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Purchasing Management

What is Purchasing Management?
Purchasing management is managing the purchasing process of an organization, including all related aspects and processes. Sometimes there is a dedicated department that deals with purchasing, for example a purchasing management department. In a smaller organization, purchasing management falls under the responsibility of the logistics department, sometimes also under marketing and sales.

What is Purchasing Management?
Purchasing management is managing the purchasing process of an organization, including all related aspects and processes. Sometimes there is a dedicated department that deals with purchasing, for example a purchasing management department. In a smaller organization, purchasing management falls under the responsibility of the logistics department, sometimes also under marketing and sales.

Purchasing management is important to ensure that the organization can continue to operate at full capacity. Matters that are important for this include goods, services, inventory and other necessities. An important element of purchasing management is managing inventory levels of items and managing associated costs. Sometimes purchasing management is also referred to as material management.

In summary, purchasing management is the following:

  • Managing deliveries and suppliers
  • Management of (stock) costs and cost reduction
  • Risk assessments when it comes to stock and inventory

Purchasing management is important because it can greatly influence the costs of making a final product. For this reason, controlling the cost of ordered goods is one of the most important parts of purchasing management (PM).

Why is purchasing management even more important?

In addition to the reasons above, purchasing management is important because:

  • Purchase supplies materials to production. Production cannot take place without input.
  • A saving of 1% on purchasing costs (material costs) can in some cases equal a turnover increase of roughly 10%.
  • A purchasing manager effectively manages an organization’s wallet because in many organizations, purchasing represents more than 50% of expenditure.

Purchasing strategy

Developing a purchasing strategy is done by professionally trained personnel who know the ins and outs of the position well. To be cost-effective, these strategies must be adequately implemented.

One method that helps them classify and analyze a company’s purchasing portfolio is the Kraljic matrix, developed by Peter Kraljic. Its main purpose is to identify the strategic significance of purchased items and adapt the purchasing strategy accordingly.

A model based on the Kraljic matrix is the Purchasing Portfolio Model by Olsen and Ellram.

The purchasing cycle within purchasing management

The purchasing cycle represents the purchasing process as it takes place in many organizations. It is a series of events that lead to the actual purchase of goods and services. An efficient purchasing process allows companies to save money and time and can be the key to a profitable and successful business.

Organizations often go through the following steps:

1. Identifying Need

The process begins with a team or department identifying the need for a particular product or material. At this stage, the company identifies the item or product it needs, the quantity and budget available for purchase.

2. Prepare supplier lists

In the second phase of the purchasing process, a company’s purchasing team collects a list of potential sellers of the products for which a need has arisen. Searching for the right supplier is slightly more difficult than selecting the cheapest party. Price should not be the only factor that qualifies a supplier for a place on the supplier list. Also pay attention to delivery times and reliability when it comes to stock deliveries.

3. Selecting suppliers and discussing contract terms

During the third phase of the purchasing process, a choice is made for a supplier who is allowed to supply the resources. This is also the moment at which the terms of an agreement are negotiated, unless this has already been established and it concerns a repeated delivery. It is important to regularly review the terms of existing agreements. Building a long-term, mutually beneficial relationship is very important.

4. Create Purchase Orders

The fourth phase revolves around the creation of a purchase order. A purchase order is a formal contract used to make the purchase of goods or services. The purchase order marks the end of contract negotiations and includes all costs associated with the purchase order. The purchase order is distributed internally to management for approval and to the finance department.

5. Receiving Goods and Services

During the fifth phase, the supplier prepares the delivery and sends it to the company. After receipt, the receiving party documents that the delivery has arrived and that everything has been checked for completeness. The supplier will be contacted immediately if something is not right. Items can always be damaged, or something may be missing.

6. Payments

The last step covers the payment of the invoice. This invoice will be sent upon receipt of the purchase order. The payment term is also stated on the invoice. It is important that all paperwork matches. Therefore, the purchase order, invoice and any payment receipts are checked and compared again.

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Tips and tricks

The articles linked to the purchasing management tag include theories, models and techniques used to effectively manage purchasing within organizations. Are you missing a topic related to purchasing management? Let us know in the comments below an article or send an email.

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Kraljic Portfolio Purchasing Model

August 11th, 2022

Kraljic Portfolio Purchasing Model: this article explains the Kraljic Portfolio Purchasing Model in a practical way. After reading you will understand the basics of this powerful purchasing strategy tool. What is the Kraljic portfolio purchasing model? In 1983, Peter Kraljic

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Purchasing Portfolio Model: this article provides a practical explanation of the Purchasing Portfolio Model by Olsen and Ellram. After reading, you will understand the basic concepts of this powerful purchasing portfolio tool for the different relationships that exist between buyers…

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