PURCHASING & SUPPLY CHAIN MANAGEMENT, 4e

Purchasing Policy
and Procedures
Chapter 3

CENGAGE LEARNING
Monczka Handfield Giunipero Patterson

Chapter Overview
Policy overview
Policies provide guidance and direction:

Role of purchasing
Conduct of purchasing personnel
Social and minority business objectives
Buyer-supplier relationships
Operational issues

Purchasing procedures
Purchasing & Supply Chain Management, 4e

The Term Policy

Refers to the set of purposes, principles,
and rules of action that guide an
organization
Standard operating procedures
Rules and regulations

Formal vs. informal policies

Part of organizational culture

Purchasing & Supply Chain Management, 4e

Advantages of Using Policies

Opportunity to define and clarify top
management perspectives
Means for executives to communicate its
leadership views and beliefs

Provides a framework for consistent

decision-making and action
Defines rules and procedures for all
employees
Purchasing & Supply Chain Management, 4e

Disadvantages of Using Policies

Often difficult to communicate within
large organizations
Might substitute for effective
management
Not a set of how-to instructions

May restrict employee innovation and

flexibility
Purchasing & Supply Chain Management, 4e

Effective Policy Characteristics

Action-oriented
Relevant
Concise
Unambiguous and well-understood
Timely and current
Guides problem-solving and behavior

Purchasing & Supply Chain Management, 4e

Policy Categories
Defining the role of purchasing
Defining the conduct of purchasing
personnel
Defining social and minority business
objectives
Defining buyer-supplier relationships
Defining operational issues
Purchasing & Supply Chain Management, 4e

Role of Purchasing
Purchasing authority
Objectives of the purchasing function
Responsibilities of various buying
levels
General or broad policy statement from
which more detailed policies emanate

Purchasing & Supply Chain Management, 4e

Purchasing Authority
Authority to conduct business and to
represent organizational interests
Created by executive committee
Authority to delegate to other
functional areas
Describes scope of and limits to
authority
Purchasing & Supply Chain Management, 4e

Objectives of Purchasing Function

Select suppliers that meet requirements
Purchase materials and services that
comply with appropriate standards
Promote buyer-supplier relations and to
encourage supplier contribution
Treat all suppliers fairly and ethically

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Objectives of Purchasing Function

Work closely with other internal
departments and employees
Conduct purchasing operations to
enhance community/employee relations
Support all corporate objectives and
policies
Maintain a qualified staff and develop its
professional capabilities
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Corporate Purchasing Office

Carry out executive policies
Develop and publish purchasing
policies and procedures
Coordinate strategy development
Evaluate purchasing effectiveness
Provide expert support at all levels
Perform other corporate level tasks and
activities
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Conduct of Purchasing Personnel

Ethics policy
Reciprocity policy
Contacts and visits to suppliers
Former employees representing
suppliers
Reporting of irregular business dealings
with suppliers

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Avoid the Appearance of Reciprocity

Giving preference to suppliers that buy
from you
Expecting suppliers to purchase your
products as a condition for securing a
purchase contract
Looking favorably on competitive bids
by suppliers who buy from you
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Examples of Irregular Dealings

Accepting bribes or kickbacks
Cronyism
Accepting late bids
Owning a stake in a suppliers
company
Other behavior not considered part of
the normal course of doing business

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Social and Minority Business

Support multi-culturism
Support minority businesses
Challenges
Lack of access to capital
Supply base optimization
Lack of adequate managerial and technical
base
Relatively small size
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Social and Minority Objectives

State managements commitment
Evaluate performance potential of
small and/or disadvantaged suppliers
Invite minority bids on new contracts
Establish minimum level of business
for minority suppliers
Create training program to educate
buyers
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Identifying Minority Suppliers

Is the supplier fully qualified?
Does the supplier satisfy U.S.
government criteria by definition?
Does the supplier meet or exceed
performance requirements?
Is the supplier price competitive?
How much business can we award
given its capacity?
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Environmental Issues
Now required by law and/or major
customers
Use of recycled materials
Strict compliance with applicable laws
Proper disposal of waste materials

Health and safety issues

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Buyer-Supplier Relations
Treating suppliers fairly and with
integrity
Supporting and developing motivated
suppliers
Providing prompt payment on invoices
Encouraging suppliers to submit
innovative ideas and jointly sharing
benefits
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Buyer-Supplier Relations
Developing open communications
channels
Informing suppliers as to why they did
not receive a purchase contract
Establishing a fair process to award
purchase contracts

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Qualification and Selection

Price/cost
competitiveness
Product quality
Delivery
Financial condition
Engineering and
manufacturing
technical
competence
Purchasing & Supply Chain Management, 4e

Management of its
own supply base
Management
capability
Ability to work with
buying organization
Potential for
innovation

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Qualification and Selection

Single vs. multiple sourcing
Longer-term purchase agreements
Reliance on non-purchasing personnel
to aid in evaluating technical and/or
financial data

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Awarding Purchase Contracts

Buyers purchasing authority
Appropriateness of competitive bidding
vs. negotiation
Using a standardized bidding process
Analysis of sealed bids
Reasons for not using the lowest bidder
When to rebid
How to negotiate with suppliers
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Difficulties at a Supplier Facility

Guidelines for strikes or labor problems
at supplier facilities
Legal removal of buyer-owned
materials, inventory, and/or tooling
Emergency disruptions to the supply
chain

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Other Relationship Policies

Accepting and using supplier-developed
ideas
Financial obligations to suppliers
providing early design involvement
Use of nondisclosure agreements
Criteria for using and/or sharing patents
and other intellectual properties
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Operational Issues
Hazardous materials
Supplier responsibility for defective
materials
Purchased item comparisons
Other operating policies

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Hazardous Materials
Controlling and/or minimizing waste
Obeying environmental laws
ISO 14000
Environmental management system

Handling hazardous waste

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Environmental Management System

Create an environmental policy
Set appropriate objectives and targets
Help design and implement program to
achieve objectives and targets
Monitor and measure program
effectiveness
Monitor and measure effectiveness of
general environmental activities
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Hazardous Waste Contractors

Evidence of valid permits and licenses
Specification of types of services it is
licensed to perform
Evidence of safeguards to prevent
accidents
Evidence of contingency plan in case
of accidental release of materials
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Hazardous Waste Contractors

Detail of specific process used to
control hazardous material once it
leaves buyers control
Evidence of adequate liability
insurance
Evidence that the hazardous waste
transporter used properly certified
disposal sites
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Responsibility for Defective Material

Charge-back costs due to supplier
nonperformance

Material inspection and rework

Repackaging and extra material handling
Returned goods shipping costs
Costs of lost or delayed production

Purchasing authority to negotiate and

settle claims against suppliers
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Purchased Item Comparisons

Periodic market evaluation of
suppliers competitors

Cost
Quality
Delivery
Technology considerations

Requesting new bids for an item from

existing suppliers
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Other Operating Policies

Compliance with laws and regulations
Restrictions on maverick spending
Proper disposal of assets
Legal right to terminate contracts
Supplier responsibility for premium
transportation costs
Supplier-requested contractual changes
Supplier use of trademarks or logos

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Purchasing Procedures
Operating instructions detailing
functional duties or tasks
How-to manual
No uniform set of procedures that
apply to every situation

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Procedure Manual
Acts as a reference guide
Especially helpful for new employees

Provides consistency by documenting

required steps and activities
May specify industry best practices
Must be reviewed periodically to
ensure that it is timely and accurate
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Procedural Areas

The purchasing cycle

Proper use of purchasing forms
Development of legal contracts
Operational procedures

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Legal Contract Procedures

Basic features of the standard
purchase agreement
Basic contract principles
Execution and administration of
agreements
Essential clauses of the contract
Compliance with contract terms and
performance assessment
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Legal Contract Procedures

Formal competitive contracting
procedures
Contract development process
Examples of sample agreements
Legal definitions
Use of formal contract clauses

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Purchasing Forms
Description of proper use
Detailed meaning of each information
field
Description of proper handling and
storage
Where?
How long?

Approval process
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Development of Legal Contracts

Basic features of the standard purchase
contract (boilerplate)
Basic contract principles
Execution and administration of
agreements
Essential elements of the contract
Contract compliance and performance
assessment
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Development of Legal Contracts

Formal competitive contracting
procedures
Contract development process
Examples of sample agreements
Legal definitions
Use of formal contract clauses

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Operational Procedures

Control of material provided to supplier

Storage of purchasing documents
Supplier qualification process
Use of computerized systems
Analysis of competitive quotations
Use of single source selection
Requirements for price analysis

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Operational Procedures
Procedures for cost analysis
Acceptable cost reduction techniques
Intracompany transactions
Processing of overshipments
Supplier acknowledgements of POs
Disposition of nonconforming
materials
Removal of buyer-owned tooling

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