This article explains in detail what an Organisational Structure is all about and its relationship to purchasing. In this article, Organisational Structure and Purchasing, you will learn the main types of purchasing organisational structure, the various cost associated with holding a large stock of material, and reasons why organisations keep large stocks.
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What Is Organisational Structure?
Organisational structure refers to the arrangement of people, functions, authority and power of an organization. This structure is developed to establish how an organization operates. It is illustrated using an organisational chart.
The type of structure adopted by purchasing organization depends on some factors such as geographical area, supply market, expertise required, customer demands, purchases requirements, price fluctuations, and many more.
The Two Main Types of Purchasing Organisational Structure Are:
Centralised purchasing refers to the purchase of materials by a single purchasing department. This department is headed and managed by a purchasing manager. He takes charge for the purchase of materials for the entire department. Companies like centralised purchasing because it gives them a higher degree of control over the purchasing process. This type of purchasing structure is often adopted by large and medium size organisation.
DECENTRALISED PURCHASING STRUCTURE
Under this structure, there is more than one purchasing manager responsible for purchasing of materials and equipment. Each department has its own purchasing manager for the purchase of materials and other functions pertaining to their department. Decentralised purchasing structure is helpful when there is an emergency or urgent situation relating to the purchase of materials for each department without relying on the top hierarchy for acceptance. This purchasing structure can be successful where the culture of the organization is such that each branch or department acts as its own profit centre, or has a business that is different from other branches if any.
Various costs associated with holding a large stock of materials.
The costs associated with holding a large stock of materials are highlighted as follow:
- Storage Costs: Holding a large volume of items means you need to have a secure warehouse or storage unit. In this case, you will have to incur some cost like rent, rates, heat and lighting, specific insurance, etc. all of which have to be absorbed by the business.
- Insurance of Stock: It is important the business has sufficient insurance in place that can cover the cost in case of an emergency situation like fire incidents. Insurance is not cheap and is another cost that must be incurred by the business.
- Security of Stocks: Stock is vulnerable to theft from internal people such as employees and external people such as thieves, armed robbery, etc. Therefore, security is paramount. Unfortunately, security comes at a price and is going to cost the business.
- Spoilage/Obsolesce Costs: Some items of stocks are perishable or may become obsolete in a short amount of time. If these items are not sold during a specific period, it will become almost worthless and will either have to be sold at a discounted rate or simply thrown away, which is going to cost the business.
- Staffing: Holding stock requires additional staff such as manager, stores keeper, security guard, forklift driver, etc. of which they are entitled to wages and salaries that must be absorbed by the business.
- Cooling/Heating: Some products need to be kept at a specific temperature, for examples, frozen food has to be kept in a specific location below some certain degree, otherwise it will be useless and fit only for the bin. The cost associated with heating or cooling of the stocks is expensive and must be absorbed by the business.
- Opportunity Costs: Holding large stock tied-up cash which could have been used to generate an income. For example, the cash tied-up in stock may have been used to get early payment discount from suppliers or invested to generate interest or dividends, etc. Therefore, it is this ‘lost’ income that is the opportunity costs.
Reasons Why Organisations Holds or Keep Large Stocks?
The reasons why organisation holds or keeps large stocks can vary from case to case basis. Some of those reasons are outlined below:
- To Meet Expected Demand: A business must ensure that it has adequate stock to meet expected demand of the customers. When a business is experiencing an increase in volume and rapid turnover, having the required stock ensure that the firm can comfortably meet anticipated demand.
- To Prevent Shortages: Companies also hold large stocks, in order to prevent a shortage of raw materials. Running out of stocks can affect the business and the customer might be forced to look elsewhere for the supply of finished products. Holding inventories allow a degree of continuity for the activities of an enterprise.
- To Benefit from Bulk Discounts: Suppliers often offer trade discounts for bulk purchases, once that purchase is above a certain amount. Business benefits from these trade discounts by buying in large quantities and thereby reducing the cost of the firm to a certain amount.
- To Facilitate the Production Process: By holding a large stock of material it allows the manufacturing process to flow smoothly, and help the business to respond effectively to unforeseen circumstances that may arise in which the business cannot predict.
- Due to Economic Situation: Holding large stock can help the organisation to deal with unusual or difficult economic circumstances. For instance, during the high inflation period, a business might not wish to purchase a stock at increasingly higher prices. Due to this reason, business prefers to buy in large quantities due to an unstable economy of the country.
- To Deal with Cyclical and Seasonal Demand: Sometimes, there may be high demand during some period like festival seasons. Therefore, organizations have to hold a large amount of stock to meet up this rapid demand.
- To Avoid Price Increase: If there is a price increase expected in next few months due to change in demand and supply, impacts of taxes and budgets, etc. the company will prefer to buy in large quantities in advance to avoid a price increase.