The Purchasing Process

1. The Purchasing Process Chapter 2 CENGAGE LEARNING Monczka – Handfield – Giunipero – Patterson

2. Chapter Overview • Purchasing objectives • Responsibilities of purchasing • E-procurement and the procure to pay process • Types of purchases • Improving the purchasing process Purchasing & Supply Chain Management, 4e

3. Elements of the Purchasing Process • Identify user requirements • Evaluate need effectively and efficiently • Identify suppliers • Ensure payment occurs promptly • Ascertain that the need was effectively met • Drive continuous improvement Purchasing & Supply Chain Management, 4e

4. Purchasing Process Specification Statement of work New product requirement Customer order / MRP Traveling requisition Purchase requisition 1. User Need YES Approved Supplier? Purchasing card On-line catalog EDI Stock check Automated ROP NO YES NO RFI/RFQ Small $ Amount? Complex Requirement ? YES 2. Evaluate Suppliers NO 4. Purchase approval Purchase order Blanket PO Purchase release 3a. Bid and/or negotiation 3b. Supplier Selection Bill of lading Packing slip Discrepancy report Kanban Acknowledgement 6. Update Supplier Scorecard Supplier invoice 5. Release & Receive Product or Service Input used to award future business Match PO and invoice Payment to supplier E-procurement documents

5. Purchase Requisition Flow Purchasing & Supply Chain Management, 4e

6. Purchasing Objectives • Supply continuity • Manage the purchasing process efficiently and effectively • Develop supply base management • Develop strong relationships with other functional stakeholders Purchasing & Supply Chain Management, 4e

7. Purchasing Objectives • Support organizational goals and objectives • Develop integrated purchasing strategies that support organizational strategies Purchasing & Supply Chain Management, 4e

8. Supply Continuity • Buy products/services at the right price • Buy them from the right source • Buy them at the right specification that meets users’ needs • Buy them in the right quantity • Arrange for delivery at the right time • Require delivery to the right internal customer Purchasing & Supply Chain Management, 4e

9. Manage the Purchasing Process • Determining staff levels • Developing and adhering to budgets • Providing professional training and growth opportunities • Introducing procure to pay systems Purchasing & Supply Chain Management, 4e

10. Procure to Pay Systems • Improved spending visibility • Efficient invoicing and payment • User satisfaction Purchasing & Supply Chain Management, 4e

11. Develop Supply Base Management • Select competitive suppliers • Identify new suppliers with high potential and build closer relationships • Improve existing suppliers • Develop new suppliers who are not currently competitive Purchasing & Supply Chain Management, 4e

12. Develop Strong Internal Relationships • Internal customers as stakeholders • Strong two-way communication • Cross-functional coordination and collaboration • Positive, problem-solving relationships Purchasing & Supply Chain Management, 4e

13. Support Goals and Objectives • Congruency of functional goals with organizational goals • Mutually-supportive, not counter-productive • Purchasing’s substantial impact on the organization’s bottom line • Purchasing as a strategic core competency Purchasing & Supply Chain Management, 4e

14. Supply Market Intelligence • Monitoring supply markets and trends • Identifying critical materials and services • Supporting new product development • Developing supply options and contingency plans • Supporting a diverse and globally competitive supply base Purchasing & Supply Chain Management, 4e

15. Reasons for Not Being Strategic • Purchasing personnel have not historically participated in senior-level corporate planning • Executive management has not always recognized the benefits of world-class purchasing Purchasing & Supply Chain Management, 4e

16. Purchasing Responsibilities • Evaluate and select suppliers • Review specifications • Act as primary contact with suppliers • Forecast and plan requirements • Clarify requisitioner’s needs Purchasing & Supply Chain Management, 4e

17. Procure to Pay Process Map Projects Internal Customers Operations Start End Supplier Need Fulfillment Enablers: Finance, Legal, Human Resources, Information Technology

18. Benefits of Electronic Documents • Virtual elimination of paperwork • Reduced time between need recognition and order release and receipt • Improved communication • Reduced errors • Reduced overhead costs • Reduced order and invoice processing Purchasing & Supply Chain Management, 4e

19. Needs Clarification – Requisitioning • Purchase requisition and/or statement of work • Forecasts and actual customer orders • Reorder point system • Stock checks (cycle counts) • New product development teams Purchasing & Supply Chain Management, 4e

20. Elements of a Purchase Requisition • Description of required material or service • Quantity required • Estimated unit cost • Operating account to be charged • Date of requisition • Date required • Authorized signature Purchasing & Supply Chain Management, 4e

21. Traveling Purchase Requisition • Printed card or barcode • Description of item • List of approved suppliers • Prices paid to suppliers • Reorder point • Record of usage • Conserves time for handling routine materials and supplies Purchasing & Supply Chain Management, 4e

22. Description • Market grade or industry standard • Brand • Specification • Performance characteristics Purchasing & Supply Chain Management, 4e

23. Supplier Identification and Selection • Existing supplier • Familiarity and track record • List of preferred suppliers • New supplier • Problem of maverick spending • Need to identify potential suppliers • Need to evaluate and qualify • Negotiate or competitive bidding? Purchasing & Supply Chain Management, 4e

24. Supplier Identification and Selection • Bidding vs. negotiating • Request for quotation • Specifications or blueprints • Supplier evaluation Purchasing & Supply Chain Management, 4e

25. When to Use Competitive Bidding • Volume is sufficiently high • Specifications or requirements are clear to the supplier • Marketplace is competitive • Buyers receive bids only from technically qualified suppliers • Adequate time is available • Buyer does not have preferred supplier Purchasing & Supply Chain Management, 4e

26. When to Use Negotiation • Any criteria for competitive bidding are missing • The purchase requires agreement on wide range of performance factors other than price alone • The buyer requires early supplier involvement Purchasing & Supply Chain Management, 4e

27. When to Use Negotiation • The supplier cannot determine risks and costs before contract is awarded • The supplier requires substantial lead time to develop and product the requested items Purchasing & Supply Chain Management, 4e

28. The Purchase Order • Quantity • Material specification • Quality requirements • Price • Delivery date • Method of delivery • Ship-to address • P.O. number • Order due date Purchasing & Supply Chain Management, 4e

29. P.O. Form Purchasing & Supply Chain Management, 4e

30. P.O. Visibility • Accounts payable • Requisitioner • Receiving • Traffic management • Purchasing • Quality control Purchasing & Supply Chain Management, 4e

31. Blanket P.O. • Used for ongoing purchases of an item • Release materials as needed vs. issuing a new P.O. each time • P.O. remains open during the time specified Purchasing & Supply Chain Management, 4e

32. Blanket P.O. Form Purchasing & Supply Chain Management, 4e

33. Types of P.O.s • Fixed-price contracts • Financial risk – market fluctuations • Competition • Technology risk • Cost-based contracts • Risk of large contingency fee • Need to identify and monitor relevant supplier costs Purchasing & Supply Chain Management, 4e

34. Receipt and Inspection • Electronic vs. paper documents • Material packing slip • Bill of lading • Receiving discrepancy report • Issues with just-in-time purchasing • Backflush accounting • Impact of change notices Purchasing & Supply Chain Management, 4e

35. Receiving Process Purchasing & Supply Chain Management, 4e

36. Invoice Settlement and Payment • Three-way match required • P.O. • Invoice • Receiving report • Electronic funds transfer (EFT) • Summarized monthly payments vs. paying for each P.O. individually • Mostly done electronically now Purchasing & Supply Chain Management, 4e

37. Reengineering Procure to Pay • Secure top management support • Map existing processes, highlighting difficulties and challenges • Understand the needs and requirements of user groups • Utilize a cross-functional team, including users Purchasing & Supply Chain Management, 4e

38. Reengineering Procure to Pay • Explore technology solutions • Define new process and conduct pilot test • Train and deploy other users (rollout) • Monitor, update, and improve the system Purchasing & Supply Chain Management, 4e

39. Types of Purchases • Raw materials • Semifinished products and components • Finished products • Maintenance, repair, and operating supplies (MRO) Purchasing & Supply Chain Management, 4e

40. Types of Purchases • Production support items • Services • Capital equipment • Transportation and third-party logistics providers Purchasing & Supply Chain Management, 4e

41. MRO Purchasing • Most organizations do not track MRO items like they do production items • There are typically too many MRO suppliers • There are too many small orders which take up too much time Purchasing & Supply Chain Management, 4e

42. Improving the Purchasing Process • Online requisitioning systems • Procurement cards issued to users • E-commerce using the Internet • Longer-term purchase agreements • Online ordering systems Purchasing & Supply Chain Management, 4e

43. Improving the Purchasing Process • Purchasing process redesign • Electronic data interchange (EDI) • Online ordering using electronic catalogs • Direct user-supplier contact Purchasing & Supply Chain Management, 4e

44. Advantages of Online Ordering • Immediate visibility to backorders • Faster order input time • Reduced ordering errors • Order tracking capability • Order acknowledgement from supplier • Ability to batch multiple items into a single order • Faster order cycle time Purchasing & Supply Chain Management, 4e

45. The FedEx Sourcing Process • Requisition item • Select sourcing strategy • Conduct in-depth research on potential suppliers • Confirm and reevaluate strategy and need Purchasing & Supply Chain Management, 4e

46. The FedEx Sourcing Process • Conduct supplier selection and negotiation process • Integrate supplier with e-procurement tools and other FedEx systems • Benchmark the supply market using FedEx Supplier Scorecard system Purchasing & Supply Chain Management, 4e

47. FedEx Strategic Sourcing Process Sourcing Process Selected Activities • Confirm user requirements • Develop category definition • Define basic characteristics • Understand industry/supply markets • Assess bargaining position • Evaluation alternative strategies • Select appropriate approaches and techniques • Identify qualified suppliers • Determine supplier value-added capabilities • Develop supplier “short list” • Verify and adjust sourcing strategy • Develop implementation plan Profile the Sourcing Group Select Sourcing Strategy Generate Supplier Portfolio Select Implementation Path Purchasing & Supply Chain Management, 4e 47

48. FedEx Strategic Sourcing Process Sourcing Process Selected Activities • Plan negotiation strategy • Evaluate supplier proposals • Conduct negotiations with suppliers • Recommend sourcing decision • Plan and implement transition to new suppliers relationships • Link key processes • Conduct joint process improvement activities • Monitor market conditions • Assess new technology and best practices impact • Conduct benchmarking activities • Determine appropriateness for reexamining category Negotiate and Select Suppliers Operationalize Supplier Integration Benchmark the Supply Market Purchasing & Supply Chain Management, 4e 48