Purchasing refers to the activities related with the acquisition of goods, raw materials or services necessary for firms to accomplish their business goals. This is referred as international purchasing when those purchasing activities are carried out in international markets to support the firm’s operations and ensure a reliable source of supply. With the economic globalization process one can experience that domestic and international purchasing activities are becoming blurred and are converging in a single function within firms.
The main reasons for firms to purchase internationally are the following ones: insufficient domestic capacity; changes in the business environment; lower prices, better quality, better delivery and access better technology.
Economic Order Quantity and Purchasing
The economic order quantity (EOQ) model is used in inventory management by calculating the number of units a company should purchase for its inventory with each batch order to reduce the total costs of its inventory. The costs of its inventory include holding and setup costs.
The EOQ model seeks to ensure that the right amount of inventory is ordered per batch so a company does not have to make orders too frequently and there is not an excess of inventory sitting on hand. It assumes that there is a trade-off between inventory holding costs and inventory setup costs, and total inventory costs are minimized when both setup costs and holding costs are minimized.
Purchase-to-Pay is an integrated system that fully automates the goods and services purchasing process for a business. The system gets its name because it handles all aspects of the acquisition from the purchase of goods to the payment of the vendor. The Purchase-to-Pay system begins with requisitioning, then proceeds to procurement, and ends with payment. Purchase-to-Pay seeks to optimize the purchasing process, thereby benefiting the organization through better financial controls and efficiency. This streamlined, integrated system saves costs and reduces risk.
Plan: Planning is imperative to control inventory and manufacturing processes. Companies always try to match supply with aggregate demand by developing a course of action using analytics. To procure what is planned is ‘Source’. To plan what is ample for production is ‘Make’ and to attain significant service levels by delivering on time with quoted lead time is ‘Deliver’. Furthermore, it is advisable to be alert with a vigilant eye on demand variations along the value-chain to avoid Bullwhip effect. For instance, firms predict market demand using analytical tools and plan the required raw materials using certain material planning tools such as Material Requirement Planning (in SAP ERP system).
Source: Sourcing is identifying vendors who will procure goods and services to meet planned/actual demand in the most economical and efficient way. There are certain standards that suppliers need to fulfil, thus assuring the firm to deliver quality goods to the client. Sourcing can be of perishable as well as non-perishable products. In the case of perishable products, it is mandated to have a minimum supplier’s lead time which will support a minimal inventory approach. On the other hand, in the case of non-perishable products, the supplier’s quoted lead time must be less than the number of days by when inventory reaches zero, thus leading to no loss in revenue.
Make: As per the preference of the consumer, the firm will perform all activities related to the transformation of raw material to the final product. Activities such as assembling, testing and packing happen at this element of Supply Chain Management. Feedback from consumers creates a Win-Win situation for both (manufacturer and end-user) as for the firm it is improving their production operations continuously.
Deliver: Another most important component of supply chain management is contributing to direct/indirect integration with the consumers. It has a significant contribution to surge the brand image of the firm. Finished goods and services, as demanded by consumers, have to meet expectations through the company’s delivery channels and logistics services. To have a seamless delivery, the firm utilizes various freights road, air and rail.
Return: It is a post-delivery customer support process that is associated with all kinds of returned products. It is also known as ‘Reverse Logistics’. It is one of the most important components of supply chain management to minimize potential deterioration of relationships with customers. On the flip side, this process provides the same course of action for the firm towards its suppliers. The firm returns the low quality, defective, expired or excessive raw materials to the suppliers/vendors.