chapter_3 supply chain
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PURCHASING & SUPPLY CHAIN MANAGEMENT, 4e
CENGAGE LEARNINGMonczka – Handfield – Giunipero – Patterson
Purchasing Policyand Procedures
Chapter 3
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, 4e2
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, 4e3
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, 4e4
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, 4e5
Effective Policy Characteristics
Action-oriented Relevant Concise Unambiguous and well-understood Timely and current Guides problem-solving and behavior
Purchasing & Supply Chain Management, 4e6
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, 4e7
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, 4e8
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, 4e9
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, 4e10
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, 4e11
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
activitiesPurchasing & Supply Chain Management, 4e
12
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, 4e13
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, 4e14
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, 4e15
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, 4e16
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
buyersPurchasing & Supply Chain Management, 4e
17
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
18
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, 4e19
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, 4e20
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, 4e21
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, 4e22
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, 4e23
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, 4e24
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, 4e25
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, 4e26
Operational Issues
Hazardous materials Supplier responsibility for defective
materials Purchased item comparisons Other operating policies
Purchasing & Supply Chain Management, 4e27
Hazardous Materials
Controlling and/or minimizing waste Obeying environmental laws ISO 14000
Environmental management system Handling hazardous waste
Purchasing & Supply Chain Management, 4e28
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 activitiesPurchasing & Supply Chain Management, 4e
29
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, 4e30
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, 4e31
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, 4e32
Purchased Item Comparisons
Periodic market evaluation of supplier’s competitors Cost Quality Delivery Technology considerations
Requesting new bids for an item from existing suppliers
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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, 4e34
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, 4e35
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, 4e36
Procedural Areas
The purchasing cycle Proper use of purchasing forms Development of legal contracts Operational procedures
Purchasing & Supply Chain Management, 4e37
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 assessmentPurchasing & Supply Chain Management, 4e
38
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, 4e39
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, 4e40
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
assessmentPurchasing & Supply Chain Management, 4e
41
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, 4e42
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, 4e43
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, 4e44