Purchasing is the process of obtaining the goods and services required by an organization. The purchasing department consists of a purchasing team to carry out the purchasing functions. Purchasing involves several activities, and it forms part of supply chain management. Supply chain management is “a strategic approach to planning for and acquiring an organization`s current and future needs through effectively managing the supply base” (Monczka et al. 11). Most companies are emphasizing on improving their purchase decisions because it impacts profitability. The purchase process operates under a legal framework. As companies seek to reduce purchasing and procurement cost, they implement new systems such as materials management and JIT purchasing. Outsourcing is also a crucial part of purchasing.
Several legal aspects face the purchasing function. First, the purchasing manager is in an agency relationship with the company, therefore, means that the company is the principal and therefore the manager is the agent. The manager oversees the purchasing function, and it involves; determining the purchasing requirements, identifying the ideal supplier and agreeing on contracts with the supplier (Van Weele 8). The purchasing manager can enter into agreements with outside parties on behalf of the company. The level of authority should be clearly stated for the manager to carry out his duty legally. Upon appointment, the manager is given the mandate to agree to purchase contracts.
A purchase contract binds the organization and the supplier to the terms specified in the contract. If the employer documents the agency relationship, the manager will not be held personally liable. The purchase contract is another legal aspect involved in purchasing; therefore, specific requisites have to be present in a purchase contract. First, the subject matter should not be illegal. Second, there should be an agreement between the parties involved. Selecting the ideal supplier forms part of the purchasing function.
The selection process begins with the issuance of a request for quotation followed by receiving of offers (Monczka et al. 43). An offer is legally binding if it contains these three elements; intent to make an offer, communicating the intent, and determining the exact subject matter of the offer. The offers will lead to negotiations before the parties agree on a contract. A contract is the final legal aspect, and it has four terms, i.e. price, quality, quantity, and delivery terms. Women, minorities and disadvantaged groups have limited access to government contracts for the provision of services or goods. This practice has become common in privately owned companies as they seek to do business with minorities. However, a business has to attain the minority-owned or woman-owned business certification before getting access to such contracts. The minority groups and women usually have a certain percentage of the contracts allocated to them. To be eligible, one must have been in business for the past six months.
Materials management forms part of supply chain management. It involves all the activities from the time inventory is received as raw materials to the time it is transformed into finished products ready for consumption. The structure of the supply chain impacts materials management (Muckstadt 6). Purchasing is one of the activities of materials management alongside; requirements planning, inventory management, and materials handling. There are three significant reasons why most firms are improving their material management systems today. First is to enable capacity planning. The firm determines its capacity before purchasing raw materials. Capacity planning is done to avoid excess utilization or underutilization of the available resources. For instance, Producing 50 units in an hour using a plant that can produce 100 units in an hour means the plant is being underutilized; thus there is lost capacity. Materials management systems lead to efficient capacity planning and drive more firms to adopt the system.
Second is to reduce throughput time. Throughput is the time taken to convert raw materials into finished products. Inventory has a crucial role in business, but it also incurs costs. If a product has a long throughput time, it will stay longer in the work-in-process inventory. This increases inventory costs; thus most firms seek to reduce the cost. Materials management ensures materials are acquired when they are needed thus reducing the throughput time and in turn reducing the material handling and inventory costs. Furthermore, shorter throughput time results in higher levels of customer satisfaction. The shorter the time a customer waits for their order to be complete, the higher the level of customer service. Materials management reduces purchasing cost which in turn reduces material cost thus improving a firm`s profitability.
The third reason is to improve quality. The quality of the materials used will determine the quality of the finished product. Today, most firms have prioritized customer satisfaction. Customers often perceive goods to be of high quality if they match their specifications. Purchasing is integrated into materials management to ensure the materials acquired are of the right quality. Most firms are seeing materials management as a way of improving quality.
Just-in-time (JIT) purchasing is a system that aims to reduce the storage of raw materials and work-in-process inventory. The JIT system is an alternative to the traditional method of keeping stock. In JIT purchasing, materials are acquired when they are needed whereas in the conventional system materials are obtained and stored for later use (Lai and Edwin 6). For successful implementation of JIT purchasing, four activities are necessary. First is to make small sized orders. JIT seeks to reduce raw materials inventory, but large sized orders require inventory to be maintained. However, smaller order sizes will be more frequent; thus company`s need to reduce order set up a time so that they can benefit from JIT.
Second is to have a shorter lead time. The benefits of JIT to a firm can be realized if the lead time is short. In the JIT system, materials are obtained when they are needed for an order. The smaller order sizes will ensure the elements of JIT such as order preparation time and supplier lead time are reduced. The third activity is to have uniform production. JIT purchasing will be implemented effectively if the workloads on the workstations are homogenous. This will enable the purchasing manager to determine the material requirements and plan for them. The fourth activity is to develop close ties with suppliers. The small-sized orders will require frequent deliveries; thus manufacturers will interact with the suppliers closely. The interaction will enable the suppliers to make timely deliveries in the right quality.
In addition to these four activities, culture also impacts the implementation of JIT purchasing. The norms and way of doing things in a particular region can determine whether JIT will be successful. For instance, if the companies in a country lack proper communication channels, it will be challenging for the top management to interact with other employees to implement the system.
Outsourcing is whereby one company transfers part of its internal business operations to another. Outsourcing is an integral part of purchasing because the purchasing functions form part of the activities involved in outsourcing such as financial assessment and supplier selection (Monczka et al. 231). Organizations outsource because of four reasons. Reducing operating costs minimizes cost. Outsourcing transfers the cost of a business process. Second is to focus on the organization`s core activities. The secondary activities such as logistics supplement the primary activities of a business. If a firm outsources the secondary activities, it will be able to focus on the primary activities. The third is to increase the market share. Outsourcing enables a company to gain a presence in new regions and establish themselves before others. The fourth reason for outsourcing is to improve operational efficiency. A firm can free up extra capacity by transferring some of their business processes.
Strategic evaluation is the first elements of strategic outsourcing. It involves identifying the significance of the process to outsource. The second element is the financial evaluation. It is an evaluation of the financial gain or loss to be realized in the long and short term. The third is the supplier selection. Suppliers are selected based on the amount of value created for the buyer (Monczka et al. 248). Creation of a purchase contract also occurs in the third element. The fourth element is the transition to external sourcing model. It involves the execution of the contract and the appointment of a relationship manager to monitor performance.
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