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Purchasing is defined as "The acquisition of needed goods and services at optimum cost from competent, reliable sources." (Scheuing. 1998), It is the roll of purchasing individuals to acquire goods and services at the "best cost" for use in the organisation. The term "best cost" is not to be confused with the cheapest. Many factors come into play when a purchasing individual is selecting a supplier. For example when selecting materials that may be the cheapest, such materials may be of an inferior quality and unfit for purpose, i.e. you would not find low quality components that are prone to failure used by a company that manufactures high depended medical equipment, when such a failure could mean the difference between life and death.
The same is also true on the other side of the coin, if using materials of too high or an "excessive" quality, it will drive up the overall cost of the finished products and could lead to your products being undercut by competitors, This is the job of the purchasing individual to find the right balance of cost verses quality for the organisation.
Another roll of purchasing is making sure that the suppliers deliver their orders when promised and live up to their commitments. If a shipment of vital components is not delivered when scheduled it can have the knock on effect of shutting down entire production lines. This can lead to a loss in profits for the organisation and be detrimental to an organisations reputation, if for example the production line is creating time sensitive products, and no quick alternative for the components can be found.
It should also be noted that there are some acquirement roles that purchasing is not responsible for within an organisation. Purchasing is not responsible for the hiring of staff to fill the various positions within an organisation, as this falls within the remit of the Human Resources Department and the individuals within the department who have specialist knowledge in this area. Purchasing is also not responsible for acquiring finance for the organisation either through investment or loans, nor is it within the purchasing departments capabilities to oversee mergers and acquisitions of other companies that the organisation may see as the acquisition of resources.
This assignment will look at how purchasing has developed into a strategic function within an organisation both in terms of building upon its original procurement function and how the rolls of purchasing individuals change as the size of an organisation increases.
The assignment will also look at new developments in purchasing such as E-procurement and how such developments have had an impact on how purchasing helps an organisation.
How Purchasing Adds Value to an Organisation
Purchasing as a strategic function
As an organisation grows in size, so too does the roles that the purchasing department takes on. The purchasing departments starts to fulfil a more strategic role in the organisation, this is due to the department's "contribution to making the most efficient and effective matching of resources to markets, customers or clients through its management of a critical element of the external environment, namely the organisations supply base" (Erridge. 1995).
The strategic role of purchasing and one of the main ways in which it adds value to an organisation, is to perform sourcing-related activities in a way that supports the overall objectives of the organization. Purchasing can make many contributions to the strategic success of the organization through its key role as one of the organization's boundary-spanning functions.
Some of purchasing strategic functions are as follows:
Supplier development and relationship management
Access to external markets / cross-functional teams
Supplier Development and Relationship Management
One of the most effective ways in which purchasing adds value to an organisation is through improving supplier relations through supplier development. "The basic idea of supplier development is to treat supply markets not as a given, but as something to be shaped." (Baily, 1998). This relates to the idea that just as individuals within an organisation benefit from training and personal development so too does the organisation benefit by developing supplier programmes that aim to develop the "kind and quality of suppliers the business needs" (ibid).
When getting involved with supplier development it can help the organisation in a number of ways, purchasing can look at how key suppliers operate, then by studying how their business practices and processes add value, it enables the organisations to see where the most money is added to the final cost of the product. This information benefits both organisations as it lets purchasing work with the supplier to redesign processes and lower production costs. This maximizes the contribution that suppliers make to the overall production process and helps to create strong buyer / supplier ties. Also when working with the supplier in product and component development it can greatly reduce the amount of time an organisation need in bringing a new product to market. This in turn can lead to an organisation gaining a large lead time advantage if it is a new product, as well as developing the organisations reputation as a market leader and innovator.
The supplier development relationship can also lead to significant improvements in quality for an organisation. When the buyers are involved in the design process they can build in clearly specified quality targets in the products. The buyers will then work with the suppliers on their production process until the quality targets are met for the products.
When putting this strategy into practice it becomes apparent that not all suppliers can meet the requirements that are demanded in this environment. "Some studies indicate that companies that adapt strategic sourcing have lowered the number of suppliers they use by an average of nearly 40 percent." (Encyclopaedia of Business, 2010). In order to identify preferred suppliers as well as suppliers that can meet requirements of an organisation, the purchasing department will carry out what is known as "Supplier Appraisal". Supplier appraisal is a series of tests that an organisation will carry out in order to score suppliers on a number of criteria, some of the criteria that may be scored are for example:
Litigation and insurance standing
The buyers will usually seek to obtain relevant information on a supplier for at least the past 3 years, thus enabling the buyers to identify any trends within a suppliers performance. Each factor can be weighted according to their importance to the buyers organisation, then based on these scores it allows a buyer to short list the best suppliers in the market, as well as being able to quickly disqualify any suppliers that do not make the grade.
Supplier evaluation should be seen as a critical process, but it is not without problems. Evaluation can be resource intensive and in some cases may not deliver a full picture of a supplier, if information on them is difficult to obtain or if that supplier is new to the market and has an unproven track record.
Because of its importance supplier appraisal is an ongoing continuous process that is carried out within the purchasing department, this allows the buyer to identify any changes in the suppliers performance and take action accordingly.
Access to External Markets / Cross-functional Teams
Many departments within an organisation rely on information that the purchasing department gains through its dealings with the organisations external environment. The purchasing department keeps informed of developments in new technologies as well as developments in new materials that are used within the organisations production function through its dealings with suppliers. This information can help an organisations strategic decision making, for example helping the organisations management in taking the company in a new direction in order to best utilise the new developments or respond to new market opportunities.
One way in which organisations utilise the purchasing departments knowledge is through the creation of cross functional teams. These cross functional teams are built up with individuals from departments across the organisation and enable the purchasing department to impart the knowledge right from the design process. This allows the purchasing individuals to also draw on outside knowledge from supply partners, who tend to be experts in their fields, with the goal to be the eradication of manufacturing and quality problems at the earliest possible stage, as well as the prevention of poor process design.
These cross functional teams have also helped to break down old barriers that can exist in an organisation between departments, Whereas before each functional department within an organisation would carry out their own process on a product then pass it on up the chain to the next stage, having minimal contact with the next department, Now each department interacts right from the beginning of the process increasing communication throughout the organisation enabling the purchasing department to gain a better insight in what is required of an individual product when looking for suppliers.
E-procurement or (electronic procurement) is defined as "Purchasing online. E-procurement systems are used to obtain materials and parts via the Web or using traditional EDI standards either for internal manufacturing (direct procurement) or office supplies and equipment (indirect procurement)." (YourDictionary.com, 2010).
With the advent of the Internet, an ever increasing number businesses now sell via computer technology online. The main reasons for this is that it can vastly reduce a businesses overhead costs and give them the ability reach a larger customer base on a global scale. This has the advantage for an organisation of creating a vast amount of suppliers that can cater to every need.
The major types of e-procurement are:
Web-based Enterprise Resource Planning (ERP): creating / approving purchasing using Web technology;
E-sourcing: Identifying suppliers using Internet technology;
E-tendering -- sending requests for information and pricing to suppliers and receiving responses using Internet technology.
E-procurement has the ability to deliver significant cost savings. By identifying preferred suppliers that can offer the best pricing or volume discounts. With the advent of e-procurement it has had a vast influence on how a purchasing department can conduct business. In large organisations for example, where it was the responsibility of individual departments for buying their own support goods and services, many different departments would use different suppliers for the same or similar items as well as duplicating items that other departments already have. With e-procurement it can provide significant savings by enabling the purchasing department to put in place a centralised ordering system that all the departments go through creating a significant advantage in that all purchasing information flows to or through a single point, allowing the purchasing department to identify areas of waste as well as making savings based on the reductions of inventories due to the removal of duplications.
Electronic procurement systems enable the purchasing department to automate time-consuming manual procurement processes that can be used to replenish frequently purchased items, for example integrating the e-procurement into a stock monitoring / manufacturing requirements system that automatically reorders stack when levels fall below a specific parameter. E-procurement software is specifically developed to optimise the procurement processes, this is usually done through an easy user interface coupled with advanced software functionality, which supports a high level of automation and compliance with corporate policies and strategies, enabling control from sourcing to purchasing.
E-procurement can enable the purchasing department to deliver far more than just lower prices. With e-procurement the purchasing department can impact various areas of the organisation, such as better productivity, faster planning, greater visibility and the elimination of unplanned, ad-hoc buying, Enabling the organisation to make a considerably higher overall return on investment not only from lower prices and percentage reduction as a result of organisation-wide, streamlined procurement, but critically, also from the internal efficiency gains that the technology brings.
Over all purchasing has grown from simple beginnings of the acquisition of resources into a valuable asset for an organisation. Purchasing has a vast reaching influence on all aspects of an organisation and if done correctly has the power to save the company money through a variety of activities.
Purchasing continues to add value to an organisation through its strategic functions from helping shape a company's corporate strategy by taking advantage of new materials and technologies, to the acquisition of better suppliers who can work with the organisation in partnership and greater fulfil the organisations needs. This adds value to the organisation as it eliminates waste and creates the ability to get the right materials, at the right price and at right time, allowing the organisation to complete its manufacturing commitments.
Purchasing also helps to streamline an organisation through the use of new and emerging technologies such as e-procurement allowing a company to make savings on smarter and faster acquirement of resources, from a greater number of sources's, allowing the purchasing department to drive down costs through the use of supplier competition and smarter ways of doing business.