PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e
THE PURCHASING
PROCESS
Chapter 2
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The stakeholders - PURCHASING
PROJECT
PROJECT TEAM
“INTERNAL CLIENTS”
PM
SELLER
PURCHASING DEPT
BUYER
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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Roles and Responsibilities
Overall Supply continuity
Goals
Manage sourcing process
Supply base management
Engage stakeholders
Sourcing strategies
Strategic Tactical
Roles Responsibilities
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Roles and Responsibilities
Overall
Forecast
Goals Plan requirements
Requisitioning process
Sourcing process
Contract/RFx preparation
Receipt and inspection
Invoice settlement &
payment
Supplier performance
Strategic Tactical
Roles Responsibilities
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Roles and Responsibilities
Overall
Core
competencies Goals
Demand
management
Contract
management
Cost management
Procurement
strategies
Strategic Tactical
Roles Responsibilities
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Elements of the Purchasing Process
Identify user
requirements
Evaluate need efficiently
and effectively
Identify suppliers Through Sourcing
Ensure payment occurs
promptly
Ascertain that need was
effectively met
Drive continuous
improvement
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Strategic Supply Management Roles
and Responsibilities
Spend analysis (historical data & correlation analysis)
Demand management (unit and rate consumption
levels)
Specifications/statements of work (purchasing x
stakeholders)
Category management
Supplier evaluation/selection
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Strategic Supply Management Roles
and Responsibilities
Contract management
Cost management
Managing procure to pay process
Supplier relationship management
Establish a supply management strategy
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Demand Management and
Specifications/SOWs
Optimizing sourcing strategies
Proactively setting policies, procedures, and
measurement systems
Ensuring appropriate levels of capacity in supply base
Establishing standards
Restricting supply base to preferred suppliers that
meet risk and compliance requirements
Reviewing material specifications
Reviewing and developing statements of work
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Contract Management
How to award contracts
Competitive bidding
How many suppliers?
Negotiation
Use of cross-functional team?
Some combination of both
Supply management has ultimate
responsibility
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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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Cost Management
Understand true cost of purchased goods and
services
Unbundling price paid and various components
over product lifecycle
Deliver a target cost
Use of decision-support tools and techniques
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Cost Management
Develop insights to …
Cost of supporting a process or commodity
Understand the gap between cost drivers and
assumed business case
Identify business case
Total cost of offering a service
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Managing the Procure to Pay Process
• Requisitioning
• RFX (i.e., RFI, RFP, RFQ)
Automation
• Contract award
of all
transactional • Orders
activities • Approval
including … • 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
Leveraging flow of information between key
internal process owners and suppliers
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Procure to Pay Process Map
Internal
Projects Customers Operations
Specific to each project Should fit under organization’s operations
Start End
Approval/
Need Supplier Receive Settle, Pay,
Forecast and Plan Contract/
Clarification/ Identification Material & and Measure
Requirement P.O.
Requisition / Selection Documents Performance
Generation
Supplier
Need
Fulfillment
Enablers: Finance, Legal, Human Resources, Information Technology
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Forecast and Plan Requirement
• Components
•
Types of •
Raw materials
Subassemblies
needs • Finished goods
• Services
Ongoing
need vs.
spot buy
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Needs Clarification: Requisitioning
Purchase
requisitions Forecasts New product
Reorder point
and/or and customer Stock checks development
system
statements of orders teams
work
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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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Supplier Identification and Selection
Existing • Familiarity and track record
• List of preferred suppliers
supplier
• Problem of maverick spending
New • Need to identify potential suppliers
• Need to evaluate and qualify
supplier • Negotiate or competitive bidding?
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Maverick Spending
User selects different supplier than supply
management would
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 & negotiating
RFx (info, quotation,
proposal)
Specifications or blueprints
Supplier evaluation
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When to Use Competitive Bidding
Bidding & negotiating
Volume is sufficiently high
Specifications or requirements are clear to supplier
Marketplace is competitive
Buyers solicit bids only from technically qualified
suppliers that want contract
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
Bidding & negotiating
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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Statement of Work
Used for procuring services
Specifies …
Work to be completed
When needed
What type of service provider
required
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Statement of Work
A statement of work typically addresses these subjects:
1. Purpose: Why are we doing this project? A purpose statement attempts
to answer this.
2. Scope of Work: This describes the work to be done and specifies the
hardware and software involved.
3. Location of Work: This describes where the work is to be performed,
including the location of hardware and software and where people will
meet to do the work.
4. Period of Performance: This specifies the allowable time for projects,
such as start and finish time, number of hours that can be billed per
week or month, where work is to be performed and anything else that
relates to scheduling.
5. Deliverables Schedule: This part lists and describes what is due and
when.
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From Wikipedia,
a publically the free
accessible encyclopedia.
website, Retrieved
in whole or in part. from "[Link]
Statement of Work
6. Applicable Standards: This describes any industry specific standards that need
to be adhered to in fulfilling the contract.
7. Acceptance Criteria: This specifies how the buyer or receiver of goods will
determine if the product or service is acceptable, usually with objective criteria.
See Acceptance testing.
8. Requirements: This specifies any special hardware or software, specialised
workforce requirements, such as degrees or certifications for personnel, travel
requirements, and anything else not covered in the contract specifics.
9. Type of Contract/Payment Schedule: The project acceptance will depend on if
the budget available will be enough to cover the work required. Therefore a
breakdown of payments by whether they are up-front or phased will usually be
negotiated in an early stage.
10. Miscellaneous: Many items that are not part of the main negotiations may be
listed because they are important to the project, and overlooking or forgetting
them could pose problems for the project.
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From Wikipedia,
a publically the free
accessible encyclopedia.
website, Retrieved
in whole or in part. from "[Link]
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
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Specifications or Blueprints
Guidelines for good requirements
Use simple direct sentences
Use a limited vocabulary
Identify and write down who wants each requirement
(“who” is a stakeholder or group of stakeholders)
Each requirement should have a single desired result
Define verifiable criteria
Every requirement must be verifiable. Often you can indicate a
possible test by adding a simple phrase to qualify a basic
need.
Determine acceptance criterion/criteria
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Ref. Alexander,
a publically [Link],
accessible & Stevens,
in wholeR. Writing
or in part. better requirements, Pearson Education Ltd, ch.7 2002
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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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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Receiving Process
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Types of Purchases
Raw materials
Semi-finished products and components
Finished products
Maintenance, repair, and operating (MRO) items
Production support items
Services
Capital equipment
Transportation and third-party logistics providers
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