The timing of releasing a purchase order is determined by several factors such as need, cost, availability, market conditions, and financial objectives. In stable conditions, the timing of the release can be predicted. However, in times of economic or market instability, purchasing may release orders to optimize company objectives. There are four types of purchase order releases that can occur.
As-needed Basis
This procurement method is typically utilized for acquiring predetermined amounts of maintenance, repair, and operating (MRO) supplies, as well as production inventories, as required. It offers the benefit of reducing cash-flow by only purchasing the necessary quantities when needed. Additionally, it is employed for strategic purposes, such as procuring targeted amounts in preparation for price hikes, planned modifications to components, and product phase-outs, all of which help to minimize obsolescence costs.
Current Requirement Buying
The method of purchase order release described here is commonly used for all types of products and services. Buyers use a purchase schedule developed from planning tools like MRP and order point to create a purchase order that balances lot quantities with cost factors like quantity discounts, carrying costs, stock out costs, and ordering costs. This approach is also utilized for repetitive MRO purchasing.
Forward Buying
One strategy for purchasing goods and services is to plan for inventory over a medium to long-term. This involves negotiating a contract with the supplier that includes agreed-upon prices, quantities, quality, and delivery. Forward buying can be useful for buyers who want to protect against potential price increases, take advantage of quantity discounts and favorable transportation rates, ensure supplier capacities, and safeguard against potential risks like materials shortages or labor disputes.
Speculative Buying
Buyers sometimes engage in a practice known as hedge purchasing, where they purchase goods and services beyond their current needs. This is done to secure prices in advance and anticipate price increases. However, this technique involves high risk and requires approval from purchasing management, while also aligning with the company’s objectives.