Importance of Purchase Management

31st January 2021 1 By indiafreenotes

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 organisation to produce the desired product, from some agency or source outside the organisation.

Purchasing or purchase management basically is a function in any enterprise that works to save money and enhance profits. Hence, it becomes one of the most important departments or functions in a manufacturing company. Organizations have realized that cost savings can be achieved if the purchasing decisions are effective. The main function of this department is to procure the material or inputs that are needed for production.

Importance of Purchasing:

Controlling the costs

The purchasing management has to analyze and decide the best suppliers as per the quality of products and most reasonable cost. They also review many other factors like if the vendor or supplier can guarantee timely shipments, what’s their reputation in the industry and relevant experience. Changing the vendors again and again is expensive; therefore, finding the best and reliable vendor is very important for controlling costs.

Stabilizing the prices

Another important role that purchasing management has to achieve price stability. In case the production cost goes up and down, other functions face roadblocks. For example, the marketing function gets confused about what price should be charged to the customers, the finance department faces problem in calculating profits and the accounts cannot gauge the company’s cash flow. Purchasing managers are the ones who are responsible for stabilizing the production cost by negotiating with suppliers and making long contracts for mutual benefit. They also hedge some items with banks in the form of a forward contract.

Supply Chain Management

Buyers also ensure that the material or supplies are received on time and are of the expected quality. In case the shipment is delayed or is not of the expected standard, it would affect the complete production chain. Hence, this function is of utmost importance across all industries.

Customer Satisfaction

Wondering how purchasing department is related to customer satisfaction? Purchase management is responsible for customer satisfaction in the following ways: working towards the best quality of the products and ensuring on-time deliveries. When the purchase department opts for highest quality of supplies or ingredients at reasonable costs, it results in cost savings, which are further passed on to the customers. Therefore, purchasing management has a critical role to play in customer’s experience with the final products and the organization.

  1. Purchasing function provides materials to the factory without which wheels of machines cannot move.
  2. A one percent saving in materials cost is equivalent to a 10 percent increase in turnover. Efficient buying can achieve this.
  3. Purchasing manager is the custodian of his firm’s is purse as he spends more than 50 per cent of his company’s earnings on purchases.
  4. Increasing proportion of one’s requirements are now bought instead of being made as was the practice in the earlier days. Buying, therefore, assumes significance.
  5. Purchasing can contribute to import substitution and save foreign exchange.
  6. Purchasing is the main factor in timely execution of industrial projects.
  7. Materials management organisations that exist now have evolved out or purchasing departments.
  8. Other factors like:

(i) Post-war shortages,

(ii) Cyclical swings of surpluses and shortages and the fast rising materials costs,

(iii) Heavy competition, and

(iv) Growing worldwide markets have contributed to the importance of purchasing.