Farmer's work, published in several articles between 1976 and 1981, was highlighted by John Ramsay in 2002, and George Kiser's article on the Elements of Purchasing Strategy, also published in 1976, reflects on how an "imaginative and effective purchasing strategy" can be adopted. Particia Moody argued in a 2001 article that "strategic purchasing remains an oxymoron".

Purchasing processes

Most organizations use a three-way check as the foundation of their purchasing programs. This involves three departments in the organization completing separate parts of the acquisition process. The three departments do not all report to the same senior manager, to prevent unethical practices and lend credibility to the process. These departments can be purchasing, receiving and accounts payable; or engineering, purchasing and accounts payable; or a plant manager, purchasing and accounts payable. Combinations can vary significantly, but a purchasing department and accounts payable are usually two of the three departments involved. Organizations typically have simpler procedures in place for low value purchasing, for example the UK's Ministry of Defence has a separate internal policy for low value purchasing valued below £10,000. When the receiving department is not involved, it is typically called a two-way check or two-way purchase order. In this situation, the purchasing department issues the purchase order receipt not required. When an invoice arrives against the order, the accounts payable department will then go directly to the requestor of the purchase order to verify that the goods or services were received. This is typically what is done for goods and services that will bypass the receiving department. A few examples are software delivered electronically, NRE work (non-reoccurring engineering services), consulting hours, etc.

Historically, the purchasing department issued purchase orders for supplies, services, equipment, and raw materials. Then, in an effort to decrease the administrative costs associated with the repetitive ordering of basic consumable items, "blanket" or "master" agreements were put into place. These types of agreements typically have a longer duration and increased scope to maximize the quantities of scale concept. When additional supplies were required, a simple release would be issued to the supplier to provide the goods or services.

Another method of decreasing administrative costs associated with repetitive contracts for common material, is the use of company credit cards, also known as "Purchasing Cards" or simply "P-Cards". P-card programs vary, but all of them have internal checks and audits to ensure appropriate use. Purchasing managers realized once contracts for the low dollar value consumables are in place, procurement can take a smaller role in the operation and use of the contracts. There is still oversight in the forms of audits and monthly statement reviews, but most of their time is now available to negotiate major purchases and setting up of other long-term contracts. These contracts are typically renewable annually.

This trend away from the daily procurement function (tactical purchasing) resulted in several changes in the industry. The first was the reduction of personnel: purchasing departments were now smaller. There was no need for the army of clerks processing orders for individual parts as in the past. Another change was the focus on negotiating contracts and procurement of large capital equipment. Both of these functions permitted purchasing departments to make the biggest financial contribution to the organization. A new term and a new job title emerged, strategic sourcing and Sourcing Manager. These professionals not only focused on the bidding process and negotiating with suppliers, but the entire supply function. In these roles they were able to add value and maximize savings for organizations. This value was manifested in lower inventories, fewer personnel, and getting the end product to the consumer quicker. Purchasing managers' success in these roles resulted in new assignments outside to the traditional purchasing function – logistics, materials management, distribution, and warehousing. More and more purchasing managers were becoming Supply Chain Managers handling additional functions of their organization's operation. Purchasing managers were not the only ones to become Supply Chain Managers. Logistic managers, material managers, distribution managers, etc. all rose to the broader function and some had responsibility for the purchasing functions now.

In accounting, purchases is the amount of goods a company bought throughout this year. It also refers to information as to the kind, quality, quantity, and cost of goods bought that should be maintained. They are added to inventory. Purchases are offset by purchase discounts and Purchase Returns and Allowances. When it should be added depends on the Free On Board (FOB) policy of the trade. For the purchaser, this new inventory is added on shipment if the policy was FOB shipping point, and the seller remove this item from its inventory. On the other hand, the purchaser added this inventory on receipt if the policy was FOB destination, and the seller remove this item from its inventory when it was delivered.

Goods bought for purposes other than direct selling, such as for research and development, are added to inventory and allocated to Research and Development expense as they are used. On a side note, equipment bought for research and development is not added to inventory, but is capitalized as assets.

Acquisition process

The revised acquisition process for major systems in the U.S. Department of Defense is shown in the next figure. The process is defined by a series of phases during which technology is defined and matured into viable concepts, which are subsequently developed and readied for production, after which the systems produced are supported in the field.

center|thumb|560px|Model of the Acquisition Process [[Collective bargaining|Labor agreements may also be taken into consideration and may be drawn into the evaluation if the particular region is known to have frequent labor disputes.

The manufacturing lead-time is the time from the placement of the order (or time final drawings are submitted by the buyer to the seller) until the goods are manufactured and prepared for delivery. Lead-times vary by product and can range from several days to years.

Transportation time is evaluated while comparing the delivery of goods to the buyer's required use-date. If goods are shipped from a remote port, with infrequent vessel transportation, the transportation time could exceed the schedule and adjustments would need to be made.

Delivery Charges - the charge for the goods to be delivered to a stated point.

Bid validity
Packing
Bid adjustments
Terms and Conditions
Seller's services
Standards organizations
Financial review
Payment currency
Risk analysis (market volatility, financial stress within the bidders)
Testing

Negotiating

Negotiating is a key skillset in the purchasing field. One of the goals of purchasing agents is to acquire goods per the most advantageous terms of the buying entity (or simply, the "buyer"). Purchasing agents typically attempt to decrease costs while meeting the buyer's other requirements such as an on-time delivery, compliance to the commercial terms and conditions (including the warranty, the transfer of risk, assignment, auditing rights, confidentiality, remedies, etc.).

Good negotiators, those with high levels of documented "cost savings", receive a premium within the industry relative to their compensation. Depending on the employment agreement between the buyer and the employer, buyer's cost savings can result in the creation of value to the business, and may result in a flat-rate bonus, or a percentage payout to the purchasing agent of the documented cost savings.

Purchasing departments, while they can be considered as a support function of the key business, are actually revenue generating departments. For example, if the company needs to buy US$30 million of widgets and the purchasing department secures the widgets for $25M, the purchasing department would have saved the company $5M. That saving could exceed the annual budget of the department, which in effect would pay the department's overhead - the employee's salaries, computers, office space, etc.

Post-award administration

Post-award administration typically consists of making minor changes, additions or subtractions, that in some way change the terms of the agreement or the seller's scope of supply. Such changes are often minor, but for auditing purposes must be documented into the existing agreement. Examples include increasing the quantity of a line Item or changing the metallurgy of a particular component.

Strategic purchasing

Purchasing processes

Acquisition process

Negotiating

Post-award administration

See also

References