Purchasing of services and goods

Irrespective of how a company resolves the issue of “make or buy” or achieves vertical integration, some services and goods have to be purchased. The efficiency of a company’s operation, therefore, is contingent upon its making supplies and goods available of a proper quality, in a proper quantity, at the proper place and time and at a proper price. A failure on any one of these counts inflates the cost, and this has a dampening effect on profits because of production bottlenecks, inferior products, disgruntled customers, excessive and unnecessary wastage.

To make purchasing effective, the management has to take policy decisions on the following
issues:

1. What type of purchasing will be there?
2. How will vendors be selected?

Types of purchasing:

If the company has a number of plants, purchasing may be centralized or localized under a centralized purchasing authority – a single person should be placed in charge of the purchasing department. This is generally so when the company operates only one plant. But this department is created in those companies as well which have more than one plant. In this case, however, a number of factors have to be taken into consideration before deciding whether purchasing should be centralized, such as the extent of the geographical separation of plants, the homogeneity of the product manufactured, the type of material forming bulk of purchase, the location of suppliers, etc.

On the other hand, under localized purchasing, each of the units of the plant has its own purchasing department which makes purchases on the basis of its requirements. This usually applies where the company runs a large number of plants in widely separated locations and turns out a variety of products.

Before the discussing an ideal situation, it is worthwhile to consider the relative merits of centralized and localized purchasing.

Merits of Centralized purchasing:

• Economy of Large-Scale Purchasing: Centralized purchasing offers the advantages of large-scale purchasing. These are: the availability of raw materials at cheaper prices, better transportation facilities at lower rates and more concessions. It is possible to place orders directly with suppliers so that thereby middlemen maybe altogether eliminated.
• Utilization of Expertise: Manufacturers with a number of working units can afford better
  paid and better qualified staff which results in more efficient and economical buying.
• More Flexibility: Through centralized purchasing, greater flexibility can be achieved in a variety of ways. First, the surplus material in one plant can be effectively used by other plants or units without any additional expenditure. Second, the emergency requirements of one plant can be met by utilizing materials from other plants in the quickest and most economical way.

Merits of Localized purchasing:

Here, purchasing is done by an individual department, which enjoys the following advantages:

• Delays and High Reserve Inventories Avoided: Delays in the procurement of materials is usually caused when purchasing is done by the central office. Different units are required to build heavy inventories to compensate for the time lag between the requisition and procurement of material. This is more true when different units are situated at different places, and the central office is not in a position to meet their emergency requirements.
• Efficient Dealing with Social Problems: Every plant or unit usually has its own peculiar problems and differences in the production process which largely affect its procurement needs. Besides these, climatic conditions, transportation facilities, warehousing facilities, laws, supplier’s distribution policies do have a direct bearing on purchasing. The central office is in a better position to understand and manage this complex situation. Purchasing becomes more effective.
• Avoidance of Conflict with Central Purchasing Department: Quite often, there may be a misunderstanding and conflict between different unit heads and the central purchasing department specially when the goods purchased are not of the right quality or are not supplied in time. From the point of view of the supplier, it is not desirable on his part to ask his sales personnel to contact plant managers who have no authority to purchase and for which they are required to contact the purchase manager.

The best solution of the purchasing problem is centralized control. The central purchasing office should concentrate on framing uniform policies and control procedures for the purchasing activities of all the departments. The different units should be allowed to make purchases in accordance with the policies laid down by the head office.

In other words, we may say that the major purchasing activity should be performed by the head office and petty purchases may be made by the respective units on the basis of their requirements. To avoid duplication, friction and confusion, the authority at the head office and unit office should be properly defined and both the head office and the offices should function within the purview of their assigned duties.