A Comprehensive Guide to the Purchasing Department
Every organization aims to create financial stability by optimizing its activities with resources. To procure these resources, organizations need a tailored plan to meet their strategic and operational needs.
In a company, the purchasing department is an organizational unit that fulfills these responsibilities. So, let's examine the purchasing process and how a purchasing department works.
What is Purchasing?
Purchasing is the process of purchasing or acquiring goods and services to make supply chain management more efficient. The goods, materials and equipment purchased in this process play a key role in raising the quality of the products/services produced by the organization. As a result, the purchasing process affects product quality and helps optimize costs in the value chain.
What is the Purchasing Department?
A company's purchasing department is responsible for procuring the goods, raw materials and services necessary to run the organization effectively.
Now, every organization has unique needs when it comes to purchasing and supplying equipment, raw materials and services.
These needs define the purchasing process and how the purchasing department works. Based on these needs, an organization determines the responsibilities of the purchasing department and streamlines purchasing plans to guard against demand-supply barriers. Let's understand the role of a purchasing department in this process.
Role of the Purchasing Department
To understand how the purchasing warehouse is used, it is important to follow the general business instructions and the role it plays in P2P (Procure to Pay) management. Purchasing departments play two roles in an organization:
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Strategic Procurement: In this role, the purchasing department plans high-level purchasing activities based on the organization's business goals. Strategic purchasing department responsibilities help strategically supply goods at economical prices and optimum quality. Decisions such as in-house production or procurement from external suppliers are taken at the strategic purchasing stage.
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Operational Procurement: This role is also described as "tactical purchasing" where all purchasing department responsibilities are focused on dealing with business operations and management. Repetitive orders, inventory restocking and bill payments are maintained to keep the production line running at optimum capacity. Operational purchasing primarily addresses the long-term needs of the company.
Based on these roles, an organization may identify various purchasing department functions and how they are to be performed.
Basic Functions of Purchasing Departments
All purchasing department functions are aligned with an organization's business objectives. Some of the basic purchasing department functions include:
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Identify business requirements for goods, materials, and services
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Find reliable suppliers to meet these requirements
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Negotiate prices, establish quality and terms of delivery
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Adjusting order quantities in supply contracts and making quotation requests
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Coordinate delivery and storage operations
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Run quality control and product testing
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Manage budgets based on ROIs and payments
Lets examine the three main purchasing department functions in detail.
Getting the Goods at the Best Possible Price
Purchasing departments must continually evaluate materials based on quality and, more importantly, pricing! To maximize profitability, organizations need to source products efficiently. For example, it is economically impractical to purchase small quantities from a large seller. The procurement team should provide bulk discounts on these orders and negotiate with alternative vendors for better pricing.
Supply of Raw Materials to Sustain Operations
The purchasing department must maintain the necessary purchases to maintain day-to-day operations while procuring the goods at the best price. From raw materials like iron and plastic to machinery, production tools and even office supplies, they all need to be procured for the business to run smoothly.
Compliance with Industry Protocols
In addition to maintaining operations, all goods and services supplied by the purchasing department must also comply with industry standards and company policies. Sellers must ensure that the raw materials are of good quality before delivering large orders. The procurement department should also establish a specific purchasing policy that checks for quality compliance at every stage of purchasing.
But before establishing any purchasing policy or procedure, an organization must assemble a strong team of professionals specializing in supply chain management.
Purchasing Department Staff
Purchasing department staff consists of a variety of professionals who identify procurement needs, manage demands, control budgets, and supply goods at competitive prices. Purchasing department staff includes:
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Purchasing manager :The manager who leads the department oversees all purchases and works closely with company executives to fully understand their business needs. Based on this, purchasing managers distribute purchasing department responsibilities among purchasing officers.
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Purchasing Officers:Under the supervision of the purchasing manager, a team of professionals carries out the purchasing activities. They research and evaluate needs according to the order size and business priorities determined by the manager. Their work helps the purchasing manager work with procurement agents and make the best purchasing decisions for the organization.
How Does the Procurement Policy and Procedure Work?
The above personnel perform the functions of the purchasing department by following a purchasing plan or a purchasing policy. An organization can set its purchasing policy and establish a clear procedure for making business purchases.
Here is an overview of a standard purchasing procedure for an organization:
Spending Limits
An organization's primary purchasing policy is to purchase goods at the best prices. The purchasing department must strictly define and follow the spending limits for each item in the order. This way, the purchasing department does not spend unnecessarily or cut costs.
Authorized Dealers
After setting spending limits, the purchasing procedure should also list all available authorized dealers. This list should be maintained and updated regularly to ensure access to the best sellers in the market. All external parties involved in the procurement process, from large vendors to small-scale suppliers, should be listed in the policy.
A list of materials
In addition to the vendor list, the purchasing policy should also make lists of purchased items. Office supplies and other daily essentials should be listed together. Likewise, industrial goods and other items required for bulk orders should be listed separately. These listings should be properly categorized to give precise orders for each purchasing unit.
Prioritization
In making these lists, the purchasing department should follow a policy of prioritization determined by purchasing managers and key business stakeholders. This policy highlights purchases that come first in the budget. Accordingly, the list of consumables can be customized before purchase orders are allocated - learn more about the difference between purchase requisition and purchase order.
Contract Negotiations Policies
When purchase orders are ready, the organization must follow strict rules in pricing negotiations. Under these policies, the purchasing department should not focus on lower prices at the expense of quality. Instead, the quality of goods should be optimized by comparing prices between vendors.
Vendor Management
During these negotiations, vendors and suppliers must be managed properly. The procurement policy should emphasize the importance of efficient vendor management. Ensuring correct order placements, placing detailed purchase orders, and sending advance notices for urgent purchases are some of the policies the organization should follow. These will help create and maintain a reliable, profitable and long-term partnership with vendors while preventing vendor fraud.
Purchasing Department Duties and Responsibilities
After establishing an effective purchasing policy, the organization can implement various purchasing department responsibilities and duties. These responsibilities are further categorized as competitive duties and non-competitive duties.
Competitive duties and responsibilities of the purchasing department include:
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Comply with state, local and federal purchasing laws
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Working with government agencies for subsidies and other benefits
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Acquiring goods at competitive prices
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Maintaining long-term exclusive partnerships with top vendors
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Making the best offers and taking orders before commercial competitors
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Sending lucrative offers to acquire vendors in advance
The responsibilities of the purchasing department from a non-competitive perspective include:
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Researching goods and products carefully according to quality, price and delivery conditions
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Evaluate vendors based on their work history and procurement capabilities
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Evaluation of the quality of goods at all stages of the procurement process
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Creating transparency in delivery and order processes
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Generating final financial reports to calculate ROIs
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Discovering new fulfillment abilities through industry conferences
All purchasing department duties and responsibilities must be carried out effectively to ensure the success of a business organization.
Most Important Purchasing Departments
5 Benefits
When the above purchasing department responsibilities are successfully fulfilled, the organization begins to see benefits. An organization can experience the various benefits of efficient purchasing throughout its business operations and production.
1. Cost Optimizations
The biggest benefit of a well-managed purchasing department is that the organization can generate instant savings through cost-effective purchasing. He can spend wisely and save money to reinvest in other business activities. The purchasing department may purchase goods from various suppliers to take advantage of warranties, discounts and concessions.
2. Risk Control and Supply Security
Besides the cost advantages, various risks of supply chain management are solved through purchasing department functions. By diversifying its supply chain, a company can manage the risks associated with suppliers. In addition, purchasing managers can take appropriate steps to secure their supply chain and avoid higher risks such as poor vendor selection, market traps, possible fraud, loss of quality, and improper delivery.
3. Strong Vendor Relationship Management
While these risks are reduced, buyer-supplier relations are strengthened. A dedicated purchasing department works closely with vendors and agents. With long-term purchasing contracts, the purchasing department can also help sellers realize the profits of supplying goods to the organization. It helps sellers stay loyal and trustworthy to the organization.
4. Work Quality Improvements
Purchasing departments can indirectly improve the production quality of the business by partnering with the best suppliers. They can help other departments achieve their goals and operate at high performance levels. They can also monitor quality and contribute significantly to the timely delivery of final products.
5. Leveraging Innovation and Technology
The purchasing department provides a competitive advantage to the business by replacing traditional raw materials with innovative substitutes. The purchasing department may also adopt accounting automation, content services, ERP, inventory control systems, workflow management software, document management systems, and outsourcing technology solutions to address supply chain challenges and automate manual tasks.
Solution
In the coming years, purchasing departments will evolve at the scale and pace of disruptive transformation. New materials will replace traditional materials and managing a larger mix of suppliers will present more challenges. In such scenarios, the key to success for an organization is to work with the best purchasing consultant. Every organization today must find a great opportunity by re-evaluating their procurement activities and achieving cost savings in the value chain.