Purchasing ProceduresProcurement in Industrial Management (BPT 3133)

CHAPTER OUTLINE

• The Purchasing Process• Purchasing Policy and Procedures• Purchasing and Supplier Integration for Competitive

Advantage• Purchasing and Supply Chain Organization• Purchasing and Supply Chain Analysis : Tools and

Techniques

LEARNING OBJECTIVES

• Understand the key objectives and responsibilities of purchasing function

• Explain the concept of purchasing process, policies and procedures

• Identify the supply chain concept and various forms of purchasing strategy aimed at gaining competitive advantage

PURCHASING

What is Purchasing?A form of buying that consists in getting the goods or services by paying a certain amount of price or money. The amount of money or price paid in the case of purchasing will be in accordance with the quality and quantity of the goods or services.

A process made up of all activities associated with identifying needs, locating and selecting suppliers, negotiating terms and following up to obtain goods and services.

PURCHASING OBJECTIVES

Supply Continuity

Manage the Purchasing Process Efficiently and Effectively

Develop Supply Base Management

Develop Aligned Goals with Internal Functional Stakeholders

Support Organizational Goals and Objectives

Develop Integrated Purchasing Strategies that Support Organizational Strategies

PURCHASING RESPONSIBILITIES

Evaluate and Select Suppliers Review Specifications

Act as the Primary Contact with Suppliers

Determine the Method of Awarding Purchase

Contracts

PURCHASING PROCESS

a) Forecast and Plan Requirement Begin purchasing cycle – need (requirement) identification

Review spending pattern and prepare a forecast of what will be purchased

Purchasing is the primary vehicle for obtaining external inputs (services and product) from suppliers

Purchasing personnel have to work with a large number of internal customers – understand and plan for what they will be buying

Spot buy – situations that arise when an internal customer has a need that comes up suddenly which is not planned for

PURCHASING PROCESS

b) Need Clarification: RequisitioningCommon method: Purchase requisitions / statement of work• Description of required material or service

– By market grade or industry standard– By brand– By specification– By performance characteristics

• Quantity and date required• Estimated unit cost• Operating account to be charged• Date of requisition (this starts the tracking cycle)• Authorized signature

PURCHASING PROCESS

c) Supplier Identification and SelectionOnce the needs are identified, one of these can happen:

• the need fulfilled by a an existing supplier• the need fulfilled by a new supplier

Two common ways:• competitive bidding• negotiation

Send Request for Quotation (RFQ) to supplier Include additional information or attachments to assist if the

requested item is complex or untested or new productionEvaluate suppliers

PURCHASING PROCESS

d) Approval, Contract and Purchase Order Preparation After supplier is selected, approval to purchase the product or

service is grantedSeveral different approaches, depending on the system:

Purchase Order (PO) / Purchase AgreementBlanket Purchase OrderMaterial Purchase ReleaseFixed-Price Contracts• Firm Fixed Price• Cost-Based Contracts

PURCHASING PROCESS

e) Receipt and Inspection Involves physical transmittal of purchase requirements and it

should be a fairly routine Purchasing or materials planning must minimize the time

required to release and receive material and need to closely monitor the status of open purchase orders

Several important documents that involved:Material packing slipBill of ladingReceiving discrepancy report

JIT Purchasing – allows firms to eliminate most receiving forms

PURCHASING PROCESS

f) Invoice Settlement and Payment Once the item or service is delivered, authorization for

payment will be issued Payment is made through company’s account payable

department Integrated systems: Electronic Funds Transfer (EFT) A record of critical events associated with the purchase is

entered into a supplier performance database – identify trends or patterns

Continuously measure and manage supplier performance

PURCHASING PROCESS

PURCHASING POLICY Policy : set of purpose, principles and rules of action that

guide an organization Characteristics apply to effective policies:

Action oriented and relevant (avoiding trivial or unimportant issues) Concise (stating a position with a min. number of words) Unambiguous (well understood) Timely and current Guide problem solving and behavior

- Advantages: define and clarify top management objectives; provide a framework for consistent decision making and action

- Disadvantages: Often difficult to communicate throughout large organizations; employees might view policies as a substitute for effective management; can restrict innovation and flexibility

Categories of Policya. Policy defining the role of purchasing

b. Policies defining the conduct of purchasing personnel

c. Policies defining social and minority business objectives

d. Policies defining buyer-seller relationships

e. Policies defining operational issues

PURCHASING POLICY

PURCHASING PROCEDURES Procedures: operating instruction detailing functional duties

or task (a how-to manual) Purpose of a procedure:

A reference guide for purchasing personnel – explaining about how to accomplish different activities or assignments

Provides consistency and order by documenting the step and activities required to perform a task

Primary emphasis: development of a concise, accurate and complete set of operating instructions

Existing procedures may no longer apply when well-established processes are changed

Most of purchasing procedures correspond to one of the following areas:a. The Purchasing Cycle

proper steps to follow during each stage of the cycle

b. The Proper Use of Purchasing Forms typical purchasing function relies on many form to conduct its business

c. The Development of Legal Contractsspecific procedures for contracting with outside suppliers and individuals

d. Operational Proceduresprovide instruction and detail across a broad range of topicscovers from following a specific set of steps requires consistent action to promote efficiency to carries out directives of functional or executive policies

PURCHASING PROCEDURES

P&S INTEGRATION - The process of incorporating or bringing together different

groups, functions, or organizations- Either formally or informally, physically or by information

technology- To work jointly and often concurrently on a common

business-related assignment or purpose- Can occur in many forms:

- through functions such as in new product development - through cross-location

- Supply management’s linkages divided to:- internal- external

Must maintain a number of

communication flows and linkages

To facilitate integration with other internal

function

Become stronger and more important

as the role of supply

management continues to

develop and evolve

INTERNAL INTEGRATION

Supply management represents the external face of the organization

Serve as the primary vehicle to integrate external suppliers and other entities into the organization

Acts as a liaison with external parties on multiple fronts (materials, new technology, information and services)

Linkages:

EXTERNAL INTEGRATION

Suppliers

Local CommunitiesGovernment

Collaborative Buyer-Seller RelationshipCollaboration - Process by which two or parties adopt a high level of purposeful co-operation to maintain a trading relationship over time•Characteristics defining the relationship:

1. One / limited number of supplier for each purchased item2. A win-win approach to reward sharing3. Joint efforts to improve performance4. Open exchange of information5. A credible commitment to work together during difficult

times6. A commitment to quality

EXTERNAL INTEGRATION

EXTERNAL INTEGRATION

P&SC ORGANIZATION

Purpose of organization structure:• Shows the assignment of work along with the authority that

accompanies those responsibilities• Formal structure – helps in defining how the firm

communicate and integrates decision making throughout the groups

• Physical placement of purchasing – indicate its organizational status and influence

• In some organizations the highest purchasing professional reporting status is on par with other major functions

Factors Affecting Purchasing Position:a. Historyb. Type of industryc. Total value of goods and

servicesd. Type of purchased

materialse. The ability to influence a

company’s performance

P&SC ORGANIZATION

• Various methods of organizing the function:– Organization by end product– Organization by category– Organization by value classification– Organization by profit centre

• Centralization/Decentralization– Complete decentralization: allowing full autonomy in each of the units– Complete centralization: which in practice means that apart from local

purchases of small value, all purchases are made from a central office– A combination of the two

P&SC ORGANIZATION

• Buying• Expediting – contacting suppliers to determine status• Inventory control – manage using sophisticated equations or

algorithms to facilitate balancing of product• Transportation – evaluate, negotiate and select• Managing countertrade arrangement – international or domestic• Insourcing/Outsourcing • Value analysis• Purchasing research/material forecasting• Supply management – progressive approach to manage supply base• Other responsibilities – receiving and warehousing, managing

company travel arrangements, production planning etc

PURCHASING DEPT. ACTIVITIES

P&SC ANALYSIS• Strategic analysis: understanding the relationship between

different factors affecting the organization and its choice of strategies

• The 3 main area for analysis are:

– The environment

– Internal resources, competencies and strategic capabilities

– Stakeholders’ expectations

P&SC ANALYSISAnalysis Methodologies

Environmental analysisPEST (political, economic, social, technological) analysisSWOT (strengths, weaknesses, opportunities, threats)

Porter’s five forces, Competitor analysis

Competitive position Strategic group analysis, Competitor analysis

Resources analysis, competencies and

strategic capabilitiesValue chain analysis, Resource audit, Core business

Comparative analysis Historical and financial analysis, Benchmarking

Organizational analysis SWOT, BCG (Boston Consulting Group) analysis, Critical success factors (CSFs)

Stakeholders’ perceptions Ethical considerations, Stakeholder mapping, Mission statements, Culture, Paradigms

• Purchasing process have:

6 objectives

4 responsibilities

6 steps

• Policy and procedures is essential for understanding how organizations operate and work

• Organization need to develop closer relationship with internal and external groups in order to become competitive

SUMMARY