Chapter 4 1

Chapter 2

The Purchasing Process

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Purchasing Objectives

1. Uninterrupted flow of materials and services to support operations

2. Keep inventories at a minimum3. Standardize materials wherever possible4. Manage the supply base 5. Ensure Purchasing is a value-added activity6. Develop strong relationships within the firm7. Effective and efficient management of the

purchasing process

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1. Uninterrupted flow of materials and services to support operations

• On Spec

• On Time

• On Quantity

• Right Price

• Right Source

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2. Keep inventories at a minimum

Emphasis in logistics today is on flows and not stocks

The “total logistics cost” concept and forward buying

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3. Standardize materials wherever possible

“Specials” as compared to “standards”

Advantages to standards

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4. Manage the supply base for reliable, high quality, innovative sources of supply, and for good supplier relations

• Current suppliers are responsive and competitive

• Identify new suppliers with potential for excellent performance

• Supplier development as necessary

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5. Ensure purchasing is a value-adding activity

Cost Quality Innovation Cycle time

Be sure senior management recognizes the benefits that a world-class supply management function can provide

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6. Develop strong relationships with other functional groups

Regular interaction and communication, particularly with engineering and operations

General Electric’s Jack Berry

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7. Effective and efficient management of the purchasing process

Well trained people Measurement Productivity enhancements

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The Purchasing Process

1. Recognize the need2. Evaluate potential suppliers3. Supplier selection (direct

placement, bidding, or negotiation)4. Order placement with the supplier5. Follow-up6. Measure supplier performance

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1. Recognizing the need

Purchase Requisition (PR) Traveling Requisition (TR) Automated systems (MRP, for

example) Statement of Work (SOW) for

service contracting

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The Purchase Request (PR)

1. Description of the required material

2. Quantity and date required3. Estimate cost (and sometimes a

recommended source)4. Budget account to be charged5. Authorized signature

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1. Recognizing the need

Purchase Requisition (PR)

Traveling Requisition (TR) Automated systems (MRP, for

example) Statement of Work (SOW) for

service contracting

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2. Evaluate Potential Suppliers

Direct Placement Competitive Bidding (RFQ) Negotiation (RFP)

The buyer will send out RFQs or RFPs only to responsible and capable suppliers with whom she is willing to to business.

• Technical Ability

• Management Capability

• Production Capacity

• Financial Stability

• Past Performance and reputation

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3. Bid, Negotiation, and Supplier Selection

When to use competitive bidding1. Volume is high enough to justify this

method2. You have a firm description of the

requirement3. At least three qualified suppliers who want

the business are willing to bid4. Adequate time is available for the process5. Price is the major factor in the purchase6. No preferred supplier exists

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3. Bid, Negotiation, and Supplier Selection

When to use negotiation1. All of the requirements for competitive

bidding are not present2. The purchase requires high start-up costs or

substantial investment by the supplier3. Factors other than price are significantly

important4. ESI is desired5. Circumstances or conditions for the supplier

to make good cost estimates are absent

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CASE:

A Problem of Price

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4. Order Placement

Purchase Order (P.O.) P.O. Number Description of the order with necessary

attachments Quantity Price Delivery date Shipping instructions Terms of Payment

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4. Order Placement, cont.

Blanket Purchase Order (BPO) Systems contracting (VMI)

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5. Follow-up

Routine tracking to ensure the supplier will be able to meet the requirements of the order or contract

The motto of follow-up:Get the facts before the facts get you!

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6. Closing actions including Measuring supplier performance

Receive the goods Update records Maintain supplier history file

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Improving the Purchasing Process

The Issue of “Rush” orders Legitimate versus illegitimate Problems with rush orders Solutions to the problem

“Maverick” buying Warrants, ratifications, and the PPM

The “small order” problem

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Dichotomizing Purchasing

Strategic “Big Picture” Issues

Strategic “Big Picture” Issues

Day-to-day purchasing activities

Can focus on this if . . .this is pretty much on autopilot

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Solutions to the small order problem

• Procurement cards

• BPOs and Long-term Purchase Agreements with order release responsibility shifted to the internal customer

• Online ordering systems

•Integrated suppliers

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Procurement software systems

Ariba i2 Free Markets SciQuest et. al.

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A summary of terms

• PR

• PO

• RFQ

• RFP

• BPO

• Depth of Competition

• Breadth of Competition

• Maverick buying

• Warrant

•Ratification

• VMI

• PPM

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Let’s move on