Chapter 5 Purchasing Management

Purchase Requisition

An internal Document that identifies and defines the need for goods and/or services. It is the instruction to the purchasing department to begin the acquisition process.

Risks associated with outsourcing include:

Potential loss of control over production decisions, intellectual property, etc. Increased reliance on suppliers Increased need for supplier management Public perception / Brand impact

Forward Vertical Integration

Refers to a company acquiring one or more of their channel partners

Backward Vertical Integration

Refers to a company acquiring one or more of their suppliers

Federal Acquisition Streamlining Act

Removed restrictions on bids less than $150,000. Micro purchases (less than $3,500) can be made without bidding

Outsourcing

Taking in house activities / operations and deciding to purchase from suppliers instead. Outsourcing has become a key method to reduce costs and increase flexibility.

Purchase Order (PO)

The Buyer's offer to the supplier to acquire goods or services. Becomes a legally binding contract only when accepted by the supplier

Request for Quote (RFQ)

document used to solicit prices from interested and qualified suppliers for specific goods or services that the organization has defined and needs to obtain

Request for Information (RFI)

document whose purpose is to gather information to be educated on the acquisition of a product or service

Merchant Buyers

purchase branded product for resale by wholesalers, distributors and retailers who

Make -vs- Buy is a _____ decision

strategic

Contracting

term often used for the acquisition of services Purchase products / contract services

Sealed Bid

document enclosed in a sealed envelope and submitted in response to invitation to bid

International Purchasing - Challenges

1. Communication due to language barriers, varying time zones, working weeks, holidays. 2. Possible cultural, political, and labor problems 3. Transportation (methods, time, costs, risks, impact on inventory) 4. Impact on cost of required tariffs and duties 5. Currency exchange management 6. Specific and varying documentation requirements for each location 7. Handling local legal matters and the process for settling disputes 8. Knowledge of International trade agreements, laws, policies and procedures

The primary goals of purchasing are:

1. Ensure uninterrupted flows of materials and services 2. Acquire materials and services at the lowest total cost for the quality and service level required 3. Manage the risk of supply through risk mitigation strategies 4. Partner with suppliers to: a. Improve quality of the finished goods produced b. Reduce total cost of acquisition c. Develop supplier capabilities to meet requirements Increase customer satisfaction

Trading Companies

Buy products in one country and sell them in different countries where they have their own distribution network. They mostly work with high production volume products such as raw materials, chemicals, etc. They may carry wide variety of goods (such as from a catalog).

Financial (Tariffs)

Duties, taxes, or customs imposed by the host country for imported or exported goods.

General Services Administration (GSA)

Establishes contracts for products purchased by government agencies. About 25% of government purchases

Bid

A tender, proposal, or quotation submitted in response to a solicitation from a contracting authority

Purchasing (n)

A term commonly used in business to represent the function of, and the responsibility for, acquiring materials, supplies, and services for an organization Purchasing department within a company is considered part of the supply chain management group in a company.

Competitive Bidding

A transparent procurement method in which bids from competing suppliers are invited by openly advertising the scope, specifications, and terms and conditions of the proposed contract as well as the criteria by which the bids will be evaluated

Order Acknowledgement

written confirmation from the supplier to the buyer that the order is received and accepted. It confirms the buyer's offer and the acceptance of the supplier's terms and conditions

Advantages of Decentralization

Knowledge of local requirements Local sourcing / relationships Less bureaucracy Customization

Centralized - Decentralized (large org w/centralized control)

Large national contracts centralized at the corporate level and smaller specific items decentralized at the business unit / local level. (Most Common large company structure)

Advantages of Centralization

Leveraging purchase volume Avoiding duplication Specialization Lower transportation costs No competition within units Common supply base

Buy American Act

US government purchases & 3rd party purchases using federal funds must buy US made products. It can be waived if the US good is more than a certain cost above the imported good.

Qualitative Factors in make vs buy

are more subjective and include such things as control over quality, the reliability and reputation of the potential suppliers (internal or external), and the impact of the decision on customers and suppliers

a high turnover ratio is

beneficial because it means the company is generating sales efficiently to sell inventory

Benchmarking

comparing what you do to other businesses that do it best and implementing changes to improve Normally looking at statistics (TAT, cost, productivity measures)

Best Practices

copying what other businesses do best and implementing in your organization Watch for culture and organizational fit

Bid Bond

debt secured by a bidder for the purpose of providing a guarantee that the successful bidder will accept the contract once awarded. If not, the bond would be forfeited

Performance Bond

debt secured by a bidder for the purpose of providing a guarantee that the work will be on time and meet specifications

Payment Bonds

debt secured by a bidder for the purpose of providing protection against 3rd party liens not fulfilled by bidder

Decentralized - Centralized (large multiunit org)

decentralized business units purchase their own materials and services and the corporate level only purchases for corporate operations

Request for Proposal (RFP)

detailed document to obtain response from potential suppliers outlining the supplier's capability, experience, price and terms in supplying the required product or service

Quantitative Factors in make vs buy

primarily involve the incremental costs of either making or purchasing the item, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity

Industrial Buyers

purchase raw materials for conversion into products, and/or purchase services, capital equipment, and MRO supplies

Small Business set aside

purchases between $3,500 and $150,000 are set aside for small business as defined by the North American Industry Classification System (NAICS).

Inventory turnover

represents the number of times the company sold through inventory in a given time period

Total Cost of Ownership (TCO)

sum of all the costs associated with every activity in the acquisition of a product. Procurement professionals recognize that although the purchase price of an item remains very important, it is only one part of the total cost of ownership.

Supply Management

the term that encompasses all acquisition activities of an organization "The identification, acquisition, access, positioning, management of resources and related capabilities the organization needs or potentially needs in the attainment of its strategic objectives." Institute of Supply Management (ISM)

low turnover ratio is

unfavorable as it means the company is not selling through products efficiently. The company is likely making/buying too much inventory for demand and may end up marking down or throwing out expired or unsaleable products

Make

Producing products or performing services internally

Return on Assets (ROA) Equation

Profit divided by assets

Reasons for Making

Protect proprietary technology No competent supplier Overall lower cost Better quality control Use existing idle capacity Control of lead-time Control of transportation and warehousing costs

The Basic Purchasing Process

Purchase Requisition Supplier Determination Issue Purchase Order Receive, Inspect & Pay

Centralized Purchasing:

Purchasing department located at the firm's corporate office makes all the purchasing decisions

Non-Financial Barriers

Quotas, licensing agreements, embargoes, laws and regulations imposed on imports and exports

Purchasing Process Steps

1. Identify a need and a Purchase Requisition is issued Request for goods or services submitted to the Procurement/Purchasing organization for action typically initiated by a user within an organization 2. Obtain authorization as necessary A Purchase Requisition is routed to authorized approver(s) depending on the type of material or service being requested and/or the dollar value of the request. Multiple authorizations, in a prescribed sequence, to various management levels of the organization, may be necessary depending on the value. 3. Identify and evaluate potential suppliers May be from a list of company approved Suppliers. If so skip step 4. 4. Make supplier selection RFI--> RFP --> RFQ 5. Create Purchase Order (PO) and deliver to the supplier. The purchase order will identify the item(s) to be procured, the quantity required, the requested delivery date(s) and the price to be paid. It will also identify the delivery location and any terms and conditions that relate to the order. The PO is the Buyer's formal offer to the supplier to obtain the item(s). The PO becomes a binding contract only when accepted by supplier. 6. Supplier confirmation of the Purchase Order The Supplier formally agrees to supply the item(s) per the specifications, terms, and conditions described on the Purchase Order. This is called an Order Acknowledgement. The Purchase Order then becomes a legally binding contract between the Buyer and the Supplier for the item(s) specified. 7. Fulfillment The supplier ships & delivers the item(s) or service to the buying organization as per the PO. 8. Receipt of Goods Once the item(s) arrives at the designated location, the Buyer will conduct a receiving process where the item(s) are checked to ensure that they conform to the details of the PO, including quality and quantity. 9. Invoice Supplier prepares an invoice for the item(s) ordered and transmits to the Buyer. 10. Reconciliation The invoice is reconciled to the purchase order and goods receipt before payment is made. This is referred to as a "3-way match" 11. Payment Invoice payment is processed using an appropriate payment method per the terms of sale outlined on the purchase order. 12. Taxes In some situations, the supplier will be obligated to charge a tax, but the buyer may be eligible to reclaim some or all of the tax based on type of transaction, tax laws and corporate status. 13. Close out the Purchase Order If the PO has been received complete, and all terms and conditions have been met, then the PO is closed out in the purchasing system. 14. Analytics Data analysis to improve the competitiveness of the purchasing process Measurements on efficiency, spend and benchmarking the procurement process. Specific transaction data and information is captured to be used in developing scorecards to review supplier performance.

Advantages of an e-Procurement System

1. Time savings - streamlines the process 2. Cost savings - time = $$ 3. Improve Accuracy - eliminates multiple points of entry 4. Traceable & updated status - current status 5. Mobile - access anywhere 6. Focus on value added activities - Purchasing personnel spends less time on administrative tasks and more time on value-added purchasing activities 7. Benefits to the suppliers - inaccurate orders, embedded catalogs

Profit-Leverage Effect

A decrease in purchasing expenditures directly increases profits before taxes (assuming no decrease in quality or purchasing total cost)

Import Merchants

A person or company engaged in the purchase and sale of imported commodities for profit. They buy and take title to the goods being imported and then sell the goods domestically.

Decentralized Purchasing:

Individual, local purchasing departments, such as at the plant level, making their own purchasing decisions

Import Brokers

Agents licensed by the governmental regulatory authority to conduct business on behalf of importers, for a service fee

Buy / Outsource

Buying materials and/or services from suppliers

Inventory turnover equation

COGS divided by inventory

Benefits to outsourcing:

Concentrate on core capabilities Reduce staffing levels Accelerate reengineering efforts Reduce internal management problems Increase capabilities and flexibility

Reasons for Buying (or Outsourcing)

Focus on core competency - If it is a not a strategic item Cost Advantage - Suppliers may provide the benefit of economies of scale. Insufficient Capacity - A firm may be at or near capacity and subcontracting from a supplier may make better sense. Lack of Expertise - Firm may not have the necessary technology and expertise Quality - Suppliers may have better technology, process, skilled labor, etc. Multi Sourcing Strategy - To mitigate risk a multi sourcing strategy using an external supplier in addition to an internal source. Inventory Considerations - opting to have the supplier hold inventory of the item or the materials required to produce the item. Brand Strategy - take advantage of a supplier's brand image, reputation, popularity, etc. Labor Arbitrage - is the practice of searching for and then using the lowest-cost workforce to produce products or services.

Return on Assets (ROA) Effect

Improve ROA by increasing profit using the same assets or the same profit with less assets. Indication of management efficiency and effective use of capital.

Inventory Turnover Effect

Increased inventory turnovers indicate optimal utilization of space and inventory levels, increased sales, avoidance of inventory obsolescence. Improvement of Cash Flow

Purchasing (v)

The action of obtaining merchandise, capital equipment, raw materials, services, and MRO (maintenance, repair, and operating) supplies from other organizations in exchange for remuneration. the transactional function of procurement for acquiring goods and contracting services.

e-Procurement

The business-to-business (B2B) electronic purchase transaction of supplies and services over the Internet via EDI (Electronic Data Interchange).

Reasons for Global Sourcing

The opportunity to improve quality, cost, and delivery performance To exploit global efficiencies: Access to low cost labor and materials. Take advantage of tax breaks and low trade tariffs To respond to insufficient domestic capacity To achieve access to better process and product technology To take advantage of reciprocal trade and countertrade arrangements

Offshoring

The practice of basing some of a company's processes or services overseas, so as to take advantage of lower costs.

Procurement

The process of selecting, vetting and managing suppliers, negotiating contracts, establishing requirements, and managing the actual process of purchasing of goods and services includes acquiring all of the goods and services that is needed by an organization. includes managing suppliers to meet the organization's requirements includes analytics and strategic sourcing decisions

Closed Competitive Bidding

The sealed bids are opened in presence only of authorized personnel.

Open Competitive Bidding

The sealed bids are opened in the presence of anyone who may wish to be present and evaluated for award of a contract

Green Purchases

Variety of federal, state, and local statutes require environmental and human health considerations when making purchases