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Timing of Purchases

The actual timing of a purchase order release depends on need, cost, availability, marketplace conditions, financial objectives, and other factors. Under normal, stable conditions, timing of the purchase order release is predictable. When economic or market conditions are unstable, however, purchasing will release orders that will optimize company objectives. Four types of purchase order releases can occur.

As-needed Basis

This method is normally used to purchase specific quantities of maintenance, repair, and operating (MRO) goods and services as well as production inventories as the need arises. Besides the obvious cash-flow reduction achieved by buying only the quantities deemed necessary at the time they are needed, this method is used for such strategies as buying targeted quantities in anticipation of a price increase, planned engineering changes to components, and product phase-out to reduce the cost of obsolescence.

Current Requirement Buying

This is the most common method for purchase order release for all types of products and services. Based on a purchase schedule developed from planning tools such as MRP and order point, buyers will assemble a purchase order balancing lot quantities with cost elements such as quantity discounts, carrying costs, stock out costs, and ordering costs. This method is also used for repetitive MRO buying.

Forward Buying

This approach utilizes medium- to long-term inventory planning to purchase goods and services in excess of current requirements. Normally, buyer and supplier engage in some form of contract in which price, quantities, quality, and delivery are agreed upon. Some reasons why purchasers will use forward buying are to guard against possible price increases, attain economies of scale through quantity discounts and favorable transportation rates, guarantee supplier capacities, and guard against risks such as materials shortages or labor disputes.

Speculative Buying

In this method, buyers purchase goods and services far beyond current requirements. This practice is often called hedge purchasing. The usual reason for speculative buying is to lock in prices in anticipation of a price increase. A decision to use this technique, which entails high risk, requires the authorization of purchasing management and should support company objectives.

Exercise

Please complete the drag and drop exercise below by matching the purchase order release to the correct description.

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