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Supplier Relationships and Procurement Plans
Main Objective of Purchasing: Maintain reliable supply of
materials or services at lowest possible
price and at desired quality level.Purchasing decisions
Cost/value analysisoDirect Cost: major portion of cost; small
reduction means large impact on final cost
Direct labor: geographic, union vs. non-union, workforce
skillsDirect material: purchased, self manufactured
oIndirect CostEngineering overheadMaterial overheadGeneral and
adminManufacturing overheadSelling and Marketing
oPrice is relative: Total Cost of Ownership is whats important
(returns, bad quality,late shipments, carrying costs,
etc)oProfit
Suppliers need to make a profitPrice is always
considerationDetermination is subjective
oCost uncertaintySupplier cost responsibilitySupplier
profitSupplier incentivesRisk and uncertainty are related
Make or BuyoCostoTimeoCapacity utilizationoProduction/quality
controloSecrecyoSupplier expertise/reliabilityoVolumeoWorkforce
Award criteriaoEstablish prior to submitting requests for
quotesoQualityoTimeoSecurityoExisting suppliers
Compensation agreementsoIncentive arrangements: motivate
supplier to improve performance
Target costTarget profitSharing agreement
oFixed Price
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Most common/preferredWith economic adjustment: high value
RMsRedetermination: fixed in initial period then adjusted per
clause
oCost Plus Fixed FeeSupplier assumes no riskCustomer pays
allowable costsCustomer pays agreed feeSupplier profit is low
Contractual obligationsoVerbal commitmentoPurchas credit
cardoPurchas ordersoBlanket orders/releases
AdvantagesFewer PosBuyers can focus on other areasVolume
pricingInformation flowLower inventory/lead timesLong-term supplier
relationship
oContractsOrder placement
Pricing PrinciplesEconomic Considerations
oVariable margin pricing: companies sell line of products and
establish prices togenerate profit margin for entire line.
oProduct differentiation: product really different from other
suppliers or just hype?oCost plus profitoSellers market
Price AnalysisoBenchmark total
priceoHistoricaloProposaloCatalog/market
DiscountsoQuantityoSeasonaloTrade
Given to buyer or distributor for performing some marketing
functions ofseller
oCashContracts Elements
Mutual ObligationAgreement or meeting of mindsCompetent
partiesLawful purpse
Contract Types
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Long-TermDefinite Delivery: production schedule of entire period
known, high degree of certaintyIndefinite Delivery
oDefinite quantity: quantity specified; delivery is to be
specifiedoRequirements: all requirements for period of time;
minimum requirements
established; termination protectionoIndefinite quantity:
minimum/maximum range specified; delivery to be specified;
high and low limitsOrder Placement Process:
1.Purchas Req2.Request for Proposal/Request for Quote
(RFP/RFQ)3.Quote Evaluation4.Purchas Order
(PO)5.Acknowledgement6.Approval of invoice7.Reconciliation
InvoicingAccounting pays invoiceReconciliations
Supplier Rating SystemsMetrics to be measured depend on needs of
the companyBalanced Scorecard:
oFinancialoCustomeroBusiness ProcessoLearning and Growth
Performance measure should address:oCustomer
satisfaction/qualityoTimeoCostoQualityoAssets
Performance Measurement StandardsoProduct
QualityoCertificationoDelivery/performanceoCost
performanceoQuantityoCooperationoOter
Buyer Performance StandardsoBuyers Service LeveloPurchasing
workloadoPlanned number of buyersoNumber of documents per year per
buyeroInput ratio number of res received/number of orders
placedoProduct flow
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oYear-to-date expense varianceEthical Standards
Ethical perceptionsResponsibilities to EmployerConflict of
Interest
Gratuities
Treatment of suppliersConfidential informationReciprocityFederal
and state lawsSmall, disadvantaged, and minority-owned
businessesPersonal purchases for employeesResponsibilities to the
professionInternational purchasing
International ProcurementCurrency fluctuations
Transportation
Cultural
