1. The Purchasing Process
Chapter 2
The Purchasing Process
Chapter 4

2. Purchasing Objectives
Uninterrupted flow of materials and services to support operations
Keep inventories at a minimum
Standardize materials wherever possible
Manage the supply base
Ensure Purchasing is a value-added activity
Develop strong relationships within the firm
Effective and efficient management of the purchasing process

3. 1. Uninterrupted flow of materials and services to support operations
On Spec
On Time
On Quantity
Right Price
Right Source

4. Keep inventories at a minimum
Emphasis in logistics today is on flows and not stocks
The “total logistics cost” concept and forward buying

5. 3. Standardize materials wherever possible
“Specials” as compared to “standards”
Advantages to standards

6. 4. Manage the supply base for reliable, high quality, innovative
sources of supply, and for good supplier relations
Current suppliers are responsive and competitive
Identify new suppliers with potential for excellent performance
Supplier development as necessary

7. 5. Ensure purchasing is a value-adding activity
Cost
Quality
Innovation
Cycle time
Be sure senior management recognizes the benefits that a world-class supply management function can provide

8. 6. Develop strong relationships with other functional groups
Regular interaction and communication, particularly with engineering and operations
General Electric’s Jack Berry

9. 7. Effective and efficient management of the purchasing process
Well trained people
Measurement
Productivity enhancements

10. The Purchasing Process
Recognize the need
Evaluate potential suppliers
Supplier selection (direct placement, bidding, or negotiation)
Order placement with the supplier
Follow-up
Measure supplier performance

11. 1. Recognizing the need Purchase Requisition (PR)
Traveling Requisition (TR)
Automated systems (MRP, for example)
Statement of Work (SOW) for service contracting

12. The Purchase Request (PR)
Description of the required material
Quantity and date required
Estimate cost (and sometimes a recommended source)
Budget account to be charged
Authorized signature

13. 1. Recognizing the need Traveling Requisition (TR)
Purchase Requisition (PR)
Traveling Requisition (TR)
Automated systems (MRP, for example)
Statement of Work (SOW) for service contracting

14. 2. Evaluate Potential Suppliers
Direct Placement
Competitive Bidding (RFQ)
Negotiation (RFP)
The buyer will send out RFQs or RFPs only to responsible and capable suppliers with whom she is willing to to business.
Technical Ability
Management Capability
Production Capacity
Financial Stability
Past Performance and reputation

15. 3. Bid, Negotiation, and Supplier Selection
When to use competitive bidding
Volume is high enough to justify this method
You have a firm description of the requirement
At least three qualified suppliers who want the business are willing to bid
Adequate time is available for the process
Price is the major factor in the purchase
No preferred supplier exists

16. 3. Bid, Negotiation, and Supplier Selection
When to use negotiation
All of the requirements for competitive bidding are not present
The purchase requires high start-up costs or substantial investment by the supplier
Factors other than price are significantly important
ESI is desired
Circumstances or conditions for the supplier to make good cost estimates are absent

17. CASE:
A Problem of Price

18. 4. Order Placement Purchase Order (P.O.) P.O. Number
Description of the order with necessary attachments
Quantity
Price
Delivery date
Shipping instructions
Terms of Payment

19. 4. Order Placement, cont. Blanket Purchase Order (BPO)
Systems contracting (VMI)

20. Get the facts before the facts get you!
5. Follow-up
Routine tracking to ensure the supplier will be able to meet the requirements of the order or contract
The motto of follow-up:
Get the facts before the facts get you!

21. 6. Closing actions including Measuring supplier performance
Receive the goods
Update records
Maintain supplier history file

22. Improving the Purchasing Process
The Issue of “Rush” orders
Legitimate versus illegitimate
Problems with rush orders
Solutions to the problem
“Maverick” buying
Warrants, ratifications, and the PPM
The “small order” problem

23. Dichotomizing Purchasing
Strategic “Big Picture” Issues
Day-to-day purchasing activities
Strategic “Big Picture” Issues
Can focus on this if . . .
this is pretty much on autopilot

24. Solutions to the small order problem
Procurement cards
BPOs and Long-term Purchase Agreements with order release responsibility shifted to the internal customer
Online ordering systems
Integrated suppliers

25. Procurement software systems
Ariba i2
Free Markets
SciQuest
et. al.

26. A summary of terms Breadth of Competition PR PO Maverick buying RFQ
Warrant
Ratification
VMI
PPM PR PO
RFQ
RFP
BPO
Depth of Competition

27. Let’s move on