Explain The Relationship Between The Purchasing Department And Other Departments Of Any Other Organisation?

Explain The Relationship Between The Purchasing Department And Other Departments Of Any Other Organisation?

Analyse the relationship between the purchasing Department and one other function of an organisation.

Or an organization, purchasing is a window to the outside world. The
prime function of purchasing is that of being sensitive to the external
supply market situation and also of feeding back this information to the
other functions of the organization. However, it is usually understood
to be to get the right quantity of material of the right quality at the
right time, at the right place, from the right source and at the right
cost.

Quite often it is not understood by even top executives, that a
considerable profit potential exists in the purchasing activity. In
fact, it has been quoted that 20-30% of a company’s profits can come
from savings generated in the purchasing department. Suppose a company’s
output volume is Rs 20 crore and the cost component of materials is say
50% (that is Rs 10 crore for materials). If the profit margin is taken
as 15%, the gross profits will be Rs 3 crore. With a 20% increase in the
output volume, the profits will increase by Rs 0.60 crore. The same
increase in profits can be achieved by 6% savings in the purchase costs.
This example is given to illustrate that there is a lot more potential
in reducing the purchasing costs as compared to increasing the sales
turnover. Moreover, the increased savings in purchasing require only one
or two purchasing executives doing a proper study and analysis of the
external market. Whereas an increase in sales volume usually means an
increased capital outlay on equipment, an increased sales and marketing
expense through increased advertising and promotional expenses, and much
more leg work by the salesmen. All this means more efforts, expenses
and risks. Compare this with the efforts required in generating equal
profit contribution from the purchasing department and one will realize
that the latter does not require such enhanced management effort and
risk. A point to be noted is that the cost of materials in the
production cost of an item, on an average, in the Indian manufacturing
industry takes a lion’s share of almost 65%. For some industries this
component could be even higher. This only highlights the importance of
the attention needed for the purchasing activity.

Links with other Organizational Functions:
Purchasing has important links with most of the organizational
functions. The Production Planning and Control or Materials Control
sections might have a say in the inventory of raw materials and bought
out parts; but the purchasing executive has a first hand knowledge of
the market situation for the supply of these items. For instance (1) Is
there going to be any shortage in the near future? (2) How will the
shortage escalate the prices? (3) Are there any good substitutes
available? (4) Will there be an industrial relations problem in the
important supplier’s company and how will this affect the company’s
production? (5) Which supplier can supply better quality material and
better quality component parts at the same or less price? (6) Which are
the potentially good vendors who could be developed into reliable
suppliers and loyal partners sharing the concerns in the business? All
such information regarding the outside market is of much importance to
the production, marketing, finance and other departments. If a company
buys component parts which are incorporated into its own products, the
Purchasing Manager will have to play a role which can perhaps, be
described as ‘External Manufacturing Manager’.