Production is an essential element of any business. You cannot achieve smooth production until you have the required equipment and raw material. Purchasing the material and equipment is quite simple; order, receive, and pay.
But, you can make it easier.
Organizations follow various purchasing methods to cut costs, ensure the availability of raw materials and make better relationships with other businesses. Understanding the different methods of purchasing allows you to devise a suitable procurement plan for your company. Here’s everything you need to know about purchasing methods.
Bulk purchasing is the most common method of purchasing goods in large production units. Bulk purchasing refers to buying a huge quantity of material at once to use over a period. It is the most economical method of purchasing. You can get the required material and objects at a lesser price when you buy large quantities. However, it needs more investment, occupies space for a long time, and you may face loss if the material is not used timely.
Purchase Per Need
The next common method of purchasing goods is purchase per need. It is also known as hand-to-mouth or zero stock purchasing. It refers to buying an item only when the need arises without keeping much extra stock at hand. Zero stocking is used mostly for emergency needs or materials of office use that you cannot quantify beforehand. It offers numerous benefits like having more money at disposal and avoiding the waste of materials. Yet, it also comes with a few risks and disadvantages. One of the most critical drawbacks of this method is the unavailability of the material in the market when needed. Thus, many companies prefer stock buying to avoid issues in production due to zero stocking problems.
Blanket purchasing means buying something from a supplier for a long period. The vendor usually knows about the demand for the material beforehand and continues to supply per need. Usually, blanket purchasing orders account for items of a particular category. They help improve the procurement process by somehow automating the process.
Purchasing for a specific period is not required in all industries. Yet, it is important for some materials like chemicals that you cannot store for a long time. Companies prefer purchasing for a specific period when the overall cost of bulk and a small amount of the material is almost the same. It allows you to save costs by preventing the loss of the object. The quantity is calculated according to previous needs to buy the material good for a short period. It is one of the most appropriate inventory management methods for avoiding bulk purchasing short-life materials.
As the name suggests, scheduled purchasing involves informing your vendor about the upcoming demand for material and pre-book it. Scheduling a purchase enables the vendors to arrange the supplies within the hour of need. It is an excellent measure of avoiding delayed production because of a supply shortage. Scheduled purchasing also saves you from the burden of managing purchase inventories of material for months. It may also sometimes give you a better cost compared to urgent buying. Other benefits of scheduled purchasing include an on-time supply of required materials and high-quality goods.
Market purchasing is a common practice, not only in industries but also in our daily life. Market purchasing means buying products when they hit a low price. The company might not require the material immediately, yet it can be used in the future. Market purchasing is favorable for items that can stay on the shelf for a long time without the fear of wastage. However, this method of purchasing requires a proper calculation to buy the right amount of material. Over-purchasing may lead to a loss. While it can sometimes help you save a considerable amount of money, you may also lose some in case of miscalculation of quantity.
Speculative purchasing is similar to market purchasing but from a different perspective. Speculative purchasing refers to taking advantage of low prices of a material in the market to sell it at a high price later. It comprises making bulk purchases and storing them to make a considerable profit from them. Speculative purchasing is different from market purchasing as it involves selling goods. On the other hand, market purchasing is done for the company’s own cost reduction. Besides the advantages of speculative purchasing, it may sometimes result in a long period of keeping inventory till the prices rise.
Group purchasing comprises buying multiple small items of different categories together to reduce cost. Often the quantity of these goods is even less than the cost of order placement. The vendor and the organization agree on a mutual price considering the supplier’s profit. It reduces the stress of visiting multiple places to buy products and lessens the workload. Instead, the supplier purchases and supplies the materials altogether.
Cooperative purchasing is another group purchasing approach. However, it involves more than one company buying together. Companies looking for similar goods place bulk orders with the vendor instead of buying small quantities at a higher price. It also helps reduce transportation costs. It is common among companies producing the same kind of products.
You may understand reciprocate purchasing as barter. Reciprocate purchasing refers to an understanding between two or more companies to buy each other’s products and services. It is feasible to offer such services when both companies can benefit from each other and reduce overall costing. Reciprocate purchasing is not the most common practice, yet many businesses opt for it.
The Bottom Line
Procurement in an industry requires proper planning to purchase high-quality goods at the best prices. Some companies prefer bulk buying while others believe in zero stocking. You may also make blanket purchase orders or opt for market purchasing for efficient procurement. There is no particular right method of purchasing for all. It depends on your company’s needs and production approaches. Choose the one that best fits your organization to save costs without disturbing operations.
Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.