Organization for Purchasing

Organization is needed when people are jointly trying to reach some common goal. A person alone in a wilderness with the goal of survival does not need organization. Unless one were to stretch the term to apply to the person’s integration of plans and actions. Similarly, a group of people relaxing on a beach do not need organization because they have no joint objective. However, if a group of people are put into an inhospitable wilderness from which they wish to save themselves they will quickly devise an organizational pattern. The organization may be thought of as the harness that enables each person to apply his individual effort toward accomplishing the defined goal.

A good organization is essential if the efforts of each individual are to be optimized. In a poor organization the efforts of some may be largely nullified by the efforts of others working at cross-purposes. The efforts of some may be less productive than they might  be because their organizational harness may not be properly integrated with that of other parts of the total organization. The secret of good organization, then, is to provide a comfortable harness for everyone and to see that the various segments of the total are so well integrated that everyone is working toward the same goal with maximum effectiveness.

Organization may be thought of in two dimensions. One deals with motivating the individuals and subgroups of the total organization to get them to contribute optimally. The other deals with the pattern of formal interrelationships that tie the members of the group together. These dimensions often find expression in organizational charts. It is this aspect of the organization of purchasing that we shall emphasize.

The most significant recent changes in purchasing organization involves a movement toward uniting purchasing with other departments dealing with materials under a single responsible executive. This practice is usually refereed to as materials management concept.

There is much to be derived from sound organization Responsibilities are clearly assigned to the personnel in the organization, which assures that all activities will be performed, but with no duplication of effort. A sound organization also clearly defines authority so that each individual in the organization knows to whom he reports and who reports to him. This definition of authority tends to lessen friction between individuals. Another benefit of sound organization is the saving in time for executives. With proper assignment of responsibility and authority, most routine decisions can be handled by a subordinate, and the executive can devote his time to broad procedural and policy matters.

Sound organizational structure also permits a chain of promotion to be established. As a concomitant of sound organization it is usual to find the development of job specification. These in turn facilitate training of individuals for their own positions and for the positions immediately above them. The existence of such a chain of promotion and systematic training for promotion greatly strengthens and improves morale within an organization. Finally, a sound organization will promote harmony among the component parts of the organization. There is less possibility of jealousy or jurisdictional rivalry if the organizational responsibilities are clearly outlined.

It should be recognized that there are distinct limitations to what can be achieved through organization, and there are certain organizational weaknesses to be avoided in setting up a business organization. An inherent limitation to any organization is the personnel who staff it. The best principles of organization are of little value if the personnel who are assigned to carry out the various responsibilities are incapable of doing so. It frequently happens that organizational principles must be compromised so as to assign responsibilities to capable personnel. It is a recognized fact that most company organization charts do not accurately reflect the lines of authority and responsibility which flow through persons as well as their positions

A second factor to consider is the possibility of over organizing. There are many organizations in which all duties and responsibilities are so minutely defined that excessive red tape results. Over organization leads to a slowing down of decision making because the channel to the decision making executive is too long or too devious. A highly refined organization can be made to run smoothly by retaining policy control at the upper levels, with authority and responsibility delegated to lower levels subject only to reporting and review. On the whole, there is greater risk of poor performance through under organizing than there is through over organizing.

In purchasing there are two major organization problems: (1) the place of the purchasing department in the overall company structure and, (2) the internal organization of the purchasing department. Two basic issues are involved in the first problem: (a) the desired degree of centralization of the purchasing function within the company, and (b) the executive (or division) to whom the purchasing officer should be responsible.

 

A firm’s organizational structure reflects management’s basic attitudes toward the major activities involved in its operation. Where should the purchasing function fit in a firm’s organizational structure?

In a given firm, how does one tell whether purchasing is a top-level function that should report to a general management executive, as do marketing and production, or a sub function that should report to one of the top functional executives? Answers to these questions can be determined only by finding the answers to several more basic questions.

How important is the purchasing activity to the total company operation? Will the company suffer significantly if purchasing does not perform as effectively as it might? How important is it that purchasing activities be coordinated closely with engineering and finance activities? Is it essential that materials costs be tightly controlled?

Due to the varied nature of different firm’s products and operations, answers to the preceding questions differ among firms. The importance of purchasing in any specific firm is determined largely by four factors:

 

1. Availability of materials

Are the major materials used by the firm readily available in a competitive market? Or are some key materials bought in volatile markets subject to periodic shortages and price instability? If the latter condition prevails, creative performance by analytical purchasing professionals is required; this typically is a top – level group.

 

2. Absolute birr volume of purchases

If a company spends a large amount of money for materials, the sheer magnitude of the expenditure means that top-fight purchasing can usually produce significant profit. Small unit savings add up quickly when thousands of units are purchased.

 

3. Percent of product cost represented by materials

When a firm’s materials costs are 40 percent or more of its product cost (or its total operating budget), small reductions in material costs increase profit significantly. Top-level purchasing usually pays off in such companies.

 

4. Types of materials purchased

Perhaps even more important than the preceding consideration is the amount of control purchasing personnel actually have over materials availability, costs, and services. Most large companies use a wide range of materials, many of whose price and service arrangements definitely can be influenced by creative purchasing performance. Some firms, on the other hand, use a fairly small number of standard production and supply materials, from which even a top flight purchasing department can produce little profit as a result of creative management, pricing and supplier selection activities.

 

A basic approach to organization

The nature of purchasing activity permits effective use of the functionalization concept. Purchasing work divides naturally into five distinct classifications, each of which encompasses a fairly wide range of activities. In most cases the classifications can be further divided into more specialized tasks, each of which still involves working with different problems, different products, different vendors. This circumstance permits the attainment of a high degree of specialization, without creating motivational problems for most purchasing personnel. Moreover, this type of functionalization permits reasonable flexibility in expanding the work force to meet operational demands.

The five classifications of work found in a purchasing operation are:

1. Management

Management of the purchasing function involves all the tasks associated with the management process, with emphasis on the development of policies, procedures, controls, and the mechanics for co-ordinating purchasing operations with those of other departments. On an exception basis, it also involves the management of unique supplier and commodity problems.

2. Buying

This includes a wide variety of activities, such as working with users to help develop requirements and specifications, reviewing requisitions, analyzing specifications, investigating vendors, analyzing vendor capabilities, interviewing sales people, studying costs and prices, analyzing bids, negotiating, and selecting suppliers.

3. Follow-up and expediting

Order follow-up activity involves various types of supplier liaison work, such as reviewing the status of orders, writing letters, telephoning and telegraphing suppliers, and occasionally visiting suppliers’ plants.

4. Special research work

A well-developed purchasing operation has an unending number of special projects or studies requiring specialized knowledge and uninterrupted effort. These projects commonly are found in the areas of formal value analysis, economic and market studies, special cost studies, special vendor investigations, and systems studies.

5. Clerical

Every department must write orders and maintain working files, catalog and library materials, and record for commodities, suppliers, prices, and so on.

The precise manner in which purchasing work is subdivided and grouped depends on the size of the department, which in turn depends on the size of the company. The size of the purchasing department typically runs somewhat over 1 percent of the total company workforce in small firms to substantially less than 1 percent in large firms.

In a small company, say 150 employees, purchasing frequently is a two-person department. The purchasing manage handles all work in the first four classifications, and a secretary performs the clerical work. As the size of the department increases, additional personnel are usually assigned joint buying and follow-up duties. At this point, buyers begin to specialize on the basis of board classifications of commodities which the buy, and each buyer typically does his or her own follow-up and expediting work. As the department grows, buyers continue to specialize in increasingly narrows commodity classification. Eventually, the follow-up and expediting work may be withdrawn from the buyers and assigned to expediters, who may specialize in somewhat the same manner as buyers. Continued growth finally results in the addition of one or more staff personnel who specialize in various kinds of special projects.

 

The Typical Organization Structure

a typical structure for the internal organization of a single plant purchasing department in a medium-sized firm includes:

   i) Manger of purchasing

The chief purchasing executive assumes various titles in different companies, such as manager of purchasing, director of purchases, or, occasionally, purchasing agent. In a small department he or she usually performs major buying activities as well as the required management duties. As the department grows, most of the manager’s time is devoted to management issues, except for the negotiation of a few major contracts.

   ii) Buyers

Buyers and their assistants perform the actual buying activity and work directly with suppliers. Each buyer, and assistant if the job requires one, handles a specific group of materials. For buying purposes, materials can be grouped in two ways: (1) materials whose purchase requires similar buying skills and technical knowledge can be grouped together, or (2) materials that are used in the same finished product or by the same operating department can be grouped together. The former practice is the more common grouping materials that have similar buying and technical characteristics permits a buyer to become a technical specialist. For example, he or she may specialize in buying electronic parts, metal castings, or abrasive materials. In most firms today this is highly desirable. As materials continue to become more complex, specialized knowledge of their characteristics, manufacturing processes and markets is indeed required to purchase them intelligently.

If a buyer’s materials are grouped by similarity of end use, one buyer may buy some or all of the parts for finished product A, and another buyer may buy the parts for finished product B. or one buyer may handle the materials used by the lubrication department and another may handle the components for the assembly department. Generally speaking, when materials are grouped by end use, the buyer buys a wider range of items and becomes less of a specialist than would be the case under the preceding method. This arrangement also produces some duplication of effort because several different buyers invariably buy some of the same types of materials.

A major advantage of grouping materials by end use, however, is the fact that buyers do not become immersed in their own technical specialties. They have a tendency to identify to a greater extent with the product or the department for which they are buying. In these circumstances, the buyer frequently feels that he or she is an integral part of a specific production effort. Companies favoring this form of organization believe that the loss of technical buying specialization is more than compensated for by the added effectiveness of the purchasing-production team effort that results. The extent to which this is actually true in a specific situation depends on the range and complexity of materials purchased by each buyer and the effectiveness achieved by the team effort.

   iii) Buying supervisors

The size of the buying staff and the complexity of the purchases handled determine the need for buying supervision. In some departments eight or ten buyers can report directly to the purchasing manager or to a line assistant. In other cases, each commodity buying group is handed by a senior buyer who reports to the chief purchasing executive. Possibly the most common arrangement is depicted in Figure – 3. In this case, buyers are organized into larger groups on the basis of similar commodity characteristics. An intermediate manager, who reports to the chief executive, is assigned to each group (some times called a buying department). These managers are variously titled senior buyers, assistant purchasing agents, purchasing agents, or buying department managers, consistent with the title of the top purchasing executive. The duties of these individuals typically encompass both managerial and actual buying activities.

iv) Expediters

The most common form of organization for the follow up and expediting activity is shown in Figure – 3. Formation of a separate expediting department permits a high degree of specialization; additionally, it facilitates an even distribution of the work load and efficient utilization of expediting personnel.

However, there is a wide difference of opinion concerning the most effective arrangement for handling the expediting activity. Some firms require each buyer to do his or her own expediting. Because of the buyer’s status and intimate knowledge of the order, these firms believe that a buyer can obtain more effective results from suppliers than can someone of lesser status in the organization. More important, companies using this approach want the buyer to assume ‘total’ responsibility for each of his or her orders. They feel the buyer can do this best by personally participating in all phases of the purchase. Additionally, if a buyer is responsible for all phases of an order and for all vendor contacts, it is easier to measure and control his or her performance.

Since much follow-up and expediting is routine work, however, it often represents an efficient use of a buyer’s time. Some companies therefore develop a hybrid organization. To achieve the benefits of specialization, they assign the follow-up and expediting function to a separate expediter. So that the buyer can retain full control of his or her orders, though, each expediter is assigned directly to one buyer (for a buying group). Thus, the expediter drops his or her work as directed by the buyer, and the buyer is held fully responsible/accountable for his or her orders. In practice, the expediter usually handles all routine follow-up inquires and all other buyer for assistance with the difficult or delicate expediting problems this form of organization when fully developed, produces a commodity-type organization structure that minimize the division of responsibility between buyers and expediters, and tends to produce a beneficial esprit de corps among buyers, expediter’s and clerical personnel assigned to a particular commodity group. In addition, this approach helps develop an internal source of new buyers – its experienced expediters. This form of organization clearly may also be less flexible and more costly, especially in small firms.

iv) Staff Research Personnel

The number of staff specialists employed depends on the size of the department, the complexity of its operation, and the types of material it purchases. Theoretically, in making pre purchase investigations good buyers should perform nearly all the activities such staff specialists are hired to do. However, most companies now realize that under the pressure of daily operations, most buyers simply do not have time to conduct all desired investigations in adequate depth. This is particularly true for complicated purchase that influence future procurement efficiency. This fact, coupled with an awareness of the benefits specialization can produce in planning and research, has led many firms to organize such activities functionally within a special staff group. The specific activities of this group are related to value analysis and purchasing research.

 

A multi plant firm faces one additional organizational question that does not concern most single-plant companies: To what extent should purchasing activity be centralized at the corporate level? In practice, virtually every firm answers this question differently. Some firms centralize the activity almost completely, doing the buying for all plants at a central head quarters office. Others decentralize the function entirely, giving each plant full authority to conduct all of its purchasing activities. Still other firms-the majority of them-develop an organization some where between these two extremes. Each extreme approach offers significant benefits that are discussed in the following sections.

 

   2.4.1 Advantages of Centralization

      1. Greater Buying Specialization

Perhaps the greatest benefit of centralization stems from the fact that it permits greater technical specialization among buyers. This leads to the development of more knowledgeable and more highly skilled buying personnel.

Centralization enables a firm to do a better technical job of buying, or it permits a job of buying comparable with that under decentralization to be accomplished with fewer buyers. It also provides for the capable buying of major capital equipment and construction services which are required only intermittently by any single plant, but which on a company wide basis represent a continuing purchasing activity.

In most companies, the importance of specialized buying cannot be overvalued. The complexity of industrial materials increases constantly. A buyer who does not fully comprehend the significance of a materials major technical and manufacturing characteristics cannot perform effectively. If buyers fail to perform with technical competence, the important buying decisions will ultimately be made in the using departments, and buyers will be relegated to a glorified clerical status.

     2. Consolidation of Requirements

Just as single-plant centralization facilitates the consolidation of plant requirements, multi plant centralization facilitates the consolidation of material requirements at the corporate level. In most situations, such consolidation results in larger purchases from a smaller number of suppliers, yielding more favorable prices and increased supplier service. Increased purchase volumes also permit the negotiation of highly profitable long-term contracts for many production materials.

     3. Easier purchasing coordination and control

When all company purchasing activities are consolidated in one office, procedures for coordinating and controlling individual segments of activity can be effected more quickly and with less paper work. Consolidation permits more direct administration and control of such important policies as those affecting supplier selection procedures, supplier relations, purchasing ethics, budget compliance, and the consistency of general purchasing practice among the various buying groups. In general, under this type of organization, the chief purchasing executive finds it easier to control the total efficiency of the corporate purchasing activity.

     4. Effective planning and research work

The existence of a centralized group to handle corporate wide purchasing requirements provides the concentrated staff know-how to improve purchasing research work. Virtually all purchasing planning needs – from internal systems design to strategic materials planning-can be conducted in more depth with greater efficiency for all purchasing operations throughout the corporation

 

   2.4.2 Advantages of Decentralization

     1. Easier coordination with operating departments

From an operating standpoint, the greatest advantage of decentralization is that it facilitates the coordination of purchasing activities with the activities of using departments with in each plant. When a complete purchasing unit is located at each operating site, purchasing personnel are close to the users’ operating problems and develop a much better feel for unique plant needs and their implication in the purchasing area. Buyers can personally discuss purchasing matters with using supervisors anytime they wish. Value analysts and technical coordinators can work daily with engineering personnel whenever necessary. Also, a plant purchasing department can develop a much closer working relationship between suppliers’ technical representatives, buyers, and plant engineers than is possible under a centralized organization.

In brief, under a decentralized arrangement, purchasing personnel can participate more fully as members of a specific purchasing – production team.

     2. Speed of Operation

A purchasing department located at the plant clearly can respond more quickly to users’ needs. The transmittal of information from plant to head quarters by means of a conventional paperwork system typically lengthens the purchasing procedure by one or two days. Of course, telephone, tele type, fax equipment, and computer links can be used in many cases, but often these are not practical as a regular method of communication. If most operating need could be adequately planned, and plans always functioned according to schedule, the time delay factor would be a minor problem. In a dynamic business situation, however, unforeseen events cause enough deviations from schedule so that this is rarely the case.

     3. Effective Use of Local Sources

If a firm’s plants are geographically dispersed, it can be difficult for a centralized purchasing department to locate and develop potentially good suppliers in the locale of each plant. At times this difficulty deprives a plant of various technical and purchasing benefits resulting from close working relationships between plant personnel and suppliers. If plants are separated by great distances, decentralized purchasing departments in many cases may also be able to reduce material transportation costs by the wise use of local suppliers.

     4. Plant Autonomy

A fundamental principle of management holds that the delegation of responsibility must be accompanied by the delegation of adequate authority to carry out that responsibility. A plant manger who is given full responsibility for the operation and profit performance of a plant can properly contend that he or she should have full authority over expenditures for materials. Decentralization of purchasing gives a plant manager this authority.

Although entirely valid, the preceding idea implies that a plant manger has no control over materials expenditures if purchasing is centralized. This need not be true. While a plant manager has no line control over a centralized purchasing department, many firms develop coordinating committees to correct purchasing situations that are unsatisfactory to plant management. If these are established with in the proper framework, a plant manager, through such a mechanism, can exercise satisfactory indirect control over the performance of a centralized purchasing department.

 

Three factors determined how feasible or desirable centralization of the purchasing function may be in a given situation: (1) Similarity of the classes of materials used in each of the plants, (2) Size of each individual plant purchasing department, and (3) Distance separating the individual plants.

 

   (1) Similarity of Materials Usage

If a firm’s plants use entirely different materials, centralization of purchasing offers only minimal benefits, the major benefits of increased specialization and requirement consolidation cannot be achieved. In such cases, potential disadvantages of centralization usually outweigh the advantages gained from better co-ordination and control.

Most firms, however, generally have a greater similarity of materials usage among plants that is at first apparent. To make specialization profitable, the various plants do not have use exactly the same items. The important thing is the similarity of types of materials (or markets). Specialization of buyers is accomplished on the basis of material (or market) classifications. Most firms find that their plants do use a number of the same classifications of materials.

 

   (2) Plant Department Size

As a general rule, centralization is more advantageous when a firm’s individual plant purchasing departments are not large. If plant purchasing operations are large, a high degree of buyer specialization may already have been achieved. Similarly, the benefits to be gained from consolidating requirements of large departments are less significant than those gained from consolidating the requirements of small plants. This is not to say that consolidation of large departments does not yield benefits. It usually does. The benefits, however, are not as significant as in the case of small departments, and they are frequently outweighed by the offsetting disadvantages.

 

   (3) Geographic Dispersion of plants

The closer a firm’s plants are situated geographically, the easier centralization becomes. Conversely, if much centralized buying is done, the more widely the plants are dispersed, the more serious the disadvantages of centralization become. Even if a centralized purchasing office has direct telephone and fax service to the production scheduling offices at each plant when a plant is 1,000 miles distant, the problems of communication and coordination with that plant are difficult indeed.

 

To this point, the discussion has dealt mostly with the organization of the purchasing function. In designing an organization structure for  a total plant, management must decide how to group and coordinate the other activities whose major interest also focuses on the company’s acquisition and utilization of materials. In addition to purchasing, the departments that are primarily concerned with materials are inventory (materials) control, receiving, stores, production scheduling, and traffic. To which functional executives should these departments report?

Historically, firms have divided responsibility for the various materials activities among two or three functional departments (i.e purchasing, production, and marketing). This division of responsibly makes it difficult to coordinate the interrelated activities of the materials oriented departments. More important, it makes effective identification and control of total materials costs extremely difficult, if not impossible. The materials management concept, and its related form of organization, has evolved in response to these needs.

Materials management provides an integrated systems approach to the coordination of materials activities and the control of total materials costs. If advocates assigning to a single operating department all major activities which contribute to the cost of materials. The objective is to optimize performance of the materials system, as opposed to sub optimizing the performance of individual operating units that are parts of the materials system.

Although the theory is simple and straight forward, its implementation provides some basis for differences of opinion. Top executives and management consultants do not agree completely on the exact form the materials management organization should take. In many cases, these differences in application of the concept are quite legitimate, simply because each firm is some what unique in terms of its specific orientation, its operating environment, and its specific problems. Consequently, some companies do not include all the materials activities in the materials management department. In fact, the title of the department varies considerably from firm to firm. Some firm’s adopt the philosophy underlying the concept, but for various reasons assign some or all of the materials activities to a strong existing department (often the purchasing department), without creating a department bearing the materials management name.

 

2.7 Summary

One of the commonly discussed questions that has to be answered is, where should purchasing be located in the organization structure? The answer depends up on the type of industry, variety and volume of purchase. The modern approach is to have an integrated materials department headed by a materials manager with the purchase manager under him. If there is no separate integrated materials department, it would be ideal to place the purchase manager directly. Under the chief executive in the headquarters.

The importance of purchasing in any specific firm is determined largely by four factors. Namely, availability of materials, absolute birr volume of purchases, percent of product cost represented by materials and types of materials purchased.

Purchasing work divides into five classifications. These include management, buying, follow-up and expediting, special research work and clerical.

Location of purchasing or material’s department with in a firm’s organizational hierarchy is determined very simply by one factor – management’s perception of the importance of the function. In a majority of manufacturing firms the purchasing/materials function reports to a top-management executive, but in a sizable minority it is seen as a second level function.

Some multi-plant firms centralize the purchasing activity almost completely, doing the buying for all plants at the head quarter office. Others decentralize the function entirely, giving each plant full authority to conduct all its purchasing activities. Since each extreme approach does have its own advantages and disadvantages, the majority of multi-plant firms develop an organization some where between these two extremes.

There are three factors which determine how feasible or desirable centralization of the purchasing function may be in a given situation. These are (1) similarity of materials usage (2) plant department size and (3) geographic dispersion of plants.

The materials management concept is a system approach that coordinate and control the material management activities, which include purchasing, traffic, stores and receiving, inventory control and production control.