Explain the importance of purchasing in a manufacturing organization. Purchasing is the most important function of materials Management.

The M at e r i al pl a n ni n g f u n ct i o n d et e r mi n e s t h e r e qu i r e me n t o f r a w ma t e r i al s , pa r t s , components, spare parts, etc. Needed for production and takes decisions regardingWhat, How and When to buy? All this decisions result in the preparation of materialrequisitions which are then passed on to purchase department for further actiontowards procurement of the materials listed in materials requisitions. DEFINITION:Purchasing refers to the function of processing of materials, s u p p l i e s , machines, equipments, tools, spare parts and services required for meeting the needsof production department and maintenance department.Purchasing implies the act of exchange of goods and services for money. In itsnarrow sense, purchasing refers merely to the act of buying on item at a price. In aboarder sense, purchasing is a managerial activity involving planning and policy formulation, research and development strategies required for the proper selection of materials and sources of supply, negotiating with supplies for best price terms, placingp u r c ha s e o r de r s f ol l o w -u p t o e n su r e t i m e l y d e l i ve r y, c o c o o r di n at i n g w i t h ot he r departments. Receiving, inwards inspection, stores and accounting IMPORTANCE OF PURCHASING IN A MANUFACTURING ORGANIZATION: Purchasing is a basic function of any industrial enterprise. Since any industrialenterprise Manufacturing goods (tangibles goods) (products) need raw materials andcomponents for converting them into finished goods purchasing function is of major purchasing department is responsible for purchasing materials of right type, in rightquantities, at the right price, made available at the right time and procured from theright supplier. In any manufacturing industry the materials cost ranges from 50 to 80% of theproduct cost, depending on the nature of the product procurement of goods through purchase accounts for about 50% of the money spent by the averageindustrial enterprise and ranges from 20 to 90% among different industriesHe n c e , t he f i n a n c i a l a s pe c t o f p ur ch a s i n g i s o f gr ea t i mp o r t an c e . A o n e percent of savings in cost of materials is achieved mainly through efficient buying. A large amount of working capital is usually tied up in the inventories of raw ma t e r i a l s , c o mp o n e n t s an d s u pp l i e s he l d b y a n i n d us t r i a l f i r m s i n c e , h i gh f i n a n c i a l s t a ke s a r e i n vo l ve d i n b u yi n g t he p u r ch a se ma n ge r w h o i s t h e cu st o d i a n of a f i r ms w o r ki n g c a p i t al i s o bl i ge d t o ha ve u t mo s t i nt e gr i t y i n spending the companys valuable money. Purchasing can effectively contribute to import substitution and thereby savingthe nations precious foreign-exchange resources purchase managers are consciously aware of external industrial activities and are able to gather vastinformation regarding new products, materials, equipments, machinery, toolsand processes for the benefit of their firms. Purchasing function has a role in the completion of major projects undertakenby a firm. Any delay is procurement of materials for the project will eventuallycause delay in procurement of materials for the project will eventually causedelay in completion of the project. Purchasing is a key function in materials management. Other functions of materials management are built around the purchasing function. For specific factors which have contributed to the rising importance of purchasinga ) P o st w a r s ho r t a ge s a n d i n cr e a si ng r e q u i r e me n t s o f d e f e n s e an d go vt . , departments.b)The cyclical Suring of surpluses and shortages of materials and fast risingmaterial casts. Stiff domestic and international competition in the manufacturing industries. Growing worldwide markets, foreign purchasing to assume international scope * IMPORTANCE OF PURCHASING DEPARTMENT:-

It is a primary function directly influencing the major cost of operating or business. E f f i c i e n t o p er a t i o n of a n y i n d u st r y d e p e nd s u p o n p r o p er t ur n o ve r o f investment. The purchasing department must ensure receipt of proper materials when needed is sufficient quantities to maintain production at thesame time, it must not increase investment beyond that required to meetcurrent needs and maintain a reasonable factor of safely against stock andconditions. D i s c o v e r i n g n e w m a t e r i a l s , w h i c h m a y b e u s e d t o a d v a n t a g e a s substitutes for materials in use. Identifying possible new line of products to be added Building up goodwill is the business world with which it deals. See changes in trends, either in price or other factors that will affect thesales of the company. Its knowledge of vendors and the manufacturing and marketing policies of o t h e r i n d u s t r i e s m a k e i t p o s s i b l e f o r t h e p u r c h a s i n g d e p a r t m e n t t o contribute invaluable help in framing plans for initiation of new products,scheduling of production and determination of marketing

FACTORS FOR PURCHASING

The importance of purchasing in any firm is largely determined the four factors: availability of materials, absolute dollar volume of purchases, percent of product cost represented by materials, and the types of materials purchased. Purchasing must concern itself with whether or not the materials used by the firm are readily available in a competitive market or whether some are bought in volatile markets that are subject to shortages and price instability. If the latter condition prevails, creative analysis by toplevel purchasing professionals is required. If a firm spends a large percentage of its available capital on materials, the sheer magnitude of expense means that efficient purchasing can produce a significant savings. Even small unit savings add up quickly when purchased in large volumes. When a firm's materials costs are 40 percent or more of its product cost (or its total operating budget), small reductions in material costs can increase profit margins significantly. In this situation, efficient purchasing and purchasing management again can make or break a business. Perhaps the most important of the four factors is the amount of control purchasing and supply personnel actually have over materials availability, quality, costs, and services. Large companies tend to use a wide range of materials, yielding a greater chance that price and service arrangements can be influenced significantly by creative purchasing performance. Some firms, on the other hand, use a fairly small number of standard production and supply materials, from which even the most seasoned purchasing personnel produce little profit, despite creative management, pricing, and supplier selection activities.

THE ROLE 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. Purchasing can also be seen as either strategic or transactional. Also, the words "direct" and "indirect" have been used to distinguish the two types. Strategic (direct) buying

involves the establishment of mutually beneficial long-term relationship relationships between buyers and suppliers. Usually strategic buying involves purchase of materials that are crucial to the support of the firm's distinctive competence. This could include raw material and components normally used in the production process. Transactional (indirect) buying involves repetitive purchases, from the same vendor, probably through a blanket purchase order. These orders could include products and services not listed on the bill of materials, such as MRO goods, but are used indirectly in producing the item. Some experts relate that the purchasing function is responsible for determining the organization's requirements, selecting an optimal source of supply, ensuring a fair and reasonable price (for both the purchasing organization and the supplier), and establishing and maintaining mutually beneficial relationships with the most desirable suppliers. In other words, purchasing departments determine what to buy, where to buy it, how much to pay, and ensure its availability by managing the contract and maintaining strong relationships with suppliers. In more specific terms, today's purchasing departments are responsible for:

coordinating purchase needs with user departments identifying potential suppliers conducting market studies for material purchases proposal analysis supplier selection issuing purchase orders meeting with sales representatives negotiating contract administration resolving purchasing-related problems maintenance of purchasing records

These functions obviously entail no insignificant amount of responsibility. As the role of purchasing grows in importance, purchasing departments are being charged with even more responsibilities. Newer responsibilities for purchasing personnel, in addition to all purchasing functions, include participation in the

development of material and service requirements and related specifications, conducting material and value-analysis studies, inbound transportation, and even management of recovery activities such as surplus and scrap salvage, as well as its implications for environmental management. In the 1970s and 1980s purchasing fell under the rubric of "materials management." Many corporations and individual facilities employed executives who held the title "materials manager," responsible for purchasing and supply management, inventory management, receiving, stores, warehousing, materials handling, production planning, scheduling and control, and traffic/transportation. Today, the term materials management has expanded to include all activities from raw material procurement to final delivery to the customer, to management of returns; hence, the newer title supply chain management. As purchasing personnel became even more central to the firm's operations they became known as "supply managers." As supply managers, they are active in the strategic-planning process, including such activities as securing partnering arrangements and strategic alliances with suppliers; identification of threats and opportunities in the supply environment; strategic, long-term acquisition plans; and monitoring continuous improvement in the supply chain. A study by found that strategic purchasing enables firms to foster close working relationships with a limited number of suppliers, promotes open communication among supply chain partners, and develops a long-term strategic relationship orientation for achievement of mutual goals. This implies that strategic purchasing plays a synergistic role in fostering value-enhancing relationships and knowledge exchange between the firm and its suppliers, thereby creating value. In addition, supply managers are heavily involved in cross-functional teams charged with determining supplier qualification and selection, as well ensuring early supplier involvement in product design and specification development. A comprehensive list of objectives for purchasing and supply management personnel would include:

to support the firm's operations with an uninterrupted flow of materials and services:

to buy competitively and wisely (achieve the best combination of price, quality and service); to minimize inventory investment and loss; to develop reliable and effective supply sources; to develop and maintain healthy relations with active suppliers and the supplier community; to achieve maximum integration with other departments, while achieving and maintaining effective working relationships with them; to take advantage of standardization and simplification; to keep up with market trends; to train, develop and motivate professionally competent personnel; to avoid duplication, waste, and obsolescence; to analyze and report on long-range availability and costs of major purchased items; to continually search for new and alternative ideas, products, and materials to improve efficiency and profitability; and to administer the purchasing and supply management function proactively, ethically, and efficiently.

DETERMINING REQUIREMENTS
In progressive firms, purchasing has a hand in new product development. As a part of a product development team, purchasing representatives have the opportunity to help determine the optimal materials to be used in a new product, propose alternative or substitute materials, and assist in making the final decision based on cost and material availability. Purchasing representatives may also participate in a make-or-buy analysis at this point. The design stage is the point at which the vast majority of the cost of making an item can be reduced or controlled. Whether or not purchasing had an impact on a product's design, the purchasing agent's input may certainly be needed when defining the materials-purchase specifications. Specifications are detailed explanations of what the firm intends to buy in order to get its product to market. Generally specified is the product itself, the material from which it is to be made, the process for making it, minimum levels of quality, tolerances (a range in which a

specified characteristic is acceptable, e.g., an outer diameter must be a certain size, 25 millimeters), inspection and test standards, and a specific function the product must perform. If the product requires a standardized component, the specifications are easily communicated by specifying a trade or brand name. However, a custom part can complicate the situation considerably; if incorrectly manufactured, such a product can severely damage a relationship, resulting in unnecessary costs and possible legal action. It is the buyer's responsibility to adequately communicate the specifications to the supplier so that there is no misunderstanding.

SUPPLY SOURCING
Part of the sourcing decision involves determining whether to purchase a part from an outside supplier or produce the part internally. This is typically known as a make-orbuy decision. If the buyer chooses to purchase the part externally, then he must find qualified suppliers who are willing to make and sell the product to his or her firm under the specified conditions. Buyers have a number of places to go to locate sources of supply, some obvious and some indirect. The most obvious sources would include the Yellow

Figure 1 Determining Requirements Pages, other purchasing departments, and direct marketing. Purchasing departments typically have a number of trade publications to which they subscribe, such as Purchasing, Iron Age, and Purchasing World, which are filled with advertisements for a multitude of suppliers. Also, being a subscriber usually puts the buyer's name on a mailing list so that flyers, postcards, and other varieties of direct marketing find their way into the purchasing department's hands.

Other sources of supply include manufacturer directories and trade registers. The best known of these is Thomas' Register of American Manufacturers, frequently referred to simply as the Thomas Register. With 125,000 trade and brand names, 151,000 U.S. and Canadian company listings, and 6,000 catalogs, it is a valuable tool for buyers. Practically every purchasing department has access to this source, either through the 34-volume book series or CD-ROMs. Suppliers also may be found at trade exhibits, in supplier catalogs, or via recommendations from other knowledgeable sources, such as salesmen and engineers. Probably the most important and frequently used source will soon be the World Wide Web; countless firms maintain Web pages and are listed in online catalogs and directories. Many firms find themselves in a situation where a suitable supplier cannot be found. In this situation, the firm is forced to develop a supplier. Supplier development is sometimes referred to as "reverse marketing," which entails finding the supplier with the most potential for success and providing the resources necessary for the supplier to manufacture the needed product. This could include training in production processes, quality, and management assistance, as well as providing temporary personnel, tooling, and even financing. When the product being purchased is fairly standard and readily available, most firms choose to utilize the competitive bidding process of supplier selection. This involves little or no negotiation. A request for bids is sent to a limited number of qualified suppliers asking for a price quote for the product, given the terms and conditions of the contract. The contract generally goes to the lowest bidder. For government bid requests, the contract legally must go to the lowest bidder qualified to fulfill the contract.

NEGOTIATION
When competitive bidding is not the appropriate mechanism for reaching the purchasing department's objectives, the buyer turns to the process of negotiation. This does not indicate a second-choice alternative, since the negotiation process is more likely to lead to a complete understanding of all issues involved between the supplier and the purchasing firm. This improved understanding can greatly reduce the number and impact of unseen problems that may arise later.

A number of circumstances dictate the use of negotiation. When a thorough analysis is required to solve a difficult make-or-buy decision, or when the risks and costs involved cannot be accurately predetermined, negotiation should be used. Also, when a buyer is contracting for a portion of the seller's production capacity rather than a product, negotiation is typically appropriate. Other circumstances where negotiation is favored include: when early supplier involvement is employed, when tooling and setup costs represent a large percentage of the supplier's costs, when production is interrupted frequently for change orders, or when a long time is required to produce the purchased products. If successful negotiation is to occur, the buyer must have a reasonable knowledge of what is being purchased, the process involved, and any factors that may affect cost, quality, delivery, and service. A thorough cost and/or price analysis is essential. The negotiating buyer must also know the strengths and weaknesses of the negotiating supplier, as well as his own. Also, in light of today's global marketplace, strong cultural awareness is a must. Through proper preparation and some negotiating skill, the purchasing agent should be able to secure a contract that fulfills his/her company's needs and is adequately beneficial to the supplier as well.

SUPPLIER MANAGEMENT
After locating proper suppliers and securing contracts, it then falls to the purchasing function to monitor and control the suppliers' performance until the contracts are fulfilledand beyond, if further business is to be conducted. All purchasing organizations need some vehicle for assessing supplier performance. Many firms have formal supplier-evaluation programs that effectively monitor supplier performance in a number of areas, including quality, quantity delivery, on-time delivery, early delivery (just-in-time users do not like early deliveries), cost, and intangibles. For some firms, consistent supplier performance results in certification. Supplier certification generally implies (or in some cases formally asserts) that the supplier has been a part of a formal education program, has demonstrated commitment to quality and delivery, and has proven consistency in his processes. Frequently, organizations are able to take delivery from certified suppliers and completely bypass the receiving inspection process.

The buyer is also responsible for maintaining a congenial relationship with the firm's suppliers. If the buyer is an unreasonable negotiator, and does not allow the supplier to make an adequate profit, future dealings may be endangered. The supplier may refuse to deal with the buyer in the future, or the supplier may greatly increase the price of a product the buyer could not obtain elsewhere. Also, relations can become strained when the buyer consistently asks for favored treatment such as expediting or constantly changing a particular order's delivery schedule.

E-PURCHASING AND E-PROCUREMENT

The Internet and e-commerce is drastically changing the way purchasing is done. Internet use in buying has led to the terms "e-purchasing" or "e-procurement." Certainly, communication needed in competitive bidding, purchase order placement, order tracking, and follow-up are enhanced by the speed and ease afforded by establishing online systems. In addition, negotiation may be enhanced and reverse auctions facilitated. Reverse auctions allow buying firms to specify a requirement and receive bids from suppliers, with the lowest bid winning. E-procurement is considered one of the characteristics of a world-class purchasing organization. The use of e-procurement technologies in some firms has resulted in reduced prices for goods and services, shortened order-processing and fulfillment cycles, reduced administrative burdens and costs, improved control over off-contract spending, and better inventory control. It allows firms to expand into trading networks and virtual corporations. Criteria for e-purchasing include:

Supporting complete requirements of production (direct) and non-production (indirect) purchasing through a single, internet-based, self-service system. Delivering a flexible catalog strategy. Providing tools for extensive reporting and analysis. Supporting strategic sourcing. Enhancing supply-chain collaboration and coordination with partners

Steps for a Purchasing Department in a Small Business

Small businesses use a purchasing department to obtain economic resources for their production processes. Purchasing is also responsible to acquire production assets, business equipment, facilities and other major items. Larger organizations often employ individuals to work exclusively in the purchasing department. Small businesses usually rely on their owners to handle the purchasing process.

Resources Needed
Business owners should determine what economic resources are needed to produce specific goods or services. Owners often review available resources in the economic market and classify them according to specific information. Resources can be separated into groups based on quantity available, cost, quality or other specifications.

Research Vendors
Business owners research available suppliers to understand who can supply their company with the necessary economic resources. Supplier reviews can also provide business owners with information about who supplies competing companies with resources. Supplier reviews include information on their ability to deliver economic resources consistently, available contracts to secure fixed cost agreements, and other similar functions or benefits.

Bids and Proposals

Some businesses use a bid or proposal process in their purchasing. Construction companies, manufacturers and other major production companies commonly use purchasing bids and/or proposals. Companies offer bids to various vendors to shop for the best available economic resource cost. Bids help companies secure multiple contracts for purchasing supplies related to a single project. Proposals allow vendors to pitch small businesses to supply services for future economic resource purchases.

Credit Terms
Business owners usually negotiate trade credit terms with vendors and suppliers. Trade credit allows small businesses to purchase economic resources on account with suppliers. Small businesses usually have to pay for a resource within a specific time frame to avoid fees and interest penalties on outstanding balances. Suppliers may also offer small businesses a discount for paying open invoice amounts prior to the invoice due date.

Purchase Order System

Small business owners usually create a purchase order system for ordering economic resources. The purchase order process allows business owners to have a written historical record of various purchases. Business owners may delegate purchase orders to a manager or employee. However, business owners may also require their signatures to authorize purchase orders.

Receiving Process
In the receiving process, suppliers are matched with shipping documents in internal receiving paperwork. This process ensures the business does not pay for goods not received. Business owners usually require supplier shipping documents to match internal receiving documents. Receiving discrepancies often require small businesses to correct them prior to issuing payment.

Purchasing management

Purchasing is the function of buying Goods & Services from External Source to an Organisation. Purchase department buys Raw Materials, Spare parts, services etc as Required by the company or Organisation. Purchase management is One of the most Crucial Area of the Entire Organisation. Thus, Needs Intensive management. Purchase is the Main Activity in Area of Material management. Purchasing management is a department in an organization responsible for purchasing activities. Purchase is Most Important Function in any Organisation. Purchase management decides profitability of the Company. Purchasing management also covers the areas of outsourcing and in-sourcing. Purchasing management is the management of purchasing process, and related aspects in an organization. Because of production companies purchase nowadays about 70% of their turnover, and service companies purchase approximately 40% of their turnover.[1]

It is Studied that 1% Saved in the Purchase function Improves the profit of the Company as much as 2 to 3% !!! The purchasing management department ensures that all goods, supplies and inventory needed to operate the business are ordered and kept in stock. It is also responsible for controlling the cost of the goods ordered, controlling inventory levels and building strong relationships with suppliers.

Contents
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1 Objectives Of Purchasing Management 2 Principles Of Purchasing Management OR (7 R'S) 3 Purchasing Cycle/ System OR Steps In Purchasing 4 Purchasing Process 5 Purchasing Management Process 6 Purchasing Planning 7 Purchasing Reporting 8 References

Objectives Of Purchasing Management[edit]

To purchase the required material at minimum possible price by following the company policies. to keep department expenses low. Development of good & new vendors(suppliers). Development of good relation with the existing suppliers. training & development of personal employees in department. to maintain proper & up to date records of all transactions.

Participating in development of new material and products. to contribute in product improvement. to take Economic "MAKE OR BUY" decisions. to avoid Stock- out situations. to develop policies & procedure.

Principles Of Purchasing Management OR (7 R'S)[edit]

1. 2. 3. 4. 5. 6. 7. Buying the Material at right PRICE. Buying Material at right QUALITY. In the right QUANTITY. At the right TIME. From the right SOURCE. At the right PLACE. With right mode of TRANSPORT.

Purchasing Cycle/ System OR Steps In Purchasing[edit]

Get Requirement from User Department. Send the INQUIRY to the Vendors(Suppliers). Get the QUOTATIONS from Vendors. Make COMPARATIVE Statement. NEGOTIATE, Fix the Price and Terms & Conditions. Place the ORDER to the right Vendor. FOLLOW up with Vendor. RECEIVE & INSPECTION. STORAGE & RECORD- KEEPING. INVOICE & PAYMENT.

Purchasing Process[edit]
Purchasing Process includes as usual 8 main stages as follows:
1. Market survey

Requisitioning
1. 2. 3. 4. 5. 6. 7. 8. Approving Studying Market Making Purchase Decision Placing Orders Receipting Goods and Services Received Accounting Goods and Services Receiving Invoices and Making Payment Debit note in case of material defect

Purchasing Management Process[edit]

Purchasing Management Process consists usually of 3 stages:

1. 2. 3. 4.

Purchasing Planning, Purchasing Tracking, Purchasing Reporting, Negotiate

Purchasing Planning[edit]
Purchasing Planning may include steps as follows:

creating purchasing projects and tasks providing related information (files, links, notes etc.) assigning purchasing tasks to the concern person setting task priorities, start/finish dates etc. assigning supervisors setting reminders control and evaluation

Purchasing Reporting[edit]
Purchasing Reporting includes:

comparing actual and estimated values calculating purchasing task and project statistics sorting, grouping or filtering tasks by attributes creating charts to visualize key statistics and KPIs

THE IMPACT OF PURCHASING MANAGEMENT A large study based on 175 company surveys with a respond rate of 22% performed by Carr and Pearson (2002) shows that the factors strategic purchasing and Purchasing Management have a positive impact on the firms financial performance in both small and large firms. Carr and Pearson (2002) also write that Purchasing Management and supplier involvement does affect the success of a new product introduction. This study also shows that a link exist between implementation of strategic Purchasing Management and achievements of a firms comprehensive goals. It is also stated in the report by Carr and Pearson (2002) that it is believed that most firms recognize the importance of strategic purchasing, because they spend a large percentage of their sales on purchased inputs. Carr and Pearson (2002) also finish their study with the words Based on this study, management should better understand the importance of Purchasing Management, supplier involvement, strategic purchasing and its relationships with firms financial performance.