Purchasing Policy and Procedures Chapter 3

The Term “Policy”  Refers to set of purposes, principles, and rules of action that guide an organization  Standard operating procedures  Rules and regulations  Formal (written) vs. informal policies  Part of organizational culture 2

Advantages of Using Policies  Define and clarify top management objectives  Means for executives to communicate their leadership and views  Provides framework for consistent decision-making and action  Defines rules and procedures for all employees 3

Disadvantages of Using Policies  Often difficult to communicate throughout large organizations  Might be viewed as substitute for effective management  Not a set of “how-to” instructions  May restrict innovation and flexibility 4

What Makes for an Effective Policy?  Action-oriented guidelines  Relevant  Concise  Unambiguous/well-understood  Timely and current  Helpful in solving problems 5

Categories of Purchasing Policies  Defining role of purchasing  Defining conduct of purchasing personnel  Defining social and minority business objectives  Defining buyer-supplier relationships  Defining operational issues 6

Defining the Role of Purchasing  Origin and scope of purchasing authority  Objectives of purchasing function  Corporate purchasing office responsibilities 7

Objectives of Purchasing Function  Select suppliers that meet requirements  Purchase materials and services that comply with appropriate standards  Promote buyer-supplier relations and encourage supplier contribution  Treat all suppliers fairly and ethically 8

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 9

Defining the Conduct of Purchasing Personnel  Ethics policy (Caterpillar case p.103)  Reciprocity policy  Contacts and visits to suppliers  Former employees representing suppliers  Reporting of irregular business dealings with suppliers 10

Avoid the Appearance of Reciprocity  Giving preference to suppliers that buy from you  Expecting suppliers to purchase your products as condition for securing purchase contract  Looking favorably on competitive bids by suppliers who buy from you 11

Former Employees  Access to insider knowledge  Include ban for a stated period of time in employee contracts  Knowledge of policies and procedures  Relationships with buyer’s personnel 12

Irregular Business Dealings  Establish reporting mechanism  Specify proper office for reporting  Create safeguards to protect reporting party  Report suspected irregularities as soon as possible 13

Examples of Irregular Dealings  Accepting bribes or kickbacks  Cronyism  Accepting late bids  Owning a stake in supplier’s company  Other behavior not considered part of the “normal” course of doing business 14

Defining Social and Minority Business Objectives  Support minority business suppliers  The best companies for minority supplier contracting (p 97)  Challenges  Lack of access to capital  Inability to attract qualified managerial and technical professionals  Relatively small size 15

Identifying Minority Suppliers  Is supplier fully qualified?  Does supplier satisfy U.S. government criteria by definition?  Does supplier meet our standard performance requirements?  Is supplier price competitive?  How much business can we award supplier given its capacity? 16

Corporate Social Responsibility  Low-cost country sourcing  Environmental issues  Labor and human rights 17

Environmental Policies  Now required by governments, investors, and major customers  Use of recycled materials  Strict compliance with local, state, and federal regulations  Proper disposal of waste materials  Documented disposal of hazardous materials  Implement back through supply chain  IBM Example (p 99) 18

Labor and Human Rights Policies  Also now required by governments, investors, and major customers  Ethical treatment of suppliers’ employees  Living wages  Safety and security  Overtime  Implement back through supply chain 19

Defining Buyer-Supplier Relationships  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 20

Defining Buyer-Supplier Relationships  Developing open communications channels  Informing suppliers as to why they did not receive purchase contract  Establishing fair and transparent process to award purchase contracts 21

Qualification and Selection  Price/cost competitiveness  Product quality  Delivery performance  Financial condition  Engineering and manufacturing technical competence  Management of own suppliers  Management capability  Ability to work with buyer  Potential for innovation 22

Labor or Other Difficulties at Suppliers  Guidelines for strikes or labor problems at supplier facilities  Legal removal of company-owned materials, inventory, and/or tooling  Address emergency disruptions to supply chain 23

Defining Operational Issues  Hazardous materials  Supplier responsibility for defective material  Purchased item comparisons  Other operating policies 24

Hazardous Materials  Controlling and/or minimizing waste generation  Obeying environmental laws  ISO  Environmental management system  Proper handling of toxic and hazardous waste 25

Supplier 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 26

Purchased Item Comparisons  Periodic market comparison and evaluation of supplier’s competitors  Cost  Quality  Delivery  Technology  Requesting new bids for item from qualified suppliers 27

Other Operating Policies  Compliance with laws and regulations  Restrictions on “maverick spending”  Proper disposal of material assets  Legal right to terminate contracts  Supplier responsibility for premium transportation costs  Supplier-requested contractual changes  Supplier use of trademarks or logos 28