Chapter 1 Commercial Operations

Tute 04: SOURCES OF BUYING

Buying is an important function in business. Buyers need to find the best quality resources at the lowest
possible cost. This will help to improve the quality of the final product and increase the profitability of the
business. Resources can be bought:

▪ from suppliers in the home country or from overseas

SUBJECT VOCABULARY/Concepts

requisition form an internal document used in business to request the supply of something that is needed by
an employee or department

invoice a business document that contains details, such as the amount owed, about the exchange of goods
between a buyer and a seller

THE BUYING PROCESS

(01)REQUISITION

(02)NEGOTIATION

(03)PLACE ORDER

(04)CHASE DELIVERY

(05)CLEAR INVOICE

(01) Requisition-When buying large quantities of resources, buyers may adopt the process shown in Figure.
Buying may begin when a requisition form is received by the firm's buyer. This provides a clear description of
the quantity and type of resource required by a user. The buyer will then use this information to start the
buying process.

(02)Negotiation-In many cases, the instruction will require a repeat purchase. This means that an order can
be placed with a regular supplier at previously agreed terms and conditions. However, from time to time,
buyers will review supplier performance or buy new resources. This may mean that a new supplier needs to

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be found. The search will be completed when terms and conditions have been agreed on. This is the second
stage in the buying process.

(03) Place Order-The order can then be placed with the supplier, which is the third stage.

(04) Chase Delivery- If there is a delay in delivery, the buyer will be responsible for contacting the supplier to
find out why the delay has occurred. The buyer should take action to speed up delivery if this is possible.

(05)Clear Invoice-When the goods arrive, they should be checked against the invoice to ensure that the
delivery matches the goods ordered.

Large businesses might have a specialized buying department. Also, large retailers such as supermarkets and
chain stores employ specialist buyers. When the quantity and variety of resources required by a business is so
large (as in these cases), resources are likely to be bought from a range of sources.

Exercise: What do you mean by the term “Chanse Delivery”? (2)

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Buying from Suppliers at Home (Local supplier)

ADVANTAGES of Buying from Suppliers at Home (Local supplier)

(01)Transport costs are likely to be lower since the distance resources have to travel is lower than it would be
if suppliers were based overseas.
(02)Communication with home suppliers may be easier. For example, buyers and suppliers will speak the
same language.
(03)Buying from home suppliers can be done more quickly. For example, urgent orders could be placed and
delivered within 24 hours. This would be more difficult with overseas suppliers. This provides buyers with
more flexibility.
(04)A business might win more support from customers (concept of their own/local materials) if it uses local
suppliers. This could increase sales.

DISADVANTAGES of Buying from Suppliers at Home (Local supplier)

(01) Keeping out overseas suppliers, lose the opportunity of quality raw materials
(02) Choice is limited
(03) Small local suppliers can be inefficient due to absence of economies of scale
(04) Overseas suppliers can be more competitive on price, where local suppliers may have higher cost.

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Buying from Suppliers from overseas supplier

Businesses are making more and more use of overseas suppliers. One reason for this is because it has
become easier to source goods and services from overseas. Globalization has resulted in economies all over
the world becoming more integrated

ADVANTAGES of Buying from Suppliers at overseas suppliers

▪ Cheaper supplies, as many foreign suppliers and manufacturers offer their services at a competitive
price such as Vietnam, China and
▪ By reaching out globally, buyers will have a much greater choice when to those selecting a supplier.
▪ Sometimes the quality of products made overseas are superior made at home.
▪ Access to world-class technology, cutting-edge research or design and specialist knowledge may be
obtained from overseas providers.
▪ Overseas producers may be able to supply much larger quantities than home suppliers due to their
economies scale of production.

DISADVANTAGES of Buying from Suppliers at overseas suppliers

▪ Different countries are likely to have different technical and industrial standards to those of the
home country. This is particularly important when buying components for an aircraft, for example,
where health and safety is an issue.
▪ Cross-border trading may require complex and unfamiliar documents
▪ It may be more difficult to settle trading disagreements with foreign suppliers due to different legal
systems.
▪ There may be hidden costs such as currency exchange fees or tariffs resulting from protectionism.
Exchange rates can also change, which can affect the prices of goods
▪ The distance that goods have to travel from abroad often means that delivery times will be longer. It
may also be very difficult to source goods at short notice.
▪ There may be challenging cultural differences, such as language, social behaviour and working
practices.

ADVANTAGES BUYING DIRECT FROM A SUPPLIER

• It is cheaper to buy direct from suppliers because the 'middleman' is removed from the chain of
production. This will help to reduce costs and raise profit margins.
• A buyer may have more control over the supplier's production process because the order is so
important for the supplier. This will help maintain quality in production.
• Buying large quantities from a single supplier will help to maintain uniformity in standards. It may be
easier to build a lasting and long-term business relationship with a very small number of large
suppliers.
• They may be more flexible. The line of communication between the buyer and the provider of
resources will be shorter, so it should be more effective.

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DISADVANTAGES BUYING DIRECT FROM A SUPPLIER

(01)A temporary break in supply could be a big problem. If the buyer depends on one, or a very small number
of suppliers, a break in supply will mean shortages for a retailer or delays for a manufacturer.

(02)A supplier may make promises about being able to supply large volumes, even if they don't have the
facilities to deliver the order. This would leave the buyer in a risky position.

(03) Buying direct from a very small number of suppliers might reduce the variety of produce available. This
might be more important for retailers than manufacturers. This is because retailers often want to provide
customers with a wide choice of products in the stores.

MJ 2023-P1(R)Q1/

BUYING INDIRECT THROUGH AN INTERMEDIARY

A lot of buyers are content to source indirectly through an intermediary such as a wholesaler or a distributor.
Middleman is a person or business that buys goods from producers and sells them on to retailers.

ADVANTAGES OF BUYING INDIRECT THROUGH AN INTERMEDIARY

(01) Intermediaries can provide a wide range of choice for buyers. For example, a small greengrocer may be
able buy its entire stock needs from a single fruit and vegetable wholesaler.

(02) Intermediaries reduce transport costs in the chain of distribution. This is because buyers can source a
wide range of products from one, or a small number of wholesalers.

(03) Some wholesalers and distributors meet the cost of transport. They may take responsibility for delivery
entirely.

DISADVANTAGES BUYING INDIRECT THROUGH AN INTERMEDIARY

(01) Goods bought from intermediaries will be more expensive. This is because the 'middleman' is entitled to
a 'mark-up'/’profit’ when selling goods on. Some intermediaries may not be able to supply the very large
volumes needed by some buyers.

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(02) Intermediaries, because they are likely to stock a wide range of products, may lack the expert knowledge
of particular lines. This may not be acceptable to large buyers.

(03) Buyers will have less control over the production of resources. This is because the first point of contact
for a buyer will be the intermediary and not the original producer.

BUYING THROUGH MAIL ORDER

Mail order involves placing an order for goods and relying on the postal service for delivery. Buyers can send
mail order by choosing goods from a catalogue or responding to an advert /advertisement placed by a seller.

ADVANTAGES BUYING THROUGH MAIL ORDER

(01) Goods bought through mail order are often cheaper than exactly the same goods sold from other
outlets. This is because sellers have lower overheads and can pass on cost savings to buyers.

(02) The lead time for goods purchased by mail order is often quite short. In some cases deliveries can be
made within 24 hours if ordered online.

(03) Goods can be sourced from all over the world when using mail order. This provides a greater choice for
buyers.

(04) Mail order is a convenient method of buying. For example, orders can be placed out of office hours.

DISADVANTAGES BUYING THROUGH MAIL ORDER

(01)Buyers may not be able to buy goods on credit from mail-order companies. They will often have to pay
for the goods before they are received - especially when buying online.

(02)The return of goods by mail order(ex:damaged goods), when necessary, can be inconvenient.

(03)There is often a lack of personal contact between buyers and sellers when using mail order. Some buyers
may be unhappy about this.

(04)Goods bought using mail order may not live up to the expectations suggested by their photographs or
descriptions in catalogues and on websites.

Exercise: Which of the following is an advantage of using mail order?

A) It provides a convenient form of buying

b) Not having a pay sales tax on goods bought through mail order

c)Goods bought thru mail order are of a superior quality

D)Mail orders are always upto date

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MJ 2023 P-1 Q2/

SUBJECT VOCABULARY/concepts

• Just-in-time an approach to manufacturing that involves storing materials and components as little
as possible. Regular deliveries are made by suppliers during the day every few hours or so. just before
they are needed on the production line
• Some businesses operate a just-in-time approach to business-particularly in manufacturing. This
means that suppliers deliver materials and components just a few hours before they are needed on
the production line (i.e. just in time). This practice requires a high level of reliability from suppliers. It
often means that suppliers need to be based very close to their customers, so will be in the home
country. However, sometimes just-in-time manufacturers do use overseas suppliers.

Exercise:

Explain two disadvantages of Buying thru an Intermediary? (4)

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OUT SOURCING

• It means an arrange for somebody outside a business to carry out work for the business

Some businesses attempt to cut production costs by finding another business to carry out work that was
previously done 'in-house' i.e. by the company itself. A business might, for example, outsource the
recruitment function, or the transport of products to customers. It might even find a supplier to manufacture
one, or more, of its components. This practice is allows a business to focus on its main area of business and
lets others carry out less important tasks. For example, a business manufacturing aircraft component may
outsource payroll, marketing or IT work.

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 Lower
costs

Benefits Increased
capacity

Superior
quality
Outsourcing
Loss of
control

Reliance
Drawbacks
on suppliers

Disagreement
from
employees

Exercise:

Explain one advantage and one disadvantage of Outsourcing? (4)

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