Purchasing Management

Purchasing management is the management of the purchasing process and related aspects in an organization. A purchasing management department can be formed and operated by one or more employees in order to ensure that all goods, supplies, and inventory needed for the organization to operate are ordered and kept in stock, as well as control inventory levels and costs associated with purchasing the items. Purchasing is the first phase of Materials Management. Purchasing means procurement of goods and services from some external agencies. The object of purchase department is to arrange the supply of materials, spare parts and services or semi-finished goods, required by the organization to produce the desired product, from some agency or source outside the organization. The purchased items should be of specified quality in desired quantity available at the prescribed time at a competitive price. In the words of Alford and Beatty. Purchasing is the procuring of materials, supplies, machines, tools and services required for equipment, maintenance, and operation of a manufacturing plant. According to Walters, purchasing function means ‘the procurement by purchase of the proper materials, machinery, equipment and supplies for stores used in the manufacture of a product adopted to marketing in the proper quality and quantity at the proper time and at the lowest price, consistent with quality desired.”

Thus, purchasing is an operation of market exploration to procure goods and services of desired quality, quantity at lowest price and at the desired time. Supplier who can provide standard items at the competitive price are selected.

Purchasing in an enterprise has now become a specialized function. It was experienced that by giving the purchase responsibility to a specialist, the firm can obtain greater economies in purchasing. Moreover purchasing involves more than 50% of capital expenditure budgeted by the firm.

Purchasing is a managerial activity that goes beyond the simple act of buying. It includes research and development for the proper selection of materials and sources, follow-up to ensure timely delivery; inspection to ensure both quantity and quality; to control traffic, receiving, storekeeping and accounting operations related to purchases.” The modern thinking is that Purchasing is a strategic managerial function and any negligence will ultimately result into decrease in profits.

Objectives of Purchasing

The purchasing objective is sometimes understood as buying materials of the right quality, in the right quantity, at the right time, at the right price, and from the right source. This is a broad generalization, indicating the scope of purchasing function, which involves policy decisions and analysis of various alternative possibilities prior to their act of purchase. 

The specific objectives of purchasing are:

1. To pay reasonably low prices for the best values obtainable, negotiating and executing all company commitments.
2. To keep inventories as low as is consistent with maintaining production.
3. To develop satisfactory sources of supply and maintain good relations with them.
4. To secure good vendor performance including prompt deliveries and acceptable quality.
5. To locate new materials or products as required.
6. To develop good procedures, together with adequate controls and purchasing policy.
7. To implement such programmers as value analysis, cost analysis, and make-or-buy to reduce cost of purchases.
8. To secure high caliber personnel and allow each to develop to his maximum ability.
9. To maintain as economical a department as is possible, commensurate with good performance.
10. To keep top management informed of material development which could affect company profit or performance.
11. To achieve a high degree of co-operation and co-ordination with other departments in the organization.

Purchasing Managers, Buyers, and Purchasing Agents

Purchasing manager is the primary individual responsible for buying materials, parts, supplies, products and services necessary to manufacture a specific product or sell an item produced by the parent company or subsidiary. He or she should be organized, detail oriented, have an understanding of basic accounting practices and inventory management.

The purchasing manager must retain good relationships with vendors, work closely with accounting, credit, and shipping and receiving departments to insure all that the flow of purchase to inventory runs without issues. These responsibilities must be held with the utmost seriousness since errors in this area can affect the entire financial balance of a business.

A good purchasing manager must first establish a beneficial working relationship with its vendors. Negotiating for the best pricing structure, the guarantee of acceptable availability and dependable shipping times insure that the inventory is maintained and the productivity is stable. An undependable vendor can cause delays in production, lost sales and even financial instability if allowed to continue in the relationship without strong guidelines being set by the manager. Communication and organization work hand in hand to help the purchasing agent establish a stock forecast and keep ordering at a reasonable level.

The accounting department, which includes accounts receivable, accounts payable, and credit, must also work closely with the purchasing manager to determine how much money is allocated to inventory and periodic purchases, how quickly invoices are paid, and how accurately the invoices are when received. In this area, the purchaser needs to be an excellent record keeper and have an understanding of how the accounting department's system works. An accurate flow between these groups is an important task that must be handled carefully, since money is the strongest link in the business chain.

Lastly, having a grasp of the company inventory and how the shipping and receiving departments function daily will prove to complete your foundation successfully. When a company has a detailed oriented and organized shipping department, the purchasing manager can feel confident that the items ordered will reach the dock, be inspected, and moved into inventory with limited problems. Having a team of individuals of like mind will act as quality assurance for whatever enters your inventory. The purchasing manager wears many hats within a company but if focused can accomplish the ultimate goal of any company-to be productive and highly profitable.

A buyer's market is a situation in which supply exceeds demand, giving purchasers an advantage over sellers in price negotiations. The term "buyer's market" is commonly used to describe real estate markets, but it applies to any type of market in which there is more product available than there are people who want to buy it. The opposite of a buyer's market is a seller's market, a situation in which demand exceeds supply and owners have an advantage over buyers in price negotiations.

Purchasing agents, also known as buyers, generally work in the purchasing departments of large companies or governmental entities. Centralizing many of the organization's buying functions saves money and creates a fair process to assess proposals from various suppliers and sales representatives. Selling to a purchasing agent may be different than to your other clients who do not employ that position. Dealing with agents, who can be aggressive and difficult to contact, requires special considerations, especially for smaller companies facing competition from big businesses.

Request for Proposal

Before a purchasing agent buys from a supplier, a request for proposal may be distributed to several companies that carry the required item. The RFP specifies all documents needed, along with pricing, for a company to be considered as a vendor. Each organization may have different requirements, but you will likely need to submit specifications of the product or service, a time line for delivery and information about your company. Do not make exaggerated claims about your item or the ability of your business to supply it on a large scale. If you have doubts about meeting the requirements, it is best to wait for an RFP that you can fulfill.

 Communication

Building relationships is part of the selling process. With most contacts, sales representatives become acquainted with them on a professional and personal level. This helps in matching a product with the customer's needs. Even though it may not be a simple task, attempt to contact the purchasing agent directly. If you are successful in obtaining a phone number or email address, introduce yourself and ask pertinent questions about the organization. Inquire about details that may not have been specified on the RFP. After you submit your proposal, contact the buyer again to keep updated on the progress of choosing a vendor and to answer any questions.

 Procedures

Submit the necessary paperwork and pricing as directed by the purchasing department, agent or request for proposal. Reject the notion that you might win the bid without providing all requested documents. If you are familiar with an employee outside of the purchasing department, do not ask that person to intervene on your behalf, as it may not always work in your favor. Purchasing agents do what's best for their companies and work independently, though they may confer with other employees.

Negotiations

The price of your product or service in comparison to competitors is important in determining whether you will win the bid. Just as vital, however, is the quality and benefit of your product. Emphasizing how your item is superior to others and how your company will provide excellent customer service makes the purchasing agent take notice. If your product contains specialized features needed by the organization, you may be contacted by the purchasing agent to negotiate your price down to match the lowest bid from a substandard supplier. Do not undersell yourself in the hope of future business that may never materialize. There is value in what you offer, so reduce your price only to the extent that you will continue to make a profit and be able to serve your customer at the best of your ability.

The Objectives for Purchasing in Manufacturing

The manufacturing process depends on raw materials, as well as supplies. In a small business, your need to keep costs down may always seem to be at war with your need to produce the best quality. You can balance these needs by creating objectives for the person in charge of your purchasing. Setting objectives allows you to think through your company's needs while keeping an eye on expenditures.

Alignment with Objectives

Purchasing must conform to company strategy. For example, you may have decided that your marketing department must explore a new region and offer specific products to customers in that region. Your purchasing manager must increase the raw materials and supplies that are necessary to manufacturing that specific product. Similarly, if you decide to phase out a product, your purchasing agent must gradually reduce the orders for materials and supplies for that product. In a small business, these kinds of changes can represent a high percentage of your overall marketing strategies. That means whoever is doing your purchasing can make a big difference in what you spend and how well focused you are. If your business is so small that the person in charge of purchasing has other duties and does purchasing part-time, make sure she understands the importance of changing purchasing to match strategy.

Replacing Obsolete Stock

The person in charge of purchasing must constantly monitor inventory losses due to damage, deterioration or outdated features. The materials that go into your manufactured products must be of sufficient quality to provide you with a finished item that is free of defects and is up to current standards. The purchasing manager sets an objective of reviewing inventory and keeping up with improvements to make sure you are using the best materials available. For a small business, this kind of attention to quality can give you a competitive edge over larger companies who may be slow to upgrade inventory.

Master Agreements

Your purchasing representative can set an objective of securing master agreements with suppliers. These agreements ensure the delivery of routine orders without having to reorder. Having a master agreement in place can free the purchasing agent to pay attention to less routine matters, and ensure that you are always supplied with the minimum amount of materials you need. This can be crucial if your purchasing is assigned to an employee part-time. The master agreement will help that employee manage that process. Your buyer should also set an objective of periodically reviewing master agreements to make sure they match your current needs and offer the best prices.

Value vs Cost

The goal of purchasing is not always finding the lowest possible price. A buyer must keep an eye on value. This means appraising materials and supplies according to how much is actually useful. Paying low prices for supplies you throw out is not a way to save money. The purchasing agent must analyze how much you spend and how much profit you realize from your purchases to make sure you get a good value. In addition, you may want to pay a premium for materials that are superior and provide you with a better product you can charge more money for when you sell it. This attention to value can give a small business the advantage over large companies that may focus more on cost-cutting.

Objectives of Purchasing Management at the Strategies Level

You can improve business performance by aligning the objectives of purchasing management with your business strategies. At the strategic level, purchasing decisions affect profitability and business growth. For a strategy to be effective, purchasing management objectives have to support its goals. By making sure your purchasing decisions are in line with strategic objectives, you can use purchasing management to help build your business.

Value for Money

Ensuring that what you buy has high value for the company is a key purchasing function, buy what constitutes value depends on your strategic business goals. If you want to grow your business by offering low-cost goods, a matching purchasing management objective is to negotiate low supplier prices. If you want to increase profitability by charging premium prices for the highest quality, your purchasing managers have to ensure that your suppliers deliver the best products available. Review purchasing objectives and align the value they provide with company strategies.

Long-Term Relationship

When you have long-term or exclusive relationships with suppliers, you often obtain lower prices, more reliable service and improved support. Your business strategy may be more effective if supported by such relationships, but it is up to your purchasing management to negotiate them. Purchasing objectives should include the pursuit of long-term relationships if they might be a strategic asset. If your strategy is to deny your competition access to a supplier, your purchasing management may have to negotiate an exclusive supply agreement.

Continuous Evaluation

A strategy of continuous improvement and increased efficiency can only succeed if supported by purchasing management objectives. Suppliers have to undergo continuous evaluation, subject to standards similar to those for internal business processes. When supplier efficiency and performance increases in line with other business functions, you can can reduce processing and production costs. Put in place purchasing management objectives to include benchmarks for suppliers in terms of product failure rates, on-time delivery percentages, and competitiveness. Continuous evaluation against such benchmarks lets you identify preferred suppliers and those with exceptional performance.

Information Technology System Integration

Your business can achieve substantial economies if your suppliers can integrate their information technology system functions with yours. For example, instead of a supplier having to ask your staff whether your stock of the supplier's products is running out, the supplier's IT systems can access your warehouse records directly and automatically ship more products when stock runs low. Strategically plan for purchasing management to support this direction and consider such integration possibilities when selecting suppliers. Specific purchasing objectives might be to automate supply of products you need regularly; automate receiving, invoicing and payments; and integrate your system's tracking of quality issues and customer support with that of key suppliers.

Purchase Order

Purchase orders (POs) are documents of authorization that are issued by a buyer and extended to a seller. Their main function is to specify the terms of purchase that will exist between the two entities, at least in regard to all purchasing activity specified in the document. This form of sales order may be used to authorize a one-time purchase, or provide the means for establishing and governing a series of purchases over an extended period of time, usually one calendar year.

Before a purchase order is produced, many businesses make use of an internal document that is known either as a purchase requisition or simply a requisition. A department or other entity within the company structure submits a request for the purchase of specified goods or services using this document. The requisition usually carries a specific identification number, making it relatively easy for the purchasing department to keep track of whether or not the request has been approved, denied, or is still under consideration. In the event that the appropriate purchasing agent approves the requisition, a purchase order is issued to determine the terms and conditions under which the purchase is made. This often involves identifying the vendor who will fill the order, the unit price for the goods or services provided, and the total purchase price. Often, vendors include the order number on the invoice for the filled order, making it easy for accounts payable to process the invoice and apply the charges to the department that originally requested the order.

Along with use in evaluating and approving requested purchases on a one-time basis, this document can also be used to authorize several purchases over a specified period of time. This is often referred to as a blanket PO or blanket order.

For example, if a department within a given company wished to use audio conferencing over the course of the business year, it would submit a requisition to the purchasing area that covered the number of call minutes needed to successfully hold those conferences for that entire year. The purchasing department then seeks to secure a vendor that will provide the service at a reasonable per minute/per line rate. Once the vendor is identified and approved, the purchasing agent issues an order to that vendor, who in turn tracks the minutes used and makes sure the blanket PO number is referenced on each invoice issued to the customer throughout the year.

While larger corporations more often use both a requisition form and a purchase order to keep track of its ordering activity, smaller companies sometimes combine the two documents, effectively using the same identification number for requesting the purchase of items and approving that request. At times, the decision to use a single document or both documents has to do with complying with governmental regulations as well as maintaining a comprehensive internal history. As long as the documentation used creates a consistent and accurate record of the transactions, and provides the company with the detail it needs, either approach will work.

The four main types of purchase orders

There are the four main types of purchase orders, such as:

• Standard purchase orders: a standard purchase order is typically used for irregular, infrequent or one-off procurement. As mentioned above, it contains a complete specification of the purchase, setting out the price, quantity and timeframes for payment and delivery. A restaurant might raise a standard purchase order when it purchases new tables and chairs. If all goes well, this should be a one-off purchase for the restaurant, and the contract will be fulfilled once the chairs are delivered in good order.
• Planned purchase orders: like a standard purchase order, a planned purchase order is relatively comprehensive. A planned purchase order requires full details of the goods and services to be purchased, and their costs. Dates for payment and delivery are also included in a planned purchase order, but these are treated as tentative dates. Issuing a release against the planned purchase order places individual orders.

For example, a restaurant might require 50,000 disposable place mats in one year – the manager could create a planned purchase order with a commercial printer detailing the price and quantity with a tentative delivery schedule. After using the first 5,000 place mats, the restaurant would create a release against the purchase order to order more.

• Blanket purchase orders: When balancing administrative costs against the need for quick and consistent deliveries of goods or services, blanket purchase orders provide a welcome advantage to the owner of a small business. If properly executed, a blanket purchase order saves both the buyer and seller a considerable amount of time and money.
• Convenience: Although the mechanics of a blanket purchase can vary, the theory behind them is always the same. The goal is to create a standing purchase order with predetermined terms and conditions that will save administrative time for buyers and sellers who wish to do an extended amount of business together over a period of time and within certain limits. The main components are a period of performance and some type of limitation on quantity or dollar amounts expended.
• Material and Supply Orders: A common type of blanket purchase order sets up pre-negotiated line items for specific materials or supplies consumed on a frequent basis. For instance, if a business purchases many paper towels and garbage bags from the same company throughout the year, a purchase order with two line items is pre-established at an agreed unit price for each item, and with a limit on how many units can be bought or dollars can be expended for each line item within a year. When goods are needed, the supplier only needs to deliver; the buyer receives the units and pays upon receipt. The contract is typically negotiated to end when the line items, dollar values or time limits have been reached.
• Service Orders: Blanket purchase orders can also be created for services rendered. If frequent maintenance or repairs are required, for example, pre-established prices can be negotiated for each type of service much like a blanket purchase order for materials or supplies. Payment is made upon signature approval from an authorized employee at the purchase location to confirm that the services were rendered complete as outlined in the blanket agreement.
• Limit of Liability Orders: Another type of blanket purchase order can be executed based on a specific time frame and dollar limit of liability, but without detailed line items. These types of agreements are helpful when reserving a limited budget for consulting services for a specific project within a given time frame. For example, if the total budget for a report writing project was $10,000, the buyer would create a single-line-item purchase order with a quantity of 10,000 units at $1 per unit for a total of $10,000 to be executed within a one-year period. The quantity would represent the dollar values to be spent on various portions of report writing as later defined during the year, agreed to by both parties and then delivered in $1 increments. If the first was report defined, written, and delivered with an agreed-upon cost of $2,000, the buyer would receive a quantity of 2,000 units at $1 per unit for a total of $2,000 payable to the consultant. The remaining value on the purchase order would then be $8,000. Subsequent reports would be defined, written, delivered, and paid in the same manner until the total budget of $10,000 was consumed from the purchase order.
• Contract purchase orders: a contract purchase order sets out the vendor’s details and potentially also payment and delivery terms. The products to be purchased are not specified. A contract purchase order is used to create an agreement and terms of supply between a purchaser and vendor as the basis for an ongoing commercial relationship. To order a product, the purchaser may refer to the contract purchase order when raising a standard purchase order.

Methods of Purchasing

Some of the methods of purchasing are discussed as follows:

Purchasing by Requirement

This method refers to those goods which are purchased only when needed and in required quantity. The goods which are not regularly required are purchased in this way. On the other hand it refers to the purchase of emergency goods. These goods are not kept in store. Purchasing department must be in knowledge of the suppliers of such goods so that these are purchased without loss of time.

 Market Purchasing

Market purchasing refers to buying goods for taking advantages of favorable market situations. Purchases are not made to meet immediate needs but are acquired as per the future requirements. This method will be useful if future needs are estimated accurately and purchases are made whenever favorable market situations arise. The market situation is constantly studied for forecasting price trends.

The advantages of this method are: lower purchase prices, more margin on finished products due to lower material cost and saving in purchase expenses. This method suffers from some limitations: losses in case of wrong judgment, fear of obsolescence, higher storing expenses due to more purchases.

 Speculative Purchasing

Speculative purchasing refers to purchases at lower prices with a view to sell them at higher prices in future. The attention in this method is to earn profits out of price rises later on. The purchases are not made as per the production needs of the plant rather these are far in excess of such requirements. A cloth mill may purchase cotton in the market when prices are low with the attention of earning profits out of its sales when prices go up. Speculative purchasing should not be confused with market purchasing.

The former is done to earn profits out of future price rises whereas the latter is concerned with purchasing for own needs when favorable market situations exist. Though speculative purchasing may result in profits but there are chances of prices going down in future, fear of obsolescence and incurring higher storage costs.

 Purchasing for Specific Future Period

This method is used for the purchase of those goods which are regularly required. These goods are needed in small quantity and chances of price fluctuations are negligible. The needs for specific period are assessed and purchases made accordingly. The requirements for such purchases may be assessed on the basis of past experience, period for which supplies are needed, carrying cost of inventory etc.

Contract Purchasing

In the words of Spiegel it is “the purchasing under contract, usually formal, of needed materials, delivery of which is frequently spread over a period of time.” Under this method a specific quantity of materials is contracted to be purchased and delivery is taken in future. Even though the goods are procured in future but the price and other terms and conditions are fixed at the time of contract. This method may be useful when price rises in future may be expected and material requirements for future may be accurately estimated.

Scheduled Purchasing

Under this method the suppliers are supplied a probable time schedule for material requirements so that they are in a position to arrange these in time. An accurate production schedule is prepared for estimating future material needs. The suppliers are informed of probable needs and orders are sent accordingly. The schedule provided by the purchaser to the vendor is not a contract. This is only a gentleman’s agreement for terms and conditions of purchases. The main objectives of this method are: minimum inventory, prompt service low prices, quality goods etc.

Group Purchasing of Small Items

Sometimes a number of small items are required to be purchased. The prices of these items are so small that costs of placing orders may be more than prices. In such situations the buyer places order with a vendor for all these items. The purchase price is agreed to be by adding some percentage of profit in the dealer’s cost. This method will be used only when dealer’s records are open to inspection for determining his cost. This type of purchasing reduces the cost of the buyer by eliminating much clerical work.

Co-operative Purchasing

Small industrial units may join to pool their requirements and then place bulk orders with dealers. This will help them in availing rebates on large quantity purchases, cash discounts and savings in transportation costs. After receiving the materials these are divided among the member units. Co-operative purchasing helps small units in availing the benefits of bulk purchasing.

Roles of a Purchasing Department

Purchasing departments are responsible for procuring supplies. This largely involved order-placing and was primarily a clerical position. However, as the development of strategic planning and the advent of just-in-time purchasing made purchasing a more crucial business function. Today, purchasing is often referred to as “supply chain management” and the purchasing department has taken on a larger and more vital business role.

Supply Sourcing

One of the main roles of the purchasing department is to source supplies and parts, and then purchase them. In large companies, this may also include deciding whether to make the item in-house. Purchasing departments often work alongside product development teams to source materials and determine cost of the finished product. Purchasing departments may use trade publications to source suppliers, or go straight to the manufacturer. Finding the correct item at the correct price can be difficult, and purchasing departments may also work to assist suppliers in manufacturing the item needed. This can involve providing considerable assistance to the supplier.

Bidding

For items needed in bulk, or specialist items, purchasing departments often use competitive bidding to choose a supplier. The department will then be responsible for all aspects of the bidding process. For example, when the purchasing department of the Port of Houston chooses a supplier, it publishes a public notice, writes detailed instructions on the bidding process, accepts companies onto the approved list of bidders, handles bid security money, opens and reads the bids publicly and makes a recommendation on which bid to accept.

Supplier Management

In addition to finding supplies and negotiating contracts for the supplies, purchasing departments are also responsible for monitoring the supplier's performance. Purchasing departments must evaluate the supplier's performance and quality control. This can include monitoring delivery times, quality, cost and performance. For suppliers in other countries, this can also mean monitoring working conditions and workers’ rights. Large firms and public organizations often certify suppliers once they are shown to meet performance targets. This may involve a training and education program, and detailed inspection of suppliers.

Cost Control

Purchasing departments, especially in government agencies, may also be responsible for maintaining strict cost control. For example, in a 2010 article on hotel purchasing specialist site Food Buyers Network, John Schalow suggests that to get the best price, purchasing departments need to ensure suppliers themselves get a lower cost from distributors and manufacturers. This can be done by increasing delivery size, paying on time, ordering online and making sure suppliers use the best practice.

 Legal Controls

Purchasing departments must also be aware of the laws applying to purchasing. For private companies, this is primarily contract law, but for government bodies, there may be state and federal laws regulating purchasing.

For example, school district purchasing departments in Texas must know that it is a state criminal offense to avoid using competitive purchasing when it is required; and that while federal law requires a bidding process to be used for all child nutrition purchases more than $100,000, Texas state law requires a bidding process for any purchase over $25,000.

 Purchasing Process

The purchasing process for companies breaks down into eight clear steps. In the first step the company identifies a need, for which the answer is the purchase of a product. The final step is the execution of a purchase contract. The steps in between build an organized, informed process that results in the company purchasing the right product for the need from a qualified supplier whose product is the most durable for the price.

Identify Need

Identify the need for a product purchase. For example, a lawn company wants to offer mowing services to its clients. To do this it needs to purchase a mower. Thus, the need to make a purchase of a product, a mower, is identified.

 Select Specific Product

Select a specific product to meet the need. For example the lawn company must select which type of mower from the many push and riding varieties on the market meets the company& amp; #039;s need for a mower the best.

 Appoint Purchase Team

Put a team together to manage the purchase process, including finalizing the list of required technical specifications for the product and the bid solicitation and award process.

 Specify Technical Specifications

Arrive at a list of required technical specifications for the product to ensure it meets the company& amp; #039;s needs.

 Budget for Purchase

Establish a budget for the purchase relying on the range of prices identified by the research done in Step 3.

 Research Potential Suppliers

Research the various product types that fit the need along with their suppliers to identify the most durable model at the best price. If the lawn company decides to purchase a riding mower, research is conducted into which brand and manufacturer provides the most durable product for the price asked.

Solicit Bids

Solicit bids from the manufacturers and suppliers of the identified product that meets all the required technical specifications.

 Award Contract

Select a supplier from the bids submitted and award the purchase contract.

 

Functions of a Purchasing Department in an Organization

Most major companies and even some government organizations have a purchasing or procurement department as part of everyday operations. These departments provide a service that is the backbone of many manufacturing, retail, military and other industrial organizations. Many individuals, even some who work for these companies, are unaware of what the purchasing department does, why it exists or what purposes it serves. To understand better what the role of the purchasing department is, consider some functions it performs.

Procuring Materials

One role of the purchasing department is to procure all necessary materials needed for production or daily operation of the company or government organization. For a manufacturing company, this might include raw materials such as iron, steel, aluminum or plastics, but it also might include tools, machinery, delivery trucks or even the office supplies needed for the secretaries and sales team. In a retail environment, the purchasing department makes sure there is always sufficient product on the shelves or in the warehouses to keep the customers happy and keep the store well-stocked. With a small business, it is especially important to keep inventory ordering at a reasonable level; investing large amounts of capital in excess stock could result in storage problems and in a shortage of capital for other expenditures such as advertising or research and development. Purchasing also oversees all of the vendors that supply a company with the items it needs to operate properly.

Evaluating Price

A purchasing department also is charged with continuously evaluating whether it is receiving these materials at the best possible price in order to maximize profitability. This can be challenging for a small business that may purchase in lesser quantities than a larger vendor and which thus may not receive the same type of bulk discounts. A purchasing department in a small business needs to shop around to find the best vendors at the most reasonable prices for the company's particular size orders. Purchasing department staff may communicate with alternate vendors, negotiate better pricing for bulk orders or investigate the possibility of procuring cheaper materials from alternative sources as part of their daily activities.

Paperwork and Accounting

Purchasing departments handle all of the paperwork involved with purchasing and delivery of supplies and materials. Purchasing ensures timely delivery of materials from vendors, generates and tracks purchase orders and works alongside the receiving department and the accounts payable department to ensure that promised deliveries were received in full and are being paid for on time. In a small business, this means working closely with the accounting department to ensure that there is sufficient capital to buy the items purchased and that cash is flowing smoothly and all payments are made on time.

Policy Compliance

The purchasing department also must ensure that it is complying with all company policies. For example, in a small business, individual staff members may communicate with the purchasing department about purchasing needs for things such as office supplies or computers. Before making a purchase, the purchasing department must ensure that it heeds the proper protocols for purchase and budget approval and must ensure that any items are purchased in accordance with the overall purchasing policy of the organization.