Purchasing System in Inventory Management: Types and Examples

What Is a 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.

Understanding Purchasing Systems

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.

Economic Order Quantity and Purchasing

The economic order quantity (EOQ) model is used in inventory management by calculating the number of units a company should purchase for its inventory with each batch order to reduce the total costs of its inventory. The costs of its inventory include holding and setup costs.

The EOQ model seeks to ensure that the right amount of inventory is ordered per batch so a company does not have to make orders too frequently and there is not an excess of inventory sitting on hand. It assumes that there is a trade-off between inventory holding costs and inventory setup costs, and total inventory costs are minimized when both setup costs and holding costs are minimized.

Purchase-to-Pay

Purchase-to-Pay is an integrated system that fully automates the goods and services purchasing process for a business. The system gets its name because it handles all aspects of the acquisition from the purchase of goods to the payment of the vendor. The Purchase-to-Pay system begins with requisitioning, then proceeds to procurement, and ends with payment. Purchase-to-Pay seeks to optimize the purchasing process, thereby benefiting the organization through better financial controls and efficiency. This streamlined, integrated system saves costs and reduces risk.