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The importance of purchasing in any firm is largely determined the four factors: availability of materials, absolute dollar
volume of purchases, percent of product cost represented by materials, and the types of materials purchased. Purchasing must
concern itself with whether or not the materials used by the firm are readily available in a competitive market or whether
some are bought in volatile markets that are subject to shortages and price instability. If the latter condition prevails,
creative analysis by top-level purchasing professionals is required.
If a firm spends a large percentage of its available capital on materials, the sheer magnitude of expense means that efficient
purchasing can produce a significant savings. Even small unit savings add up quickly when purchased in large volumes. When
a firm's materials costs are 40 percent or more of its product cost (or its total operating budget), small reductions in material
costs can increase profit margins significantly. In this situation, efficient purchasing and purchasing management again can
make or break a business.
Perhaps the most important of the four factors is the amount of control purchasing and supply personnel actually have
over materials availability, quality, costs, and services. Large companies tend to use a wide range of materials, yielding
a greater chance that price and service arrangements can be influenced significantly by creative purchasing performance. Some
firms, on the other hand, use a fairly small number of standard production and supply materials, from which even the most
seasoned purchasing personnel produce little profit, despite creative management, pricing, and supplier selection activities.
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