Sourc. & Sup. M. Ch. 2

The Purchasing Process: 

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

Chapter Overview: 

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

Elements of the Purchasing Process: 

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 Sourcing & Supply Chain Management, 4e 3

Purchasing Process: 

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

Purchase Requisition Flow: 

Purchase Requisition Flow Sourcing & Supply Chain Management, 4e 5

Purchasing Objectives: 

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

Purchasing Objectives: 

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

Supply Continuity: 

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 Sourcing & Supply Chain Management, 4e 8

Manage the Purchasing Process: 

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

Procure to Pay Systems: 

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

Develop Supply Base Management: 

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 Sourcing & Supply Chain Management, 4e 11

Develop Strong Internal Relationships: 

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

Support Goals and Objectives: 

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 Sourcing & Supply Chain Management, 4e 13

Supply Market Intelligence: 

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 Sourcing & Supply Chain Management, 4e 14

Reasons for Not Being Strategic: 

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 Sourcing & Supply Chain Management, 4e 15

Purchasing Responsibilities: 

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

Procure to Pay Process Map: 

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

Benefits of Electronic Documents: 

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 Sourcing & Supply Chain Management, 4e 18

Needs Clarification – Requisitioning: 

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 Sourcing & Supply Chain Management, 4e 19

Elements of a Purchase Requisition: 

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 Sourcing & Supply Chain Management, 4e 20

Traveling Purchase Requisition: 

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 Sourcing & Supply Chain Management, 4e 21

Description: 

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

Supplier Identification and Selection: 

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? Sourcing & Supply Chain Management, 4e 23

Supplier Identification and Selection: 

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

When to Use Competitive Bidding: 

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 Sourcing & Supply Chain Management, 4e 25

When to Use Negotiation: 

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 Sourcing & Supply Chain Management, 4e 26

When to Use Negotiation: 

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 Sourcing & Supply Chain Management, 4e 27

The Purchase Order: 

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

P.O. Form: 

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

P.O. Visibility: 

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

Blanket P.O.: 

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 Sourcing & Supply Chain Management, 4e 31

Blanket P.O. Form: 

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

Types of P.O.s: 

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 Sourcing & Supply Chain Management, 4e 33

Receipt and Inspection: 

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 Sourcing & Supply Chain Management, 4e 34

Receiving Process: 

Receiving Process Sourcing & Supply Chain Management, 4e 35

Invoice Settlement and Payment: 

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 Sourcing & Supply Chain Management, 4e 36

Reengineering Procure to Pay: 

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 Sourcing & Supply Chain Management, 4e 37

Reengineering Procure to Pay: 

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 Sourcing & Supply Chain Management, 4e 38

Types of Purchases: 

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

Types of Purchases: 

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

MRO Purchasing: 

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 Sourcing & Supply Chain Management, 4e 41

Improving the Purchasing Process: 

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

Improving the Purchasing Process: 

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

Advantages of Online Ordering: 

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 Sourcing & Supply Chain Management, 4e 44

The FedEx Sourcing Process: 

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

The FedEx Sourcing Process: 

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 Sourcing & Supply Chain Management, 4e 46

FedEx Strategic Sourcing Process: 

FedEx Strategic Sourcing Process Sourcing & Supply Chain Management, 4e 47 47 Selected Activities Sourcing Process Profile the Sourcing Group Select Sourcing Strategy Generate Supplier Portfolio Select Implementation Path 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

FedEx Strategic Sourcing Process: 

FedEx Strategic Sourcing Process Sourcing & Supply Chain Management, 4e 48 48 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 Sourcing Process Negotiate and Select Suppliers Operationalize Supplier Integration Benchmark the Supply Market