PURCHASING FUNCTIONS AND ROLES IN
What is Purchasing:
Purchasing is the act of and the functional responsibility for procuring materials, supplies, and services” (Giwa, Asaju, 1983) Non-marketers see purchasing as simply the act of or the process of buying. To the practitioner it involves determining the need and ensuring the supply of the need with the minimum cost. Thus, purchasing involves determining the need, obtaining the proper product, materials, supplies and services in the right quality and quantity, at the right price and time and from the right source and at the right place.
Importance of Purchasing
In the distant pass, the need of the individuals was relatively few and they could be supplied readily. Few purchases were made with growth in industrialization, the entire globe became the market for the products of the Industries and the need for the supplies became more demanding.
A study of the expenditure of most firms shows that more than 50% of their recurrent and capital expenditure are expended on purchases of both materials and services. Since the firms operate in a competitive market, the need to ‘buy right’ cannot be over-emphasized. There was the need to reduce the costs of production by reducing the cost of inputs.
To achieve economic purchasing, there is the need to have trained professional buyers. There is no need to re-emphasize that there is a large difference in the level of integrity for domestic and institutional buyers. This has brought us into the era of scientific purchasing.
The Purchasing Environment:
Purchasing, according to Lysons (1989) is the function responsible for obtaining by purchase. Lease or other legal means, equipments, materials, supplies and services required by an undertaking for use in production.
Those involved can thus be categorized into three groups depending on whom they do their purchasing.
a) Industrial Buyers: They are organized bodies. They make highly rational purchases. They are more concerned about the quality and the use of their purchases, e.g. manufacturers, extractive and service industries.
b) Institutional Buyer: These are buyers of goods and services for bodies that produce services but not necessarily on commercial basis e.g. hospitals, armed forces, local and state governments or hotels.
c) Intermediate Buyers: These are people engaged in commercial activities. They buy for resale or for facilitating the resale of other goods in the industrial and ultimate consumer markets e.g. distributors, retailers etc.
Evolution of Purchasing:
Purchasing represents a stage in the evolution of civilization. In the ancient times, most settlements were self-sufficient. Wars exposed the people to the arts and products of others. When the wars ended trading started, people sought what they lacked from the neighbourhood.
The clay work (cuneiform clay tablet) excavated at El-Bash Shamra and dated about 2.800 years B.C. carries on inscription which roughly translated needs “HST is to deliver 50 jars of fragrant smooth oil fifteen days after (a starting date) and during the reign of AS. In return, he will be paid 600 small weight in grain. The order will continue indefinitely until the purchaser or his son removes his consent”.
Despite the long history for purchasing, not much importance was paid to purchasing until recently. Initially, it was thought to be a simple routine job that can be combined with other services. However, the magnitude of the amount of money that goes into purchasing and the need for profitability has led to its professionalism.
Objectives of Purchasing:
Purchasing has been defined as “the act of obtaining materials of the right quality in the right quantity from the right source delivered to the right place at the right time at the right price (Lyson, 1989), In practice,-some of these rights are irreconcilable e.g. quality and price – the best quality is usually sold dearest.
Thus, each has to be analyzed in the light of the requirements and the purchasing environment. Some go with the objectives, which have to be balanced against the prevailing environment, however, the following are some of the general objectives of a manufacturing concern.
To make the maximum contribution to the competitiveness, profitability and survival of the undertaking.
To ensure continual flow of supplies to meet the requirements of production and other functions.
to ensure that equipments, materials, supplies and services are provided at the lowest cost commensurate to standard of quality and delivery.
To ensure that stock is neither too low nor too high stock should be at the level compatible with safety.
To minimize losses arising from duplication, waste, deterioration, obsolescence or pilferage.
To build up supplier goodwill through fair dealings, cooperation, assistance and prompt payment.
To integrate the purchasing activities with all related functions in the undertaking through free flow of information and expertise.
To keep under review purchasing policies, procedures and tactics that will make the above laudable objective achievable.
Duties of the Purchasing Manager:
To maximize the contribution of the purchasing department to the company’s profitability.
To advise management and the finance department on market trends that will affect future plans.
To manage the company’s purchasing department and maintain its integrity.
To advice management and the marketing department on purchasing and supply activities.
To maintain the list of approved sources of supply and to investigate new alternative sources.
To participate in the determination of specification and standard.
To determine the method purchase, source of supply negotiate the prices to be paid and to arrange for the delivery and storage of supplies.
To advice in the ‘make’ or ‘buy’ decisions.
To establish and maintain intelligent record system from which appropriate reports can be got.
Interdependency of Purchasing Functions
The purchasing department has a unique relationship with other departments. No company can stay in business unless its products can be sold at a profit. The purchasing department assists the production department by supplying high quality inputs that enhance high quality production.
The department buys the inputs at low prices that keep cost of production low and eventually the selling price to enhance high turnover.
The purchasing department is a source of information on the supply of inputs. Thus, the company can stock goods or the sales department may have to sell at lower prices to reduce stock.
Ethics of Purchasing:
Good purchasing officer must note the following in the process of his duties:
Must consider the interest of his company in all his transactions. He must thus follow the purchasing policies.
Must be receptive to competent counsel from his colleagues without impairing the dignity and responsibility of his office.
Should buy without prejudice but ensure to seek maximum ultimate value for each Naira expenditure.
Should be honest and practice fairness in all the buying and selling activities. He should denounce bribery and kickbacks.
Should give prompt and courteous receptions to all that call on legitimate business mission.
Should counsel and assist fellow purchasing agents in the performance of their duties.
Should co-operate with all organizations or individuals engaged in the activities designed to enhance purchasing.
Information received confidentially during the course of duty should never be used for personal gain. When the officer gives information, it should be true and fair.
A purchasing officer should not accept business gifts other than items of small intrinsic value e.g. diaries, calendars, etc.
Hospitality beyond what can be deemed to be modest must not be accepted. The scale and frequency of hospitality should not be higher than what the recipient’s employer would likely provide in return.
Limitations of Purchasing Authority
The purchasing Department does not operate with a blank cheque. It acts within a defined scope of authority. The purchasing authority is guided by:
The annual budget: The purchasing department derives its spending power from the company’s approved budgets. It cannot spend beyond what the budget authorized without the budget being reviewed or a supplementary budget made.
General management specific limit. At times, management may authorize expenditure to a certain limit. Purchasing to go beyond the specified limit, authority and approval must be sought from the authority.
Control by specifies regulation. Some companies require that expenditure on some specific items should be approved by the accounting officer over the item e.g. Executive action is required for the purchase of capital equipment.
Purchasing objectives. Purchases of materials for production or resale are the duties of the purchasing officer. Purchases primarily for the purpose of speculative profits should be subjected to the authority of management.
Amount required by user department too much stock is as bad as too little stock. The purchasing quantity is guided by the quantity that is required by the user department. Such quantity needed is determined by the rate of usage and ease of replenishment.
Type of Purchasing:
Purchasing takes place in two types of markets i.e. stable and unstable markets. On the stable market, factors of supply, demand and the price are reasonably stable. In the later, the supply and the price fluctuate substantially. Political forces, weather conditions and other unpredictable factors usually influence the supply of commodities under this category. A progressive purchaser therefore adopts the “purchase according to market conditions” in the following ways:
a) Speculative Purchasing: This is forward buying method, which aims at keeping material costs to a minimum. Speculative buyers buy for inventory appreciation. The total cost of keeping inventory must be measured against the resultant reduction of costs.
b) Forward Purchasing: This is the purchase of materials in a quantity exceeding current requirements, but not beyond the actual foreseeable requirements. The forward purchasing differs from speculative buying in that the later is propelled by an expected future need unlike the former.
c) Han-to-mouth-Purchasing: This is a method whereby the purchaser buys exactly what he needs currently. The method is often less economical. The advantage of the technique is that purchases are made at the average price. Inventory losses as a result of obsolescence are unminised and more cash are available for operations. The disadvantages are that there is increased cost in ordering various orders and the possibility of running out of order is high.
d) Hedging: This involves the purchase of or the sale of a future contract in a specific commodity to offset the purchase of a commodity. It is the purchase of a commodity for delivery in future period. Hedging is advantageous in that;
It protects inventory values during slums
It safeguards profit margins
It guarantees delivery promptly, and
It establishes a favourable material price.