1. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Analysis 3. The purchasing process: the buyer’s role

2. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Programme The purchasing process: Step 1: determining on purchase order specifications Step 2: supplier selection Step 3: the purchasing contract Steps 4&5: ordering & Expediting Step 6: Follow up and evaluation of the buying process

3. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 1: Develop purchase order specification Differentiation between: Functional specification Describes the functionality which the product must have for the user Advantages of a functional specification: 1.Potential suppliers are challenged to give advice using their expertise and experience 2.It stimulated innovation and innovative ideas 3.It creates one terms of reference, against which all supplier proposals can be evaluated Detailed technical specification Describes the technical properties and characteristics of the product as well as the activities to be performed by the supplier in detail

4. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 1: Purchase order specifications The purchase order specification comprises the following: Quality specifications (technical norms and standards the product should meet) Logistics specifications (Quantities and delivery time) Maintenance specification (How the product will be maintained and serviced) Legal and environmental requirements (Products, services and production process should be in compliance with legislation) Target budget (Supplier solutions and proposals would be within predetermined financial limits)

5. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 1: Added value of the buyer Ensuring unambiguous functional, technical, logistics and maintenance specifications Preventing the use of supplier or product brand specifications Recording clear procedures regarding approval of specification changes Ensuring a clear sample inspection procedure Ensuring clear descriptions of the methods for testing product quality Ensuring a general cost breakdown to help assessment of quotations at a later stage

6. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 2: Supplier selection Step 2 Supplier selection contains 4 sub-steps…. 1.Determining the method of (sub)contracting 2.Preliminary qualification of suppliers and drawing up the ‘bidders list’ (long list and short list) 3.Preparation of the request for information (RFI), request for quotation (RFP) and analysis of the bids received 4.Selection of the supplier

7. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 2: Supplier selection 1. Method of subcontracting Turnkey Subcontracting Partial subcontracting Responsibility of the entire assignment is placed with the supplier Assignment is divided into parts that are contracted out separately, to various suppliers: co-ordination rests with the principal

8. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 2: Supplier selection Advantages Principal knows where he stands financially After completion no need for settlements: supplier carries all the risks A firm completion date Disadvantages Difficult to get insight in supplier’s cost breakdown Preparation costs a lot of time One does not know in advance which supplier will turn out to be the best 1. Fixed price: principal orders the supplier to perform the required activities at a fixed price, before a predetermined date.

9. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 2: Supplier selection Advantages Principal obtains exact picture of the cost structure of the work Principle is free in his choice of suppliers Disadvantages Principal is not sure about the financial consequences No incentive to work faster, as the supplier is paid per hour No certainty about completion date 2. Cost-reimbursable: nature and scope of activities are not determined in advance; the supplier works at an agreed hourly rate

10. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 2: Supplier selection Decision in favor of either fixed price or cost-reimbursable contracts is determined by a number of factors..... Comprehensiveness of the specification: availability of extensive specifications is crucial for fixed price contracting Available time: is there enough time for a tender procedure and price negotiations, or should the work be started immediately Technical expertise: if specialised knowledge is required, a cost reimbursable contract is preferred Knowledge of the industry: the degree to wich the principal knows the methods and price arrangements operating in that particular industry

11. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 2: Supplier selection Unit-rate contract: Determines the cost per activity for standardized and routine activities. Unit-rate contracts are used for activities that are standardized but which are difficult to estimate in terms of volume and time

12. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 2: Supplier selection 2. Preliminary qualification of suppliers Summary of the prequalification requirements, based on the purchase order specification Assembling the initial bidders list that indicates which suppliers may probably do the job

13. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 2: Supplier selection 1.Identify 3 to 5 prospective suppliers (bidders’ short list) 2.Receive quotations 3.Preliminary technical and commercial evaluation 4.Use of ranking schemes Supplier selection proposal Decision to select certain supplier Underlying ranking schemes Underlying quotations

14. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 2: Added value of the buyer Determining the most adequate way of subcontracting Identifying reliable supplier-partners by means of an adequate procedure of prequalification Drawing up the request for comparable quotations Handling requests for information from suppliers Conducting a balanced analysis of quotations in close co- operation with the user

15. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 3: The purchasing contract Prices and terms of delivery Fixed price plus incentive fee: motivate suppliers to deliver work above agreed standard Cost plus contract: actual cost plus agreed profit margin. Used in situations where the work can not be specified adequately or when a fixed price constitutes too big a risk for supplier or buyer Cost-reimbursable contract: based on fixed hourly rates (which incl profit for supplier) Agreement with price-adjustment: mainly used for agreements with long-term delivery or when very specific and market-sensitive materials are processed

16. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 3: The purchasing contract Terms of payment Common practice that payment takes place in several terms Preferred method of payment is based on suppliers performance Penalty clauses and warranty conditions Suppliers have to guarantee: The goods are of good quality and in accordance with specifications The goods are completely new and free of defects Legal and government regulations have been met Base materials obtained from ‘sustainable’ sources of supply A sound purchasing contract includes agreement on penalty clauses, warranty period and (if applicable) systems responsibility

17. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 3: The purchasing contract Other arrangements Insurance and safety regulations Transfer of rights and obligations Contracting out to third parties Terms of delivery

18. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 3: Added value of the buyer Providing the required contracting expertise in the form of modular purchase contracts (and contract clauses) and general terms of purchase Determining what price and other commercial conditions will be negotiated Preparing specific contractual arrangements to minimize risks and liabilities Preparing and conducting the negotiations about all terms and conditions of the contract Editing the purchase agreement Monitoring contract compliance and contract-review

19. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Steps 4 & 5: Ordering & Expediting Several types of expediting... Exception expediting: buyer only undertakes action when the organization sends out signals of material shortages Routine status check: preventing materials supply and quality problems - few days before promised delivery, the buyer contacts the supplier to confirm the delivery date Advanced status check: for critical purchase parts – a detailed production plan will be handed over to the buyer and during the process the buyer will carry out periodic checks Field expediting: for critical purchase parts – fieldinspector periodically inspects on site whether supplier is on schedule (e.g. military projects)

20. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Steps 4 & 5: Ordering & Expediting In summary, the added value of the buyer during the ordering and expediting phase lies predominantly in:  Developing efficient ordering routines  Checking that all purchase orders are confirmed by the supplier  Developing and executing a computer-supported, differentiated method of expediting and inspection  Maintaining a computer-supported database with regard to critical purchasing and supplier information  Developing a sound procedure for order handling  Applying effective ‘trouble shooting’ when necessary

21. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 6: Follow up and evaluation Things that have to be taken care of: Settling warranty claims and penalty clauses Settling the results of work in excess or work that does not meet specifications Organizing the purchase and supplier documentation Recording project evaluations Evaluating and ranking supplier performance

22. © Cengage Learning – Purchasing & Supply Chain Management 4 ed (1-84480-024-5) Step 6: Added value of the buyer Settling claims, with regard to work not covered in the specification Recording the user’s experience with specific products and suppliers by means of a detailed vendor rating system Supervising compliance with agreements