The relationship between purchaisng and other organizational functions

Introduction One of the basic functions common to all types of business enterprise is purchasing. It is basic because no business can operate without it. All businesses are administered or managed by cocoordinating and integrating these six functions:

i. ii. iii. iv.

Creation of idea or business function. Finance, the capital acquisition and financial planning and control function. The human resources and labor relations function. Purchasing, the acquisition of required materials, services and equipments.

v. The transformation of materials into economic goods and services which could be termed as Conversion. vi. The marketing and selling of goods and services produced, Distribution.

The design engineering department, the finance or controllers department, the personnel or human resources department, the purchasing department, the production department, and the sales or marketing department are the common industrial titles of the organizational units responsible for performing these six functions. In non-industrial enterprises, the same functions must be performed, but they may be identified by different names.

This paper shows the relationships between the purchasing function and other organizational functional areas and the information they share

What is purchasing? This is a managerial activity that goes beyond the simple act of buying, and which includes the planning and policy activities covering a wide range of related and complementary activities is Purchasing. such activities include the research and development required for the proper selection of materials and sources; the follow-up to ensure proper delivery; the inspection of incoming shipments to ensure both quantity and quality compliance with order; the development of proper procedures, methods, and forms to enable the purchasing department to carry out established polices; the co-ordination of the activities of the purchasing department with such other external divisions of the concern such as traffic, receiving, storekeeping, and accounting, so as to facilitate smooth operations; and the development of a technique of effective communication with top management of the company so that a true picture of the performance of the purchasing function is presented.

A typical purchasing department performs a number of specific activities. Involved in the primary responsibilities of a purchasing department are buying, value analysis and purchasing research. Many purchasing departments, however, also include activities such as inventory control, stores, receiving, subcontracting, and traffic. Consequently, when one encounters the term Purchasing department the name alone does not reveal precisely what operations are involved.

Procurement
A term whose genesis can be traced to early government parlance is Procurement. Today it is widely used by the armed forces to define one of several supply functions involved in logistics activities. In the broadest sense, the government defines procurement to include the entire process by which all classes of resources (People, materials, facilities, and services) for a particular project are obtained.

The term Procurement originated in governmental organizations but it has also been used by industries for many years. The meaning of procurement in industry parallels its meaning in government. In both cases, the procurement concept encompasses a wider range of supply activities than does the purchasing concept. The difference between can be more specifically stated as Procurement is concerned with the overall gathering of resources, while purchasing is the specific act of acquiring something by paying money for it. Purchasing is one form of procurement.

Interdepartmental Relationships and the information they share

A purchasing department exists to supply the needs of other departments in the company. To a considerable extent the attitudes and reactions of these other departments toward the purchasing department depend on the degree and kind of service that the purchasing department extends and the nature of the existing interdepartmental relations.

Purchasing is constantly working with the other departments in the company, and thus it is essential that mutual trust and cooperation prevail in order to foster efficiency. There are areas where friction may develop between purchasing and other departments because of misunderstanding over who should do the work. In many companies the materials management form of organization has been introduced to minimize this friction and to improve coordination among the materials departments. An organizational manual that clearly describes the duties and responsibilities of each department help to minimize conflicts of interest. Such manuals are becoming common place today, especially in larger companies. The following paragraphs will be devoted to a brief discussion of some of these interdepartmental relationships.

i) Purchasing and Production Production and purchasing have the common goal of efficient and profitable operation; however, their philosophies differ. A production executive quite naturally thinks in terms of having all he

needs of the best materials. This philosophy can easily lead to excessive inventories of unnecessarily high quality. The purchasing executive may find himself in an unpopular position when he must contend for a reasonable quantity of the appropriate quality. To a considerable extent, the relationships between these two departments can be harmonized through the exchange of information which each department develops in the normal course of its operations.

Production must keep purchasing informed as far in advance as possible about production plans and schedules. With such information purchasing is able to plan its procurement program intelligently so as to minimize emergency and rush orders. As changes in production plans develop, they should be communicated to purchasing so that time is available for vender selection, negotiations, and delivery. The production department must be made to realize the lead time that exists between the issuance of a requisition and receipt of goods. Efficient purchasing procedures can minimize this time but, at best, production must work closely enough with purchasing in anticipating needs to allow for the minimum lead time.

On the other hand, purchasing has certain responsibilities toward the production department. The purchasing department must keep production informed of expected arrivals, and must notify the production department promptly of any unusual delays so that production may be rescheduled without plant stoppages.

The purchasing department has a valuable tool for the production department in its file of vendors catalogs. These should be supplied on call to the production department. Purchasing also has the responsibility of informing the production department about any new materials, machines, or methods that come to the buyers attention through visiting salesmen or trade literature. A buyer sometimes is instructed to secure samples for testing by the production department. At other times a buyer should secure samples on his own initiative and bring them to the attention of the production department for testing purposes.

In many companies the purchasing and production departments share joint responsibility for development of standards and specifications for materials and supplies to be purchased. In other companies purchasing merely has a voice in the matter, with responsibility in the production department. The important thing is for the purchasing department to make sure that wherever possible, standards conform to materials that are readily available in the market and avoid unnecessary deviations that add to costs.

In the purchase of plant equipment, purchasing and production are but two of many departments involved in the decision. Each, however, has a role to play in the purchase of equipment. Production concerns itself with initiating the action and determining the kind of equipment to be purchased. Purchasing surveys the potential suppliers who will be requested to bid on the order and has an important voice in deciding who gets the order. The treasures, the engineering department, sometimes the sales department, and often the president participate in the decision.

ii) Purchasing and Engineering The engineering department is primarily responsible for the design and specifications of the products the company makes and the processes the company uses. Engineers in such

departments have definite ideas about the physical and chemical properties required in the end product and know what materials have the desired properties. However, because there frequently are several materials possessing suitable properties, it is important for someone to determine which material can be purchased most advantageously. This is a proper responsibility of the purchasing department.

A close working arrangement must be developed between the engineering and purchasing departments. Engineering should not be so exacting that its demands override price and market considerations, and purchasing must not stress price to the point where it interferes with sound engineering requirements.

The two departments should complement each other; and close cooperation is essential for smooth and successful relationships. Good engineering produces a product up to company specifications, with both technical and market efficiency.

iii) Purchasing and Sales No company can stay in business for long unless its products can be sold at a profit. The purchasing department can help the sales department by buying at the lowest possible cost so that a companys selling price can be competitive. About 50 percent of a typical sales department sells has been purchased from others. The sales department can help purchasing schedule its purchases effectively by apprising the purchasing department of sales quotas and sales expectations. The sales department can be particularly helpful by giving the purchasing department as much advance information as possible during negotiations with customers for special orders and non-stock items. In many companies the practice of reciprocity calls for the maintenance of close liaison between purchasing and sales in order to properly effectuate the policy.

iv) Purchasing and Finance Purchasing relationship with finance is different from its relationships with production, engineering, and sales. The difference stems from the fact that cost determinations cannot be hidden in the purchasing-finance relationship as they often can in the other relationships. The importance of good financial planning is highlighted by the fact that poor financial planning is the major cause of business failure. Among the basic data needed by an organization for proper planning of its working capital and cash-flow positions are accurate sales forecasts and accurate purchasing schedules. It is just as important for purchasing to inform finance of changes in its schedule as it is to inform production and sales of these changes.

There are many economic factors that periodically bring favorable and completely unexpected buying opportunities. A supplier for example, may momentarily have excess capacity because of the cancellation of a large order. During the period that this condition exists, the supplier may sell products at prices designed to recover only out-of-pocket costs. (Include direct costs paid for making a specific product). This may be done because it is in the long-term interest of the firm not to reduce its labor force. The potential income from such unexpected buying opportunities must be weighted against the potential income from other alternative uses of the companys capital. Acquiring new equipment, adding to plant facilities, and increasing sales and promotional efforts are some of the alternative uses of capital that a company must consider. Usually, the alternative

offering the greatest income in the long run should be selected, since no firm has enough capital to satisfy all requirements.

Regardless of the price advantage obtainable, the right time to buy from the stand point of business conditions is not always the right time to buy from the stand point of the companys treasury. If the purchasing department places orders to take advantage of unusually low prices without consulting the finance department, the company could find itself paying for these purchases with funds needed for other purposes. On the other hand, if the finance department does not strive delight to make funds available for such favorable buying opportunities, the company may have to pay higher prices for the same material. Therefore, it is routine procedure for all purchase requests to clear through the finance department to ascertain that there is an uncommitted balance in the proper account equal to the contemplated purchase.

v) Purchasing and Stores If the stores department is independent of the purchasing department, the relationship between the two is closer and more continuous than those between any other two departments. On all shelf stock items the stores department initiates the purchase requests on which the buyer acts. The buyers decision concerning a purchase is based on such factors as rate of use, number of defective parts, and trends in the rate of use. This information is most easily secured through the records of the stores department. The buyer must keep the stores department informed on minimum stocks and reorder points so that the stores department can keep its inventories at proper levels.

Conclusion Successful small businesses understand the importance of fostering an environment that stresses effective communication and teamwork between all departments within the organization. Departments, including purchasing, can benefit from this type of supportive and collaborative environment that allows all segments of an organization to support each other while working toward departmental and company goals. Reference

1) Purchasing Management: Materials in Motion by J.H. Westing, IR. Fine and G.J Zent. 2) Purchasing and Materials Management by Donald W. Dobler, Lamar Lee, Jr. and David N. Burt. 3) Production and Operational Management by Everett E. Adams Jr. Ronald J. Ebert.