Buying as a specialist activity
Buying is a job for experts because buying can badly damage a business. In a small business probably all the buying will be done by one person. Because the range of purchases is not wide and the buyer is knowledgeable about the business he will be able to buy expertly. For example, a man running a small shop selling materials for artists will obviously have a lot experience in that field. The work is very specialized and the fact that this customers often ask for his advice indicates he is an expert. He will therefore be an efficient buyer.
In large business, however, the amount and variety of purchases is so extensive that no one person can be expert in very area. The solution is to divide the work between separate buyers, each being responsible for his own types of purchases. Thus a large provision store would have separate buyers of meat, bread, fruit, frozen products, etc. Again, if one considers the enormous variety of purchases to be made by a motor-car manufacturer, it is obvious that the services of many experts are required. Such a system provide the advantages of specialisation, so that each buyer concentrates on his own area. Having specialist buyers gives the following advantages:
- Each buyer will have a lot of technical experience. Consequently, he can assess accurately the quality of the available goods. He will be as knowledgeable him. (One can easily imagine what would happen if an inexperienced person bought fish at Billingsgate market!)
- A buyer will have a sound knowledge of conditions in his market. A good buyer can anticipate price changes, shortages and surpluses, and he will know where there are ‘bargains’ to be had.
- An experienced buyers will know the sellers personally. He will know who he can trust, who delivers promptly, who can be relied on for quality, etc.
The work of specialist buyers would be centralized in a Purchases or Buying Department. The section would be responsible for the clerical work of ordering, keeping records and authorising payment to the sellers. It would ‘chase’ suppliers who were late in making deliveries and would check incoming goods.
The principles of efficient buying
Some business will buy goods for resale, these being wholesalers and retailers.
Manufacturers will buy raw materials, machinery and, in some cases, components.
All businesses will buy equipment and office supplies.
The principles of efficient buying may be summarised as follows:
- A business buying goods for resale must be guided by the preferences of its customers. There is no point in buying goods which are unpopular. Therefore, a business must react to a demand by its customers. If the public insists of buying something which the shopkeeper knows is not the best product, he must remember that ‘the customer is always king’. For example, a retailer knows that coloured strips in toothpaste do not improve it, but if customers, persuaded by advertising, insist on coloured toothpaste, he would be foolish not to stock it.
- Obviously, the selling price must exceed the buying price by an amount sufficient to cover expenses and provide a profit, but it is not always best to sell those goods on which the difference is greatest. For instance, if there is a ‘profit margin’ of only 5 percent on article A and it is 15 percent on article B.
- Goods should be bought in large amounts because suppliers give discounts for large purchases. There are limits to this, however. Unless goods can be sold quickly a large purchase will result in the buyer having to meet heavy storage costs. The expense of storing goods is high (particularly in rent) and some goods will deteriorate unless sold within a short time. A supermarket sells vast quantities of goods every day, so it will buy in large amounts in the knowledge that they will be quickly taken out the shop.
It must also be remembered that ordering a large amount means that a large sum has to be paid. If it takes some time to sell all he consignment, the seller will be receiving his return slowly. So long as stock is unsold it represents ‘tied- up’ capital.
(d) Machinery and equipment bought for use within a business mustbe ‘cost effective’. The savings they provide by improving efficiency and reducing other costs must be more than the purchases cost (including their maintenance).A firm may buy a computer because it would result in fewer clerks being employed, and so less would be paid in wages. However, total cost may rise because computer experts will have to be employed, and other unanticipated cost may showthemselves. Many a manager has been persuaded by a salesman to buy a piece of office equipment and then found his costs has increased!
The documents used in buying and selling
Firms regularly engaged in buying and selling all use the same types of documents. Each document serves two purposes:
- To give information to the other party – for example, to tell a supplier what goods are required.
- To enable it to keep its own records – for example, to know what goods have been ordered.
The documents are therefore linked to records kept by the buyer and the seller. Thus, after goods have been sold, the seller, using his document, will have a record of what he has supplied and how much he is owed for it. The buyer’s record, taken from the same document, will tell him what goods he has received and how much he owes for them. As each document travels between the two parties, each will keep its own records.
Figure show the movement of document and the records kept by buyer and seller. Yu should refer to this diagram when studying the following explanations of the documents used in buying and selling. Before that stage is reached, however, it may be necessary for buyer and seller to agree on a price. We will therefore first look at the documents which may be used before the goods are actually ordered.