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

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

28. Purchasing & Supply Chain Management, 4e
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. Purchasing & Supply Chain Management, 4e
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. Purchasing & Supply Chain Management, 4e
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 & Supply Chain Management, 4e
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