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Types of Purchases in Supply Chain Management

Procurement checklist

Types of Purchases in Supply Chain Management

Businesses purchase a wide range of products and services. Every purchase represents a compromise between what an organization can produce internally against what it must purchase from other sources. The make-or-buy choice is actually very straightforward for many products. Few businesses could produce their own computers, pencils, or production machinery. However, these components are necessary for all businesses to continue operating. The difficult part is figuring out which suppliers provide the best chance for the things a company needs to buy from outside sources. Let’s discuss the range of products and services that a typical purchasing department is tasked with procuring. It’s worth noting that organizations should set up measures to track the number of commodities in physical inventory for each category.

  1. Raw Materials

Timber, coal, oil, and metals like copper and zinc are all included in the raw materials purchasing category. Additionally, it may consist of agricultural basic products like cotton and soybeans. The supplier’s failure to transform the raw material into a freshly produced product is a crucial aspect of raw material. The raw material becomes marketable after any processing. For instance, copper needs to be refined to get rid of impurities. The fact that raw materials are not all of the same quality is another important feature. For instance, the amount of sulfur in different types of coal can vary. Raw materials frequently earn a grade that indicates their level of quality. This enables the acquisition of raw materials based on the desired grade.

  1. Semi-finished Products and Components

All of the supplies that were obtained from vendors in order to assist an organization’s final manufacturing are categorized as semi-finished products and components. Components, subassemblies, assemblies, subsystems, and systems with a single part number are included. Tires, seat components, wheel bearings, and automotive frames are examples of semi-finished goods and components that an automobile manufacturer could purchase. Because components have an impact on product quality and cost, managing the purchase of semi-finished components is a crucial purchasing duty. Outsourcing product requirements make it more difficult for purchasing to choose certified suppliers for complicated assemblies and systems as well as simple components.

  1. Finished Products

For internal usage, all businesses buy finished goods from outside vendors. Additionally, bought goods that need just minor processing before being sold to final consumers fall under this category. An organization may sell a product made by another manufacturer under its own brand name. But why would a business buy finished goods to resell? Well, to answer that, some businesses have tremendous design capabilities, but they have outsourced every aspect of their production capacity. Additionally, buying finished goods enables a business to provide a whole line of goods. To create material standards, purchasing (engineering in this case) must collaborate closely with the manufacturer of a finished product. The purchasing firm must ensure that the product meets the technical and quality requirements required by engineering and the final consumer even though it does not generate the final product.

  1. Maintenance, Repair, and Operating Items

Anything that does not directly go into a company’s product is considered maintenance, repair, and operation (MRO) item. But these things are necessary for running a business. This covers cleaning materials, office and computer supplies, and spare machine parts. Monitoring MRO inventory is challenging due to the common dispersion of these products within an organization. When a user forwards a purchase requisition, most buying departments simply learn when to order MRO inventory. A typical purchasing department can get hundreds of small-volume purchase requisitions because MRO components are used by all departments and locations. MRO items are sometimes referred to as nuisance items by buyers.

  1. Production Support Items

The packaging supplies needed to export finished goods, such as pallets, boxes, master shipping containers, tape, bags, wraps, inserts, and other packaging supplies, are considered production support items. The major distinction between production support and MRO items is that production support items directly support an organization’s manufacturing operation.

  1. Services

All businesses rely on independent contractors for specific tasks or services. To maintain the grounds around a business or to handle problems that the maintenance crew is unable to handle, an organization may employ a heating and conditioning specialist or a lawn care service. Machine maintenance, data entry, consulting, and cafeteria service management are additional frequent services. The acquisition of services takes place across an organization, just like MRO products. Because of this, there has been a propensity to give them little attention and to manage service procurement at the facility or department level. As with any category of purchases, attentive and specialized attention can lead to receiving the best service for the least amount of money overall. As they would with other high-priced purchase categories, businesses are increasingly negotiating longer-term contracts with service providers.

  1. Capital Equipment

Purchasing capital equipment entails investing in items destined for longer-term usage. The acquisition of capital equipment falls into a number of areas. The first consists of common equipment that doesn’t call for any special design specifications. Furniture, computers, and general-purpose material-handling equipment are some examples. Capital equipment created particularly to satisfy the needs of the buyer falls under a second category. Examples include modern manufacturing facilities, sophisticated machine tools, and machines for generating power. These latter items demand careful technical interaction between the buyer and seller in order to be purchased.

Purchases of capital equipment differ from other purchases in a number of ways.

  • First, purchases of capital equipment do not happen frequently. For instance, a production machine might be in service for ten to twenty years. Over 30 years may pass until a new plant or power substation is no longer in use. Even workplace furniture has a ten-year lifespan.
  • Another characteristic is the high cost of capital equipment investments. From a few thousand dollars to hundreds of millions of dollars, this can vary. High-value contracts will need approval from the finance and executive teams. The majority of capital equipment is depreciable over its useful life for accounting purposes.
  • Last but not least, the purchase of capital equipment is quite susceptible to overall economic conditions.

Rarely are buyers able to discontinue the use of capital equipment after delivery due to dissatisfaction or change of suppliers in the middle of a significant project. The competence of the supplier to maintain the equipment should also be taken into account by the customer because the relationship between the two parties may extend for many years. The effects of choosing an underqualified capital equipment provider might be felt for many years, and the opposite is also accurate. The advantages of choosing a reputable capital equipment provider might extend for many years. For more information and in-depth knowledge on purchasing, look into our Purchasing & Supply Chain Management course.

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