Fundamentals of purchasing in Industry

Purchasing is one of the core activities of any economy. All types of organizations, whether merchandising, manufacturing or even non-profit, are continuously engaged in purchasing certain goods or services. In the business world purchasing is broadly classified into two groups: mercantile purchasing and industrial purchasing. Mercantile purchasing refers to the commercial activities wherein the buying of items is intended to their resale at a profit. Industrial purchasing involves the procurement of items for the purpose of consumption or conversion. The industrial purchasing encompasses the wider area and opens the avenues for their microscopic studies.

Industrial purchasing deals with the efficient procurement and management of issues incidental to it in respect of the following items:

Raw materials – Raw materials are the items which are purchased in their natural or fabricated state which needs further processing and fabrication e.g. Iron ore, crude oil, rubber, leather, yarn, granules, etc.

Components – Components are the finished products which are sub-assembled or assembled to form finished products e.g. a tire in automobile industry.

Consumable stores and supplies – These are the items which are required in the manufacturing operations but which normally do not enter into the finished products. They are also known as indirect materials e.g. lubricants, abrasives, paper, cleaning compounds etc.

Office supplies – The office supplies are the indirect materials which are consumed in the office. They include office stationery such as writing paper, stencil paper, duplicating ink, pins, pens, pencils etc.

Office appliances – Office appliances refers to office machines such as typewriters, duplicating machines, calculators, intercom system, air conditioning equipments etc.

Spares and tools – They include tools and parts required for repair, replacement and maintenance, such as bolts, nuts, hammers, pumps, wrenches, bearings, different types of tools, etc.

Machines and equipments – Various types of machines and equipment are required for different types of manufacturing operations and services. They include lathe, driller, cutter, furnaces, boilers, trucks, material handling equipment etc.

Meaning: Purchasing is one of the most common at the same time a strategic activity of the business. The success of any business activity is contingent upon having materials and parts, stores and supplies, machines and equipment available in proper quantity, with proper quality, at the proper place and time and at the proper price, popularly referred to as five R’s of efficient procurement. Failure to satisfy any of these criteria adds to the cost and reduces the profit margin. It is as good as conducting the manufacturing operations with obsolete machines and outmoded methods of production and institution sales efforts with inefficient selling techniques.

In a narrow sense, the term purchasing merely refers to the acquisition of some kind of property and giving of an accepted price on consideration in return. The broader meaning of purchasing is described as under by Westing, Fine and Zeng. Purchasing is a managerial activity that goes beyond a routine act of buying, and includes the planning and policy activities covering a wide range of related and complementary activities. Included in such activities are the research and development required for the proper selection of materials; sources from which those materials may be brought; selection of the supplier on the scientific on the scientific basis; order placing on expressly classified terms and conditions; the follow up to ensure proper delivery; the inspection of incoming shipment to ensure that both quantity and quality comply with the order; the development of proper procedure, methods and formats to enable the purchasing department to carry out the established policies efficiently; the co-ordination of the activities of the purchasing department with such other internal divisions of the concern such as, receiving, store keeping, traffic and accounting so as to facilitate smooth operations; and the development of a technique of effective communication with the top management of the company so that a true picture of the performance of the purchasing function is presented. Till the middle of the last century, purchasing was not considered as a major business activity. The entire complexion of this activity has undergone a sea change since last two decades. The clerical order placers have given way to value conscious purchasing personnel, skilled in price and cost analysis, product reliability, economic ordering quantity determination, learning curves, purchasing research, economic forecasting, supplier selection, contract negotiation, evaluation of supplier performance, value analysis, materials studies and the logistics of supply management. The modern concept of purchasing is effectively presented in a presidential speech made in 1966, before the shareholders of the Bethlehem Steel Company, Inc. (USA) that the company’s purchase department was headed by a voice president who is a member of the Board of Directors and the Executives Committee of the Company. There are about 1,000 people in the purchasing department dealing with the more than 30,000 vendors to whom are issued 25,000 to 30,000 purchase orders per month. These suppliers are located in 50 states and 60 foreign countries. More than one billion dollars are spent annually for materials and services Average inventories carried amounts to approximately 400 millions dollars. These figures indicate the role of purchasing in a large corporate sector. Such views are also expressed by John H Hill in a speech made before the National Association of purchasing Agents (NAPA – USA) describing purchasing traditionally has been considered a service function, a place where money was spent. Recent developments have shaken this point of view. Good purchasing is essential to good profits. The difference between good purchasing and poor purchasing can be the difference between outstanding results and mediocre performances.