Purchasing, more a science than an art

There is a difference between buying and purchasing. People often think that purchasing is the same as buying that we do every day, such as buying a newspaper, food and new clothes. Purchasing is professional buying by an organisation. Purchasing is structured, based on facts, and shaped by corporate policy. Buying in the private domain has space for irrational considerations, whereas in the professional domain this space is not present. In purchasing we recognise the purchase, the purchasing function, and the purchaser/purchasing department.

The purchase involves everything you receive an external invoice for. This can be goods (materials, office supplies), services (temporary labour, pest management), and works (for the factory, office). Purchasing is therefore known as a supporting business activity for an organisation. As organisations have been outsourcing more business activities that were previously undertaken by the company itself, the financial importance of purchasing has significantly increased over the past 30 years. Today purchasing as percentage of revenue is 20-30% for service industry; 50-70% for manufacturing; and 60-90% in trade. An organisation can leave purchasing solely to the purchasing department or leave parts of this responsibility to other departments as well. This person in the other department is not called a purchaser, but purchasing is then just part of his responsibilities. Purchasing is not only relevant for companies but also very important for the public sector (government departments, hospitals, schools, etc.).

The purchasing function has a strategic, tactical and operational dimension. The purchasing strategy is deducted from the corporate strategy. The purchasing strategy is addressing the role of purchasing in the organisation, a purchasing policy and how the purchasing function is organised. A commodity strategy is a central component of a purchasing strategy, where according to Peter Kraljic for each purchasing group a strategy is formulated based on an analysis of the supply risk and strategic importance of a purchasing group (also know as a purchasing portfolio analysis). The result of the commodity strategy is the foundation for supplier relationship management. Tactical purchasing is also referred to supplier relationship management. Tactical purchasing involves the specification of the purchase, supplier selection and contracting of the supplier. The purchasing department normally leads these activities, although supplier selection is conducted in direct consultation with the internal users. Specification of the purchase is known to have the highest impact on the integral costs. Finally, operational purchasing involves the actual ordering of the purchase based on the contract, monitoring of the purchase and the after care. Operational purchasing is often delegated to the actual users.

The purchasing organisation has evolved over the years from basic transactional purchasing (decentralised, with a focus on processing orders and chasing suppliers), cost-drive purchasing (centralised, with a focus on minimising costs), integrated purchasing (cross-functional teams, integrating and aligning strategies and processes with stakeholders across the supply chain), towards value driven purchasing (cooperative purchasing, transforming towards a sustainable value system through horizontal collaboration).

Today modern purchasing is data oriented, involved in obtaining intelligence on the purchase market as well as recurring analysis of own spending. Analytical tools and purchasing models support decision making for the strategic and tactical purchasing function, whereas automation can help in better controlling and simplifying the operational purchasing function. However, still many people working in purchasing regard purchasing more an art, celebrating their (often price oriented) negotiation skills. I would like to argue differently. The building blocks of modern purchasing in your organisation should be based on facts and proper analysis instead. For this reason purchasing is more a science than an art!