PURCHASING & SUPPLY CHAIN MANAGEMENT, 6e

The Purchasing Process

Chapter 2

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 Chapter Overview

§ Purchasing objectives
§ Strategic supply management roles and
responsibilities
§ Improving the procure-to-pay process
§ Approval, contract, and purchase order
preparation
§ Types of purchases
§ Improving the purchasing process
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 Roles and Responsibilities
Overall
Goals

Strategic Tactical
Roles Responsibilities

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Elements of the Purchasing Process

[Link]
xv840l0

§ Identify user requirements

§ Evaluate user needs effectively and
efficiently
§ Identify suppliers to meet that need
§ Develop agreements with suppliers
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Elements of the Purchasing Process

§ Develop ordering mechanism

§ Ensure payment occurs promptly
§ Ascertain that need was effectively met
§ Drive continuous improvement

"Kaizen is a Japanese term meaning

"change for the better" or "continuous
improvement.” (Investopedia)
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 Business Buyer Behavior
The Buying Process

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 Business Buyer Behavior
Participants in the Business Buying Process
Buying center is all of the individuals
and units that participate in the
business decision-making process
§ Users
§ Influencers
§ Buyers
§ Deciders
§ Gatekeepers
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 Business Buyer Behavior
Participants in the Business Buying
Process
§ Buying center provides
a major challenge
§ Who participates in the
process
§ Their relative authority
§ What evaluation criteria
each participant uses
§ Informal participants
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 Business Buyer Behavior
Participants in the Business Buying
Process
• Users are those that will use the product or service
• Influencers help define specifications and provide
information for evaluating alternatives
• Buyers have formal authority to select the supplier and
arrange terms of purchase
• Deciders have formal or informal power to select and
approve final suppliers
• Gatekeepers control the flow of information

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 Purchasing Objectives
§ (1) Supply assurance
§ (2) Manage sourcing process efficiently
and effectively
§ (3) Supplier performance management
§ (4) Develop aligned goals with internal
stakeholders
§ (5) Develop integrated supply
strategies that support business goals
and objectives
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 (1) Supply Continuity

§ Source products/services at right price

§ Source them from right source
§ Source them at right specification that
meets users’ needs
§ Source them in right quantity
§ Arrange for delivery/service
performance at right time to right
internal customer
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 (2) Manage Sourcing Process

§ Determine staffing levels

§ Develop and adhere to administrative
budgets
§ Provide professional training and
growth opportunities for employees
§ Introduce improved buying channels
within procure-to-pay systems

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 (3) Supplier Performance Management

§ Select competitive suppliers

§ Identify new suppliers with high
potential and develop closer
relationships
§ Improve existing suppliers
§ Develop new suppliers that are not
competitive with current suppliers

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 (4) Develop Aligned Goals with
Internal Stakeholders
§ Consider internal customers as
stakeholders
§ Establish strong cross-boundary
communication
§ Develop cross-functional coordination
and collaboration
§ Develop positive, problem-solving
relationships
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 (5) Develop Integrated Strategies that
Support Goals and Objectives
§ Match functional supply goals with
organizational goals
§ Become mutually-supportive, not
counter-productive
§ Leverage supply management’s
substantial impact on firm’s bottom line
§ Utilize supply management as strategic
core competency
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 (6) Reasons for Not Being Strategic

§ Supply management personnel have

not historically participated in senior-
level corporate planning
§ Executive management has not always
recognized benefits of world-class
supply management

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 Supply Market Intelligence

§ Updates on supply market conditions

and trends
§ Identify emerging materials and service
technologies
§ Develop supply options and
contingency plans to reduce risk
§ Support requirements for diverse and
globally competitive supply base
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Strategic Supply Management Roles
and Responsibilities
§ Spend analysis
§ Demand management and
specifications/statements of work
§ Category management and supplier
evaluation/selection
§ Contract management

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Strategic Supply Management Roles
and Responsibilities
§ Cost management
§ Managing procure-to-pay process
§ Supplier relationship management
§ Establish a supply management
strategy

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 Spend Analysis

§ Process of collecting historical data by

commodity
§ Drive all spend to a unit or rate of
consumption
§ Used to drive strategies in …
§ Demand management
§ Commodity management
§ Risk management
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 Demand Management and
Specifications/SOWs
§ Process of using consumption data to
forecast and estimate future
consumption
§ Optimize sourcing strategies
§ Proactively set policies, procedures, and
measurement systems
§ Ensure appropriate levels of capacity in
supply base to minimize risk
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 Demand Management and
Specifications/SOWs
§ Establish fixed set of standards to limit
options
§ Restrict supply base to include only
preferred suppliers that meet risk and
compliance requirements
§ Challenge product and service
specifications to drive out costs
§ Review and develop statements of work
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Category Management and Supplier
Evaluation/Selection
§ Process of developing insights into…
§ Stakeholder requirements
§ External industry intelligence
§ Supply base capabilities
§ Operational risks
§ Strategy development
§ Identify competitive value

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Category Management and Supplier
Evaluation/Selection
§ Category strategy elements
§ Business case to identify rationale for plan
§ Risk mitigation plan
§ Business value derived from
implementation
§ Negotiation plan
§ Supplier scorecard
§ Sourcing work plan

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 Contract Management

§ How to award contracts

§ Competitive bidding
§ How many suppliers to bid?
§ Negotiation
§ Use of cross-functional team?
§ Some combination of both
§ Supply management has ultimate
responsibility for the contract

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 Contract Management

§ Definition
§ “A process associated with defining the
contract, defining roles and responsibilities
of both parties, and advising when to
modify and ensure appropriate escalation.”
§ Need for …
§ Accuracy in terms and conditions
§ Alignment with category strategy, required
service levels, and periodic audits
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 Contract Management

§ Need to trigger proactive sourcing prior

to contract expiration
§ Maintenance of contract database
§ Initiation of compliance and/or
improvement actions when less-than-
desirable supplier performance occurs

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 Cost Management

§ Understand true cost of purchased

goods and services
§ Unbundling price paid and various
components over product lifecycle
§ Deliver a target cost and a unit rate
§ Use of decision-support tools and
techniques

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 Cost Management

§ Develop insights to …
§ Cost of supporting a process or
commodity
§ The gap between cost drivers and
assumed business case
§ Identify the business case
§ Total cost of offering a service
§ Development of cost models

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Managing the Procure-to-Pay Process
§ Automation of all transactional activities
including …
§ Requisitioning
§ RFX (i.e., RFI, RFP, RFQ)
§ Contract award
§ Orders
§ Approval
§ Receipt
§ Payment
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 Supplier Relationship Management

§ Day-to-day transactions
§ Identification and mitigation of
operational risk and deliverables
§ Business continuity planning
§ Understanding suppliers’ business
challenges
§ Identification of opportunities to
improve value and reduce cost
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 Supplier Relationship Management

§ Establishing supplier scorecard metrics

and reviewing progress
§ Contract terms and conditions (i.e., the
T’s and C’s)
§ Leveraging flow of information between
key internal process owners and
suppliers

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 Establish a Supply
Management Strategy
§ Repeatable and well-defined process for
building strategy and governance
§ Clear alignment with executive vision
and internal user-specific business
goals
§ Process based on well-developed
supplier market intelligence and internal
stakeholder inputs
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 Establish a Supply
Management Strategy
§ Established goals and metrics for short-
term project plans and longer-term
plans
§ Established procurement transformation
initiatives
§ Established communication plan to
inform senior management
§ Update and review against defined goals
and objectives
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Improving the Procure-to-Pay Process

§ How much relative effort a company

spends on P2P differs greatly between
sourcing situations
§ Companies can use a superior P2P
process to create competitive advantage

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Stages of the Procure to Pay Process

1. Forecast and plan requirement

2. Need clarification (requisition)
3. Supplier identification/selection
4. Contract/purchase order generation
5. Receipt of material or service and
documents
6. Settlement, payment, and measurement
of performance
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 Procure to Pay Process Map
Internal
Projects Operations
Customers

Start End

Need Approval &

Supplier Receive Settle, Pay, &
Forecast & Plan Clarification/ Contract/
Identification Material & Measure
Requirement P.O.
Requisition & Selection Documents Performance
Generation

Supplier Need
Fulfillment

Enablers: Finance, Legal, Human Resources, Information Technology

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 Benefits of E-Procurement

§ Virtual elimination of paperwork

§ Reduced time between need recognition and order
release and receipt
§ Improved communication
§ Reduction in errors
§ Reduction in overhead costs
§ Reduction in P.O. and invoice processing time

[Link]
(Procure to Pay process at Unilever)
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 Forecast and Plan Requirement

§ Need is beginning of purchasing cycle

§ Sources of need
§ Annual or biannual planning process
§ New product development process
§ Operational needs
§ Extensive information flows
§ Sometimes, actual needs are difficult to
define clearly
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 Forecast and Plan Requirement

§ Types of needs
§ Components
§ Raw materials
§ Subassemblies
§ Finished goods
§ Services
§ Unplanned needs
§ Ongoing need vs. spot buy
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 Needs Clarification: Requisitioning

§ Purchase requisitions and/or statements

of work
§ Traveling purchase requisitions and/or
bar codes
§ Forecasts and customer orders
§ Reorder point system
§ Stock checks
§ Cross-functional sourcing teams
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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
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 Statement of Work

§ Used for procuring services

§ Specifies …
§ Work to be completed
§ When it is needed
§ What type of service provider required

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 Statement of Work

§ Other details
§ Required training
§ Site safety
§ Liability and insurance
§ Uniforms
§ Background checks

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 Traveling Purchase Requisition/
Bar Codes
§ Printed card, label, or bar code
§ Description of item
§ List of approved suppliers
§ Prices paid to suppliers
§ Reorder point
§ Record of usage
§ Conserves time for ordering routine
materials and supplies
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 Forecasts and Customer Orders

§ Anticipated customer orders

§ Actual customer orders
§ Customized product orders for specific
customers
§ New product development
§ MRP (Materials Required Planning)
systems

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 Reorder Point System

§ Computerized system to track on-hand

inventories, order quantities, and
demand forecasts
§ Predetermined order point and order
quantity
§ When on-hand inventory level hits order
point, standard order quantity is generated

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 Stock Checks

§ Sometimes called cycle counts

§ Physical checking of inventory
§ Verify actual on-hand inventory (POH)
§ Make necessary adjustments to item
inventory record
§ Inventory may be misplaced, lost,
damaged, short-shipped, or stolen
§ Results in inaccurate inventory records
(ROH)
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 Cross-Functional Sourcing Teams

§ Used to proactively determine sourcing

needs
§ Identify potential suppliers before need
occurs
§ Faster order cycle times
§ Better supplier evaluation and selection

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 Description

§ By market grade or industry standard

§ Well-understood specifications for
standard items
§ Common agreement on what terms mean
§ By brand
§ Proprietary or unique products
§ Brand provides perceived advantage to
user

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 Description

§ By specification
§ Materials used
§ Manufacturing or service steps required
§ Physical dimensions
§ By performance characteristics
§ Focus on customer’s desired outcomes
§ Prototypes or samples

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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?
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 Maverick Spending

§ User selects different supplier than

supply management has approved
§ May be acceptable when there is small
chance of risk
§ Loss of opportunity to control cost
and/or leverage purchase volume
§ Exposes firm to greater risk

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Supplier Identification and Selection

§ Bidding vs. negotiating

§ Request for quotation
§ Specifications or blueprints
§ Supplier evaluation

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 When to Use Competitive Bidding

§ Volume is sufficiently high

§ Specifications or requirements are
clear to supplier
§ Marketplace is competitive (i.e.,
adequate # of suppliers)
§ Buyers solicit bids only from
technically qualified suppliers who
want contract
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 When to Use Competitive Bidding

§ Adequate time is available for suppliers

to evaluate RFQ
§ Buyer does not have preferred supplier
for particular item

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 When to Use Negotiation

§ Any criteria for competitive bidding are

missing
§ Purchase requires agreement on wide
range of performance factors other
than price
§ Buyer requires early supplier
involvement

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 When to Use Negotiation

§ Supplier cannot determine risks and

costs before contract is awarded
§ Supplier requires substantial lead time
to develop and produce requested
item(s)

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 Request for Quotation

§ Supply management invites quotes or

bids from pool of potential suppliers
§ Consists of necessary information to
allow supplier to accurately respond
§ Includes due date of bid
§ Defines whether substitute offers are
acceptable
§ Normal practice is minimum of 3 bids
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 Specifications or Blueprints
§ Used for …
§ Complex products or services
§ Untested or new production processes
§ Consists of …
§ Detailed blueprints
§ Samples
§ Technical drawings
§ May include use of RFP (Request for
Proposals)
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 Evaluate Suppliers

§ Evaluation of potential supplier pool

§ Pre-qualification of capable suppliers
§ Development of selection criteria
§ Design supplier evaluation process
§ Reverse auctions (or e-auctions)
§ Low bids garnered electronically in real-
time

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 An illustration for Reverse auction

• Reverse auctions gained popularity

with the emergence of internet-based
online auction tools that enabled
multiple sellers to connect with a buyer
on a real-time basis.

• In other words, a reverse auction

works only when there are many
sellers who offer similar goods and
services to ensure the integrity of a
competitive process.

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 Purchase Order

§ Drafted after supplier evaluation and

selection is completed
§ Legally-binding document (i.e.,
contract)
§ Carefully define terms and conditions
§ Standard legal language (i.e., “boilerplate”)
§ Offer and acceptance
§ Visibility throughout company
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 Purchase Order

§ Quantity § Method of
§ Material delivery
specification § Ship-to address
§ Quality § P.O. number
requirements § Order due date
§ Price § Name and
§ Delivery date address of buyer

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 Typical
Purchase Order
Form

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 P.O. Visibility

§ Accounting (accounts payable)

§ Requisitioner or requesting department
§ Receiving
§ Traffic management
§ Supply management
§ Quality control

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 Blanket Purchase Order

§ Usually open for 1 year

§ Used for repeated purchases of item or
family of items
§ Release materials as needed vs.
issuing new P.O. each time
§ P.O. remains open during specified
term
§ Importance of escape clause
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 Blanket
Purchase Order
Form

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 Material Purchase Release

§ Used to release shipments under

blanket P.O.
§ Provides notification to supplier about
forecasted and actual needs
§ User oftentimes makes actual order
release
§ Increasingly electronic

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 Types of P.O.s

§ Fixed-price contracts
§ Financial risk – market fluctuations
§ Industry competition
§ Levels of supply
§ Market prices
§ Technology risk

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 Types of P.O.s

§ Cost-based contracts
§ Expensive, complex, and critical
purchases
§ Risk of large contingency fee
§ Need to identify and monitor relevant
supplier costs

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 Receiving Process

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 Receipt and Inspection

§ Electronic vs. paper documents

§ Acknowledgement and receipt
§ Material packing slip
§ Details contents of shipment
§ Bill of lading
§ Transfers ownership and possession
§ Receiving discrepancy report
§ Shortages and overages
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 Receipt and Inspection

§ Invoice settlement and payment

§ Records maintenance
§ Supplier performance database
§ Continuously measure and manage
supplier performance
§ Purchasing cycle does not end with
receipt of goods or services
§ Frequency of evaluation and feedback
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 Invoice Settlement and Payment

§ 3-way match required to pay invoice

§ P.O.
§ Invoice
§ Receiving report
§ Electronic funds transfer (EFT)
§ Summarized monthly payments vs.
paying for each P.O. individually
§ Mostly done electronically
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 Reengineering Procure to Pay

§ Secure top management support for

initiative and project budget
§ Map existing P2P process, highlighting
problems
§ Understand needs and requirements of
user groups
§ Utilize cross-functional review team,
including users and suppliers as
appropriate
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 Reengineering Procure to Pay

§ Explore technology solutions with ERP

systems
§ Define new process and conduct pilot
test
§ Train and deploy other users (rollout)
§ Monitor, update, and improve system

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 Types of Purchases

Direct Purchase

§ Raw materials
§ Semifinished products and
components
§ Finished products
§ Maintenance, repair, and operating
(MRO) items
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 Types of Purchases

Indirect Purchase

§ Production support items

§ Services
§ Capital equipment
§ Transportation and third-party logistics
providers

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 MRO Purchasing

§ Most organizations do not track MRO

items with same intensity as with
production items
§ There are typically too many MRO
suppliers
§ There are too many small orders which
take up too much time

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 Procuring Capital Equipment

§ Assets to be used > 1 year

§ Standard general equipment vs.
customized equipment
§ Features of CE procurement
§ Irregular frequency
§ Requires large sums of money
§ Highly sensitive to general economic
conditions
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 Transportation and 3PLs

§ Specialized type of services

procurement
§ Need to evaluate and select
transportation service providers just
like production item suppliers
§ Evaluate capability of service providers
to coordinate wide range of logistics
services
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 Improving the Purchasing Process

§ Online requisitioning systems from

users to purchasing
§ Procurement cards issued to users
§ E-commerce using the Internet
§ Longer-term purchase agreements
§ Cloud-based ordering systems

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Advantages of Cloud-Based Ordering

§ Immediate visibility to backorders

§ Faster order input time
§ Reduced ordering errors
§ Order tracking capability
§ Order acknowledgement from supplier
§ Ability to batch multiple items from
multiple users into single order
§ Faster order cycle time
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 Improving the Purchasing Process

§ Purchasing process redesign

§ Coordination of subprocesses
§ Electronic data interchange (EDI)
§ Online ordering through e-catalogs
§ Allowing users to contact suppliers
directly
§ Convenience ordering system
§ Reduced administrative burden
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© 2016 Cengage Learning. All rights reserved. May
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a publically accessible website, in whole or in part. Purchasing & Supply Chain Management, 6e