Purchasing is a fundamental function in an industrial establishment. An industrial enterprise is primarily meant for converting raw materials into finished products. The wheels of industry will not move unless materials of the right type are bought in right quantities and made available at right time. Needless it is to say that is buying function which is responsible for supply of materials to the factory.
As is well known, more than 50% of the total cost is contributed by a single element called materials. It is proved that a one percent saving in material cost is equivalent to nearly 10 percent increase in turnover. Saving in the cost of materials is achieved mainly through efficient buying.
An average manufacturer spends a major portion of his earnings on purchases and has the largest portion of working capital tied up in inventories. The annual reports of companies prominently illustrate the way their earnings are distributed. High financial stakes are involved in buying and the purchasing manager is the custodian of his firmâ€™s purse; his first and foremost obligation is integrity in spending its funds.
Added to the spending of major portion of earnings on raw materials is the tendency to buy an increasing proportion of requirements. Only in primitive economies, are products almost self-sufficient and in our economy, only the old fashioned of inefficient manufacturer continues to make everything himself, like a do-it your self home handyman.
The early manufacturer employed an army of workmen toiling way by hand to transform raw materials into finished products. The advanced manufacturer nowadays uses costly automatic machines in the manufacturing process, buying out whole sub-assemblies and components as well as materials from specialist suppliers; manufacturers in advanced economies are inter-dependent rather than self sufficient.
Purchasing can effectively contribute in import substitution and thus enable the saving of foreign exchange. Purchasing executives by the intrinsic nature of their job gain a good knowledge of a wide range of external industrial activities. Hence, more than anybody else in the organization, they are able to bring information about new products, materials and processes. This enables them to- suggest alternatives which can reduce costs or dependence on imports.
The purchasing is the main factor in timely execution of industrial projects. It is the known fact that mismanagement of purchasing function is a frequent cause of delays in executing industrial projects. At times this has led to costly stoppages, interruptions, delays and wastage in important projects. The economic, social, developmental and political consequences in these cases have been serious and a source of great embarrassment.
Purchasing is the key stone of materials management. Most companies have developed materials management around purchasing, often relegating the other functions to second class status. The materials management organizations that exist in real life organizations evolved out of purchasing departments in most cases and they are most likely to be headed by an ex-purchasing manager than anyone else.