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.

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