Purchasing refers to the responsibility to procure supplies, materials, products, and services for use in business. Purchasing agents or buyers are part of the operational strategy in any organization. Retail businesses need the right combination of goods and services available at the right time to meet customer needs. Manufacturers need the right combination of materials, components, and services available at the right time in order to produce goods in an efficient, cost-effective manner.
The major goals of purchasing are to make sure needed goods and materials are available, to secure delivery in a timely manner, and to minimize costs. Typical functions of purchasing departments in a business include
• identifying sources of supply
• coordinating resource requirements for the different parts of the organization
• developing requests for proposals
• selecting sources of supply
• meeting with and negotiating details of supplier contracts
• overseeing supply contracts
• managing supplier delivery and payment processes
Purchasing agents are frequently part of business buying centers. The buying-center concept is the idea that in businesses and organizations, many people with different roles and priorities participate in purchasing decisions. Unlike consumer buying, where the consumer—alone or with assistance or influence from acknowledged opinion leaders—makes his or her own purchase decisions, in business buying a group often determines which products or services are purchased.
The typical business buying center will include a variety of roles.
• initiators—people who start the purchase process by defining a need
• decision makers—people who make the final decision
• gatekeepers—people who control the flow of information and access to individuals in an organization
• influencers—people who have input into the purchase decision
• purchasing agent—the person who actually places the purchase order
• controller—the person who oversees the budget for the purchase
• users—people who use the product or service.
In a buying center, purchasing agents often address the questions of “what to buy, where to buy it, and what will it cost?” Purchasing departments usually control vendor analysis, the monitoring and reviewing of the performance of suppliers with respect to timeliness and quality. Purchasing managers would probably be involved in make-or-buy decisions.
Since the 1950s, the role of purchasing in most businesses has become more important. Traditionally purchasing was seen as a clerical function, symbolized by clerks surrounded by paper in a windowless office far in the back of company headquarters. With the evolution of systems management, just-in-time delivery systems, total-quality management and other management strategies, purchasing became recognized as a cost-control center and a “player” in management decision making.
The importance of purchasing can be illustrated by what happens when purchasing decisions are isolated within a business organization. A story in the Wall Street Journal described how Ford Motor Company took a writeoff of $1 billion associated with purchases of palladium, a precious metal used in catalytic converters (pollutioncontrol devices in exhaust systems). Ford found it had too much palladium and that they had paid too much for it, and now palladium prices were falling “drastically and seem unlikely to return to their highs.”
In 2000 Ford managers approved purchasing-department plans to begin stockpiling the metal and make arrangements for long-term contracts with producers from other countries. Ford’s treasury department regularly used hedging to offset interest-rate and currency risk, but their treasury department did not work with the purchasing department, and purchasing managers were not involved in hedging strategies. In addition, the purchasing department apparently did not keep in contact with Ford’s research department, which was aggressively working on finding new ways to reduce the need for palladium while still meeting pollution standards. By 2001, Ford’s research staff had results showing the company could reduce its use of the metal by half, significantly reducing demand.
Palladium prices kept rising, eventually spiking at over $1,000 per ounce in 2000—but then the prices fell. High prices had induced other producers, particularly South African companies, to expand output. Combined with reduced demand, world palladium prices dropped by over 50 percent, and Ford found itself with a huge stockpile of metal bought at high prices, now worth considerably less. According to the Wall Street Journal, “Ford has instituted new procedures to ensure that treasury-department staffers with experience in hedging are involved in any major commodities purchase in the future.”
Today purchasing includes e-procurement, using Internet- based automated acquisition and management systems to reduce costs. The Institute for supply management, formerly the National Association of Purchasing Managers “claims that the use of e-procurement can slash the average cost associated with generating a purchasing order from $150 to $30... In addition, the technology may speed up the buying process, eliminate maverick buying, help negotiate bulk discounts, and improve employee productivity.” Supply-chain management is now a more widely used term than purchasing. Supply-chain management combines purchasing functions with logistics management.
A major resource used by purchasing managers in the United States is Thomas’ Register of American Manufacturers. This huge, green series of reference books, available in larger libraries or electronically, lists 170,000 manufacturers and 72,000 products and is used by purchasing managers to identify sources of materials and supplies. In addition, purchasing managers can submit orders and request quotations at the Thomas Register website.
See also distribution channel; just-in-time production.
Further reading
Hayes, Heather B. “Reaping the Benefits of E-Procurement: Not just a quick fix, e-procurement requires a thoughtful and thorough approach to produce the most rewards.” BioPharm, February 2002; Hodgetts, Richard M. Management Theory, Process, and Practice. Harcourt Brace Jovanovich, 1990; Institute for Supply Management website. Available on-line. URL: www.ism.ws; Thomas Register website. Available on-line. URL: www.thomasregister. com; Gregory L. White, “How Ford’s Big Batch of Rare Metal Led to $1 Billion Write-off,” Wall Street Journal, 6 February 2002, p. A1.