What is Purchasing?

Updated on 14 November 2022

Table of Content

Organizations, similar to the general public, need to purchase services and goods to fulfill their everyday needs. Moreover, they are in dire need of a water-tight purchasing program to extract maximum value from every dollar they invest.

purchasing involves acquiring necessary items from third-party vendors via supply chains. It starts after the procurement teams have specified the corporate requirements. purchasing processes are essential to keeping organizations well-stocked, from purchase orders (PO) to inventory management. Besides, maintaining a healthy relationship with the suppliers is also a vital aspect of purchasing to avoid unnecessary hassles later on.

The purchasing team of an average business invests around half of every revenue dollar on components, ranging from services to raw materials. As such, the purchasing process has been witnessing significant traction over the recent past as organizations discover ways to reduce their operating expenses (OPEX). Now, business owners perceive purchasing as more of a strategic function that they can leverage to curtail bottom-line costs. Also, they are striving to level up their purchasing processes in order to boost customer experience.

Types of Purchases

Depending on business needs, the procurement team is responsible for buying the following goods and services:

Raw Materials

Raw materials include components businesses use to develop a new product, such as wood, metals, and minerals. These primary goods come in their pristine form as any processing makes them saleable.

Besides, the purchased raw materials do not exhibit uniform quality. Case in point, various types of coal vary by the sulfur content. Feed materials are generally inscribed with a grade indicating their quality level, allowing purchases based on the required grade.

MRO Components

Maintenance, repair, and operating (MRO) components include anything that does not go directly into businesses' end product; however, they are critical to running a business. MRO items include office supplies, spare machine parts, and cleaning supplies.

Since these items are scattered throughout organizations, tracking MRO inventory is a daunting task. The only way purchasing professionals determine when to order MRO inventory is when a user dispatches a purchase request. As every enterprise division and location utilizes MRO items, the purchasing team receives dozens, or even thousands, of small-ticket purchase requisitions.

Finished Components

Businesses purchase finished components from third parties for internal purposes. This category incorporates purchased supplies that require no significant processing before re-selling them to the end consumers. Additionally, companies may market a product developed by another manufacturer under their brand name.

Organizations, despite having exceptional design capabilities, outsource the production in order to offer an entire range of deliverables. Examples of such companies include Cisco, General Motors, and IBM. The purchasing (or engineering) team works in close collaboration with the end-product manufacturers to devise material specifications. Even though the purchasing personnel is not connected to the production of the final item, they must ensure that the item fulfills the customers' quality and technical specifications.

Semi-finished Components

Semi-finished products include all the items bought from third parties necessary to support manufacturing a company's end product. This entails assemblies, subassemblies, systems, and subsystems. For instance, an automaker usually buys seat assemblies, car frames, and wheel bearings as the required semi-finished components. While buying semi-finished items, the purchasing team must work closely with the suppliers to ensure optimum quality and cost-effectiveness.

Manufacturing Support Items

Manufacturing support materials include the items required to pack and ship end-consumer products, such as boxes, pallets, bags, tapes, and master shipping containers. These items are directly associated with a company's manufacturing operation.

Services

Companies bank on third parties for specific activities or services. For instance, they may hire a heating and cooling technician to manage repairs beyond the maintenance staff's expertise. Or they may approach a lawn care service to maintain the grounds around the office premises.

Typical services consist of legal support, consultants, web hosting, and customer assistance. Like MRO items, the purchasing of services happens throughout the business hierarchy. Hence, most companies shed limited attention on them and manage service purchasing at the departmental or facility level.

Capital Machinery

Capital machinery purchasing incorporates buying assets intended for usage for at least a year. It breaks down into two major categories. The first includes a standard set of equipment that comes with no special design needs. Furniture, computer systems, and general-purpose material-handling components are common examples.

The second category includes capital machinery developed explicitly as per purchasers' requirements. Examples are new production units, specialized manufacturing equipment, power-generating equipment, and specialized machine tools. Buying these items demands close technical involvement between sellers and buyers.

Transportation

The purchasing personnel invests in this specialized service to manage inbound and outbound material flows, such as freight and third-party logistics (3PL). Before finalizing the third party, the purchasing team thoroughly analyzes and filters 3PLs the same way they do with suppliers of manufacturing items. Moreover, they go with vendors who can deliver coordinated logistics and transportation services for the entire organization, including packaging, warehousing, and assembly. Since several shippers cover a larger geographical region, the purchasing expert can bank on fewer transportation providers.

Some companies can develop their own manufacturing equipment and other essential supplies. That being said, every organization does need these outsourced items to ensure uninterrupted operations.

8 Critical Purchasing Cycle Steps

Unlike customer buying habits, organizations have a more formal method of purchasing. Instead of making impulse purchases, decision-makers compare the third parties, prices, and the quality of goods/services before reaching a conclusion.

A typical purchasing consists of the following steps:

Identifying the Need/Problem

The purchasing program begins with any employee (of all ranks) within the organization realizing the need for tools, products, or services that will support regular operations. Then, the purchasing team works along with other teams to determine the requirements and find the best possible solution.

For instance, if some employees encounter hefty travel and fuel expenses as they reside far from the workplace, the organization can allow them to work from home and invest in effective communication and collaboration tools.

Creating a Purchase Requisition

A purchase requisition is an internal document forwarded to the purchasing team or manager by a company's employee (s). The purchase request includes the complete detail of the required service/product, along with the sender's information.

Purchase requisitions below the decided corporate budget are updated automatically into the PO and later submitted to the third party. On the flip side, random requests are forwarded to the relevant official for review before getting transferred to PO.

Searching for Potential Third Parties

The third step of the purchasing cycle is looking for potential third parties. If organizations do not have an established collaboration with a third party, they can attend trade shows, conduct online research, or ask for recommendations from acquaintances.

Drafting an RFP

POs that receive budget approval are returned to the purchasing team, which then creates a request for proposal (RFP). For large purchases, companies write a formal RFP and send it to select third parties. They can also make the process public to allow anybody to participate in the bidding. For smaller purchases, this could be as linear as looking at the price tag on a website. Interested third parties submit their bidding and review based on reputation, price, regulatory history, and performance history.

Assessing and Picking the Suitable Third Party

After the response of potential bidders, the purchasing team filters out and picks the ideal third party based on certain criteria.

Subjective criteria:

  • Vendor's and/or middle person's reputation
  • Competence
  • Already existing collaboration

Objective criteria:

  • Location
  • Price
  • Reliability
  • Product quality
  • Delivery time (Tentative)
  • Technical specifications
  • Terms and conditions
  • Easy operation and maintenance
  • After-sales process

Contract Negotiation

The third party who wins the bid receives the agreement. Then, the purchasing manager discusses with the selected vendor and settles on mutually-agreed terms and conditions. Accordingly, they refine and check the contract before signing. After inking the deal, the PO receives a legally binding agreement between the buyer and the seller. In some cases, the purchasing manager might also need to establish a line of credit with the third party.

Placing the Order

After signing the contract, the purchasing team formally places the order. Both parties agree (in writing) to the specifics, including delivery times, price, and fees. For future reference, businesses keep a copy of this agreement in their files.

Checking Product Quality

The third party delivers the services or goods within the pre-decided time window. After the order arrives, the purchasing team checks it for any defects or anything the vendor has failed to deliver.

For bulk orders, this could be a formal assessment involving key decision-makers in the enterprise and the vendor's sales personnel. For smaller purchases, it is generally informal. That said, punctuality is key as if any problem arises with the product, the third party should address them before the purchasing team releases the remaining payment. A record of these reviews helps identify and monitor any issues that might crop up later in the buyer-seller contract.

Why Beroe

As a leading provider of procurement intelligence, Beroe provides businesses across continents with a simple, strategic, and automated way to manage their direct and indirect spending. In a world where companies must be more effective and efficient, Beroe's procurement solutions promise end-to-end transactional analytics, better transparency and insights, on-time market intelligence, and better supply chain visibility. The productivity suite consists of features, including category management, spend analysis, and low-cost country sourcing, to help clients meet the most urgent issues and keep up with the global trends. Besides, procurement intelligence enables organizations with cost savings and to stay prepared for any supply chain disruptions.

For more information, visit Beroe LiVE.Ai®

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