What is Purchasing? Purchasing is the act of buying something to achieve one particular goal. This could be anything from money to food to merchandise. The process of purchasing is crucial in determining the outcome of an activity or project. Purchasing has sometimes been seen as an abstract or even abstruse concept. However, in business purchasing is an activity performed routinely by all business owners.
Purchasing is the method that a company or organization employs to acquire goods and services to achieve its objectives. Although there are many companies that attempt to lay down rules in the purchasing process, such processes may differ greatly between companies. There are five main factors that impact purchasing decisions, namely supply, demand, investment, return, and risk. These factors have a profound effect on the cost and value of purchases. The importance of these aspects can be understood more clearly in the following discussion.
Supply is the basic need of a product. There are two types of sources of purchasing, direct and indirect. Direct means that the product is being purchased from the manufacturer directly, whereas indirect means that the item is acquired through a distribution channel, or by selling through a distribution channel other than the manufacturer. In any case, a company must first determine the type of purchasing activity it will engage in before considering alternative sources for the product. For example, if a company is in the manufacturing and distribution of food products, it would not make sense to purchase frozen foods through a wholesaler.
The second factor, demand, involves both a physical need and a consumer perception of need. It is a major determinant of price. Thus, a company that has high demand will typically charge a higher price for a product. However, if a company’s products are very low in demand, then the price will fall. Thus, a company that manufactures in a high-demand area but which has low demand should be able to reduce its cost of production while simultaneously increasing its profit margin.
The third factor, cost of production, relates to how much money a company is willing to spend in order to produce a product. This is often considered the raw material cost, since it includes the cost of raw materials such as oil, copper, etc. A company’s operational overhead, including rent, wages, etc., is generally included in its production cost. Thus, when analyzing what is purchasing, the accounting records will record the cost of capital rather than the cost of actual production.
These three major factors form the basis for the fundamental analysis of what is purchasing decisions. What is not purchasing is not really relevant because the accounting records do not capture what is not purchased. What is important is what is purchasing. The accounting measures that relate what is purchasing to cash inflows, operating costs, and net income are called the cost components of purchasing.
Some of the major questions that come up in what is purchasing research include why a company purchases a certain good rather than another, how the company determines the cost of production versus the cost of sales, and what are the implications of purchasing a good at a price where the profit margin is negative. What is purchasing is often referred to as a PPT or project portfolio. This is particularly true of the oil and gas industry. Many companies are required to consider what is purchasing in determining their budget for a project. Most oil and gas project portfolios will contain both fixed assets and variable costs.
What is purchasing is a dynamic concept that can be used by companies of all sizes to improve their overall profitability. By understanding the factors that affect what is purchasing, managers can adjust their activities so that they can gain a better understanding of their product mix and better control their costs. For example, if a company discovers that the selling price of a commodity is too high, it may be able to reduce its inventory to the point where it is selling at net income instead of net cash. Understanding what is purchasing can also help managers avoid making an expensive mistake in the short term by purchasing the wrong commodity. Although this might seem like an easy solution at first glance, the long term impact of what is purchasing is vital to the success of any company.