The management of the manufacturing entity has to give a lot of their time and attention to the task of purchasing. If the company fails to do so, it may result in an interruption in the entire system.
What is Purchase?
Purchase means procurement of materials, components, parts, and supplies of the manufacturing concern. These are required at the time of production of goods. Its aim is to make available the materials in the right quantity, right quality, at right time, at the right price, and from the right source.
The primary concern of a material purchase department are:
- What to buy?
- How much to buy?
- When to buy?
- From where to buy?
- At what price to buy?
Steps Involved in Purchase Process
To make effective purchases the company can follow these steps:
- Accepting only duly authorized purchase requisitions from various units and departments
- Finding out multiple sources of material supply and choosing the best vendors among different vendors.
- Preparing purchase orders and executing them.
- Receiving materials and inspecting them.
- Returning or replacing the defective items from stock.
- Checking and passing bills to the suppliers for payment.
Composition of Purchase Department
Let us take a quick look at the composition of the Purchase Department of an enterprise:
- At the top, there is a Purchase Manager
- Then comes, the Purchase Officer who reports to the purchase manager.
- After that, there are various assistants who report to the purchase officer. These include:
- Tender Assistant
- Purchase Order Assistant
- Follow-up Assistant
- Records Assistant
- Coordinating Assistant
Methods of Purchasing
There are two methods of purchasing:
- Centralized Purchasing
- Decentralized Purchasing
Centralized Purchasing System
As the name signifies, Centralized Purchasing is one in which the purchasing department of the company is situated at a specific place. Further, all the purchases are made by that single unit, for various manufacturing units. This means, there is a single head, under which all the factory requirements are fulfilled.
The primary advantage of this system is that it prevents duplication and overlapping in purchasing. Also, it facilitates material control and efficient storekeeping.
The Head of the department is known as the Purchase Manager or Chief Buyer. He is so appointed to look after all the purchasing requirements of different departments, branches, and units.
Advantages of Centralized Purchasing
- Ensures a consistent procedure and policies for procuring material and supplies
- The benefit of bulk purchasing, i.e. material can be purchased at a low price and favorable purchasing terms.
- Standardization of materials and elimination of varieties
- Reduces purchase cost
- Expertise development in purchasing
- Reduces investment in inventories
- Exercise greater control
- Undivided responsibility
- Maintenance of consistent buying policy
- Increased buying power, which strengthens bargaining position.
- Reduction in transportation cost to a great extent.
- Prevents reckless purchases.
- Reduces the carrying cost of inventory.
Disadvantages of Centralized Purchasing
- Requirements for specific items remain unattended.
- High initial investment is required in purchasing materials.
- May cause delays in receiving material, which can interrupt the production process.
- Not appropriate when the location of branches is scattered, i.e. at different geographical locations
- In an emergency situation, materials cannot be bought from local suppliers.
- Replacement of defective items takes time.
- Expensive because of the increase in administration cost of a separate purchase department
Considering the above advantages, we could say that centralized purchasing is best when:
- A company operates only one plant
- A company operates two or more plants that are close to each other. Also, the requirement for raw materials is almost the same.
Decentralized Purchasing System
When multiple purchasing departments are set up for different units/branches. Each department is responsible for purchasing materials for that specific manufacturing unit only. Such a system, wherein each unit makes its own purchases is a decentralized purchasing system.
In other words, when the departments or branches independently purchase materials and supplies to fulfill their needs, it is decentralized purchasing. Therefore, depending upon their requirements, the branches are authorized to purchase materials. And so, in case of emergency, materials can be bought from local suppliers also.
It must be noted that when the branches or plants are located distantly, then this system can fulfill the requirement of materials in a better way by making purchases in the local market.
Advantages of Decentralized Purchasing
- Purchase of material by each branch and department whenever required.
- Materials are bought in the right quantity and quality, and also at right time.
- Direct contact with suppliers
- Reduction lag time between indent and receipt of material.
- Reduces paperwork
- Reduces cost of operations
- Immediate replacement of defective materials
- No heavy initial investment.
- Instant placement of purchase orders
Disadvantages of Decentralized Purchasing
- The benefit of bulk purchase, i.e. economies of scale and discount cannot be availed.
- Lack of specialized knowledge in the purchasing staff.
- Over and under purchasing of material
- Effective control of materials is missing
- Lack of cooperation and coordination among different units and departments of the concern.
Factors Determining Purchase System
- Product Type
- Type of material bought
- Plant location
- Availability of expertise
- Availability of local suppliers
- Management policy
In the case of centralized purchasing, only one purchase department exists which possesses the authority to make all the purchases. On the other hand, in the case of decentralized purchasing, each branch or department is independent with regard to purchasing material, as and when required.