Activities of the “purchasing function” in business include acquiring inventory (finished goods for resale) or materials for production. In a retail business, the purchasing department is responsible for buying the merchandise needed to stock the shelves of a bricks and mortar outlet or the warehouse of an eCommerce operation. In a manufacturing business, the purchasing department sources the materials required to create a product that will eventually hit the marketplace for sale.
The purchasing department is vital to an organization. In a retail business, this department has to use its funds wisely. This means buying the right products (based on customer demand), at the right time, in the right quantities, at the right price. Foresight and planning are the hallmarks of a properly run purchasing department. Having enough product on hand to satisfy consumer demand is essential. However, a business does not want to purchase too much inventory that may sit in storerooms or on store shelves for far too long without turning over and bringing in dollars (cash flow).
It’s important that the purchasing department understand their market niche so that they don’t spend money on products the marketplace no longer demands. In addition, the department must be able to read marketplace headwinds properly. For example, a certain product may be selling, but be losing popularity. In a few months the ‘sheen’ may have worn off this product with consumers demanding something else.
The purchasing department must study trends and consumer behaviour to understand how consumers are thinking, as they consistently demand new and improved products. When the popularity of a product fades, a business does not want to be stocked with a warehouse full of stock that is no longer ‘hot’ on the market.
Price determination is an activity of the purchasing function as well. A business must ascertain the price they are willing to pay for finished products, or raw materials to make products. Haphazardly buying without paying attention to price often results in reduced profits. A quality purchasing department will negotiate wisely to get the best price possible. In a retail business, the lower the price paid for merchandise, the greater the spread between the retail price and cost of goods sold. This results in improved margins and more profit for the company.
In a manufacturing business, less paid for raw materials and such means the business is keeping its cost down. Therefore, it can produce products while conserving its financial resources. It can then have a bigger spread between its cost of production and the price it will ultimately charge to its customers. Again, this results in a healthier bottom line.
Being cognizant of prices paid for inventory or raw materials ensures a company is not paying too much for goods. In this way, they can price their products competitively as the marketplace demands.
Another purchasing department activity is finding the best suppliers. These suppliers will supply the needed goods, on time, at the best price possible. They will consistently deliver the right amounts to a business and rarely be out of stock if at all possible. Furthermore, a purchasing department activity is setting up an organized ordering system for the finished goods or raw materials it requires.
Additional Resource: Contemporary Canadian Business (Appelbaum, Beckman, Boone, Kurtz: Holt, Rinehart and Winston of Canada, Limited: Chapter 14 - Production and Operations Management)