Understanding the Role of Purchase in Procurement: Key Processes and Their Implications

Procurement and purchasing are critical functions in any organization, especially in manufacturing settings where materials make up a significant portion of production costs. This article delves into the distinction between purchase and procurement, and the importance of adhering to a well-defined procurement process to ensure efficiency, minimizing costs, and ensuring timely delivery of materials.

What is Purchase in Procurement?

According to various sources, such as Finance Strategists, purchasing refers to the acquisition of materials or goods for a price. This process is typically managed by a specific department or individual, often a purchase manager within the procurement department, especially in large companies. The purchase manager oversees the acquisition of materials and goods, ensuring they meet the organization's needs and quality standards.

The Critical Role of Purchase in Procurement

In manufacturing companies, purchasing is a critically important and specialized activity. Materials represent a substantial portion of production costs. Hence, the efficiency and success of the procurement process directly impact the overall profitability and growth of the organization. A well-executed procurement strategy can significantly reduce costs, improve quality, and streamline the supply chain.

Key Processes in a Procurement and Purchase Department

The procurement process is a series of steps that organizations follow to acquire the materials they need. This includes:

Price Verification and Comparison: Evaluating multiple vendors and comparing prices to find the most cost-effective options, including the cost of transportation and installation. Payment Terms: Defining the payment methods and terms, such as net 30, net 60, or other flexible options. Delivery Terms: Determining the preferred mode of delivery and the estimated delivery time. Approval Process and Authority: Ensuring that the purchase request goes through the necessary approvals and that the purchasing agent has the appropriate authority to make the purchase. Purchase Request Validation: Before proceeding with the purchase, validating the request to ensure it aligns with the organization's needs and budget constraints. Logistics Involvement: Assessing whether any transportation or logistics are required to deliver the materials. CAPEX Budget Allocation: If the requirement is under Capital Expenditure (CAPEX), checking the budget allocation and ensuring there is enough funds available. Other Verification Steps: Additional checks to ensure compliance with company policies and external regulations.

Once the purchasing request is approved, the designated person in the purchase department follows these guidelines to ensure the process is completed efficiently. This systematic approach helps organizations avoid unnecessary expenses, ensure the quality of materials, and ensure timely delivery to minimize disruptions in production and supply.

The Impact of a Good Procurement Process

A well-executed procurement process has significant implications for an organization. It leads to:

Customer Satisfaction: Ensuring that the organization has the materials it needs when it needs them, thus enhancing customer satisfaction and satisfaction with the supply chain. Profitability: By minimizing costs and optimizing the use of resources, the procurement process directly contributes to the organization's profitability. Growth: Efficient procurement activities support organizational growth by ensuring the availability of necessary materials and timely delivery, which in turn supports production and delivery to customers.

Role of the Purchase Department

The purchase department is responsible for following the rules and regulations outlined in the procurement process. Their primary roles include:

Price Collection: Gathering price quotes from vendors and comparing them across different suppliers. Price Comparison: Analyzing the prices of different vendors to determine the most cost-effective options, including transportation and installation costs. Price Negotiation: Negotiating prices with vendors to achieve the best deals for the organization. Delivery Time: Determining and ensuring the materials are delivered on time to avoid delays in production. Payment Terms: Managing the payment terms to ensure they align with the organization's financial policies. Purchase Order Issuance: Issuing the necessary purchase orders to vendors. Material Handover: Ensuring the materials are accurately handed over to the appropriate storage areas. Invoice Submission: Collecting invoices from vendors and submitting them to the accounts department for processing. Vendor Development and Management: Building and maintaining strong relationships with vendors to ensure a steady supply of high-quality materials.

Additionally, the purchase department prepares various reports, such as price trend analysis, spend analysis, and account-wise expense reports, providing valuable insights into the procurement activities and helping to optimize the process.

Procurement and Purchase Departments in Different Organizational Structures

In some organizations, especially those in the lower to middle segments, procurement and purchasing may be handled by the same department. This is because the processes and responsibilities are closely related, and maintaining separate departments may not be cost-effective. However, in larger organizations, these functions are typically separated into distinct departments to ensure specialization and efficiency:

Procurement Department: Focuses on the strategic aspects of sourcing materials and ensuring compliance with procurement policies and regulations. Purchase Department: Handles the day-to-day activities, including procurement records, receiving, and managing the logistics of purchasing materials. Logistics Department: Coordinates the receipt, storage, and distribution of materials. Warehouse/Store Management: Ensures materials are properly stored and managed, ready for use in production or sale.

By separating these functions, organizations can leverage the expertise of each department to optimize the procurement and purchasing processes, ensuring cost savings, timely delivery, and high-quality materials for their operations.

Conclusion

A robust procurement and purchasing process is essential for the success of any organization. By adhering to a well-defined process, organizations can minimize costs, ensure the quality and availability of materials, and support their overall growth and profitability. Understanding the roles and responsibilities of the purchase and procurement departments, as well as the importance of following established processes, can significantly benefit an organization's supply chain management and financial performance.