Purchasing/procurement

What is purchasing?
Several scholars provided a wide range of definitions for the term purchasing. Some of
definitions given are:
 Lu (2011) Purchasing is a means of obtaining materials or services of the right
quality in the right quantity from right source delivery them to the right place at the
right price.
 Purchasing is the act of exchange of goods and services for money (Datta,1990)
 Purchasing is an organizational activity concerned with the acquisition of materials
and services of the right quality, from the right services of the right quality, from the
right supplier in right quantity, at right time and with the desirable service delivered
to the right time.
 Donald Waters (2003), Purchasing is the function responsible for acquiring all the
materials needed by an organisation. Many of these transactions are not standard
purchases, but include rental, leasing, contracting, exchange, gifts, borrowing, and so on.
This is why some people prefer to talk about the ‘acquisition of materials’ or the more
common term of procurement. ‘
 Procurement’ and ‘purchasing’ are often taken to mean the same thing. Usually, though,
purchasing refers to the actual buying, while procurement has a broader meaning.
Major activities of Purchasing Department:
i. identification of purchasing needs
ii. Discussion with sales people
iii. Identification of suppliers
iv. market studies
v. Negotiations
vi. Analysis of proposals
vii. selection of suppliers
viii. issuance of purchase order
ix. contract administration
x. purchasing records

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Types of purchasing
There are two basic types of purchasing: purchasing for resale and purchasing for
consumption or transformation. The former is generally associated with retailers and
wholesalers. The latter is defined as industrial purchasing.
Importance of purchasing in Business
What is the importance of purchasing in business organization? Why is it important? the
following are importance of purchasing:-

1. Purchasing as a function of business

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 co-coordinating and integrating these six functions:
i. Creation of idea or business function.
ii. Finance, the capital acquisition and financial planning and control function.
iii. The human resources and labor relations function.
iv. Purchasing, the acquisition of required materials, services and equipment’s.
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 controller’s 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.

These basic functions may be supervised by a single manager or by individual managers for
each function, depending on a company’s size. Regardless of how they are supervised, they
are performed by someone in every business. Some small firms, for example, do not have a
purchasing department; nevertheless, the purchasing function must still be preformed.
Sometimes it is performed by the president; at other times it is performed by an executive
who administers several basic functions, including purchasing.

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By its very nature, purchasing is a basic and integral part of business management. Why is
this fact important? For a business to be successful, all its individual parts must be
successful. It is impossible for any organization to achieve its full potential without a
successful purchasing activity. In the long run, the success of a business enterprise depends
every bit as much on the purchasing executive as it does on the executives who administer
the other functions of the business.

This is not to imply that all purchasing departments are of equal importance to the success
of their companies. They are not; their importance varies widely. The importance of any
individual business function within a specific organization is dependent on a number of
factors. Among these factors are the type of business, its goals, its economic circumstances,
and how the enterprise operates to achieve these goals. In some situations purchasing can
function in a perfunctory manner without jeopardizing a company’s profit. These
situations, however, are exceptions. Similar exceptions can be found in marketing, finance,
or any other function of business. For example, in a firm selling a highly advanced technical
product, the marketing department usually does not have weighty responsibilities.
Engineering excellence does more than efficient marketing techniques to sell the product.
On the other hand, marketing a highly competitive standard product requires selling ability
of the highest order. In such companies, the marketing department has a position of major
importance.

2. Purchased Materials as Resources or Elements of productive work

The basic goal of any industrial activity is the development and manufacture of products
that can be marketed at profit. This goal is accomplished by the appropriate blending of
what management authorities historically have called the five Ms: machines, manpower
materials, money, and management. Materials today are the lifeblood of industry. No
industrial organization can operate without them. Materials of the appropriate quality must
be available at the right time, in the proper quantity, at the needed location, and at an
acceptable price. Failure to fulfill any of these responsibilities concerning materials adds to
company costs and decreases company profit just as surely as do outmoded production
methods, inefficient personnel, and ineffective selling.

3. Profit leverage effect

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Through better purchasing a firm saves in the amounts paid to vendors for needed
materials or services, that saving amount will directly goes to profit. The effect of the saving
is to decrease costs of goods sold.

On the average, manufacturing firms spend about 50% of their sales dollars in the purchase
of raw materials, components, and supplies. This gives the purchasing function tremendous
potential to increase profits.

4. Effect on efficiency: the effectiveness with which the purchasing function is performed
will show up in other operating results. Rapid processing of requests wills increase the
possibility of receiving requested goods on time. This facilitates the timely production
and delivery of goods/services. Wise choice of vendor will eliminate shortage of
materials and shut down of the production line.
5. Effect on competitive position: a firm can’t be competitive unless it can deliver and
products or services to its customers when they are wanted and at a price the
customers feels is fair. If purchasing does not do its job, the firm will not have the
required materials when needed and price, which will keep end product costs under
control.
6. Effect on image: the actions of purchasing department influence directly the public
relations and image of the company. If actual and potential vendors are not treated in a
businesslike manner they will form a poor opinion of the entire organization and will
communicates this to other firms. This poor image will adversely affect the purchaser’s
ability to get new business to find new and better vendors.
7. Source of Information: the contacts of the purchasing function in the market place
provide a logical source of information for various functions within the organization.
Information about prices, availability of goods, new sources of supply, new products and
new technology can obtain from the purchasing unit.

Objectives of Purchasing
According to Dobler and Burt the objectives of purchasing can be viewed from three levels:
1) General objectives/Principles of purchasing
2) Functional/operational objectives
3) Detailed level objectives

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A) General Objectives/principles of purchasing/7Rights
The general objective of purchasing is concerned with the acquisition of materials with the
seven rights (7R’s): from the right supplier, In the right quality, in the right quantity, at the
right time, in the right price, with the right service and delivered at the right place

1. Right Quality: Quality in general can be stated as the whole set of features and
characteristics of a product or service that are relevant to meeting requirements. It is
the totality of features and characteristics of a product or service that bear on its ability
to satisfy a given need. It is intrinsic excellence of a product/service. People generally
favor materials /things services of high quality and best quality.

Quality has no meaning in purchasing except as it is related to functional and ultimate cost.
The best quality needs not the right quality .example, for one job the best grade may be the
right quality whereas for another job the lower grade may be the right quality. High price
does not automatically guarantee better quality. In industrial and institutional purchasing
quality is related to suitability and cost rather than to intrinsic excellence.

2. RIGHT PRICE: The right price is the one which brings the best ultimate value. It need
not be the lowest price. Buying required quality and quantity material with maximum
possible lowest price. Price should be determining in combination with other factors
such as quality, ultimate life, delivery time, after sales services. The factors that affect
the price of items are quality & quantity required urgency of requirements, demand and
supply of materials in the market etc...
3. RIGHT TIME: Right time implies purchases of materials are made available in time
when needed. Example: In case of recurring item, right time means the time when the
stock reaches the minimum level. The right time for buying involves what we call the
total lead-time. Lead time is time difference between the identification of a need for an
item, until it is approved for purchase, manufacturing, transport, shipping, and
inspection.
4. RIGHT QUANTITY: Quantity refers to the number of units of the required materials to
be purchased to continue the operation of the organization without interruption. It
deals with decision on planning and control, estimating the overall material
requirement, the order quantity, when to make order, number unit in stock, delivery
time etc.

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5. RIGHT SUPPLIER: Supplier refers to a vendor who is reliable and will meet its
commitments to provide the right quality at the right time and place with a desirable
service.
6. RIGHT SERVICE: The right service is the totality of additional value of the supplier
provide to the buyer before and after the sale of the materials or services.

Such value includes: Technical advice in design and specification of materials, Maintenance
services, Guaranties, Installation services etc.

7. RIGHT PLACE: The right quality and quantity goods should be made available at the
place where they are needed. If materials are not shipped to the right place the buyer may
incur additional transportation and loading/unloading costs and delay of goods.