We have already made it clear in another publication what supply is , so now we are going to review in detail what the purchasing or acquisitions department is, what its functions, objectives and characteristics are, as well as its importance within any company, its processes and best practices to develop an efficient purchasing department.
So let’s start from the beginning.
What is the purchasing or acquisitions department?
The definition of the purchasing or acquisitions department is understood as the area responsible for carrying out the purchase or acquisition of all the necessary goods that the company requires for its correct operation, at the correct time, with the specified quality and at the best cost.
Regardless of whether you work in a transnational company or if you manage a SME, you must find that the material you need to carry out your operations is obtained in a structured and planned way , and for that you must understand that the purchases (acquisitions) of a company They are a key piece to achieve higher profits and improve your production cycle, regardless of whether your company makes a product or provides a service.
The first thing we must do to develop an effective purchasing department is to define our policy and our processes, and for that you need to know the following.
What are the responsibilities of the purchasing department?
The responsibilities of the purchasing department are based on the process how the goods that the company needs are acquired, and these are:
. Procure the products and services that the other departments of the company require in order to carry out their activities.
. Negotiate prices, delivery conditions and payment terms with suppliers.
. Manage an effective relationship based on honesty with suppliers.
. Manage contracts and agreements, thinking about the best interests of the company.
. Achieve savings of at least 3 times what is invested (salaries, equipment, benefits) in the purchasing department.
What are the functions of the purchasing department?
The purchasing functions are closely related to the way in which the areas that need a supply make their request, since this will be the one that triggers the entire purchasing process. The functions of the purchasing department are:
- Process the purchase request in a timely manner
- Choosing the right suppliers to supply
- Get at least three quotes to compare prices and delivery conditions
- Negotiate with suppliers
- Issue the purchase order (including purchase specifications) to the supplier
- Track delivery with suppliers
- Provide feedback to applicants on the status of their order
- Facilitate payment to suppliers
- Analyze market trends
- Negotiate contracts and agreements
- Find alternative suppliers to the supplies that are considered necessary
- Evaluate the performance of suppliers before and after making a purchase
We will see all these functions in more detail in other articles due to their importance.
What are the purchasing objectives?
These objectives will largely depend on the results you want to achieve for your company, since these will be the watershed to know if your purchasing department is working efficiently, therefore, the objectives of the purchasing department are:
. Reduce purchasing and storage expenses.
. Generate purchase orders within the established time limit.
. Ensure the delivery of materials and the provision of services, in the time established in the purchase order.
. Minimize quality defects in purchased materials.
. Develop new or existing suppliers that contribute to reducing costs and / or delivery times.
. Ensure that providers are up to date with their payments.
. Decrease the number of “one-stop shops” to avoid supply shortages.
. Increase the participation of suppliers in internal projects of the company.
. Ensure that suppliers have current qualifications or certifications.
But remember, you must develop your objectives based on the SMART methodology (for its acronym in English) to ensure that your objectives are met:
. E S pacific: clearly define what you want to achieve
. M edible defines amounts or percentages of the result you want to achieve
. A licensable: that is something that can be made objectively consider
. R elevating: that is of importance to your company or internal clients
. A T time: date when your goal must be met
Example of a purchasing goal
Reduce expenses by 8% (2,000,000 MXN) of all company departments during the next 12 months, generating new contracts and purchasing catalogs through better structured negotiations.
The buyer is responsible for carrying out all the transactions necessary to make the purchase of a material or service, such as the requisition process, the quotation, generation of the purchase order and the monitoring of invoices, and will also be in charge of generating contracts and agreements, as well as, it will be the first point of contact for the duration of the business relationship with suppliers.
The expediter is responsible for making sure that the suppliers are aware of the order and its characteristics, it will also be who will follow up between the priority orders of the company with the orders that are pending with the suppliers.
The developer is responsible for searching with existing suppliers in our company, and outside of this, different products, designs, components, services, that offer the company a cost reduction or a better service provider, and to achieve this, they must consider a variety of factors such as location, logistics costs, novelty of the product or service, risk, and the vendor’s state of maturity.
The supply engineer is responsible for measuring the quality of the products and services purchased, in addition to supporting any of the positions to develop suppliers, this engineer must know in detail the entire supply process, since he will be the one Make sure that a supplier has everything necessary (certifications, qualifications, conditions of your company and its workers) to perform the service or product that we are going to buy in the best possible way.
The purchasing leader is responsible for planning, organizing, directing and controlling the strategies to be followed by the department, and will also be responsible for reporting to senior management on the fulfillment of the purchasing team’s objectives. Among its main functions will be to motivate, guide and listen to your team, as well as to develop new ways of working that speed up and facilitate the team to meet its objectives.
Since we define the main jobs within a purchasing department, it must be clarified that if the company where you work or if your company is not large enough to hire 5 people within the department, then the buyer can perform the 5 positions (only if they do not affect your performance).
And on the contrary, if your company has more than 5 people in purchases, then your organization chart will have these same positions, but it will also have supervisors or more leaders, and with more specific positions, such as a buyer of materials and another services, or buyers, developers and supply engineers segregated by “commodities” or “products”, which is the best way to classify your jobs, but we will see this topic in more detail in another article.
If you review the organization chart, the buyer and the expediter are at the same level, because they will be in charge of handling purchase orders, communicating with their internal customers about the status of their orders, and following up with suppliers about the status of their purchase orders, so they maintain a close working relationship.
On the other hand, the developer and the purchasing engineer are at the same level, because each complements the function of the other, when the developer finds a supplier, the purchasing engineer must evaluate it and share certain improvements to be made, and the developer must In charge of carrying out the follow-up with the supplier, so that it achieves these improvements, so that both positions can develop strategies to improve the quality of the suppliers, sharing the responsibility and the tasks to be performed
It is very important that you have a specific mission and vision of the purchasing department, since these will be the pillars on which you are going to base yourself to manage your purchasing department, just make sure that these missions are integrated with the mission and vision general of your company, so that you achieve total synchrony between the purchasing department and the management of the company.
The purchasing policy is a document that is intended to facilitate our staff to carry out the purchasing department’s strategy, since we will rely on the policy to achieve the commitment of the team, and of the areas that maintain contact with purchases, to reinforce the commitment and participation of all those involved.
The purchasing department policy serves to provide an accurate guide for leaders and employees to develop action plans that allow them to achieve their objectives.
Purchasing department policies should be as clear and simple as possible, so that they are easy to understand, and, in addition, it should be disseminated both among the department members and with our internal clients, so that they also know the work being done. In the department and the responsibility they hold.
How to develop purchasing policies?
To develop an effective purchasing policy , we must ensure that it can be done on a single page , that it maintains a language that everyone in the company can understand and, above all, that the purchasing team can really use the document as a guide to know how to perform the functions of the department.
In my opinion, there are 3 fundamental requirements that any purchasing policy must have:
. Mention the objective of the policy.
. Define the guidelines and considerations to follow.
. Establish the responsibilities of the department and its internal clients.
Regardless of whether you want to generate purchasing policies for a private, governmental or industrial company, you must ensure that it at least meets the 3 requirements already mentioned, and try to make them brief and concise, if you do not do so, I can guarantee that no one in your department or in the company you will be able to remember them, much less take them as a guide to carry out your functions.
To make it clearer and have a better idea, I looked for a purchasing policy that meets these requirements, so if you click on this link PDF purchasing department policies (although they could have made it even easier) you can review the example and it will be easier for you to develop your own policy.
Purchasing Policies and Procedures Manual in a company
The purchasing policies and procedures manual is part of the company’s internal control system, said manual should be created to obtain specific, structured, systematic and general information on the instructions, processes and responsibilities within the purchasing department, in addition to serving for information on policies, functions, systems and procedures that are needed to perform the operation
This purchasing regulation is made in order to group all the documents necessary to develop the tasks that the purchasing department must perform in a company, but it is not mandatory to create a manual, you can maintain procedures and instructions as independent documents, but these must be easy to locate and must maintain a sequence between them, ensuring that anyone is able to understand them.
The basic elements that a company’s purchasing policy manual should contain are:
. Purchasing policy: every manual should start with the policy, and with this direct the expected behavior that any collaborator in the purchasing department should develop.
. Rules of the purchasing area: they must indicate the actions that are prohibited, the appropriate way to act and the way in which the functions of the department should be developed.
. Workflow: in this section all the instructions should be delimited so that any person in the company or new member of the purchasing team knows how to perform key tasks such as requisition, selection procedures, purchase order, approvals, and reception of goods.
. Type of purchase: the processes to meet the different types of purchases will be defined, whether they are purchases of goods or services, and the sub-classifications that the company has made of them.
. Purchases by transaction amount: define the guidelines depending on an established purchase amount, it can be a guideline for purchases of less than 29,999 MXN, another guideline for purchases of between 30,000 and 49,999 MXN, and so on to the extent deemed necessary depending of the company.
. Records: define which records to keep digitally or physically such as quotes, requisitions, purchase orders, contracts, bids, etc.
Importance of the purchasing department
The usefulness of the purchasing department lies in the ability of your department to not only be a department of control and management of expenses (reactive), but a key unit that offers your company a competitive advantage within your sector (active).
What do I mean by the above? Because normally the purchasing department works to process purchase orders, negotiate some of these, generate the occasional contract and get a few savings, all this due to the poor structure of the department, the lack of categorization in the products and / or services, and the mismanagement and communication of the departments that make the request, which results in a reactive purchase or “put out fires”, which is the most common in companies.
On the other hand, when I speak of an active purchasing department, I mean a department, which, in collaboration with the other areas, plans the supply of resources, also has a detailed structure that allows tasks to be simple and avoids bottlenecks. Bottle within the purchasing process, which allows the company to obtain its supplies at a better price, with better deliveries and with time to solve problems that were not contemplated in the plan;
Purchasing department characteristics
The main characteristic of the purchasing department is that it is the only department capable of saving and contributing to the profits of the company, since whatever the company “invests” in the salaries and services of the purchasing department, it must be able to pay himself and to get higher profits, all this through the savings generated.
That is, if a company “invests” a total of $ 200,000 monthly in the purchasing department, it must be able to achieve savings for the company of $ 600,000, I would say that the correct ratio should be at least 1 to 3, where for each peso that is “invested” in the purchasing department, and it must get 3 pesos in savings.
Other characteristics that we can find are that the department can be divided by the 2 types of purchases, which exist:
. Direct purchases: acquisition of raw materials and goods for production. An example of this would be the purchase of metal bars and machined components.
. Indirect purchases: acquisition of goods and services that allow your company to carry out its daily business activities. An example of this would be the purchase of spare parts for a machine, travel and IT services.
What are the stages of the purchase process?
Within the supply, the purchase process or cycle can be divided into 5 stages , which must be developed in the best possible way, and improve over time, to keep this important cycle running smoothly; these stages are:
- Requisition or purchase request.
- Purchase order or order note.
- Receiving supplies.
- Payment to suppliers.
What is the purchase requisition or purchase request?
The purchase requisition is the document or digital format (it should never be done “on paper”) with which the purchasing department is authorized to supply any good or service, which must be previously authorized, based on the amount of the request, and must be issued by the users responsible for making the requisition correctly.
. Utility: the requisition is used to communicate the need of a department of the company to the purchasing area, regarding any supply that is required for its operation.
. Function : the function of the requisition is to indicate all the requirements such as quantity, date it is needed, specifications, characteristics and / or properties that the supply must have in order for it to be useful for the company.
What is the quote?
The quote is the document or format (it should not be received “on paper” and it is acceptable to receive them by email) in which the price of a good or service, its availability and the characteristics of the offer are stipulated, to participate in the process of purchase. In some sectors, instead of calling it a quotation, they will call it a budget or an estimate, but the most commonly used term is quotation.
With the new purchasing tools, this document should remain in the past, and any quotation should be made within the online system to manage purchases (E-procurement) of the company, but as this is still out of reality, the buyer will be responsible for the proper handling of these documents, so that you can make reports that compare the quoted supplies.
. Utility: the quotation serves to communicate to the seller (through a request for quotation or RFQ) the characteristics and quantities that are needed from the supply, and also, to group all the similar needs of the company to facilitate the purchase of the supply.
. Function: the function of the quotation is to indicate all the requirements that were made in the requisition to the suppliers that can supply the product or service us need, and also serves as a guide for the buyer when choosing the supplier, since, with this we can compare prices, characteristics and delivery conditions.
What is the purchase order or order note?
The purchase order or purchase order is an agreement (it should not be issued “on paper”) that the purchasing department makes to a supplier to request a good or service, with which the supplier, depending on the payment terms, can begin to provide the service or carry out the product, without receiving a payment at that moment.
A purchase order must clearly mention the date of issue, quantity, description of the supply, identification number (if any), specifications, purchase price, payment terms, delivery method, taxes, and name and address of the buyer and seller. When the purchase order is sent to the supplier, the latter is expected to confirm receipt of the order and the date on which the order will be delivered.
Everything that is bought in a company should be done through a purchase order (there are a few exceptions), through a unique registration number, with which its use can be controlled.
. Utility: the purchase order is used so that the supplier has a document that allows him to know what to sell, it is also a promise of payment, so that the supplier begins to manage the sale, without having to pay him (in most cases)
. Function: the function of the purchase order is to confirm the price and delivery conditions, of the requirements that were made in the requisition to the suppliers.
How can I make a purchase order?
To make a purchase order, the ideal would be that you have a purchase management system that allows you to make a purchase order from the information provided in the requisition, and that later, it will take the quote data and transfer everything this to the purchase order in a semi-automatic or automatic way, and thus, minimize the error and facilitate the control and measurement of all the purchase orders.
But if your company does not have that, you only need either Excel or Microsoft Access, but as the most widely known and widely used tool is Excel, we suggest that you at least have an Excel format.
Example of a purchase order
If you need an example of a purchase order, you can download in this link a format of a purchase order with taxes, so that you only have to enter the information indicated there, but remember to add a new purchase order number each time. Make a new document. The employee’s signature can be digital.
The receipt of supplies is the process by which one or more supplies manufactured, distributed or made by a supplier arrive at our warehouse to be inspected, validated, classified and entered into our “stock” or inventory, to be able to store it until the company I needed it.
In the process of receiving supplies, we are going to carry out 2 types of receptions, the receipt of physical material, and the receipt of services, which also need to be validated to confirm that they were made and guarantee that something is paid performed.
. Utility: the receipt of supplies serves so that we can ensure that the material or service that we buy complies with the conditions in which we request it from the supplier.
. Function: the function of the reception of supplies is to receive the materials that I send or that we collected from the supplier, and to compare what the purchase order requests against what was physically received, and to prevent the transfer to “stock” if there is any difference.
Payment to suppliers
Payment to suppliers is the process where after the merchandise or service has been validated and accepted, we make a bank transfer or cash deposit according to the credit days stipulated in the purchase order, based on the invoice delivered during reception. Of the material;
We can find different types of invoices, such as:
. Ordinary invoice: it reflects in detail all the deliveries, prices and the supplier and buyer identification data.
. Commercial and preform invoice: they are only informative and serve to confirm the value of a transaction, especially in international trade.
. Electronic invoice: It is done the same as the ordinary one but its difference is that it will not be delivered physically but will be sent in electronic format.
Since we define all the stages that make up the purchase cycle in a supply chain, it is necessary to know which is the stage that can cause us the greatest problems, so it seems important to explain in more detail about the problems we can find in the supply receiving cover;
Terms and conditions of a purchase order
A very important point within the preparation of the purchase order, are the terms and conditions of purchase, which should be stipulated in the order, they are usually added at the end of it, and although they are often overlooked, they are a fundamental part, since the purchase order acts as an agreement and it is with these conditions that we can make our claims if necessary.
Confirmation of receipt of the purchase order
Having said that, you can imagine the importance of the supplier confirming that the purchase order has been received, previously the order had to be signed and sent back to the buyer, but now what can be done is to receive a confirmation through the system purchasing management, by email, or failing that, the simple fact of having some evidence that the supplier is processing the order, even if it is a partially finished job.
At the beginning of the work, the supplier understands that he agrees with the terms and conditions, and that is why he has started to do the work, or that for that reason, he has confirmed receipt. It is important that as buyers with each new supplier and even every certain time, a “refresh” or review of these conditions is carried out with the suppliers, so that they have no excuses when we make our conditions valid.
External records in our purchase order
It is advised that for no reason the supplier’s quote number or any other identification number of a supplier’s process should be entered, since by doing this we may harm the terms and conditions of our purchase order, by including a number of supplier registrations we are validating the conditions linked to that registration number.
This is why I recommend issuing quotes under your own registration numbers, and thus not having “loopholes” when enforcing our conditions.
How to make the terms and conditions of purchase?
The terms and conditions must be prepared by your legal department, in conjunction with the purchasing department, to know exactly what conditions are needed, we can add conditions to protect and ensure that the supply will be delivered on time and in the conditions agreed upon, so you can add some penalty for late deliveries, some penalty for low quality, or like him not disclosing information that is intellectual property of the company.
Quality in purchases
As I had already mentioned at the beginning, the receipt of supplies plays a key role in the purchasing process, since it is where the receipt inspection process is carried out, during which the quality of purchases will be reviewed, therefore It does not matter if you are a large or small or even a micro company, you must have a process that allows you to define what are the parameters to accept a good or service.
The key points to take into account during the quality review in purchases will depend on the line of business of each company, but it does not matter if you are a grocery store or a large information technology (IT) consulting firm, Everyone must have a checklist or blog, either digital or printed, that serves as a guide to know what to check when receiving a good or service, and for this, the purchase specifications are normally used.
What are the purchase specifications?
The purchase specifications are the description and the precise characteristics of the requirements with which the purchased material or service must meet, mentioning the tolerance levels allowed (minimum and maximum).
Depending on the business of your company, the specifications may be provided by the engineering area, the quality area, the user requesting the material or a standard of services or products, but these must be as clear and understandable as possible, in order to avoid setbacks with your suppliers.
Also make sure to hold talks every so often with your suppliers, where you share tips that help them better and more easily understand your specifications.
What should the purchase specifications include?
Within the purchase specifications must include relevant information such as size, weight, unit of measure, physical or chemical properties, the use of material, technical specifications and performance and specifications brand if you can only use certain suppliers to make that component you want to buy.
The Inspection Plan
The Inspection Plan is a detailed program that contains the necessary information about the tests, services and parameters that must be reviewed of a material, machine, product or service, this will help us to define the characteristics that must be inspected in each operation only from the purchased materials, but also from those produced, but here we will focus on the purchased ones.
The Inspection plan is divided into the following elements:
. Inspection Operation: indicates the actions to be carried out during the inspection of the different goods or services received.
. Inspection Characteristic: indicates the unique qualities that a certain good or service possesses, and thus, ensure that they are inspected with the appropriate instrument.
. Inspection instrument: it is the tool that the inspector will use to validate that the characteristics of the good or service have been met.
Now that we have carried out all these actions, we can confirm whether or not the good or service is in accordance with the purchase specifications, and in the event that it is not in accordance, a Non-Conformity would have to be raised , which must be notified to the department. of purchases so that they can claim the supplier, and thus, get the replacement of the material, perform the service again or, failing that, make a credit note.
Regardless of the case, all these Non-Conformities will have to be measured and it will help us to evaluate the suppliers, this will be discussed in detail later.
Now you know the 10 elements that make up an effective purchasing department:
- Understand what a purchasing department is
- Understand your responsibilities and roles
- Define your goals
- Structure department positions
- Establish purchasing policies
- Identify the purchasing area as a competitive advantage
- Analyze its characteristics
- Correctly develop all the stages of the purchase process
- Establish terms and conditions to protect the interests of the company
- Evaluate quality within purchases
If you carry out each of the points in your company, you will go from a purchasing department without structure to a department with defined bases and functions, but that does not mean that you can already sit down and rest, this was just the beginning.
Now we must know how to manage a purchasing department, that is, now we have to direct and manage the efforts of our department (which we already have well structured), and thus, obtain greater savings, better deliveries, and better relationships with suppliers. . We will see this in the following articles.