Purchasing is an integral part of every company’s processes. No business is exempt from this rule, not even self-employed entrepreneurs. From managing relationships with suppliers to sourcing raw materials, the different types of purchasing play an important role in increasing a company’s achievable margins.
Every company buys a wide range of products and services. Each of these purchases represents a compromise between what the organisation can produce in-house and what it must buy from other sources (suppliers). The “make or buy” choice is actually quite simple for many products.
Few companies could produce their own computers, pencils or production machinery. However, these components are necessary for all businesses to continue to operate.
These different purchases are categorised according to their strategic importance to the company.
In this article, we will look at the different types of purchase that a company may need to make on a day-to-day basis.
- 1 What is corporate purchasing?
- 2 Why is purchasing so important?
- 3 What is a type of purchase?
- 4 The different types of purchasing
- 5 What is purchasing family management?
- 6 What is the purpose of a purchasing family?
- 7 The different purchasing families
- 8 Example of families and sub-families in a company
- 9 How do you define a company’s purchasing families?
- 10 Analysis of purchasing families
- 11 Weproc and the management of purchasing types and families
What is corporate purchasing?
Buying for a company is very different from buying for yourself. BtoB purchasing is the process of sourcing, acquiring and paying for a company’s goods and services. Although many organisations use terms such as “purchasing”, “procurement” and “sourcing” interchangeably, these are different components of the purchasing process.
Whereas procurement focuses on ordering and delivery, and sourcing concerns the search for potential partners & suppliers, the term purchasing process refers to all the stages in the life cycle of a purchase. This includes sourcing, acquisition, payment, analysis of procurement data and planning for future expenditure.
Why is purchasing so important?
The importance of purchasing is linked to the supply chain. Procurement is one of the keys to understanding a company’s needs and strategy. It’s about finding the best supplier on the market who will meet their requirements in terms of quality and price.
What’s more, without sourcing, it will be difficult for companies to acquire goods and services that will give them a competitive edge. This will also reduce productivity and increase losses. This is because the goods and services acquired by the company will not meet its needs.
What is a type of purchase?
There are several types of purchase, each with a distinct function within a company. Understanding the distinctions between these forms can help companies to make better decisions, and thus optimise the management of their purchasing process. Direct purchasing, indirect purchasing, the purchase of goods and the purchase of services are the four basic types of purchasing.
The different types of purchasing
Direct purchasing covers everything needed to make a final product. In simple terms, this means the direct purchase of raw materials that contribute to the company’s end product.
From the point of view of a buy-and-sell business, it refers to any item or material purchased from a wholesaler for resale to customers or end consumers.
Here are some examples of direct purchases:
- Raw materials
- Components and spare parts
- Items purchased for resale
Indirect purchasing refers to materials that are important for day-to-day operations but do not contribute directly to the company’s product. In simple terms, they are materials that support the running of an organisation.
In small companies, these purchases may be managed by just a few people, or centralised by an assistant. On the other hand, large companies set up special purchasing departments to manage indirect purchases. Here are a few examples of indirect purchasing:
- Marketing services
- Equipment maintenance
- Office supplies
- Consultancy services
Purchase of goods
The purchase of goods clearly refers to the good itself or to physical items. Although these are physical items, the term also includes software subscriptions. The success of purchasing goods is highly dependent on the efficiency of your supply chain.
Purchasing goods can also include indirect and direct purchasing. Here are a few examples:
- Raw materials
- Equipment maintenance
- Office supplies
Purchase of services
Buying services means hiring third parties, renting software and having contractors or vendors work for you. In other words, it’s about acquiring services based on people. Buying services can also include direct and indirect purchases in its process.
As far as the differences between direct and indirect purchasing are concerned, there is also a notable distinction in terms of internal management. Indirect purchasing is often less well organised than direct purchasing, mainly due to a lack of visibility over expenditure.
What is purchasing family management?
Family management is a strategic approach to purchasing. It involves segmenting expenditure into areas that contain similar or related products, enabling a targeted approach to be taken to families that offer opportunities for consolidation and efficiency gains. Within an organisation, buyers are responsible for managing different families of goods or services, ensuring efficiency, transparency and visibility.
Family management may involve the division of products or services, or may refer to the dissection of products or services by value, supplier, type or volume into various categories to facilitate management and procurement. Procurement decisions also play a role in the categorisation of items or services. Don’t underestimate the time it takes to implement a sourcing strategy!
At its most basic level, family management consists of grouping items together. Family management is an ongoing process that requires the involvement of various company stakeholders in the business units throughout the purchasing life cycle, from strategy development to final supplier management.
What is the purpose of a purchasing family?
Purchasing families can be used toimprove procurement processes and increase productivity. Purchasing categories allow you to :
- develop targeted strategies on the best way to acquire similar goods/services,
- gain abetter overview of purchasingspend within your organisation
- obtain significant discounts
- establish aggregated supply agreements to cover a family of multiple transactions.
Example: Rather than going to different suppliers for different items, determine exactly how much your organisation spends on all stationery items and what those items are. You can then enter into an agreement (and therefore negotiate a framework contract) with a single supplier or a limited number of suppliers to meet your needs. This approach allows you to obtain significant discounts and improve purchasing efficiency.
The different purchasing families
Purchasing families should be broad enough to take advantage of market competition. Around ten global families should be enough to cover a significant proportion of your organisation’s expenditure. A family of goods or services can include sub-families when greater differentiation is required:
Family: a group of goods/services with common supply and demand factors and suppliers.
Sub-family: a logical sub-grouping within a category with similar goods/services/market characteristics.
Note: similar definitions of families may have different sub-families. For example, a small organisation may have a family for professional services, whereas a larger organisation may need to differentiate between intellectual and legal professional services.
Example of families and sub-families in a company
Level 1 – Overheads.
Level 2 – there are 4 purchasing sub-families:
- Administrative support
- Professional Services
- Office automation
Level 3 – The “Office Automation” sub-family includes 3 sub-families:
This breakdown enables you to fine-tune your company’s expense management. The more accurate your spend mapping, the easier it is to group your suppliers together, and so optimise your company’s performance.
How do you define a company’s purchasing families?
The process of identifying families involves mapping the spend data of an organisation/business unit. The mapping of purchases and the identification of purchasing categories must be carried out by people with sufficient knowledge and insight into the organisation’s spending and purchasing activities.
Note: Purchasing families may change over time. For example, a family may change due to changes in the supplier market. In today’s market, IT consumables such as USB sticks and compact discs would most likely be classified in the stationery family, as they are currently supplied at a competitive price by general stationers. Previously, they were only purchased from specialist suppliers to technology companies.
The process of categorisation (or family management) forms part of the organisation’s purchasing strategy and purchasing activity plan.
Analysis of purchasing families
There are several ways of analysing your purchasing families, and thus creating your spend map. The 2 best known are the Pareto method (or ABC method) and the Kraljic matrix. Let’s take a closer look at these 2 methods.
The Pareto or ABC method
The Pareto principle, better known as the “80/20 rule“, is an idea formulated by the economist Vilfredo Pareto in 1896.
The principle essentially states that around 80% of outcomes are determined by 20% of causes for many events. It has been applied to various subjects such as economics, business management, quality control and mathematics.
In each situation, it is used to indicate that the majority of effects can be attributed largely to a small minority of causes or contributors. As it often proves reliable when estimating results, this concept is widely used by various industries trying to maximise their efficiency.
The same principle applies to spend analysis and procurement management: by focusing on the most expensive products and services, you can get the best return on investment in terms of savings. Let’s take a closer look at how this works.
Pareto analysis and the Pareto principle are often confused and even used interchangeably, even though they are two distinct concepts. The Pareto principle, also known as the 80/20 rule, is a well-known formula that suggests that 80% of the results can be attributed to 20% of the causes.
Pareto analysis is a form of data evaluation that examines the impact of individual factors on a wider system. This technique enables the factors to be prioritised according to their impact on the overall result or objective, making it easier to target the points of improvement with the greatest impact.
In summary, the Pareto principle expresses the importance of prioritising when making improvements, while Pareto analysis illustrates this approach through structured evaluation.
What is Pareto analysis?
Pareto analysis, also known as ABC analysis, is a data-driven approach that identifies the factors that have the greatest impact on a particular outcome.
This concept can be used to identify the products or services that generate the highest costs in an organisation’s purchasing process. By analysing spend data, companies can identify the specific elements on which it makes sense to concentrate their efforts in order to make savings.
For example, let’s say your company spends €100,000 a year on office supplies such as paper and pens. On closer analysis, you may find that €70,000 is spent on high-end stationery, while only €30,000 is spent on pens and other low-cost items.
This means that 70% of your expenditure goes on one type of product – in this case, stationery – and 30% on other types of office supplies.
By concentrating your efforts on reducing the costs associated with stationery purchases, you could potentially save more money than if you tried to reduce all office supply costs in the same way.
How does Pareto analysis work?
In a nutshell, Pareto analysis involves classifying data into two categories:
- the“few vital products or services” (the elements or services that produce most of the value)
- “other useful but not vital products or services” (items or services that produce little value).
Using the ABC method:
- Class A: these purchases represent 80% of the total cost of purchases for 20% of suppliers.
- Class B: These purchases represent 15% of the total cost of purchases for 30% of suppliers.
- Class C: These purchases represent 5% of the total cost of purchases for 50% of suppliers.
ABC analysis of suppliers
For example, if an organisation spends €1 million on supplies each year and discovers, through Pareto analysis, that €800,000 of this amount is spent with only 20% of suppliers, these 20% of suppliers need to be given special attention in order to get the best value for money.
Similarly, if an organisation finds from its spend analysis that only 10% of its products generate 90% of its profits, it may be wise to invest more resources in marketing or researching these products, while cutting back on other less profitable products.
The Kraljic matrix
The Kraljic matrix is a method used to classify a company’s purchases according to theimportance of the purchase and the complexity of the market for a specific item, dividing them into four classes:
- Strategic purchasing
- Lever purchases
- Simple purchases
- Critical purchases
The Kraljic model is used to identify the strategic weight of different purchasing families (internal and external). It aims to help buyers select the most appropriate purchasing strategy and adapt it to reduce procurement risks and improve profits. The Kraljic matrix can be used to determine which product purchases should be favoured and which are not worth pursuing in view of the risks involved.
Weproc and the management of purchasing types and families
Purchasing management software such as Weproc provides powerful expense management and reporting functions for family managers, finance managers and buyers. It also ensures that buyers throughout the organisation comply with the purchasing policy when buying goods and services. Gain a deeper understanding of the types and families of purchases made by companies, and discover how to integrate them into an overall purchasing management strategy.
Weproc offers a unique platform for monitoring, reporting and planning spend to achieve better results:
- The platform allows users to create a customised item catalogue using their referenced suppliers and products. With customisable budget management, approvals based on validation circuits and dynamic budget functions, you can access real-time data for total budget control and to reduce unforeseen expenditure.
- The application is also equipped with robust reporting capabilities that provide visibility and fine-grained analysis of spend across all product categories, enabling data-driven decision making for each critical spend area.
- Users benefit from real-time visibility into all aspects of spend, enabling them toimprove category performance or overall financial efficiency.
Family management works best with visibility and control of the purchasing process. Weproc provides the data and functionality you need to successfully manage your purchasing by family.
Want to learn more about our procurement management software Weproc? Contact us or request your free 15-minutes demo below!
Weproc is a SaaS software specialized in digitizing the procurement process of companies. From purchase requests to supplier invoicing, through the validation process, Weproc is designed to simplify the purchase management of SMEs and mid-sized companies by centralizing all purchase-related activities.