Small Business: The Function of Purchasing

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The Function of Purchasing

Sam Holtz, the owner of a small foundry, complained bitterly one day about the amount of defective material he was receiving. "The raw material is guaranteed to meet quality specifications so as to contain less than.005% impurities. For the past three weeks, though, our castings have been turning out rougher than they should. I'm sure that last shipment of raw material wasn't as pure as it should have been. What do I do now?"

In another plant, Joe White was wondering what to do about a new supplier of electronic components he had just purchased from. "I got a good price on the first shipment, and so signed an order for two more shipments. The bill I got for this last shipment is almost $600 over that of the first. I told the supplier to take it back or reduce the bill, and he said that his quotation gave him the right to increase prices as inflation and labor expenses rose for him. I know I could get the shipment for less, elsewhere."

Both these situations highlight the need to follow good purchasing procedures to reduce the incidence of such problems.

In this section you will review the activities which lead to effective purchasing. Specifically, you will explore the procurement cycle which concerns decisions on:

how to determine the firm's purchasing needs
finding a supplier who will best satisfy purchasing needs
negotiating and making the purchase
communicating the purchase decision to the supplier and to relevant personnel within your firm, and
a follow-up procedure for evaluating your purchasing decisions

What is the function of a buyer in a manufacturing firm? At first glance, it may seem to be to find and purchase a quantity of material for the best price. But price is not the only concern. Low-priced material may not be a bargain if it is of unacceptable quality or if delivery is not reliable.

Clearly, the purchasing function involves more than obtaining the best price. It also involves buying the best value, which means buying:

the right quantity and quality
at the best price
from suppliers who are reliable and provide good service

One way to obtain the best value on a purchase is to set purchasing objectives and carefully follow the procurement cycle. This is explained later in this section.

Purchasing Objectives

It is often helpful to state the goals of purchasing for your business. In this way, you will never lose sight of the purpose of the purchasing function and will be able to make more intelligent purchasing decisions.

Here is a sample list of purchasing objectives:

to provide an uninterrupted flaw of materials and services for company operations

to find reliable alternative sources of supply

to buy at the most economic order quantities

to buy the best value: a combination of right quality at the best price with the best supplier service

to maintain good relations with vendors

The Procurement Cycle

Effective procurement consists of a series of steps which form a cycle. The steps in the cycle can be described as follows:

1. Determine needs. Before you buy anything, it is necessary to know what you need to buy and how much. It is important to remember that determining what you need involves not only quantity, but quality decisions as well. Determining and specifying appropriate quality requirements, in some situations, is a more difficult task than deciding what quantity to buy.

2. Select the supplier(s). When there are many suppliers to choose from, it is not simple to choose those who will give the best value - not only in price but in service, and consistent quality as well. Selection of suppliers may also mean finding more than one acceptable vendor if the purchased product is so important that you would suffer substantial losses if it were not available. In such a situation, in case the primary supplier cannot meet your needs as a result of a heavy workload, strike, unavailability of raw materials, etc.

When deciding to use more than one supplier, you have to weigh these advantages against the possible disadvantages of higher price and poorer service when you buy smaller quantities from two vendors rather than larger quantities from a single, reliable one.

3. Negotiate the purchase. In addition to specifying quantities and obtaining agreement on price, this can involve guarantees, method of payment, containers and packaging, delivery dates and other details of the purchase. Proper documentation of the purchase agreement is part of negotiation and assures that any questions or disputes that may arise will be settled in line with your expectations.

4. Follow-up. Here you look at the quality of product and service as well as the accuracy of quantities to determine what improvements, if any, are needed for the future.

Food For Thought
Addiction can work against you, or it can work for you. It just depends on what you're addicted to. When you get yourself addicted to success, you'll want more. You'll do whatever it takes to get it.
Look at how many people are addicted to cigarette smoking. It is a smelly, disgusting habit. It's expensive, unhealthy and alienates other people. Yet millions continue to do it. They are unwilling to stop themselves. Why? Because it makes them feel good. Or how about heroin? This addiction is on the rise again. Using herion requires involvement in an underground culture. It is expensive, it involves sticking a needle into one's own body, and it consumes and destroys life. Yet more and more people are doing it. Why?

Because it feels good.

Success can feel good, too. It can feel very good. And unlike tobacco or heroin, the "high" from success and accomplishment doesn't fade in a matter of hours.

Once you've had a small success, then it becomes easier to get addicted to success. The "high" of accomplishment makes you want more. That's why it is important to set some small, quickly attainable goals. When these goals are reached, you "feel good" and you look for ways to do it again. That's how most addictions start out -- small. Each time you experience success, savor it. Enjoy it. This is vitally important, because the more you "feel good", the more addicted you'll be.

Get yourself addicted to success, and you can't help but succeed. Start small, and really savor each accomplishment. You'll be "hooked" in no time. Because it feels so good, you won't want to stop.

A great freedom comes when you have done everything that needs to be done. When you don't have the burden of things you've said you'd do "later", you are free to pursue your dreams.
When something needs to be done, do it now. Then you only have to deal with it once. If you keep putting it off, you spend an enormous amount of energy worrying about it and feeling guilty about it. And it's still not done. Who needs that? Either do it now, schedule a specific time to do it, or decide NOT to do it. Don't carry around a lot of vague "laters". They clog your brain and your spirit, and slow you down.

When you stop stockpiling "laters" and start taking decisive action, you gain clarity, focus and effectiveness. Do it now!

The way to true abundance is to reject the scarcity mentality.
Stop dwelling on what you DON'T have. Instead, focus on what you COULD have, what you could BE. It makes all the difference in the world. Trying to get what you want by taking it from others will never work. Whether your actions are legal or not, you'll always come up short. Because this "zero-sum" mentality presumes scarcity. And when you dwell on scarcity, that's what you'll get in your life.

Learn to think with an "abundance" mentality. You can start by being thankful for the things you do have. Learn to appreciate the beauty around you. Realize that it's not necessary to own or control the sunset, or the sky, or another person in order for them to fill your life with joy. Understand that you can have lasting success only by providing