What is Purchasing?

Purchasing is the organized acquisition of goods and services on behalf of the buying entity. Purchasing activities are needed to ensure that needed items are obtained in a timely manner and at a reasonable cost. A purchasing department is especially necessary in a manufacturing business, where large amounts of raw materials and components must be obtained on a recurring basis. The purchasing department's primary goals are as follows:

To locate suppliers that can provide goods and services in accordance with the buyer's requirements.
To buy items that meet the quality specifications of the buyer.
To create a stream of deliveries into the buyer's premises that minimize the raw materials inventory investment while still ensuring that goods are available as needed.
To minimize the amount of cash invested in inventory.

Related AccountingTools Courses

Contract Management

How to Audit Procurement

Purchasing Guidebook

Purchasing Activities

Common purchasing activities are as follows:

Receive and verify purchase requisitions from around the company.
Search for qualified suppliers that can fulfill the buyer's needs.
Prepare and issue request for proposal (RFP) documents to qualified suppliers.
Evaluate supplier responses to RFPs, select a winner, and negotiate a contract.
Issue purchase orders to suppliers that authorize purchases. A master purchase order may be issued when there are a number of deliveries contemplated under a purchasing arrangement.
Administer contracts that have a longer duration.
Review open purchase orders to see if any should be closed.

Purchasing Best Practices

Here are some key purchasing best practices to help organizations streamline their procurement processes, optimize costs, and build reliable supplier relationships:

Create purchasing policies. Define and document procurement policies and guidelines, including purchasing thresholds, authorization levels, and preferred vendors.
Centralize purchasing. Consolidate purchasing to leverage volume discounts, negotiate better terms, and reduce redundancy.
Develop strong supplier relations. Build strong partnerships with reliable suppliers to secure favorable terms, priority service, and quality assurance.
Use a structured selection process. Use a structured selection process for evaluating and choosing suppliers based on criteria like price, quality, reliability, and service.
Use purchasing software. Use procurement software to streamline purchasing workflows, track orders, and improve accuracy.
Set key performance indicators. Define and monitor KPIs, such as cost savings, supplier delivery performance, quality ratings, and cycle times, to measure procurement effectiveness.
Optimize inventory management. Use Just-In-Time (JIT) or other inventory strategies to balance carrying costs with demand.
Conduct a periodic spend analysis. Regularly analyze purchasing data to track spending trends, identify high-cost categories, and highlight potential areas for savings.
Conduct risk assessments. Develop contingency plans, such as backup suppliers or alternative sourcing options, to manage supply chain disruptions.

These best practices can help streamline purchasing processes, reduce costs, and enhance supplier performance.

Purchasing Systems

The purchasing department may operate a freestanding purchasing software package, though the system is more effective if integrated into the software of the receiving and accounts payable functions. An enterprise resources planning system will include a purchasing module, so that orders can be placed by any authorized person using the ERP system.