What Is Purchase Management?

What Is Purchase Management
|Updated on: April 27, 2022

Purchase is an integral process in the majority of businesses. A manufacturing company purchases the raw materials or services needed to make its products. A retail company buys and sells items, while a wholesaler does the same in bulk. So, in both manufacturing and retail businesses purchasing drives the operation of the business. Therefore, purchasing and all its related processes should be managed for maximum quality and timeliness at the minimum cost. Purchase management is one of the most vital areas of a company’s operation that can directly affect the bottom line. It is essential to understand the objectives of purchasing management to get the best results for the business.

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What is Purchase Management? Meaning And Objective of Purchasing

Purchase management is managing the purchase of the goods and services that the company requires from suppliers and vendors. It is often an integral part of the company’s operations and is an opportunity to improve the efficiency and profitability of the company. The purchase process is usually meant to acquire the raw materials, parts, machinery, equipment, and services that the company requires at the right time and at an advantageous price.

The purchase of these goods and services should aim for the highest quality while also keeping the price as low as possible to enhance the company's profitability. Companies must pay close attention to business purchase management to maximize productivity and profitability. They should also monitor the quality of the procured items to maintain their quality standards. The timelines of purchases are important to ensure that the inputs required for manufacturing are always available in sufficient quantities whenever required. Good purchase management enables companies to stay competitive and achieve economies of scale.

Business purchase management also requires that the company select the right vendor(s) and maintain a good, mutually beneficial relationship with them. While maintaining business relations with regular vendors, the company should also minimize the risks of having too small a group of vendors.

Meaning and definition of purchasing

Purchasing is the buying or acquiring goods and services on behalf of a business or company. It is an organized process within a business that ensures that the company acquires the items that it needs, when it needs, and at a reasonable cost. The purchase function of a business is vital in a manufacturing company. The entire manufacturing process is dependent on the purchase of huge amounts of raw materials and input components. The purchasing function in such a company is an ongoing and recurrent activity.

The purchase process often starts with identifying the required items and then finding a supplier for the same. The purchase process then acquires these items in time and perfectly complies with the quality and specifications. Purchase management tries to minimize the money spent on purchases while also maintaining a steady input stream of the required raw materials and components. Purchase management keeps the purchase process efficient, accurate and cost-effective. The size and scale of purchasing may vary depending on the size and type of company. But, the objectives and general process of business purchase management stay the same.

Purchasing cycles

The purchase cycle is the series of steps or processes that the company follows to make a purchase. Every business has its variation of the purchasing cycle, and it starts with the identification of the need and ends with the successful purchase of the goods or service.

  • Identification of the requirement: The business has to identify the items or services they need. These could be the items that are required for the production cycle, goods for resale, office supplies, maintenance supplies, or articles for any other requirement. When a need is identified, the purchase cycle begins
  • Verification and requirements: After the need for a service or item is identified, the specifications or details must be listed. This may need discussion with the various related departments to determine the detailed specification and quantity of the requirement
  • Purchase requisition: This is a formal document detailing the items required, specifications, purpose, and quantity. This may be a document that is manually filled out or a software form that is submitted as a purchase requisition
  • Purchase approval: If all the purchase requisitions that are made are converted into orders, the company would have no control over its expenditure. A company usually has a system of checks and balances whereby a designated person, usually in management, has the authority to scrutinize purchase requisitions and decide whether they are approved. Sometimes, if the person considers that the company can do without the requested item, the purchase requisition may be rejected. If approved, the purchase order moves further in the purchase cycle
  • Supplier identification: Most companies maintain a list of pre-approved suppliers who they regularly place orders with. If there is no such supplier, identifying the best supplier for that purchase order starts. The terms of the purchase are negotiated and the order is confirmed
  • Supply: The purchased items are supplied as per the terms that were agreed upon. The vendor sends an invoice with the order
  • Payment: After cross verifying the purchase order, the supplier invoice, and the goods delivered, the payment is made to the supplier. There may also be returns and refunds that are handled in accordance with the agreement between the companies
  • Record keeping: The company's records are updated with the accounting and inventory information. If the entire purchase cycle is performed using business management software, the software will already have the details of the purchase made. This eliminates the tiresome task of repeated data entry at every step of the cycle

What is purchase management? 

The management of the purchasing cycle of the company to obtain the required items with the desired specification and at an attractive price is called purchase management. It aims to improve the efficiency of the company operations by delivering all the requirements in the required time. The best quality goods that perfectly match the requested specifications must be bought. It also aims to save money and improve the profit margins by minimizing the amount spent on purchases. Purchase management is an important process in any business, whether manufacturing, wholesale or retail. Purchasing management governs the purchase strategies of the company for cost management, profit, and efficiency.

Key objectives of purchasing

Understanding the objectives of purchasing management is imperative to comprehend how the process works. These objectives can be generally applied to different types of companies.

The most common objectives of purchasing management are as follows:

Availability of materials, supplies, and equipment at the minimum possible costs: For manufacturing, wholesale and retail businesses, the supply of items at the right time is vital to the company's operations. If there is any delay in the supply of items, the entire operation of the business could be severely impacted. Business purchase management aims to obtain the supply of goods and services to be available when required. The input cost of purchases impacts the profit margins of the products. Purchase management tries to reduce the cost of production by obtaining items at the lowest possible cost while also maintaining quality.

Enable regular flow of production: A smooth flow of the raw materials and components keeps the company's production line or supply chain going. Good purchase management sustains the regular production flow with the timely and accurate supply of items. This also helps keep productivity at an ideal rate. In a retail business, the steady inflow of items ensures that there is enough stock to be sold. Here, purchase management will also include the right selection of the most appropriate goods in demand.

Increase asset turnover: Purchase of inventory items is a significant investment of cash. This inventory holding is usually listed under assets in the company’s financial reports. When the purchase is inefficient, the company’s cash flows get locked up in purchased inventory. Bad purchase decisions can be very costly for a company. Items that are deadstock lock in cash and also cost money to store. If they are disposed of, it would usually be for a low value. But purchase that keeps inventory at a minimum and is matched by a brisk sales volume leads to efficient inventory management. This asset turnover improves the profitability of the company.

Develop Alternate Sources of Supply: Developing and sustaining good relations with a group of suppliers is ideal. However, overreliance on one supplier(s) from one particular geography is risky. If there are any unforeseen political or natural events in that region, the entire supply of that item would be cut off. If there is a flaw in an item supplied by one vendor, the company can always fall back on the other suppliers. So good purchase management involves reducing risk by maintaining a balanced mix of suppliers from different places. Having more than one supplier is also good to prevent supplier monopoly and keep prices competitive.

Establish Cordial Relations with Suppliers: Companies and their suppliers have a very interdependent relationship. It is good to establish and maintain very cordial relations with all the suppliers. This makes both parties more comfortable accommodating each other’s requests and requirements. When the supplier is confident of an ongoing relationship with recurrent orders, it is easier to negotiate a lower price and more flexible terms. The supplier might also give the company a more generous line of credit and other allowances.

Some of the benefits of a good relationship with suppliers are:

  • Competitive rates
  • Less time spent in negotiating terms and conditions
  • priority over other buyers, which is useful when materials are in short supply
  • priority intimation if there is anything new available
  • extended and more favorable credit periods and amounts

Achieve Close Co-ordination with Other Departments: Purchasing is an activity that impacts the functioning of many other departments in the company. So, purchase management aims to achieve seamless coordination with all the relevant departments and their personnel. This ensures the timely and smooth functioning of the company’s operations. Some of the departments that are directly involved with some of the purchasing functions are:

Production department: This is the principal department that requisitions items for purchase. The production department would create purchase requisitions for items and the detailed specifications, quality, and quantity. They will also specify the timelines within which the items are required. A good relationship between the production department and the purchase department keeps the production process fed with input materials.

Engineering department: The engineering department is in charge of the machinery and equipment used in the company. Since the production of goods depends on machinery, the engineering department has a vital role in the company. The engineering department should work closely with the functions of purchasing management to order any required new equipment and for spares and services required to keep the existing equipment in good condition.

Marketing department: The marketing department advertises the advantages and benefits of products being sold by the company. It is essential that the marketing department keep itself in sync with the actual details of the material used so that they can advertise according to the specifics and quality of the item. A marketing campaign that promises more than it can deliver is bound to fail in the long run and adversely impact the business and its reputation.

Finance department: Purchasing and finance go hand in hand. Purchasing involves paying for goods. So, the finance department has to work together with purchase to use the company’s funds in the best manner to obtain the necessary items, raise money, get the best price and plan the financial aspects of purchasing. The purchase department should negotiate payment terms that are agreeable to the finance department. Both departments need to work together to honor the company's payment obligations to its vendors in a timely manner.

Human resource department: Purchasing is a very people-oriented function. Suppliers and vendor companies are represented by people who negotiate with the personnel in the purchasing department. It is essential to staff the purchasing department with people who have the relevant skills. The human resource department must also support the functions of purchasing management in the ongoing training and skill development of the purchase department people.

Train and develop the personnel: The purchase department personnel will have to meet and do business with different kinds of people. Their people skills and the ability to negotiate while maintaining good relations with the suppliers are essential for the company. So, the purchase department should be attentive to its personnel's adequate training and development. The time and money spent on training the purchase department people will help the company when the purchase department negotiates more favorable deals for the company.

Some of the important aspects of purchase department training include; continual Improvement Process or KAIZEN, quality management, process audit, supplier upgradation or development, Production Part Approval Process (PPAP), and 5S work place management system.

Efficient record maintenance and management reporting: Purchasing involves a lot of paperwork and record-keeping. Impeccable and accurate record-keeping prevents lapses, mismanagement, and fraud in the purchase function. Accurate records, up to date, and easy to understand help management keep a close eye on the purchasing activities. Regular reports that are easy to understand should be a part of the purchase process.

Using software to achieve easier purchase management

As discussed above, purchasing is a very important function that can improve the efficiency and profitability of a company. The sheer volume of items, suppliers, and purchase orders that a purchase department handles may seem overwhelming. But, using intelligent business management software such as Tally makes it easy to manage, share and coordinate.

Recordkeeping is intuitive, and the data flows through the entire purchase cycle without the need for reentry. The paperwork also flows instantaneously from department to department, eliminating red tape and bottlenecks that may slow down the purchase cycle. It is easy to keep an eye on pending purchase requisitions, purchase orders, and payments using TallyPrime. TallyPrime also secures the purchase process and creates an audit trail for easier management and auditing of records. There is no communication gap between other departments and purchasing when they are all connected by the software.

Using TallyPrime for purchase management gives your purchase department the tools for greater efficiency and productivity. This can directly impact the company’s profit margins and bottom line. Easy record-keeping and process management make work easier for the purchase department and all the departments interacting with the purchase process. The software can also alert you when staple items are running low and need to be reordered, preventing stockouts.

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