What is Purchasing?

Purchasing is the organized acquisition of goods and services on behalf of the buying entity. Purchasing activities are needed to ensure that needed items are obtained in a timely manner and at a reasonable cost. A purchasing department is especially necessary in a manufacturing business, where large amounts of raw materials and components must be obtained on a recurring basis. The purchasing department's primary goals are as follows:

To locate suppliers that can provide goods and services in accordance with the buyer's requirements.
To buy items that meet the quality specifications of the buyer.
To create a stream of deliveries into the buyer's premises that minimize the raw materials inventory investment while still ensuring that goods are available as needed.
To minimize the amount of cash invested in inventory.

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Purchasing Activities

Common purchasing activities are as follows:

Receive and verify purchase requisitions from around the company.
Search for qualified suppliers that can fulfill the buyer's needs.
Prepare and issue request for proposal (RFP) documents to qualified suppliers.
Evaluate supplier responses to RFPs, select a winner, and negotiate a contract.
Issue purchase orders to suppliers that authorize purchases. A master purchase order may be issued when there are a number of deliveries contemplated under a purchasing arrangement.
Administer contracts that have a longer duration.
Review open purchase orders to see if any should be closed.

Purchasing Best Practices

There is a tendency for the purchasing function to be bogged down in paperwork, which is related to the excessive use of bidding procedures and the issuance of purchase orders. The function can be streamlined by replacing bidding with sole source arrangements for most purchases. Also, lower-cost purchases are now made with procurement cards, thereby avoiding the use of purchase orders. This level of streamlining focuses the attention of the purchasing department on just the most expensive and complex expenditures, where the greatest gains can be achieved.

Purchasing systems can also be used to flag delayed purchasing issues. This management by exception approach is quite useful for the purchasing staff, which can use it to identify those transactions that are most likely to require follow-up actions.

Purchasing Systems

The purchasing department may operate a freestanding purchasing software package, though the system is more effective if integrated into the software of the receiving and accounts payable functions. An enterprise resources planning system will include a purchasing module, so that orders can be placed by any authorized person using the ERP system.