PURCHASING & SUPPLY CHAIN MANAGEMENT, 4e

Purchasing Policy
and Procedures
Chapter 3

CENGAGE LEARNING
Monczka – Handfield – Giunipero – Patterson
 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
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 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

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 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
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 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

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 Effective Policy Characteristics

 Action-oriented
 Relevant
 Concise
 Unambiguous and well-understood
 Timely and current
 Guides problem-solving and behavior

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 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

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 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

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 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

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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

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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
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 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
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Conduct of Purchasing Personnel

 Ethics policy
 Reciprocity policy
 Contacts and visits to suppliers
 Former employees representing
suppliers
 Reporting of irregular business dealings
with suppliers

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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

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 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

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 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
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 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
buyers
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 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?
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 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

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 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
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 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

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 Qualification and Selection

 Price/cost  Management of its

competitiveness own supply base
 Product quality  Management
 Delivery capability
 Financial condition  Ability to work with
 Engineering and buying organization
manufacturing  Potential for
technical innovation
competence
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 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

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 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
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 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

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 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

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 Operational Issues

 Hazardous materials
 Supplier responsibility for defective
materials
 Purchased item comparisons
 Other operating policies

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 Hazardous Materials

 Controlling and/or minimizing waste

 Obeying environmental laws
 ISO 14000
 Environmental management system
 Handling hazardous waste

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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 activities
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 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

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 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
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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
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 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
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 Purchasing Procedures

 Operating instructions detailing

functional duties or tasks
 “How-to” manual
 No uniform set of procedures that
apply to every situation

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 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

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 Procedural Areas

 The purchasing cycle

 Proper use of purchasing forms
 Development of legal contracts
 Operational procedures

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 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 assessment
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 Legal Contract Procedures

 Formal competitive contracting

procedures
 Contract development process
 Examples of sample agreements
 Legal definitions
 Use of formal contract clauses

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 Purchasing Forms

 Description of proper use

 Detailed meaning of each information
field
 Description of proper handling and
storage
 Where?
 How long?
 Approval process
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 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
assessment
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 Development of Legal Contracts

 Formal competitive contracting

procedures
 Contract development process
 Examples of sample agreements
 Legal definitions
 Use of formal contract clauses

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 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
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 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
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