Chapter_3 Supply Chain

PURCHASING & SUPPLY CHAIN MANAGEMENT, 4e

CENGAGE LEARNINGMonczka – Handfield – Giunipero – Patterson

Purchasing Policyand Procedures

Chapter 3

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, 4e2

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


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


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


Effective Policy Characteristics

Action-oriented Relevant Concise Unambiguous and well-understood Timely and current Guides problem-solving and behavior


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


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 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


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


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


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

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Conduct of Purchasing Personnel

Ethics policy Reciprocity policy Contacts and visits to suppliers Former employees representing

suppliers Reporting of irregular business dealings

with suppliers


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


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


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


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

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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

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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


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


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


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


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


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


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


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


Operational Issues

Hazardous materials Supplier responsibility for defective

materials Purchased item comparisons Other operating policies


Hazardous Materials

Controlling and/or minimizing waste Obeying environmental laws ISO 14000

Environmental management system Handling hazardous waste


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

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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


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


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


Purchased Item Comparisons

Periodic market evaluation of supplier’s competitors Cost Quality Delivery Technology considerations

Requesting new bids for an item from existing suppliers


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 Procedures

Operating instructions detailing functional duties or tasks

“How-to” manual No uniform set of procedures that

apply to every situation


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


Procedural Areas

The purchasing cycle Proper use of purchasing forms Development of legal contracts Operational procedures


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 assessmentPurchasing & Supply Chain Management, 4e

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Legal Contract Procedures

Formal competitive contracting procedures

Contract development process Examples of sample agreements Legal definitions Use of formal contract clauses


Purchasing Forms

Description of proper use Detailed meaning of each information

field Description of proper handling and

storage Where? How long?

Approval process


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

assessmentPurchasing & Supply Chain Management, 4e

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Development of Legal Contracts

Formal competitive contracting procedures

Contract development process Examples of sample agreements Legal definitions Use of formal contract clauses


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


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


Documents

Chapter_3 Supply Chain