Within a company, different functional areas coexist that allow its proper functioning: management, finance, administration, production/operations, quality, marketing, human resources, project management, processes, and logistics. To achieve organizational objectives, it is crucial that all of them are aligned with the purpose and business strategy.
Next, we are going to delve into the Purchasing area: what it is, what its main functions are, its greatest challenges, etc.
What is the Purchasing area?
The purchasing area is the department in a company and all the professionals that make it up, in charge of meeting the supply needs. This implies buying or acquiring raw materials, semi-finished products, spare parts, or services necessary for the operation of said company. All this in the indicated time, with the specified quality, and at the best possible cost.
The main objective of the purchasing area is to achieve continuity in supplies to avoid stock outages, but its mission is also to reduce final production costs. This is what differentiates a reactive purchasing area (it reacts to the lack of some material or raw material and acquires it) from an active one, which, in addition to the above, constantly searches for and monitors suppliers to obtain better prices and favorable conditions for the company.
History and evolution of the area
The concept of shopping has always existed. People and companies have always had to buy products, and materials and hire labor to execute projects. The pyramids of Egypt, the mass production of cars, and any other product or service provided throughout history have required the purchase of supplies. While the purchasing practices of ancient times were likely much simpler, the work that was done still stands today, indicating that robust supply chains could exist thousands of years before modern technologies.
In 1932, Charles Babbage introduces a key concept in his book "On the Economy of Machinery and Manufactures"; he speaks of the “materials man” in the mining industry, who designates a person who selects, purchases, and supervises the products used in a project; basically what a purchasing officer does today.
From globalization and the irruption of technologies, processes were automated not only in manufacturing itself but also at "administrative" levels of companies through digitization, for better document management. This last step is still under development in some companies, and the future comes hand in hand with tailor-made solutions to optimize this central area of any organization. Although digital technology may have only begun to play its role in the purchasing department some 50 years ago, it is one of the most significant changes in practice since its inception: programs, applications, and systematizations that organize and facilitate the tasks of the Purchasing area.
Main functions of the Purchasing area
Synthesizing what has been explained so far, this area provides:
1. Stock or inventory control
To avoid crises or stock breakages that are very expensive for companies, the purchasing area must know at all times the stocks it has. From raw material to the cartridges of a printer. The most advisable thing is always to adjust the purchases to the real needs of the company, not to buy more so as not to have unused materials. This item also includes ensuring that delivery deadlines are met.
2. Dealing with suppliers
Since the Purchasing area is in charge of stocks, suppliers are essential. This area is in charge of meeting them and negotiating with them the prices, quantity and quality, delivery times, and response on special dates. As well as evaluating them with quantitative and qualitative criteria to know if some improvement is possible.
3. Cost analysis
This function is linked to the negotiation with suppliers and the objective of reducing costs while respecting the quality of the product that our customers demand from our production. Therefore, finding a balance between the purchasing department and the sales department to improve or at least not harm profitability.
4. Keep accounting
Although this will depend on the size of the company, this is one of the most important functions that concern the purchasing area. In large companies, the collaboration between the purchasing area and the accounting area must be close. In other smaller ones, they will be tasks that Purchases must deal with. After human resources, purchases are one of the sources of the largest item of expenditure; clear accounts are essential to avoid liquidity problems.
5. Commercial management
Within the commercial management, the management of administrative processes, the aforementioned accounting, fiscal and financial processes are included. Of course, all this work must be agreed by the direction of the company and the advisers, if any.
6. Preparation and review of contracts. Compliance control
Just as the purchasing area must keep track of suppliers and prices, it must do the same with contracts. Legal advice is essential at this point since each contract must follow guidelines to be valid. Controlling its compliance is essential for the relationship with the supplier, but both parties must comply with what is set out therein.
7. Area optimization
Defining and systematizing the processes, through the joint work of the entire area. In this way, it is possible to establish a single way of doing things to avoid confusion and waste of time, in addition to a greater performance of the entire area.
Main problems in the Purchasing area
1. Seeing the price and not the cost
The price of a proposal must also be analyzed taking into account deadlines, forms of payment, freight, other technical aspects, and also the supplier's business history. In short, the cost paid must be analyzed.
2. Not planning
The results will always be poor when there is no time to analyze proposals, and potential suppliers, evaluate budgets and negotiate.
3. Not doing a supplier analysis
Not all suppliers are the same, so they must be analyzed, and evaluated considering prices and payment terms, quality of the product or service delivered, service added to the product, logistics, and financial capacity, among other aspects.
4. Not evaluating supplier performance
Supplier evaluation provides quality information to make decisions, negotiate and optimize our resources. An annual evaluation of strategic suppliers is important, considering management times, compliance, quality and quantity, commercial competitiveness, risks, and added value, among other aspects.
5. Buying materials from the same suppliers
It leads to inefficiencies, increased costs, and reduced service to buy from the same providers, whether for convenience or habit. You can opt for the alternative of having supplier B who is assigned a lower percentage of the purchase but with whom a commercial relationship will be generated. This will allow us to monitor quality and increase our bargaining power. Price comparisons and surveys should be done on a regular basis.
6. Buying more or buying less than needed
You have to know the optimal stock point for physical space and financial capacity issues. Buying more or less than needed costs us money, either because we have immobilized stock or have to stop due to lack of supplies.
7. Not having goals or indicators
What is not measured cannot be managed or improved.
8. Not tracking the purchase order
It is important to monitor the fulfillment of purchase orders to have traceability of orders throughout the process. We must check the time elapsed between the moment we generate an order and when the supplier attends to it since it provides us with valuable information for the management of times and needs of the company.
9. Having no policies
Establishing a purchasing policy is important to regulate basic issues related to order requests, delivery times, selection and evaluation of suppliers, and costs, among others.
Main challenges in the Purchasing area
“We are fine, but… how could we be better?” This question always leads to growth and every answer becomes a challenge. Grow, innovate, improve.
1. The challenge of integrating
The best way to carry out the functions of the Purchasing department effectively is for it to be in continuous coordination with the business flows of the company so that the necessary purchases can be planned and changes in the market can be detected. Therefore, the exchange of information and transparency in each of the stages and departments of the supply chain is key. Working fluidly with other departments is essential for optimal operation of the Purchasing area.
2. Permanent training
Investing in the training of human resources is the best way to innovate and respond to current demands. A good selection of qualified personnel is not enough, so good training is very important. This is the case in every position in any area.
3. Technological reinforcement
Rely on technological resources to achieve optimal results in the purchasing system. Gaining visibility, integrating activities, and streamlining processes are aids that technology can provide, in addition to increasing transparency in operations. These incorporations will be of great help to improve innovation.
What is the Purchasing area made up of?
The organization charts of all companies are different, according to their needs. The positions detailed below can be held by many people or by one, depending on how many make up the Purchasing area. More specific or intermediate positions can be added, such as supervisors.
The buyer is the first point of contact with suppliers. This person is in charge of carrying out all the necessary transactions to purchase materials or services: requisition, quote, purchase order generation, and invoice follow-up. Also, this person will be in charge of generating contracts and agreements.
The expeditor is responsible for making sure that the suppliers are aware of the order made by the company and its characteristics in terms of quality and other requirements. Also, this person is who knows which priority purchases are and the orders that are pending with the suppliers.
The developer is responsible for carrying out a constant search for novelties, both within our company's suppliers and in the market. Products, designs, components, and services are sought that offer the company a reduction in costs or a better service provider. The location, the logistics costs, the novelty of the product or service, the risk, and the maturation of the supplier will be factors that should be considered in this search.
The procurement engineer is responsible for measuring the quality of purchased products and services. These engineers must know the entire supply process in detail since they will be the ones to ensure that a supplier has everything necessary to perform the service or product that we are going to buy from them in the best possible conditions: certifications, qualifications, conditions of their company and its workers.
The purchasing leader is responsible for planning, organizing, directing, and controlling the tactics that the Purchasing area must follow. This person will also be responsible for reporting to senior management on the fulfillment of the purchasing team's objectives. Among the main functions will be motivating, guiding, and listening to the team, as well as developing new ways of working that make it faster and easier for the team to meet its objectives.
The buyer and expeditor are on the same level and have a close working relationship as they will be handling purchase orders, communicating with their internal customers about their orders, and following up with suppliers on the status of their shopping orders.
The developer and the purchasing engineer, on the other hand, are on the same level because each one complements the function of the other. When the developer finds a supplier, the purchasing engineer must evaluate it and share certain improvements to be made, and the developer must be in charge of following up with the supplier, so that those improvements are achieved and both positions can develop tactics to improve the quality of suppliers, sharing responsibility and tasks to be performed.
Importance of the Purchasing area
As we have already seen, the Purchasing area is crucial within the company; we can summarize its importance in 5 items:
1. It gets lower costs
Through the management of the supplier business relationship, the Purchasing area has tools that allow you to negotiate to obtain better prices. This allows for maximizing the profitability of the company.
2. It prevents the lack of materials
The area must always be aware of what materials there are and which ones are needed, thus protecting the supply chain, and ensuring that there are no stock breaks. Avoiding crises using multiple vendors and other similar resources are functions of this area.
3. It improves the quality
Companies agree on a product quality level that is established from the beginning of the production chain. The purchasing area must take this item into account in each acquisition. But also, through the negotiation capacity that the area possesses and the constant search for innovation, it can access better qualities that improve the final product or service.
4. It manages relationships
The relationship with suppliers must be cared for, developed, and maintained. The challenge in the purchasing area is to make suppliers interested in working with the company to make them invest in a long-term relationship.
But not only suppliers are important for the purchasing area, but also the other departments of the company to achieve alignment of objectives, collaboration, and collaborative work.
5. It innovates
As the purchasing department constantly surveys the market, it is in an ideal position to acquire innovative products that can provide a competitive advantage to the business in terms of price, quality, or convenience.
Management indicators of the Purchasing area
The management indicators are measurement tools that allow the management of the Purchasing area to be controlled and optimized. The most important ones are:
- Delivery times by supplier: It is crucial to have the average delivery time measured by each supplier to quickly detect variations, as well as determine orders over time.
- Payment time per supplier: Properly knowing the payment time for each supplier makes it possible for the company to optimize the use of financial resources.
- Failures and breakages by supplier: Making a detailed count of the failures in the acquired merchandise offers the possibility of making claims as well as classifying the suppliers by the quality of the supplies they sell.
- Price variations by supplier: Understanding the frequency and magnitude of price variations by supplier makes it possible to project input purchases to reduce costs as much as possible.
- Return on investment (ROI): This indicator offers information on the time in which the investment will be recovered after making an expense.
- Total process time (TTP): This indicator is one of the most useful. It focuses on analyzing the entire flow of any process that takes place in purchasing. There are some cases in which it is also used only in transactions that take place between suppliers and the purchasing area.
- The number of rejected orders: Rejections, exchanges, and returns are common in many businesses. This indicator measures the ratio of returns.
- Trading volume and processes performed by the buyer.
- The other areas' requirements that were fulfilled on time.
- Savings that were achieved and implemented, taking into account the market trend for material or service.
We are far from those times when it was believed that the purchasing area was the office from which the company's accounting was done; a rigid and monotonous area. Purchasing is the heart of companies, the area that supplies the raw material, that ensures that quality is maintained or even grows, that tries to get the best prices to be more competitive. It is dynamic since it must be in contact with suppliers and be present in the market looking for new alternatives. It is the area that must have the full support of management and, at the same time, the necessary control to transmit transparency.
Developing the potential of this area is then exploiting all these characteristics: savings in negotiations, quality of raw materials, and the human part of the relationship with suppliers.
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