Purchasing and supply chain management are key factors in satisfying cusomers. It is important to understand that any organisation is a consumer of products and services, just as you are a consumer. An organisation changes the products and services it consumes into finished items to satisfy it’s customers demands.
If we think about it carefully, organisations spend vasts amounts of money , often more than 50% of it’s revenue on raw materials, services and compnents in order to create their product and service offerings.
Business today is under increasing pressure from competitors in China and India who have chosen to expand their value chain from supplier to producers of finished products. The cheap labour and availability of raw materials make companies in these countries formidable competitors.
Purchasing is a key element in competitive business environments with the main purchasing functions summarised as follows.
determining the specifications (quality and quantity) of the goods and services needed by an organisation
finding and selecting the most appropriate suppliers, and developing mutually beneficial relationships with them
preparing and conducting negotiations with suppliers in order to buy at the right price (not always the cheapest), and to secure supply by means of contracts
placing orders and developing the most efficient supply and purchase processes
controlling and monitoring orders (we refer to this as expediting the delivery of the order) and following up on orders, including settling claims, handling faulty consignments, analysing invoices, closing orders, maintaining files and records, and performing supplier assessments, ratings and rankings.
Effective purchasing has many benefits to an organisation, some direct and some indirect. Apart from the obvious pricing and quality advantages, the following indirect advantages are achieved with effective purchasing management.
By creating relationships with suppliers that supply high quality goods and raw materials, the organisation is able to reduce the cost of product quality inspections
Purchasing can help to reduce cost prices by buying fewer different types of the same product. We refer to this as standardisation. The benefit is that the organisation is able to buy the same standard products from more than one supplier, rather than using many supplier-specific products. Standardisation means less dependence on certain suppliers, better use of competitive bidding, and lower inventory.
Research has shown that many product innovations come from collaborations between suppliers and buyers. Purchasing can contribute towards innovation, which in turn can contribute towards the organisation’s competitive position in the market place.
More and more organisations realise that, to meet customer demand more effectively, they must be more flexible. One way to achieve this is to have better integration between the buyer’s enterprise resource planning system (ERP) and those of its suppliers. Purchasing must aim at improving supplier performance so that the organisation can achieve this kind of flexibility.
Purchasing has an important role to play in creating synergy, especially when an organisational structure allows for small business unit (SBU) procurement. Here, business unit managers are responsible for profit and loss (managers are responsible for revenue and costs, including material costs). Therefore, the organisation can be more effective if the purchasing functions across the SBUs are coordinated.
Now that we are able to view purchasing in a more wholistic fashion, we are able to see the effects of a well thought through and well managed purchasing strategy, how it effects the companies profitability at both product and operations level.