DEFINITION of 'Purchasing System'

A purchasing system is a process for buying products and services encompassing purchase from requisition and purchase order through product receipt and payment. Purchasing systems are a key component of effective inventory management in that they monitor existing stock and help companies determine what to buy, how much to buy and when to buy it. Purchasing systems may be based on economic order quantity models.

BREAKING DOWN 'Purchasing System'

Purchasing systems makes the purchasing process more efficient and help companies reduce supply costs. Computerized purchasing systems can cut companies' administrative costs, shorten the length of the purchase cycle and reduce human error, thereby minimizing shortages. They can also simplify order tracking and make it easier to manage purchasing budgets by quickly creating expenditure reports.

Purchasing systems play an essential role in controlling a company's cash outflows. They ensure that only necessary purchases are made and that they are made at reasonable prices. Purchasing systems make use of outputs from production planning systems. These outputs include input amounts needed in the production process.

RELATED TERMS
  1. Central Purchasing

    Central purchasing is a department within a business or organization ...
  2. Financial System

    A financial system can be defined at the global, regional or ...
  3. Hire Purchase

    Hire purchase contracts allow buyers to purchase expensive goods ...
  4. Direct Purchase Program

    A direct purchase program is a method by which individuals can ...
  5. Point of Purchase - POP

    A point of purchase is a place where sales transactions occur, ...
  6. Purchase Price

    The price that an investor pays for a security. This price is ...
Related Articles
  1. Insights

    Inside National Payment Systems

    Investopedia explains: The global interconnection of U.S. payment systems makes commerical and financial transfers possible.
  2. Trading

    Automated Trading Systems: The Pros and Cons

    Automated trading systems minimize emotions, allow for faster order entry, lead to greater consistency and resolve "pilot error."
  3. Taxes

    The Link Between The Fed, Money, Debt And Taxes

    Assets on the Fed's balance sheet, money supply level, national debt level and economic production should be maintained in equilibrium.
  4. Investing

    When Using a Money Order Makes Sense

    Money orders are usually the least expensive way to send "cleared" funds to pay a bill (or traffic ticket). Here's how they work and what to watch out for.
  5. Tech

    Is the Payment Processing Industry Evolving? (PYPL, TGT)

    Learn about the many changes in commerce and payment systems that are happening in the rapidly evolving payment processing industry.
RELATED FAQS
  1. What are the financial benefits of hire purchases?

    Discover more about a hire purchase plan, and learn some of the specific financial benefits for a company using this plan. Read Answer >>
  2. How are cash purchases recorded on a company's income statement?

    Take a deeper look at the treatment of cash payments on a company's financial statements, including how specific purchases ... Read Answer >>
Trading Center