The practice of correct purchasing management ensures that the company has the best suppliers to supply the best products and services, at the best total value. The purchasing function often spends more money than any other function in the business, so purchasing provides a good opportunity to reduce costs and increase profit margins. Given that the purchase is no longer just another activity to become a strategic element of the organization, today more than ever it is necessary to know the fundamental aspects related to this issue.
Introduction
Companies today operate in increasingly globalized markets and face strong competition with their peers, whether national or foreign.
Because of this, reducing costs is essential for the efficient and effective performance of any entity. No organization finds it economical to manufacture all the material it uses. The advantages of specialization are too great. The purchasing function often spends more money than any other function in the business, so purchasing provides a good opportunity to reduce costs and increase profit margins.
Purchasing is no longer just another activity to become a strategic element of the organization. The practice of the purchasing strategy is to ensure that the company has the best suppliers to supply the best products and services, at the best total value.
Purchasing activity plays an important role in most organizations, as purchased materials generally account for 40-60% of the value of final product sales. This means that relatively small cost reductions can have a greater impact on profits than equal improvements in other areas of the organization. (Ballou, Ronald H. 1991)
It is important not to confuse the terms supply and buy; It must be distinguished that the supply function has a broader character within which the concept of purchase is found.
The purchasing function "aims to acquire the goods and services that the company needs, guaranteeing the supply of the required quantities in terms of time, quality and price."
Carrying out purchases is becoming increasingly complex, due to the nature and diversity of the products or services being purchased, while taking into account the dynamism of the economic environment, technological changes and the growing demands for quality.
The purchasing function has evolved from traditional contributions to obtain the best prices, required quality, necessary service, etc., to more advanced functions such as innovation and prospecting for new markets, outsourcing of techniques that cannot be performed by the company, participation in product development, tasks that increasingly require greater technicality from buyers.
The complexity of purchasing management depends, among others, on the following factors:
- Annual volume of purchases and orders Environment in which the function takes place.
Industrial environment.
In this environment of searching for raw materials and components, the quality and price of which must be agreed in advance so as not to make the manufacturing process more expensive, in any case having to select the suitable manufacturers of these products in terms of flexibility, quality, reliability and price.; The purchasing function is generally handled by a purchasing agent who has the legal authority to execute contracts on behalf of the company. In a large company, the purchasing agent may also have staff that includes buyers and dispatchers.
In turn, within a manufacturing environment, it is not the same to manufacture for repetitive order stocks than to manufacture on request or to develop products referring to engineering specifications, in which both the required products and the suppliers are constantly changing.
In manufacturing companies, the purchasing function is supported by engineering drawings and specifications, quality control documents, and testing activities, which evaluate purchased items.
Service environments.
In these market-approved and finished-product acquisition environments, the role of purchasing is less important. However, in other services such as transportation and restaurants, the purchasing function is critical.
In the wholesale or retail services segment, purchases are made through a buyer who is responsible for the sale and profit margins of the merchandise purchased. Buyers typically must rely on historical vendor behavior or standard classifications.
A company that decides to buy a product instead of doing it, must manage a purchasing function. Purchase management takes into account numerous factors such as inventory and transportation costs, availability of supply, efficiency in deliveries, and quality of suppliers.
The basic responsibilities of purchasing management are:
- Maintain continuity in supplies taking into account the programs. Provide these supplies in accordance with the required quality standards. Obtain the necessary products at the lowest possible total cost, within the required delivery terms and conditions. Prevent price variations in the market, as well as current situations or trends that are of interest to the organization.
For effective purchasing management to be carried out, permanent coordination is necessary between the sales or operations departments and the purchasing department.
In order to fulfill its responsibilities, the purchasing manager must carry out the following activities:
- Search and evaluation of suppliers: It constitutes one of the most important activities of the purchasing function, tending to have a qualification of suppliers based on their ability to respond to our company, which constitutes a starting point for future relationships with them Maintenance of an updated file of products, with their technical characteristics, identification codes, suppliers, prices and delivery and payment conditions Permanent negotiation of prices, quality, presentations and delivery times, depending on the forecasts of Purchase and supplier qualification. Purchase forecast, in both technical, economic and financial aspects. Order planning by item and supplier, determining order volumes and expected launch dates.Preparation of purchase orders, launching of orders and follow-up of them until their reception and quality control, if required Solve discrepancies in the receipt of the product Analyze variations in prices, delivery times and quality
To meet its objectives, the purchasing function consists of clearly differentiated activities that we could summarize as:
- Study of supply sources (Market analysis) Selection of suppliers Control of the required quality specifications, including packaging, presentation, etc. (purchase quality management) These specifications are usually dictated or by a technical department (environment industrial) or by the marketing department (commercial environment) Price management, to achieve the cheapest possible purchases The management of delivery terms and conditions, to achieve maximum reliability, flexibility and reduction of delivery times. Follow-up and control of all operations carried out in all the agreements and conditions established by the supplier. The sale of surplus and obsolete products, to avoid economic losses.
Forms of purchase
In any company, not all purchases are carried out following identical processes.
The following are determining factors in the way in which the acquisition of goods is carried out: the usual activity carried out by the company, the importance of the company within the context of the market (purchasing power), the type of item to be acquired, the significance of the purchase, the geographical location of the supplier, the characteristics of the seller, etc.
It can be considered that, it will be possible to act more coherently, if they are independently defined:
- Normal purchases Acquisition of so-called minor items Imported goods Incorporation of fixed assets
However, it is reasonable to think that in certain cases, for example, the acquisition of an element that can be classified within what is called normal purchase, but that particular guidelines are taken of some of the three other ways of buying mentioned. (Klein, Miguel J. 1994)
Normal purchases
Within this way of purchasing, the raw materials to be incorporated in a production process and in other goods or elements representative of a general outlay identified with the area of production, marketing or administration are located.
Usually, these are elements about which information is available regarding the maximum, minimum quantity and the order point.
Summarizing, it can be said that it covers those elements of repetitive consumption for the habitual development of the company. (Klein, Miguel J. 1994)
Acquisition of minor items
The minor elements are those that are necessary for the development of the company but are required only at a certain time, such as a spare part, an accounting book, etc. The purchase of these items, being of a small amount, is generally made using a fixed fund. Even, these purchase operations are made for a limited amount.
It is not convenient to centralize this type of purchasing to a single department. The most convenient thing is for the person in charge of the sector who needs such a good to make the purchase. (Klein, Miguel J. 1994)
Shopping abroad
There is a marked difference in the way of acting between a local purchase and one made abroad.
When goods are imported, particularities related to the seller, freight, exchange and transport insurance, among others, must be considered. Special attention should be paid to the quality of the goods to be purchased. It is also necessary to take into account the relative to the currency used in the operation, emphasizing the risk that arises from the time the product is shipped from or leaves the supplier's warehouse until the buyer's arrival in the country.
Purchases made abroad are frequently made in a more considerable volume than for local purchases, to lower the costs of merchandise, freight, etc. Also, they are usually high-priced goods and for this reason the precautions to be taken must be stricter. (Klein, Miguel J. 1994)
Purchases of assets
It is characterized by being elements that do not require a permanent replacement. Includes raids, machinery, motors, tools, facilities, real estate, etc.
Given that the disbursement in these operations is, in general, important, the consent of a senior representative of the company, such as the general manager or the person who replaces him in case of absence, is requested for its authorization. or impossibility of that, or in the last instance, of the board of directors it is a question of a large-scale acquisition. (Klein, Miguel J. 1994)
Stages of the purchase decision
The main stages of the purchase decision process are as follows:
- Recognition of the need. The purchase process begins when the buyer recognizes the need to purchase a product or service by recognizing a difference between the desired state and the actual existing state. This need may arise from external or internal impulses Search for information. At this stage, the buyer must collect all the information he considers necessary to support his analysis and decision-making. This information is related to the definition of possible suppliers, information on the parameters of the offers of each supplier, the characteristics and demands of the company's consumers, characteristics of the supply object and other information related to the market and the company. Formation of alternatives.Based on the information collected, the buyer will determine the purchase alternatives they face, characterizing each of the alternatives with those relevant parameters. Evaluation of alternatives. The buyer in each purchase determines what the main selection criteria are. Based on this definition, each alternative is evaluated according to these criteria and based on the weighting of the different criteria, a comprehensive evaluation of each alternative is reached in order to select the one that is most convenient for the company.. Considering the previous evaluation and the force scheme of the actors of the purchase, the purchase decision is reached that includes a set of parameters such as: the supplier, the quantity to buy, the value of the purchase, payment method,subject of transportation, place of delivery, delivery date, characteristics of the product, container and packaging to be used and other elements. Execution of the purchase. This stage comprises the set of actions to execute the purchase decision taken previously. This stage is of great importance since it is in it that the materialization of the purchase is achieved and requires careful attention to execute the purchase, adjusting to the parameters that make up the purchase decision. Post-purchase monitoring. After the purchase is executed, monitoring of the product or service must be maintained throughout the consumption or use cycle in order to detect possible failures that may be the subject of a complaint, as well as increase the information about the corresponding brand, which is very useful in future purchases. (Gómez, Martha I. Acevedo,José A. 1998)
Shopping techniques.
Once the purchase decision has been made, various techniques can be used to carry them out:
Open orders: it is a purchase contract for certain items from the supplier. It is not an authorization to send something. The supply is only made upon receipt of an agreed document, which can be a supply request or a supply release.
Purchase without invoice: In a purchase environment without invoices, there is generally a single supplier of all units of a specific product.
Electronic Orders and Funds Transfer - Electronic orders and funds transfers reduce paper transactions. Electronic ordering can not only reduce paperwork, but also speed up the time to purchase.
Electronic Data Interchange (EDI) is a standard data transfer format for computerized communication between organizations. For example, with EDI the data for a purchase order (of the order, delivery date, quantity, number of parts, purchase order number, address) is arranged in the standard EDI format.
Purchase without inventory - The supplier holds the inventory instead of the buyer. Inventories on consignment are a related option.
Standardization: the purchasing department must make significant efforts to increase the levels of standardization.
Vendor relations
Viewing the provider as an adversary is counterproductive. Close, long-term relationships with a few providers are a better way. A good supplier relationship is one in which the supplier is committed to helping the buyer improve their product and win orders. Suppliers can be a source of ideas about new technology, materials, and processes. Shopping is a way to pass this information on to the appropriate people in the organization.
In addition, good relationships include those in which the buyer is committed to keeping the supplier informed of possible changes to the product and the production schedule.
The purchasing function and the suppliers must develop mutually advantageous relationships.
Quality of Purchases.
When a product reaches the hands of a producer or is used in the final product, one more link in a logistics chain is being closed that must be oriented towards quality for the process to be carried out successfully.
Advancing the relationship between buyers and suppliers is the way through which improvements in logistics management have to arrive. «The supplier has to intuit and help define the quality that will be required by the buyer. It has to define its own requirements with the intervention of all the departments involved and the support of the supplier ”.
Quality must be understood as the basis of this relationship, and inherent to it the concepts of communication and integration must be developed. The momentum that this area has gained with the application of ISO standards by many producers, marketers and suppliers, who have resorted to certification, is valuable.
The organization must ensure that the product purchased meets the specified purchase requirements, since the suitability of the raw materials and materials purchased will depend on the effect of these on the subsequent realization of the product or on the final product / service. To ensure that the purchase meets its objective effectively, a purchasing procedure must be developed; the purpose of which is to define the scope of the functions to be carried out by the purchasing department and to establish the basic lines to coordinate these functions vis-à-vis suppliers and other departments of the organization.
It will be conceived in accordance with the requirements to proceed reflected in the Quality Manual, ISO 9001 and / or other existing procedures in the entity that are convenient to consult.
Efficiency indicators.
Control index of the purchasing function.
- Purchase index.
Significance of purchases compared to sales in percentage terms. Cost index of the purchasing department.
Meaning of the cost of the purchasing department (management cost) in relation to the value of purchases. Cost of a purchase order.
It will be determined by the quotient between the cost of the purchasing department and the number of orders issued. Purchasing concentration index.
It reveals the average purchase amount per order. Workload index.
Average number of purchases per employee.
It is determined by the quotient between the value of purchases and the number of employees in the purchasing department. Supplier concentration index.
Collects the average number of orders that are awarded to each supplier.
It is obtained by dividing the number of orders by the number of suppliers. Turnover per supplier.
Indicates the volume of purchases by supplier.
It is obtained by dividing the value of purchases made by the number of suppliers. Raw material stock rotation index.
Indicates the number of times the average stock rotates with respect to the amount of raw materials (materials) purchased.
It is determined by dividing the value of annual purchases by the average annual stock. Reject index.
Relationship between the value of returns and the value of purchases, expressed in percentage terms.
It is obtained by dividing the Value of Returns by the value of Purchases and multiplied by 100. Financing index of purchases by suppliers.
Indicates the percentage of the value of purchases that is financed by suppliers.
It is obtained by dividing the average balance of suppliers by the value of purchases and multiplied by 100. Days of credit by suppliers.
If the analysis period is the year, it can be determined by the relationship between the value financed by the suppliers and that of the annual purchases and multiplied by the 360 days of the year. Profitability of the purchases.
It is obtained by dividing the profit (annual savings) obtained from purchases, divided by the annual cost of the purchasing department and multiplied by 100. (García Fernández, Nazario. 2002)
The main indicators of the Purchasing Department are:
- Value of total purchases / Total sales compared to the previous year Total purchases / Number of purchases Percentage of rejected purchases Percentage of production stoppage due to lack of raw material Inventory / Sales Average purchase order cost Average time of order delivery.Order number per month compared to the previous year.
New trends in purchasing policy
Today, new logistics trends have substantially changed this scheme, setting new priorities that together are more beneficial for the company.
According to these trends, the priority scheme would be as follows:
- Concerted quality. Delivery time. Flexibility in the face of changes in orders. Prices and payment conditions.
This new thought gives rise to the promotion of the so-called co-manufacturing relationship, through the selection of certain suppliers called co-manufacturers, with whom a relationship is maintained by virtue of which the product is not purchased but rather its manufacturing capacity; in the sense that a mutual commitment is created, based on an informative transparency, especially with regard to purchasing forecasts and manufacturing capacity in order to guarantee, by the buyer, a certain volume of purchases in exchange for obtaining the Provider maximum flexibility in supplies with reduced delivery times and product price.
In short, under this concept, the manufacturer-collaborator is one more link in the company's logistics chain.
Bibliography
Anaya Tejero, Julio Juan: “Integral Logistics. The operational management of the company. " Editorial ESIC. Madrid 2000
Procedure to diagnose the purchasing management of the Cuban company. Design proposal of a computer tool for its application and processing. Diploma work-CUJAE-2003
Heizer and Render, Production Management - Tactical Decisions, Ed. Prentice Hall.
Msc. Puig Domínguez, Violeta de la C: The new role of purchasing and its impact on the competitiveness of the organization. Institute of Foreign Trade.
