Importance of Purchasing in a Manufacturing Organization

Purchasing is a crucial function in a manufacturing organization as it impacts cost, working capital, import substitution, project completion, and materials management. It involves the procurement of materials, supplies, and services needed for production and maintenance. The purchasing department is responsible for sourcing the right materials, in the right quantities, at the right price, from the right suppliers. It plays a key role in cost savings, efficient use of working capital, import substitution, project completion, and overall materials management.

Q. Explain the importance of purchasing in a manufacturing organization.
Purchasing is the most important function of materials Management. The
Material planning function determines the requirement of raw materials, parts,
components, spare parts, etc. Needed for production and takes decisions regarding
What, How and When to buy? All this decisions result in the preparation of material
requisitions which are then passed on to purchase department for further action
towards procurement of the materials listed in materials requisitions.
DEFINITION:-
Purchasing refers to the function of processing of materials, supplies,
machines, equipments, tools, spare parts and services required for meeting the needs
of production department and maintenance department.
Purchasing implies the act of exchange of goods and services for money. In its
narrow sense, purchasing refers merely to the act of buying on item at a price. In a
boarder sense, purchasing is a managerial activity involving planning and policy
formulation, research and development strategies required for the proper selection of
materials and sources of supply, negotiating with supplies for best price terms, placing
purchase orders follow-up to ensure timely delivery, co-coordinating with other
departments. Receiving, inwards inspection, stores and accounting
*IMPORTANCE OF PURCHASING IN A MANUFACTURING ORGANIZATION:
Purchasing is a basic function of any industrial enterprise. Since any industrial
enterprise Manufacturing goods (tangibles goods) (products) need raw materials and
components for converting them into finished goods purchasing function is of major
purchasing department is responsible for purchasing materials of right type, in right
quantities, at the right price, made available at the right time and procured from the
right supplier.

 In any manufacturing industry the materials cost ranges from 50 to 80% of the
product cost, depending on the nature of the product procurement of goods
through purchase accounts for about 50% of the money spent by the average
industrial enterprise and ranges from 20 to 90% among different industries
Hence, the financial aspect of purchasing is of great importance. A one
percent of savings in cost of materials is achieved mainly through efficient
buying.
 A large amount of working capital is usually tied up in the inventories of raw
materials, components and supplies held by an industrial firm since, high
financial stakes are involved in buying the purchase manger who is the
custodian of a firms working capital is obliged to have utmost integrity in
spending the company’s valuable money.
 Purchasing can effectively contribute to import substitution and thereby saving
the nations precious foreign-exchange resources purchase managers are
consciously aware of external industrial activities and are able to gather vast
information regarding new products, materials, equipments, machinery, tools
and processes for the benefit of their firms.
 Purchasing function has a role in the completion of major projects undertaken
by a firm. Any delay is procurement of materials for the project will eventually
cause delay in procurement of materials for the project will eventually cause
delay in completion of the project.
 Purchasing is a key function in materials management. Other functions of
materials management are built around the purchasing function.
 For specific factors which have contributed to the rising importance of
purchasing
a) Post war shortages and increasing requirements of defense and govt.,
departments.
b) The cyclical Suring of surpluses and shortages of materials and fast rising
material casts.

 Stiff domestic and international competition in the manufacturing industries.
 Growing worldwide markets, foreign purchasing to assume international scope
* IMPORTANCE OF PURCHASING DEPARTMENT:-
 It is a primary function directly influencing the major cost of operating or
business.
 Efficient operation of any industry depends upon proper turnover of
investment. The purchasing department must ensure receipt of proper
materials when needed is sufficient quantities to maintain production at the
same time, it must not increase investment beyond that required to meet
current needs and maintain a reasonable factor of safely against stock and
conditions.
 Discovering new materials, which may be used to advantage as
substitutes for materials in use.
 Identifying possible new line of products to be added
 Building up goodwill is the business world with which it deals.
 See changes in trends, either in price or other factors that will affect the
sales of the company.
 Its knowledge of vendors and the manufacturing and marketing policies of
other industries make it possible for the purchasing department to
contribute invaluable help in framing plans for initiation of new products,
scheduling of production and determination of marketing