Chapter 3 Purchasing Policy and Procedures

1. Purchasing Policyand Procedures Chapter 3 CENGAGE LEARNING Monczka – Handfield – Giunipero – Patterson

2. Chapter Overview • Policy overview • Policies provide guidance and direction: • Role of purchasing • Conduct of purchasing personnel • Social and minority business objectives • Buyer-supplier relationships • Operational issues • Purchasing procedures Purchasing & Supply Chain Management, 4e

3. The Term “Policy” • Refers to the set of purposes, principles, and rules of action that guide an organization • Standard operating procedures • Rules and regulations • Formal vs. informal policies • Part of organizational culture Purchasing & Supply Chain Management, 4e

4. Advantages of Using Policies • Opportunity to define and clarify top management perspectives • Means for executives to communicate its leadership views and beliefs • Provides a framework for consistent decision-making and action • Defines rules and procedures for all employees Purchasing & Supply Chain Management, 4e

5. Disadvantages of Using Policies • Often difficult to communicate within large organizations • Might substitute for effective management • Not a set of “how-to” instructions • May restrict employee innovation and flexibility Purchasing & Supply Chain Management, 4e

6. Effective Policy Characteristics • Action-oriented • Relevant • Concise • Unambiguous and well-understood • Timely and current • Guides problem-solving and behavior Purchasing & Supply Chain Management, 4e

7. Policy Categories • Defining the role of purchasing • Defining the conduct of purchasing personnel • Defining social and minority business objectives • Defining buyer-supplier relationships • Defining operational issues Purchasing & Supply Chain Management, 4e

8. Role of Purchasing • Purchasing authority • Objectives of the purchasing function • Responsibilities of various buying levels • General or broad policy statement from which more detailed policies emanate Purchasing & Supply Chain Management, 4e

9. Purchasing Authority • Authority to conduct business and to represent organizational interests • Created by executive committee • Authority to delegate to other functional areas • Describes scope of and limits to authority Purchasing & Supply Chain Management, 4e

10. Objectives of Purchasing Function • Select suppliers that meet requirements • Purchase materials and services that comply with appropriate standards • Promote buyer-supplier relations and to encourage supplier contribution • Treat all suppliers fairly and ethically Purchasing & Supply Chain Management, 4e

11. Objectives of Purchasing Function • Work closely with other internal departments and employees • Conduct purchasing operations to enhance community/employee relations • Support all corporate objectives and policies • Maintain a qualified staff and develop its professional capabilities Purchasing & Supply Chain Management, 4e

12. Corporate Purchasing Office • Carry out executive policies • Develop and publish purchasing policies and procedures • Coordinate strategy development • Evaluate purchasing effectiveness • Provide expert support at all levels • Perform other corporate level tasks and activities Purchasing & Supply Chain Management, 4e

13. Conduct of Purchasing Personnel • Ethics policy • Reciprocity policy • Contacts and visits to suppliers • Former employees representing suppliers • Reporting of irregular business dealings with suppliers Purchasing & Supply Chain Management, 4e

14. Avoid the Appearance of Reciprocity • Giving preference to suppliers that buy from you • Expecting suppliers to purchase your products as a condition for securing a purchase contract • Looking favorably on competitive bids by suppliers who buy from you Purchasing & Supply Chain Management, 4e

15. Examples of Irregular Dealings • Accepting bribes or kickbacks • Cronyism • Accepting late bids • Owning a stake in a supplier’s company • Other behavior not considered part of the “normal” course of doing business Purchasing & Supply Chain Management, 4e

16. Social and Minority Business • Support multi-culturism • Support minority businesses • Challenges • Lack of access to capital • Supply base optimization • Lack of adequate managerial and technical base • Relatively small size Purchasing & Supply Chain Management, 4e

17. Social and Minority Objectives • State management’s commitment • Evaluate performance potential of small and/or disadvantaged suppliers • Invite minority bids on new contracts • Establish minimum level of business for minority suppliers • Create training program to educate buyers Purchasing & Supply Chain Management, 4e

18. Identifying Minority Suppliers • Is the supplier fully qualified? • Does the supplier satisfy U.S. government criteria by definition? • Does the supplier meet or exceed performance requirements? • Is the supplier price competitive? • How much business can we award given its capacity? Purchasing & Supply Chain Management, 4e

19. Environmental Issues • Now required by law and/or major customers • Use of recycled materials • Strict compliance with applicable laws • Proper disposal of waste materials • Health and safety issues Purchasing & Supply Chain Management, 4e

20. Buyer-Supplier Relations • Treating suppliers fairly and with integrity • Supporting and developing motivated suppliers • Providing prompt payment on invoices • Encouraging suppliers to submit innovative ideas and jointly sharing benefits Purchasing & Supply Chain Management, 4e

21. Buyer-Supplier Relations • Developing open communications channels • Informing suppliers as to why they did not receive a purchase contract • Establishing a fair process to award purchase contracts Purchasing & Supply Chain Management, 4e

22. Qualification and Selection • Price/cost competitiveness • Product quality • Delivery • Financial condition • Engineering and manufacturing technical competence • Management of its own supply base • Management capability • Ability to work with buying organization • Potential for innovation Purchasing & Supply Chain Management, 4e

23. Qualification and Selection • Single vs. multiple sourcing • Longer-term purchase agreements • Reliance on non-purchasing personnel to aid in evaluating technical and/or financial data Purchasing & Supply Chain Management, 4e

24. Awarding Purchase Contracts • Buyer’s purchasing authority • Appropriateness of competitive bidding vs. negotiation • Using a standardized bidding process • Analysis of sealed bids • Reasons for not using the lowest bidder • When to rebid • How to negotiate with suppliers Purchasing & Supply Chain Management, 4e

25. Difficulties at a Supplier Facility • Guidelines for strikes or labor problems at supplier facilities • Legal removal of buyer-owned materials, inventory, and/or tooling • Emergency disruptions to the supply chain Purchasing & Supply Chain Management, 4e

26. Other Relationship Policies • Accepting and using supplier-developed ideas • Financial obligations to suppliers providing early design involvement • Use of nondisclosure agreements • Criteria for using and/or sharing patents and other intellectual properties Purchasing & Supply Chain Management, 4e

27. Operational Issues • Hazardous materials • Supplier responsibility for defective materials • Purchased item comparisons • Other operating policies Purchasing & Supply Chain Management, 4e

28. Hazardous Materials • Controlling and/or minimizing waste • Obeying environmental laws • ISO 14000 • Environmental management system • Handling hazardous waste Purchasing & Supply Chain Management, 4e

29. Environmental Management System • Create an environmental policy • Set appropriate objectives and targets • Help design and implement program to achieve objectives and targets • Monitor and measure program effectiveness • Monitor and measure effectiveness of general environmental activities Purchasing & Supply Chain Management, 4e

30. Hazardous Waste Contractors • Evidence of valid permits and licenses • Specification of types of services it is licensed to perform • Evidence of safeguards to prevent accidents • Evidence of contingency plan in case of accidental release of materials Purchasing & Supply Chain Management, 4e

31. Hazardous Waste Contractors • Detail of specific process used to control hazardous material once it leaves buyer’s control • Evidence of adequate liability insurance • Evidence that the hazardous waste transporter used properly certified disposal sites Purchasing & Supply Chain Management, 4e

32. Responsibility for Defective Material • Charge-back costs due to supplier nonperformance • Material inspection and rework • Repackaging and extra material handling • Returned goods shipping costs • Costs of lost or delayed production • Purchasing authority to negotiate and settle claims against suppliers Purchasing & Supply Chain Management, 4e

33. Purchased Item Comparisons • Periodic market evaluation of supplier’s competitors • Cost • Quality • Delivery • Technology considerations • Requesting new bids for an item from existing suppliers Purchasing & Supply Chain Management, 4e

34. Other Operating Policies • Compliance with laws and regulations • Restrictions on “maverick spending” • Proper disposal of assets • Legal right to terminate contracts • Supplier responsibility for premium transportation costs • Supplier-requested contractual changes • Supplier use of trademarks or logos Purchasing & Supply Chain Management, 4e

35. Purchasing Procedures • Operating instructions detailing functional duties or tasks • “How-to” manual • No uniform set of procedures that apply to every situation Purchasing & Supply Chain Management, 4e

36. Procedure Manual • Acts as a reference guide • Especially helpful for new employees • Provides consistency by documenting required steps and activities • May specify industry best practices • Must be reviewed periodically to ensure that it is timely and accurate Purchasing & Supply Chain Management, 4e

37. Procedural Areas • The purchasing cycle • Proper use of purchasing forms • Development of legal contracts • Operational procedures Purchasing & Supply Chain Management, 4e

38. Legal Contract Procedures • Basic features of the standard purchase agreement • Basic contract principles • Execution and administration of agreements • Essential clauses of the contract • Compliance with contract terms and performance assessment Purchasing & Supply Chain Management, 4e

39. Legal Contract Procedures • Formal competitive contracting procedures • Contract development process • Examples of sample agreements • Legal definitions • Use of formal contract clauses Purchasing & Supply Chain Management, 4e

40. Purchasing Forms • Description of proper use • Detailed meaning of each information field • Description of proper handling and storage • Where? • How long? • Approval process Purchasing & Supply Chain Management, 4e

41. Development of Legal Contracts • Basic features of the standard purchase contract (boilerplate) • Basic contract principles • Execution and administration of agreements • Essential elements of the contract • Contract compliance and performance assessment Purchasing & Supply Chain Management, 4e

42. Development of Legal Contracts • Formal competitive contracting procedures • Contract development process • Examples of sample agreements • Legal definitions • Use of formal contract clauses Purchasing & Supply Chain Management, 4e

43. Operational Procedures • Control of material provided to supplier • Storage of purchasing documents • Supplier qualification process • Use of computerized systems • Analysis of competitive quotations • Use of single source selection • Requirements for price analysis Purchasing & Supply Chain Management, 4e

44. Operational Procedures • Procedures for cost analysis • Acceptable cost reduction techniques • Intracompany transactions • Processing of overshipments • Supplier acknowledgements of POs • Disposition of nonconforming materials • Removal of buyer-owned tooling Purchasing & Supply Chain Management, 4e