Importance of purchasing

The term 'purchasing' refers to buying of a material or an item from a company or division that supplies materials. Since a manufacturing firm is involved in the conversion of raw materials into finished goods, it should ensure that right type of materials (here, raw materials) are purchased in the right quantities at the right time. Apart from obtaining the right product at a lower cost, the purchase department may also perform other activities like developing a network of vendors, and providing the necessary information about new products, materials and services to other departments.

A firm purchases an item only when

• The cost of purchasing the item is less than that of actually manufacturing it.

• The company does not have the requisite manpower to make the item.

• The expected returns on the investment made in manufacturing the items are not attractive.

• The demand for the item (to be manufactured) is seasonal and there is a risk in storing and maintaining it.

Management of purchasing activities is very important for a firm for the following reasons:

Impact of Costs on Profits

In a typical manufacturing firm, the cost of purchases is more than 50 percent of the total costs. Thus, a small saving in the cost of the material can have a significant impact on the profitability of the firm.                                  

Increasing Prominence of Automated Manufacturing

With increased automation of manufacturing facilities, labor costs have decreased in many mass production industries. For this reason, material costs become the central focus in the control of production costs. In addition, automation requires a rigid control on design, delivery schedule and quality of purchased materials. This makes the purchase department's role more significant as it has to maintain a good relationship with vendors to ensure the delivery of high quality materials, in the right quantities, and at the right time, continually.

Increasing Global Competition

Increase in population and consumption worldwide have made it difficult for firms to procure scarce materials that are essential for production. To offset increased competition for scarce materials, firms are extending their purchase activities globally. This could result in increase or decrease in material costs, depending on the taxes and duties associated with the import of materials.                    

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