How to Create a Formal Purchasing Program

Purchasing Management

Although purchasing is certainly an important task and deserved careful attention, you will not be able to spend the same amount of time on all of your purchases, nor should you. More expensive items, for instance, deserve more careful attention and consideration than less expensive ones. The following four considerations will help you decide what items deserve the most attention, according to the SBA:

  1. Unit cost. The SBA recommends that you give more attention to costly items than to less expensive ones. The more money you have tied up in a given type of inventory product, the more attention you need to give to that product in your purchasing, even if you sell few of these expensive items.
  2. Extended cost. The SBA points out that some items may have a low cost, but you may buy and sell them in high volume. In this case, you may need to give a higher priority to these items, although their unit cost is fairly low.
  3. Lead time. You need to consider the time to allow between ordering an item and receiving it. If a low-cost item has a long lead time, for instance, you would need to make regular checks on its delivery status. In that case, the SBA says, you may need priority.
  4. Shipment rejection. If there is a high possibility you will reject an item because of technical problems or deficiencies in quality, the SBA suggests assigning it a high priority.

The Costs of Buying

In addition to the cost of goods you buy, you also have to pay and account for the costs of acquiring and carrying inventory.

Inventory acquisition costs are costs associated with generating and processing orders, and include the following:

  • Portions of employee salaries and operating expenses directly pertaining to purchasing, inventory control, receiving, inspection and accounts payable.
  • Costs of supplies such as forms, envelopes and stationery.
  • Costs of placing orders (telephone, fax, postage, etc.)

Inventory carrying costs usually consist of the following elements:

  • Interest charged on your financial investment into inventory.
  • Cost of insurance covering your inventory.
  • Property taxes paid on inventory.
  • Cost of storing inventory.
  • Obsolescence and deterioration of items in inventory.

Buy Wisely

Prices for the goods and materials you buy may fluctuate. If you find that the price for a given item is rising, do not buy large quantities of this item thinking that the price will rise even higher if you wait. Instead, the SBA advises that you buy smaller quantities of this item, but buy them more often. You can quickly sell off the items you bought at high prices, instead of tying up money in overpriced inventory. Keep buying small quantities as prices return to their normal level. You will save money on your purchases, as well as reduce demand for the item, "encouraging" prices to drop. Once prices have stabilized at their normal level, you can resume buying in larger quantities.

Comparison Shopping

While you might purchase many items from catalogs that list specific prices on specific quantities, you may need to contact suppliers for price quotes on other items. Before you buy an item, you should contact a number of suppliers and compare prices, delivery options and expenses, and so on. You can do this by visiting suppliers' websites or requesting quotes in writing.


Suppliers extend a variety of different discounts to their customers. Many vendors offer quantity discounts: the more units you buy, the less you pay per unity. These discounts can apply to individual purchases or to a specific group of purchases made over time, as you would make under a blanket order. Suppliers also offer seasonal discounts that apply to merchandise being sold out of season. The danger with buying off-season goods is that they may go out of style or become obsolete, and never go back "in-season." Vendors also offer cash discounts that you earn by paying the entire invoice within a specified time period. If you received an invoice with the notation "1/10, Net 30," it would mean that you could take a one-percent discount from the net amount of the invoice if you paid within ten days. You would otherwise have to pay for the entire amount of the invoice within 30 days.

Dealing With Vendors

Once you have compared prices from a group of suppliers, you can then select your vendors. Before you place an order with a vendor, you not only need to compare prices, but you also need to compare credit terms, emphasis on customer service, standing in the industry, and other related factors.

If you buy a number of different kinds of products, you may have to use a variety of vendors. If, on the other hand, a single vendor can meet all of your needs at reasonable prices, you may want to give that vendor the bulk of your business. Do not, however, rely solely on this vendor. You should keep in contact with other vendors, and watch for new ones. It's a good idea to be on good terms with more than one supplier. If your primary supplier ever fails to ship goods on time, suspends operations because of some natural disaster, or starts offering poor service, you will have other sources to use as back-up.

By using a few different sources of supply, furthermore, you will build more credit than you would if you used only one. Your primary supplier may also offer you better discounts or otherwise try to win all of your business.

Evaluating Suppliers

You not only need to evaluate suppliers before you place an order, but you also need to evaluate their performance constantly. Consider the following points when you evaluate a supplier's performance:

  • Timeliness of deliveries
  • Completeness of orders shipped
  • Quality of items shipped
  • Quality of customer service
  • Competitiveness of price
  • Previous performance with similar orders
  • Strength of financial condition
  • Ability to meet design specifications
  • Expertise of sales representatives and technical staff

Locating Suppliers

Before you can approach a supplier, you need to know where to find them. You need to be aware of where you can find suppliers both before you begin business and after you have started. Keep looking for new suppliers. To look for suppliers in your area, search online and consult the Business-to-Business Yellow Pages and your local Chamber of Commerce. To broaden your search, consult websites, publications and associations pertaining to your industry; these sources should be able to give you a number of leads.

Many trade associations and publications publish directories listing suppliers to their industries. If you require industrial or mechanical equipment, consult manufacturers' directories such as the Thomas Register of American Manufacturers. Finally, talk to your employees. They may know of excellent suppliers you might use.

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