Procurement planning involves planning purchasing activity for a specific period of time, commonly during the budget process. The process includes group purchasing, on-time delivery, negotiated wholesale pricing, and low administrative overhead to result in cost savings and higher profitability.
Procurement planning is the process used by companies or institutions to plan purchasing activity for a specific period of time. This is commonly completed during the budget process. Each year, departments are required to request budgets for personnel, expenses and purchases. This is the first step in the purchase planning process.
Budgets for all departments are then reviewed, and in an organization busy with procurement planning, accountants spend the time finding common purchasing requirements. Based on the budgets presented, they can direct departments to work with central purchasing to combine planned expenditures for specific products. This process works best in an organization committed to cost reduction. Issues relating to delivery dates, contract compliance and customer service must be resolved internally before entering into a contract.
The main concept of procurement is that advanced planning, scheduling and group purchasing will result in cost savings, more efficient business operations and therefore higher profitability. There are four steps that form the basis of purchasing planning: group purchasing, on-time delivery, negotiated wholesale pricing, and low administrative overhead.
Group purchasing is the process of combining total resource requirements for different departments and creating a purchase order. Departments may be physically located in a number of buildings, with delivery dates, quantities and conditions listed on the purchase order. This practice is increasingly common in government and public sector businesses, where the same item can be sourced for a variety of different institutions.
Just-in-time delivery is a central component of purchasing planning. Under this model, the cost of storage is paid by the supplier. They are responsible for ensuring that the purchased quantities of materials are ready and available for delivery on the specified dates and times. This type of delivery requirement is typically combined with group buying, keeping warehousing costs low.
Wholesale pricing and negotiation are very important when completing your purchase planning. Organizations that combine the total quantity requested over a specific period of time are able to obtain lower prices, based on a specific level of ordering. Negotiations are typically completed by the Purchasing Director or Senior Purchasing Agent.
The administrative cost is the cost to the organization for the entire procurement cycle to pay. This includes salaries and support costs for personnel involved in purchasing, invoice processing, production control, and vendor inquiry resolution. An organized and managed process eliminates a significant amount of these costs, as they are incurred only once for each commodity.
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