N5 Entrepreneurship 3.2 Purchasing management
The purchasing function deals with the ordering and buying of materials, goods and services needed by the business to generate a profit. A manufacturing business will use the raw materials or parts of a product for the production of a new product while a retailer will sell the ordered goods again. Value will be added in both cases. This added value does not mean changing the product. Convenience and availability are other forms of adding value. The retailer may also re-pack some of the products according to customer preference. The cutting of cheese in a supermarket is a good example of this.
The importance of purchasing must not be underestimated. As a businessperson, you would like to ensure the highest possible return on your investment. Purchasing is a cost aspect that can reduce your profit if not carefully planned. The business is paying for obsolete and out of date stock. A second aspect to remember is your inventory turnover rate. This refers to the time from purchasing until selling. If a business has a stock turnover of 22 days, it means that if no new purchases were made it will take an average of 22 days to empty your shop or warehouse. A rapid stock turnover means that your purchases are made according to customer needs. The benefit is increased profits.
Steps to increase turnover: • price products according to customers’ income • carry fewer ranges of products • avoid highly fashionable items or don’t buy too many of them • get to know your customers’ tastes.
Purchasing process The purchasing process includes the following basic activities:
1. Selecting suppliers Selecting good and dependable suppliers is of the utmost importance for a business if the business would like to maintain its activities. There are four stages of supplier selection:
Stages of supplier selection 1. The survey stage, when all possible suppliers are identified. 2. The enquiry stage when information about the different suppliers is collected. 3. Negotiations and selection stage. 4. Review stage and if necessary searching for a more satisfactory supplier.
The following criteria should be used when selecting suppliers.
• Pricing structure Terms of payment (30 days), discounts and methods of payment are important considerations. The competitiveness of their prices will also be a very important consideration.
• Delivery
Determine whether a supplier delivers, how often they deliver, and if there are any costs involved. Lot sizes and their willingness to deliver at short notice should also be a consideration.
• Quality
Quality of raw materials and other goods is very important because it affects your ability to deliver a good quality product or service to your customers. This will be discussed in more detail later on.
• Service
Service considerations include the efficiency of the suppliers, their salespeople, whether they offer a research service (if needed) and the latest products.
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