A Comprehensive Guide on Purchasing Departments
Every organization aims to create financial stability by optimizing its operations with resources. To procure these resources, organizations require a specific plan to fulfill their strategic and operational needs.
A purchasing department or procurement department in a company is an organizational unit that fulfills these responsibilities. So, let’s explore the process of purchasing and how a purchasing department works.
What is Purchasing?
Purchasing is the process of buying or acquiring goods and services to make supply chain management more efficient. Goods, materials, and equipment procured in this process play a key role in improving the quality of products/services produced by the organization. Ultimately, the purchasing process impacts the product quality and helps in optimizing costs in the value chain.
What is a Purchasing Department?
The purchasing department of a company is responsible for procuring the goods, raw materials & services required to operate the organization effectively.
Now, every organization has its specific needs when it comes to the sourcing and procurement of equipment, raw materials, and services. These needs define the purchasing process and how its purchasing department functions.
Based on these needs, an organization sets the purchasing department’s responsibilities and streamlines its procurement plans to guard against demand-supply hurdles. Let’s understand the role of a purchasing department in this process.
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The Role of a Purchasing Department
To understand how the purchasing department works, it is important to explore the role it plays in the overall business workflow & P2P cycle. Purchasing departments play two roles in an organization:
- Strategic Purchasing: In this role, the purchasing department plans high-level procurement activities based on the organization’s business goals. Strategic purchasing department responsibilities help in sourcing goods strategically (e-sourcing) at economical prices and optimum quality. Decisions such as in-house manufacturing or procurement from external suppliers are taken at the strategic purchasing stage.
- Operational Procurement: This role is also defined as “tactical purchasing”, where all the purchase department responsibilities are focused on taking care of business operations and administration. Repeat orders, inventory restocking, and invoice payments are maintained to keep the production line running at its optimal capacity. Operational procurement primarily caters to the long-term needs of the company.
Based on these roles, an organization can specify various purchasing department functions and how they are fulfilled.
Key Functions of Purchasing Departments
All purchasing department functions are aligned with the business objectives of an organization. Here are some of the basic purchasing department functions:
- Identify business requirements for goods, materials, and services
- Find reliable suppliers to meet these requirements
- Negotiate prices, build quality, and delivery terms
- Set up the order quantities and making bid requests on supply contracts
- Coordinate delivery and storage operations
- Run quality control and product testing
- Manage budgets based on ROIs and payments
Let’s explore the three main purchase department functions in detail.
Acquiring Goods at the Best Possible Price
Purchasing departments must continuously evaluate materials based on quality and, more importantly, on pricing! To maximize profitability, organizations need to procure goods efficiently. For example, buying small quantities from a large vendor is not economically practical. The procurement team must achieve bulk discounts on these orders and negotiate with alternate vendors for better pricing.
Procuring Raw Materials for Sustaining Operations
While procuring goods at the best price, the purchasing department must also maintain the purchases necessary for sustaining daily operations. From raw materials such as iron and plastic to machinery, production tools, and even office supplies - they all need to be procured to keep the business running smoothly.
Compliance with Industry Protocols
In addition to sustaining operations, all goods and services procured by the purchasing department must also be compliant with industry standards and company policies. Vendors should ensure that the raw materials are good in quality before delivering large orders. The procurement department should also establish a specific purchasing policy that checks quality compliance at every level of the purchase.
But, before establishing any purchasing policy or procedure, an organization must create a strong team of professionals specializing in supply chain management.
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Purchasing Department Staff
The purchasing department staff is composed of various professionals who identify the supply needs, manage requisitions, control budgets, and procure goods at competitive prices. Purchasing department staff includes:
- Purchasing Manager: Leading the department, the manager supervises all purchases and works closely with business executives to understand their business needs thoroughly. Based on this, purchasing managers distribute the purchasing department responsibilities among the purchasing officers.
- Purchasing Officers: Under the purchasing manager’s supervision, a team of professionals runs the buying activities. They explore and evaluate the needs based on the order size and the business priorities set by the manager. Their work helps the purchasing manager in working with supply agents and taking the best procurement decisions for the organization.
- Agents: Like mortgage brokers, these agents execute the purchase department responsibilities at the ground level. Negotiating prices, finding alternate vendors, and obtaining bulk discounts are some of the key activities that these agents handle.
How Procurement Policy and Procedure Work
The above staff fulfills its purchasing department functions by following a purchasing plan or a procurement policy. An organization can set its procurement policy and establish a clear procedure for making business-related purchases.
Here’s an overview of a standard purchasing procedure for an organization:
Spending Limits
The primary procurement policy of an organization is buying goods at the best prices. The purchasing department should strictly define & follow spending limits for every item in the order. This way, the purchasing department does not overspend or cut costs unnecessarily.
Authorized Vendors
After determining the spending limits, the procurement procedure should also enlist all available authorized vendors. This list should be maintained and updated regularly for ensuring access to the best vendors in the market. From large vendors to small-scale suppliers, all external parties involved in the procurement process must be listed in the policy.
List of Supplies
In addition to the list of vendors, the procurement policy should also make lists of the purchased items. Office supplies and other daily necessary items should be listed together. Similarly, industrial goods and other items required in bulk orders should be listed separately. These lists should be appropriately categorized for making precise orders for every purchase unit.
Prioritization
While making these lists, the purchasing department should follow a prioritization policy set by the purchasing managers and key business stakeholders. This policy highlights the purchases that go first in the budget. Based on this, the list of supplies can be customized before allocating purchase orders - learn more about the difference between purchase requisition vs purchase order.
Contract Negotiations Policies
Once the purchase orders are ready, the organization should follow strict rules on pricing negotiations. Under these policies, the purchasing department should not focus on lower prices at the cost of quality. Instead, the quality of goods should be optimized with a pricing comparison among vendors.
Vendor Management
During these negotiations, vendors and suppliers should be managed properly. The procurement policy should emphasize the importance of efficient vendor management. Ensuring accurate order placements, issuing detailed purchase orders, and sending advance intimations for urgent purchases are some policies that the organization must follow. These will help in building and sustaining a reliable, profitable, and long-term business partnership with vendors while preventing vendor fraud.
Legal Liabilities
Throughout this procedure, the purchasing policy must also adhere to state and federal purchasing laws. Under these strict guidelines, the staff should work coherently with government agencies. These policies also help in preventing conflicts between an organization and its suppliers.
Purchasing Department Duties and Responsibilities
After establishing an effective purchase policy, the organization can implement various purchasing department responsibilities and duties. These responsibilities are further categorized into competitive duties and non-competitive duties.
The competitive duties and responsibilities of the purchasing department include:
- Following the state, local, and federal procurement laws
- Working with government agencies for subsidies and other benefits
- Acquiring goods at competitive rates
- Maintaining long-term exclusive partnerships with top vendors
- Placing best bids and acquiring orders before business competitors
- Sending lucrative proposals to acquire vendors in advance
The purchase department's responsibilities in a non-competitive aspect include:
- Researching goods and products carefully based on quality, prices, and delivery terms
- Evaluating vendors based on their business history and supplying capabilities
- Assessing the quality of goods at every level of the procurement process
- Creating transparency in delivery and order processes
- Building conclusive financial reports to calculate ROIs
- Exploring new fulfillment capabilities through industry conferences
All purchasing department duties and responsibilities must be performed effectively to ensure the success of a business organization.
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Top 5 Benefits of Purchase Departments
When the above purchasing department responsibilities are performed successfully, the organization starts experiencing its benefits. An organization can experience several upsides of efficient purchasing throughout its business operations and productions.
#1 Cost Optimizations
The biggest benefit of a well-run purchasing department is that the organization can build immediate savings from cost-effective procurement. It can spend wisely and save money to reinvest in other business operations. The purchasing department can acquire goods from a mix of suppliers to reap the benefits of warranties, discounts, and concessions.
#2 Risk Control and Supply Security
Besides cost benefits, several risks of supply chain management are solved through purchasing department functions. A company can manage the risks with suppliers by diversification of the supply chain. Moreover, purchasing managers can take appropriate steps to secure the supply chains and avoid higher risks such as poor vendor selection, market pitfalls, potential frauds, loss of quality, and improper delivery.
#3 Strong Vendor Relationship Management
While mitigating these risks, the buyer-supplier relationships become stronger. An exclusive purchasing department works closely with vendors and agents. With long-term purchase contracts, the purchasing department can also help vendors realise the profits of supplying goods to the organization. It helps vendors stay loyal and reliable with the organization.
#4 Business Quality Improvements
By partnering with the best vendors, purchasing departments can indirectly improve the production quality of the business. They can help other departments achieve their targets and work at high-performance levels. They can also track quality and contribute significantly towards the timely delivery of end-products.
#5 Leveraging Innovation & Technology
By replacing traditional raw goods with innovative substitutes, the purchasing department brings a competitive advantage to the business. The purchasing department can also adopt accounting automation, content services, ERP, inventory control systems, workflow management software, document management systems, and outsourcing technology solutions for fixing supply chain challenges and automating manual tasks.
Conclusion
In the years to come, purchasing departments will evolve at the scale and speed of disruptive transformation. New materials will replace conventional supplies and managing a bigger mix of vendors would bring in more challenges. In such scenarios, the key to success for an organization is recruiting the best purchasing staff. Today, every organization must find a great opportunity by reevaluating its procurement activities and saving costs in its value chain.