Every organization, whether it is a manufacturer, wholesaler, or retailer, buys materials, services, and supplies from outside suppliers to support its operation. for most organizations, supply management means purchasing. in many firms, purchasing has been seen as a clerical activity. however, the emergence of the supply chain management concept has enlightened many managers about the strategic role played by purchasing.
Purchasing contributes to the firm’s efficiency and effectiveness in many ways. first, it helps to determine a firm’s cost structure. purchased goods and service are one of largest elements of costs for many firms. in the average manufacturing firm in North America, purchased goods and services account for approximately 55 cents of every sales dollar. by way of contrast, the average expense of direct labor in the manufacturing process accounts for only about 10 cents of every sales dollar. while the percentage spent on purchased in puts does vary considerably across organizations, it is clear that the potential savings from strategic management of purchasing are considerable. therefore, managers with goods negotiating skills and strong relationships with suppliers can save their organizations large sums relative to the competition. and identifying the right production equipment and buying it at a good price can create competitive cost advantages that last for many years.
Second, goods purchasing practices avoid operational problems stock outs of raw materials or component parts can shut down a production plant. the quality of finished gods and service is obviously dependent upon the quality of the materials and parts used in producing those items. if poor quality components and materials are used, then the final product will not meet customer’s quality standards. while avoiding these problems may not lead to operational effectiveness, operational effectiveness is impossible of these problems arise.
Without effective purchasing practices, operations in a firm may be disrupted, customer service levels may fall, and long term customer relationship may be damaged. before any product can be manufactured, supplies meeting certain conditions must be available. fortunately, progressive managers have recognized these potential contributions of purchasing and have taken the necessary steps to ensure results. the most important single setp in successful organizations has been the elevation to top executive status of the purchasing manager. this, coupled with high-caliber staff and the appropriate authority and responsibility, has resulted in an exciting and fruitful realization of the potential of the purchasing contribution.