Purchasing Note Definition of purchasing: Purchasing is defined as an activity responsible for the acquisition of supplies, materials, equipments, etc

c that are found important for the successful operation of a business. Is a process of buying the right quality of materials and or service with the right quantity and price from the right source at the right time. Is defined as an activity that includes all the purchasing activities Just right from the time a material is requisitioned up to its delivery to the final users. Objectives of purchasing: Purchasing has got many fundamental objectives. Almost these include: Determine material requirements Ensure continuity of supply Minimize cost of materials through wise and competitive purchase Keep inventory investment and inventory levels to a practical minimum Conduct purchasing research to forecast and speculate market conclusions Develop a good source of supply Provide appropriate quality of materials Establish harmonious working relations with organizational units and potential suppliers Administer purchasing personnel effectively Avoid duplication, wastage and obsolescence with respect to materials Assist make or buy leasing and capital equipment purchase, etc Determine the required lead time and ensure proper delivery of materials Importance of Purchasing: purchasing is one of the basic functions common to all types of business enterprises. It is common because no business operates without them.

Inventory costs: 1.Carrying cost 2. Purchasing cost 3. Inventory shortage 4. Inventory excess (results in capital tide up) - Purchasing plays an important role in the profit making process of a business enterprise. Purchasing commands the highest company expenditure and thus every dollar saved in purchasing ads an extra profit to a corporate income. More dollars are spent on the purchase of materials and services than all other expense items combined together. The average percentage distribution of company expense and income: Cost of goods & services purchased56% Wages salaries& labor benefits21.4% Other expenses16.7% Net income 5.9% The fact that purchasing is responsible for spending over half of most companies income received from sales and other sources of highlights the profit making potential of the purchasing function. The following simple formula would be helpful in determining the reduction in materials purchase That produce the same amount of profit in sales volume.

X=Y/Z

; where X: increase in sales birr Y: saving in purchasing in birr Z: profit margin in percentage

Consider a company with a sales volume of 80,000,000 birr and material costs 50% of sales where as the profit margin is 10%. What reduction in the cost of materials will produce the same amount of profit with that of a 25% Increase in sales volume.

Sol n : sales volume marginal cost (50%*s.v.) profit margin (10%*s.v.) increase in sales vol.(25%*s.v.) X%*40m/100=2m X%=20m/4m=5%

80m 40m 8m 20m

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