Purchasing Constitutes an Activity Faced

¶ … purchasing constitutes an activity faced by individuals in their private lives; however the purchasing of goods and services for organizations comprises a professional activity. Professional purchasing entails to get the best out of the market place and in order to accomplish this use of certain set of competencies are needed. Every act of purchasing is the result of a contract between the buyer and seller; however the purchasing process must initiate prior to the decision of the source and last after the contract is created. Evidently, the degree of the need will decide the intensity and complexity of purchasing process. Purchasing is a conscious process which must look into the value for money aspect with the right personal accountability for decisions. Dearth of sufficient time and improper preparation comprise principal problems of effective purchasing. It has to be ensured that proper understanding of the timescales are available for carrying out the necessary exercise and the amount of preparation which will be required. (Good Purchasing Practice) simple means to understand the purchasing process is the achievement of the '5 Rights'. These are "Right Product, Right Time, Right Place, Right Price & Right Quality." (Good Purchasing Practice) It is important that the size, scope and particular specification of the needs are known prior to initiating any specific purchasing process. As regards choosing the Right Product the various points to be adhered to are (i) consulting with the user (ii) identification of the actual performance needs (iii) taking a decision regarding a precise and brief description of the needs. At the same time caution should be taken to avoid the following points (i) one must not be vague - if something is beyond the scope of the knowledge, it has to be found out (ii) it should not be made more complicated than necessary (iii) brand names must not be used without a fair reason.

As regards the Right Price it is important to (i) understand the market through wide research (ii) possess knowledge about the general market price. (iii) Value of competition should not be ignored (iv) willingness to negotiate (ii) possess knowledge regarding the extent of spending (iii) possess awareness about the economies of scale. Concurrently, it is important to exercise caution that (i) it is not to be assumed that big is always beautiful (ii) possible suppliers should not be misled regarding the amount to be spent. Regarding the Right Time it is important to (i) to be conscious regarding the need of things (ii) have knowledge about timescales and lead times. It should be kept in mind not to (iii) spare too scanty time to finish a proper exercise (iv) impose unnecessary time scales. (Good Purchasing Practice)

Regarding the Right Place it is important to (i) find out exactly where the goods, services or works are needed (ii) ensuring that the site is accessible in case of online purchases. (iii) Presume that the supplier has knowledge regarding the location of the Department. (iv) The delivery implications should not be concealed. Coming to the Right Quality it is to be ensured that (i) quality standards are met to true performance needs (ii) only the appropriate quality standards are specified (iii) outputs are specified rather than the inputs. (iv) It is not necessary to specify a higher quality than what is needed (v) caution should be exercised not to ignore what needs to be achieved in favor of describing the tasks. (vi) Application of the recognized quality standards. (Good Purchasing Practice)

Workability, Competitiveness and Optimization of the Five Rights:

The prospective role of effective and efficient purchasing has been extensively recognized by the business realm for a lot of years and the buyer has been given to choose the right quality of product or service, in the "right quantity, at the right time, in the right place, at the right price." (Purchasing Good Practice) To view it from a different angle, actually these collective five rights constitute value for money proposition. Moreover, it has been more and more recognized that the cost of the purchasing process is also the vital factor in the value for money equation and the different means of minimizing or avoiding such costs have been developed. The compulsion to carry out a competitive process in no way, nevertheless, reduces the benefits which can accrue from the best practice techniques in purchasing. The Five Rights symbolize the value for money and the possibility of obtaining each of them will be maximized through examining of a combination of the issues stated below. The relative weight if each 'right' and the amount of time to be spent on the aspect below will surely be dependent on the exact nature of the purchase and the situation facing the same.

Specification: This constitutes the means of defining what is desired is a central aspect in getting value for money. It is crucial to choose the right level of quality for the task in hand. It is also vital to apply the right medium to describe that need to the potential suppliers. A variety of alternatives is available, starting from the use of brand names, blue prints or engineering drawings, and complete descriptions of the procedures to manufacture, through to functional or specifications based on performance. Every of these have it benefits and drawbacks however the general choice in the present era is for output-based specifications which permit manufacturers to offer trade pattern products or standard working practices. It has to be borne in mind that it is normally more costly to need industry to build a solution, particularly in case where the individual demand is not specific to the ultimate user. (Purchasing Good Practice)

Source of supply: Following the definition of the need in the most appropriate manner, the most crucial factor in ensuring delivery of the value for money is the preference of the source of supply. A lot of matters merit consideration, not least the prospective supplier's: (i) capability & capacity - thus permitting a buyer to evaluate the probable capability of the supplier to give the right quality and quantity of goods within the required timescale. (ii) Financial position- to guarantee that a company possesses the required financial resources for the manufacturing or servicing of the demand. (iii) Track record - to exhibit that almost similar demands have been successfully fulfilled. This might entail looking for references from the client records and analyzing the vendor rating records that must comprise crucial data like speed of delivery, product or reliability of service, pace of query resolution and price competitiveness in the earlier tender exercises. (iv) Location: although important enhancements in distribution chains have taken place in recent years, which might be a factor where the contract covers the service position instead of the supply of goods. (v) Administration: the capability of a company to manage orders and invoicing is nearly as crucial as the supply of goods and services and incompetence in these spheres can rapidly eat into competitive edge as regards pricing. (Purchasing Good Practice)

Seeking the optimum mix of the Five Rights to fulfill corporate requirements:

The basic function of purchasing is to buy the available merchandise or service which is the best and at the lowest price which is possible. A broader function evolves it into a managerial activity that transcends beyond the basic activity of buying and includes the planning and policy activities covering a broad range of connected and complimentary activities. Comprised in such activities are the research and development needed for deciding the right sources of supplies. Due attention is accorded to the specifications, standards, inspection, receiving, accounting, storage and excess equipment. The Purchase Director tries to buy the Right Quality available in the Right Quantity and at the Right Time and Right Place, from the Right Source to be delivered to the Right Place. (Hamilton County Finance Division: Purchasing Department)

Use of Five Rights by the businesses for their advantage and disadvantages to specific business or industries:

In the Information age with the advent of the Internet, purchasing takes a new turn with e-procurement. This is an effective means of acquiring indirect items and items which are difficult to locate, low cost or short-notice spares and replacement components. Nearly, every OEMs, brokers, distributors, manufacturers, and machine shops are equipped with web ordering systems. Majority of the companies are presently purchasing indirect materials online, nearly half are procuring direct materials online and roughly takes the use of industry exchanges and e-marketplaces. Mobile computing is growing to be more refined and is assuming to be more popular in the storeroom. Armed with a wireless system, real-time information flows across every important process inside the warehouse, inclusive of receiving, picking and issues or returns. (Proven, controversial, and new approaches are part of an effective asset management program)

Key Performance Indicators -- KPIs are more and more popular decision support tools. For instance, an EAM solution has the potential to calculate a KPI on inventory turns by diving inventory expenses by the average inventory levels. At the time when the problem regions are identified, automatic notification is possible to be sent to the plant and storeroom managers for escalation. The other supply chain -- KPIs can comprise of vendor performance, obsolescence, and items available but which is not being used, supplier pricing and much more. Supplier Relationship Management -- SRM: This is the new brand concept of developing and handling long-term relations with the suppliers of specialist equipments and replacement parts. In case of asset-intensive industries, several suppliers have an almost exclusive position due to the uniqueness of their replacement parts.

Vendor-managed Inventory --VMI: In cases where the raw material inventory is owned by the suppliers till it is needed, comprises a strategy which lowers the inventory and administrative costs, while fulfilling the demand for components and equipments. Outsourced asset management and maintenance: It follows the pattern for the execution of non-core businesses. In the case of asset-intensive companies, the broad infrastructure and deep knowledge base needed to deal with some strategic assets can well be beyond their capacity. Collaborative commerce and Internet-enabled collaboration within enterprises presently supports remote asset monitoring and proactive maintenance services. Advanced EAM solutions have the potential to support this business model by giving the potential to share the needed real-time information in and out of the business. (Proven, controversial, and new approaches are part of an effective asset management program)

Planning for significant purchases is a processes concentrating on the management of a particular purchase. It might entail planning for a one-time purchase of a good or service which is crucial or it might entail planning for a group of goods and services which are recognized as vital. Planning for significant purchases helps in the following manner (i) identifies the optimum manner to approach the procurement of goods or services by means of information gathering and analysis (ii) finds out the risk connected with the purchase of goods or services early so that these can be managed and (iii) finds out the ways of achieving the objectives defined for the purchase, keeping in line with the department's/agency's Corporate Procurement Plan. (Planning for Significant Purchases)

As a constituent of the corporate procurement planning process the total of a department's/agency's purchases are found out and the total expenditure on individual or collection of goods and services is also being found out. In case of every good/service or group of goods/services, its extent of problems of securing supply is required to be found out. The goods and services which are purchased in any of the high relative expenditure or difficult to secure supply categories are regarded as important purchases. In case the goods and services are important to a department/agency depends on (i) the significance of the good or service to the department's / agency's operations (ii) the possibility of supply failure; and (iii) the influence of supply failure. Risk exposes in terms of the purchase or particular types of goods emerge from four sources. These are (i) purchaser organization inclusive of criticality of the purchase to its operations or standing. (ii) The product or service (iii) the supplier; and/or (iv) the market. (Planning for Significant Purchases)

Industry Examples:

IBM holds that companies must do business with various suppliers, not much for the greater part for social reasons, but since it makes good business proposition, according to the head of IBM's supplier diversity program. It is expected that IBM will spend roughly $2 billion with various suppliers in the year 2005 out of which 60% would be ethnically owned and 34% which are being owned by women. IBM has about 300 diverse suppliers in the U.S.A. It is crucial to possess diverse suppliers, in the opinion of Theo Fletcher who is the Vice President of the Security, Compliance and diversity of IBM's Integrated Supply Chain Group. Fletcher goes on to opine that the company does not think of the same in relation to social benefits even though there are a lot of these. Nevertheless, it constitutes a business necessity. It is important for the company that it has a supply base which appears like the employee base and that appears akin to the market the company is trying to attract. (IBM says diverse suppliers are good for business)