PURCHASING & SUPPLY CHAIN MANAGEMENT, 4e

The Purchasing Process

Chapter 2
 Chapter Overview

 Purchasing objectives
 Responsibilities of purchasing
 E-procurement and the procure to pay
process
 Types of purchases
 Improving the purchasing process

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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

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Purchasing Process 1. User Need

Specification
Statement of work
YES Approved New product requirement
Supplier? Customer order / MRP
Traveling requisition
Purchase requisition
Purchasing card NO
On-line catalog
EDI YES Small $ NO Complex YES RFI/RFQ
Stock check Amount? Requirement
Automated ROP ?

2. Evaluate
NO Suppliers
Purchase order 4. Purchase
approval 3a. Bid and/or
Blanket PO
negotiation
Purchase release
3b. Supplier
Bill of lading Selection
6. Update
5. Release & Packing slip Supplier
Supplier
Receive Discrepancy report invoice
Scorecard Input used
Product or Kanban to award
Service Acknowledgement future
Match PO and Payment to business
E-procurement invoice supplier
documents 4
Purchase Requisition Flow

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 Purchasing Objectives

 Supply continuity
 Manage the purchasing process
efficiently and effectively
 Develop supply base management
 Develop strong relationships with other
functional stakeholders

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 Purchasing Objectives

 Support organizational goals and

objectives
 Develop integrated purchasing
strategies that support organizational
strategies

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 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
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 Manage the Purchasing Process

 Determining staff levels

 Developing and adhering to budgets
 Providing professional training and
growth opportunities
 Introducing procure to pay systems

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 Procure to Pay Systems

 Improved spending visibility

 Efficient invoicing and payment
 User satisfaction

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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

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Develop Strong Internal Relationships

 Internal customers as stakeholders

 Strong two-way communication
 Cross-functional coordination and
collaboration
 Positive, problem-solving relationships

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 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
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 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
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 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

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 Purchasing Responsibilities

 Evaluate and select suppliers

 Review specifications
 Act as primary contact with suppliers
 Forecast and plan requirements
 Clarify requisitioner’s needs

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 Procure to Pay Process Map
Internal
Projects Operations
Customers

Start End

Need Supplier Approval/ Receive Settle, Pay,

Forecast and Plan
Clarification/ Identification Contract/ PO Material & and Measure
Requirement
Requisition / Selection Generation Documents Performance

Supplier Need
Fulfillment

Enablers: Finance, Legal, Human Resources, Information Technology

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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

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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

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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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 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
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 Description

 Market grade or industry standard

 Brand
 Specification
 Performance characteristics

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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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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 the supplier
 Marketplace is competitive
 Buyers receive bids only from
technically qualified suppliers
 Adequate time is available
 Buyer does not have preferred supplier
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 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

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 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

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 The Purchase Order

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

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P.O. Form

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 P.O. Visibility

 Accounts payable
 Requisitioner
 Receiving
 Traffic management
 Purchasing
 Quality control

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 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

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Blanket P.O.
Form

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 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

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 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

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Receiving Process

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 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
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 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

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 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

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 Types of Purchases

 Raw materials
 Semifinished products and
components
 Finished products
 Maintenance, repair, and operating
supplies (MRO)

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 Types of Purchases

 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 like they do 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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Improving the Purchasing Process

 Online requisitioning systems

 Procurement cards issued to users
 E-commerce using the Internet
 Longer-term purchase agreements
 Online ordering systems

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Improving the Purchasing Process

 Purchasing process redesign

 Electronic data interchange (EDI)
 Online ordering using electronic
catalogs
 Direct user-supplier contact

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 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
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 The FedEx Sourcing Process

 Requisition item
 Select sourcing strategy
 Conduct in-depth research on potential
suppliers
 Confirm and reevaluate strategy and
need

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 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

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FedEx Strategic Sourcing Process
Sourcing Process Selected Activities
• Confirm user requirements
• Develop category definition
Profile the Sourcing • Define basic characteristics
Group • Understand industry/supply markets

• Assess bargaining position

• Evaluation alternative strategies
Select Sourcing • Select appropriate approaches and
Strategy techniques

• Identify qualified suppliers

Generate • Determine supplier value-added
Supplier capabilities
• Develop supplier “short list”
Portfolio
• Verify and adjust sourcing strategy
Select • Develop implementation plan
Implementation
Path
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FedEx Strategic Sourcing Process
Sourcing Process Selected Activities
• Plan negotiation strategy
• Evaluate supplier proposals
Negotiate and Select • Conduct negotiations with suppliers
Suppliers • Recommend sourcing decision

• Plan and implement transition to new

suppliers relationships
• Link key processes
Operationalize Supplier
• Conduct joint process improvement
Integration activities

• Monitor market conditions

• Assess new technology and best
Benchmark the practices impact
Supply Market • Conduct benchmarking activities
• Determine appropriateness for
reexamining category

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