Purchasing and Procurement
| Author | R. Inman |
| Pages | 719-723 |
Page 719
Purchasing and procurement is used to denote the function of and the responsibility for procuring materials, supplies, and services. Recently, the term "supply management" has increasingly come to describe this process as it pertains to a professional capacity. Employees who serve in this function are known as buyers, purchasing agents, or supply managers. Depending on the size of the organization, buyers may further be ranked as senior buyers or junior buyers.
Prior to 1900, there were few separate and distinct purchasing departments in U.S. business. Most pre-twentieth-century purchasing departments existed in the railroad industry. The first book specifically addressing institutionalized purchasing within this industry was The Handling of Railway Supplies—Their Purchase and Disposition, written by Marshall M. Kirkman in 1887.
Early in the twentieth century, several books on purchasing were published, while discussion of purchasing practices and concerns were tailored to specific industries in technical trade publications. The year 1915 saw the founding of The National Association of Purchasing Agents. This organization eventually became known as the National Association of Purchasing Management (NAPM) and is still active today under the name The Institute for Supply Management (ISM).
Harvard University offered a course in purchasing as early as 1917. Purchasing as an academic discipline was furthered with the printing of the first college textbook on the subject, authored by Howard T. Lewis of Harvard, in 1933.
Early buyers were responsible for ensuring a reasonable purchase price and maintaining operations (avoiding shutdowns due to stockouts). Both World Wars brought more attention to the profession due to the shortage of materials and the alterations in the market. Still, up until the 1960s, purchasing agents were basically order-placing clerical personnel serving in a staff-support position.
In the late 1960s and early 1970s, purchasing personnel became more integrated with a materials system. As materials became a part of strategic planning, the importance of the purchasing department increased.
In the 1970s the oil embargo and the shortage of almost all basic raw materials brought much of business world's focus to the purchasing arena. The advent of just-in-time purchasing techniques in the 1980s, with its emphasis on inventory control and supplier quality, quantity, timing, and dependability, made purchasing a cornerstone of competitive strategy.
By the 1990s the term "supply chain management" had replaced the terms "purchasing," "transportation," and "operations," and purchasing had assumed a position in organizational development and management. In other words, purchasing had become responsible for acquiring the right materials, services, and technology from the right source, at the right time, in the right quantity.
Page 720
Only in small firms is purchasing still viewed as a clerical position. When one notes that, on average, purchasing accounts for over half of most organizations' total monetary expenditures, it is no wonder that purchasing is marked as an increasingly pivotal position.
The importance of purchasing in any firm is largely determined the four factors: availability of materials, absolute dollar volume of purchases, percent of product cost represented by materials, and the types of materials purchased. Purchasing must concern itself with whether or not the materials used by the firm are readily available in a competitive market or whether some are bought in volatile markets that are subject to shortages and price instability. If the latter condition prevails, creative analysis by top-level purchasing professionals is required.
If a firm spends a large percentage of its available capital on materials, the sheer magnitude of expense means that efficient purchasing can produce a significant savings. Even small unit savings add up quickly when purchased in large volumes. When a firm's materials costs are 40 percent or more of its product cost (or its total operating budget), small reductions in material costs can increase profit margins significantly. In this situation, efficient purchasing and purchasing management again can make or break a business.
Perhaps the most important of the four factors is the amount of control purchasing and supply personnel actually have over materials availability, quality, costs, and services. Large companies tend to use a wide range of materials, yielding a greater chance that price and service arrangements can be influenced significantly by creative purchasing performance. Some firms, on the other hand, use a fairly small number of standard production and supply materials, from which even the most seasoned purchasing personnel produce little profit, despite creative management, pricing, and supplier selection activities.
There are two basic types of purchasing: purchasing for resale and purchasing for consumption or transformation. The former is generally associated with...
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