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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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