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The importance of purchasing management in SMEs

Preprint · April 2021

DOI: 10.13140/RG.2.2.29012.53121

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 The importance of purchasing management in SMEs.

Musab S. ALRuthia

Abstract

This article aims to aware entrepreneurs of the importance and function of Purchasing
management in SMEs, particularly after the amid spread of Covid-19. Based on studies that have
done by GEM (Global Entrepreneurship Monitor), Saudi Arabian Monetary Agency (SAMA) and
the Saudi Industrial Development Fund (SIDF) in Saudi Arabia. The paper shows numbers of SMEs
closed due to the misuse of the purchasing department; it also indicates the correlation between
the successful organisations and the purchasing management. Moreover, the impact of not
controlling purchases in SMEs. Furthermore, the analytical report that has done by the GEM in
Saudi Arabia in 2020 indicates the expenditures of SMEs on purchasing and the outcome of
improper use of purchasing management on SMEs in Saudi Arabia. Above that, it shows the
correlation between supply chain and purchasing management. The result of this article
emphasises that the success of the purchasing department means the success of the enterprise.
Thus, the purchasing department is indispensable with SMEs.

Keywords: SMEs, Purchasing management, entrepreneurs, supply chain

1
Introduction

The Corona pandemic has led to economic problems in the global economy. The pandemic has
resulted in a significant loss to many SMEs, to the extent that it leaves many companies taking
arbitrary measures, whether by dismissing their employees or by reducing the salaries of
employees. The pandemic has allowed many SMEs to review their accounts, especially about
their expenditures and, in particular, purchases. Especially since it has SMEs that suffer from
constant spending, this thing hurts their expenses and profits (Lu et al., 2021). The pandemic
caused young entrepreneurs to lose or go bankrupt instead of improving their profit margins and
cash revenues to the point that many of them hired consultants to set up costly systems for them,
retrain employees or fire some employees (Eggers, 2020).

1. The Importance of Purchasing

Many of us do not know about the importance of the purchasing function and its means in the
facilities?

By saying that the purchasing function is one of the activities that any company settles to achieve
its objectives, whether in the production of goods or services, purchasing management varies
according to its activity's nature. The function of purchasing based on specialisation and
integration leaves the purchasing department from the departments that are very important in
the organisational structure of all companies. That makes them affect the company's profitability
effectively, making you unable to dispense with it or lax in its design (Khan et al., 2021).

Why is purchasing essential to any company?

❖ A large percentage of corporate expenses are purchases. It is the largest group in

expenditures after salaries in many companies.
❖ Purchasing is necessary for the work of any company, without which no company would
be able to continue without purchases.
❖ Purchases include many things such as products - such as office tools or furniture, services
- such as consulting or cloud software, and goods for sale. But in addition to these
expenses, it also includes travel tickets, hotels, car rentals, etc.

2
 ❖ Purchases include any product or service the company needs to continue and succeed,
whether local or international (Kulik, 2010).
2. The impact of not controlling purchases in SMEs

Ok, what would happen if I did not control the purchases of my facility?

❖ First, act more than you expected.

❖ You become a conflict of interest.
❖ The company is obligated to pay amounts that may be unnecessary.
❖ Imagine, according to a report conducted by the Saudi Arabian Monetary Agency (SAMA)
in Saudi Arabia that included all SMEs found that more than 95,000 companies were
closed in 2017, 42% of the SMEs that closed, the reason for this was financial reasons1.
❖ According to a questionnaire conducted by the GEM (Global Entrepreneurship Monitor)
in Saudi Arabia in 2018, 64% of the participating companies spent more than 5,000 riyals
per month for purchases, while 31% of them spent more than 25,000 per month 2.

3. The GEM analytical report for Saudi SMEs outcomes

The GEM (Global Entrepreneurship Monitor) is an organisation that provides research and
studies for policymakers, and its goal is to provide valuable insights on the best ways to promote
entrepreneurship to drive growth and prosperity. Of course, it is a networked federation of Qatari
national teams mainly linked to higher academic institutions. It is the only global research source
that collects data on entrepreneurship directly from individual entrepreneurs (Bakar et al., 2017).
According to the latest report of the Global Entrepreneurship Monitor3 in 2020, they found that
the average salary for administrative jobs in Saudi Arabia is about 6000 riyals/month, taking into
account government fees and other potentially costly fees. They also found that about 70% of
SMEs have at least one person dedicated to managing their purchasing processes. Besides, many
companies are not interested in dealing with their purchases, finding that 35% of SMEs spend at
least 5,000 per month on purchasing; this, of course, is a lot of for SMEs. Based on the latest

1
https://www.sama.gov.sa/enUS/EconomicReports/AnnualReport/Fifty%20Fourth%20Annual%20Report.pdf
2
https://www.gemconsortium.org/economy-profiles/saudi-arabia-2
3
https://www.gemconsortium.org/economy-profiles/saudi-arabia-2.

3
market research from several local and international sources, 40% of SMEs were closed due to
financial problems. As a result, improper management of purchasing led to the lack of
improvement in profits and thus continuity.

I will tell you something significant!

Based on the latest report of the Oxford business group in Saudi Arabia in 20204, that the Saudi
Industrial Development Fund (SIDF) ratified in 20205. They mentioned that if companies focus on
internal processes to control spending and reduce manual or traditional work. In that case, they
know that they reduce their costs by at least 8,000 SAR / month; this ultimately increases their
net profits by 10% by reducing hiring and creating time to produce and focus on the actual growth
of their business.
I advise all entrepreneurs to manage their purchases properly because it is the backbone of their
companies. It has a massive role after Allah Almighty in the optimal use of capital and the capital
cycle and providing all the needs of all departments and sections in your establishment at the
right time and at the lowest cost and with the highest quality to achieve the planned goals of
your establishment.

4. The connection between Purchasing management and supply chain

Above and beyond that, you should know that purchasing management is considered one of the
logistical activities that have recently become tracking of supply chains, and this is what makes
purchasing important in the organisation for several things, the most important of which are:
❖ Selecting and qualifying suppliers.
❖ Choose the appropriate prices.
❖ Choose quality.
❖ Economic purchase.
❖ Managing the budget properly (Krause et al., 2009).

4
https://oxfordbusinessgroup.com/saudi-arabia-2020
5
https://www.sidf.gov.sa/en/Documents/The%20Report%20Saudi%20Arabia%202020%20-%20Digital%20version

4
Conclusion
Concisely, the purchasing department is one of the most important departments at the level of
any establishment, whether your establishment is industrial or service. In short, the profitability
of any facility depends on the strength, effectiveness, and honesty of the purchasing
management. The success of any facility is linked directly to the existence of an efficient needs
management and purchasing department. Correct purchasing management helps you to achieve
profits for your company if it provides products or services, of course, by providing the necessary
resources for the production process at the lowest prices (Sánchez et al., 2003).
The result is that the success of the purchasing department means the success of the
organisation. It must be present in all companies and establishments, and it cannot be dispense
with organizationally for the establishments.

5
 References
Bakar, A.R.A., Ahmad, S.Z., Wright, N.S. and Skoko, H., 2017. The propensity to business startup:
Evidence from Global Entrepreneurship Monitor (GEM) data in Saudi Arabia. Journal of
Entrepreneurship in Emerging Economies.
Eggers, F., 2020. Masters of disasters? Challenges and opportunities for SMEs in times of crisis.
Journal of Business Research, 116, pp.199-208.
https://oxfordbusinessgroup.com/saudi-arabia-2020. Accessed on 22/04/2021.
https://www.gemconsortium.org/economy-profiles/saudi-arabia-2. Accessed on 22/04/2021.
https://www.sama.gov.sa/enUS/EconomicReports/AnnualReport/Fifty%20Fourth%20Annual%20Repo
rt.pdf. Accessed on 22/04/2021.
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%20Digital%20version. Accessed on 22/04/2021.
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4396.
Krause, D.R., Vachon, S. and Klassen, R.D., 2009. Special topic forum on sustainable supply chain
management: introduction and reflections on the role of purchasing management. Journal of
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Kulik, S., 2010. Purchasing practice in SMEs: Practical impressions about the purchasing activities
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Lu, L., Peng, J., Wu, J. and Lu, Y., 2021. Perceived impact of the Covid-19 crisis on SMEs in different
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Sánchez‐Rodríguez, C., Martínez‐Lorente, Á.R. and Clavel, J.G., 2003. Benchmarking in the
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