The power of purchasing not only results in freedom for the buyer, rather also responsibilities.
Purchasing has developed from being a clerical function to becoming a strategic function within firms. Further, purchasing has become more important for firms: instead of producing in-house, companies mostly buy from external sources. In fact, in Western economies, the purchasing ratio often exceeds 60%. In other words, for every 1 dollar that firms earns in revenues, they spend 60 cents to pay their suppliers. This puts the importance of purchasing into perspective.
Recognising the importance of purchasing, and the possibilities that it offers companies to affect their profit margin, it is not surprising that many choose to adopt a transaction-oriented approach in purchasing. Moreover, it is not surprising that the focus is primarily on price, quantity and delivery. The fact is that savings that a company achieves through lower purchasing prices have an immediate effect on the companies profit line. If a company saves 10% in price, this goes straight into the profit line. Indeed, savings through price-oriented purchasing is a fast and efficient way of boosting a company’s profits. However, a company that focuses on price and adopts a transaction-oriented approach, should bear in mind that this approach will affect how the supplier views the buyer. Ultimately, this will affect how the supplier behaves towards and serves the buyer. A buyer that attempts to push prices too low, is unlikely to face a satisfied and motivated supplier. In fact, a supplier that feels that it is being squeezed, will attempt to justify lower prices, which can result in delivering lower quality to the buyer. In other words, a buyer that feels tempted to push prices down, should keep in mind that this may result in short-term business engagement with the supplier. This may result in the need for the buyer to find a new supplier, which may be time and resource consuming.
The lesson of this is, that although purchasing has become strategic and it can have a direct and considerable effect on the profit line, the power of purchasing should be utilised wisely and responsibly.