Chapter 4 1 Chapter 2 The Purchasing Process
Dec 20, 2015
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