Purchasing is important, particularly because of its impact on costs and its relationships with your suppliers, who are a crucial part of your supply chain success. Learn how the purchasing function contributes to company goals and the four things needed to create a successful purchasing department.
- [Voiceover] Have you ever heard of a Chief Purchasing Officer? You know, like a Chief Executive Officer, or Chief Information Officer. A member of the highest level of executives in the company, but this person is responsible only for the purchasing function. We are now seeing more and more U.S. companies elevate purchasing to this very significant level. And that's the number one thing I want you to take away from this session. Purchasing is important. Now, why is that? First and foremost, purchasing is very important to the company's success because of its impact on cost.
In many manufacturing companies today, more than half the cost of making a product is attributed to the company's suppliers; the people who provide materials and components and assemblies to your factory. And it's the purchasing group that buys those needed goods and services in a manner that provides maximum value for your company. By the way, that's a pretty good definition of the term "purchasing." The Purchasing Department selects a supplier, negotiates contract terms with the supplier, and then manages that supplier's performance in completing the terms of the contract.
Selecting the best supplier clearly has an influence on cost, both directly through the purchase price, and indirectly through the efficient way the supplier completes the contract. In addition to the impact on company cost, purchasing builds relationships with suppliers to help your company improve its reputation for high quality, for on-time delivery, and for innovative products. Early Supplier Involvement, or ESI, is a really good example of this. Having key suppliers join your development team can help bring new products to market faster and cheaper, because the product is designed with supplier capabilities in mind from the very beginning.
And who knows more than your supplier about material cost and component capabilities? Lastly, you cannot overestimate the importance of purchasing to your reputation and your competitive advantage in the marketplace. Most often, when a company has a product recall, the quality issue is not with the product design itself. It's usually an issue with a component or part provided by a supplier. Most often, when a company has a problem concerning corporate responsibility, the act was committed by a supplier rather than employees for the company.
For example, suppliers who use child labor or sweat shop practices damage your reputation. It's clear that purchasing is becoming more and more important in today's business world. What started out as a very administrative task of simply placing a purchase order with a vendor is rapidly transitioning to a corporate strategy for sourcing critical needs from all around the world. So having a successful Purchasing Department is critical to your company's future. A purchasing organization needs four things to be successful.
First and foremost, you need highly qualified employees. You also need a formal organizational structure that supports efficient operations and effective communication. Another important need is an Information Technology system that coordinates planning and execution of purchasing activities. And lastly, you need a really effective system to manage the performance of suppliers. Here's one more thing I want you to consider. It's very important for purchasing to closely manage your supplier relationships while also becoming more integrated with your customers.
The key to achieving this is a strong linkage with all the other groups within your organization. When you begin to examine your purchasing capabilities, look for the connections with production and logistics and marketing. This will give you an initial feel for how important purchasing is to your company.
- Understanding purchasing process and procedures
- Managing suppliers
- Sourcing worldwide
- Negotiating contracts with suppliers
- Analyzing costs