Assignment ch 2, and ch 3
feras81
chapter_2_the_purchasing_process1.pptxThe Purchasing Process
Chapter 2
OSCM 3660:002 Strategic Sourcing
Spring 2016
Sandeep Jagani
PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e
© 2012 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
© 2012 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
1
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
Purchasing & Supply Chain Management, 5e
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Roles and Responsibilities
Purchasing & Supply Chain Management, 5e
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Overall
Goals
Tactical Responsibilities
Strategic
Roles
Elements of the Purchasing Process
Identify user requirements
Evaluate need efficiently and effectively
Identify suppliers
Ensure payment occurs promptly
Ascertain that need was effectively met
Drive continuous improvement
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Purchasing Objectives
Supply continuity
Manage sourcing process efficiently and effectively
Develop supply base management
Develop aligned goals with internal stakeholders
Develop integrated purchasing strategies that support organizational goals and objectives
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Supply Continuity
Source products/services at right price
Source them from right source
Source them at right specification that meets users’ needs
Source them in right quantity
Arrange for delivery and/or service performance at right time to right internal customer
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Manage Purchasing Process
Determine staffing levels
Develop and adhere to administrative budgets
Provide professional training and growth opportunities for employees
Introduce improved buying channels within procure to pay systems
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Develop Supply Base Management
Select competitive suppliers
Identify new suppliers with high potential and develop closer relationships
Improve existing suppliers
Develop new suppliers that are not competitive
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Develop Aligned Goals with Internal Stakeholders
Consider internal customers as stakeholders
Establish strong two-way communication
Develop cross-functional coordination and collaboration
Develop positive, problem-solving relationships
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Develop Integrated Strategies that Support Goals and Objectives
Match functional goals with organizational goals
Become mutually-supportive, not counter-productive
Leverage supply management’s substantial impact on firm’s bottom line
Utilize supply management as strategic core competency
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Reasons for Not Being Strategic
Supply management personnel have not historically participated in senior-level corporate planning
Executive management has not always recognized benefits of world-class supply management
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Supply Market Intelligence
Monitor supply markets and trends
Identify critical materials and services
Support new product development
Develop supply options and contingency plans
Support diverse and globally competitive supply base
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Strategic Supply Management Roles and Responsibilities
Spend analysis
Demand management and specifications/statements of work
Category management and supplier evaluation/selection
Contract management
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Strategic Supply Management Roles and Responsibilities
Cost management
Managing procure to pay process
Supplier relationship management
Establish a supply management strategy
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Spend Analysis
Process of collecting historical data by commodity
Drive all spend to unit or rate of consumption
Used to drive strategies in …
Demand management
Commodity management
Risk management
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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
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Demand Management and Specifications/SOWs
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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Category Management and Supplier Evaluation/Selection
Process of developing …
External industry intelligence and analysis
Internal demand
Supply base capabilities and operational risks
Strategy to match needs with marketplace realities
Identify competitive value
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Category Management and Supplier Evaluation/Selection
Category strategy elements
Business case to identify rationale for plan
Risk mitigation plan
Business value derived from implementation
Negotiation plan
Supplier scorecard
Sourcing work plan
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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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Contract Management
Use to trigger proactive sourcing prior to contract expiration
Maintenance of contract database
Initiation of compliance and/or improvement actions when less-than-desirable supplier performance occurs
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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
Automation of all transactional activities including …
Requisitioning
RFX (i.e., RFI, RFP, RFQ)
Contract award
Orders
Approval
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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Establish a Supply Management Strategy
Repeatable and well-defined process for building strategy and governance
Clear alignment with executive vision and internal user-specific business goals
Process based on well-developed supplier market intelligence and internal stakeholder inputs
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Establish a Supply Management Strategy
Established goals and metrics for short-term project plans and longer term plans
Established communication plan to inform senior management
Update and review against defined goals and objectives
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Improving the Procure to Pay Process
How much effort a company spends on P2P differs greatly between sourcing situations
Companies can use a superior P2P process to create competitive advantage
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Stages of the Procure to Pay Process
Forecast and plan requirement
Need clarification (requisition)
Supplier identification/selection
Contract/purchase order generation
Receipt of material or service and documents
Settlement, payment, and measurement of performance
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Benefits of E-Procurement
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 time
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Procure to Pay Process Map
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Start
End
Supplier Need Fulfillment
Internal Customers
Projects
Operations
Enablers: Finance, Legal, Human Resources, Information Technology
Purchasing & Supply Chain Management, 5e
Forecast and Plan Requirement
Need Clarification/ Requisition
Supplier Identification/ Selection
Approval/ Contract/ P.O. Generation
Receive Material & Documents
Settle, Pay, and Measure Performance
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Forecast and Plan Requirement
Beginning of purchasing cycle
Sources of need
Annual or biannual planning process
New product development process
Operational needs
Sometimes, actual needs are difficult to define clearly
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Forecast and Plan Requirement
Types of needs
Components
Raw materials
Subassemblies
Finished goods
Services
Ongoing need vs. spot buy
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Needs Clarification: Requisitioning
Purchase requisitions and/or statements of work
Forecasts and customer orders
Reorder point system
Stock checks
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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Statement of Work
Used for procuring services
Specifies …
Work to be completed
When needed
What type of service provider required
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Traveling Purchase Requisition/ Bar Codes
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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Forecasts and Customer Orders
Anticipated customer orders
Actual customer orders
Customized orders for specific customers
New product development
MRP systems
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Reorder Point System
Computerized system to track on-hand inventories, order quantities, and demand forecasts
Predetermined order point and order quantity
When on-hand inventory level hits order point, standard order quantity is generated
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Stock Checks
Sometimes called cycle counts
Physical checking of inventory
Verify actual on-hand inventory
Make necessary adjustments to item inventory record
Inventory may be misplaced, lost, damaged, or stolen
Results in inaccurate inventory records
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Cross-Functional Sourcing Teams
Used to proactively determine sourcing needs
Identify potential suppliers before need occurs
Faster order cycle times
Better supplier evaluation and selection
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Description
By market grade or industry standard
Well-understood specifications
Standardized terms
By brand
Proprietary or unique products
Brand provides perceived advantage to user
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Description
By specification
Materials
Manufacturing or service delivery steps
Physical dimensions
By performance characteristics
Focuses on desired outcomes
Prototypes or samples
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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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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 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 supplier
Marketplace is competitive
Buyers solicit bids only from technically qualified suppliers that want contract
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When to Use Competitive Bidding
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
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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When to Use Negotiation
Supplier cannot determine risks and costs before contract is awarded
Supplier requires substantial lead time to develop and produce requested item(s)
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Request for Quotation
Supply management invites quotes or bids from pool of potential suppliers
Consists of necessary information to allow supplier to accurately respond
Includes due date of bid
Defines whether substitutes are acceptable
Normal practice is minimum of 3 bids
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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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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
Drafted after supplier evaluation and selection is completed
Legally-binding document (i.e., contract)
Care in defining terms and conditions
Standard legal language (i.e., “boilerplate”)
offer and acceptance
Visibility throughout company
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Purchase Order
Quantity
Material specification
Quality requirements
Price
Delivery date
Method of delivery
Ship-to address
P.O. number
Order due date
Name and address of buyer
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Typical Purchase Order Form
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P.O. Visibility
Accounts payable
Requisitioner or requesting department
Receiving
Traffic management
Supply management
Quality control
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Blanket Purchase Order
Usually effective for 6 months to 1 year
Used for routine purchases of item or family of items
Release materials as needed vs. issuing new P.O. each time
P.O. remains open during specified term
Importance of escape clause
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Blanket Purchase Order Form
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Material Purchase Release
Used to release shipments under blanket P.O.
Provides visibility to supplier about forecasted and actual needs
User oftentimes makes actual release
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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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Receiving Process
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Receipt and Inspection
Electronic vs. paper documents
Acknowledgement and receipt
Material packing slip
Details the contents of shipment
Bill of lading
Transfers ownership and possession
Receiving discrepancy report
Shortages and overages
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Receipt and Inspection
Invoice settlement and payment
Records maintenance
Supplier performance database
Continuously measure and manage supplier performance
Purchasing cycle does not end with receipt of goods or services
Frequency of evaluation and feedback
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Invoice Settlement and Payment
3-way match required to pay invoice
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 for initiative and budget
Map existing P2P process, highlighting difficulties and challenges
Understand needs and requirements of user groups
Utilize cross-functional review team, including users and suppliers as appropriate
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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 system
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Types of Purchases
Raw materials
Semifinished products and components
Finished products
Maintenance, repair, and operating (MRO) items
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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 with same intensity as with 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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Procuring Capital Equipment
Assets to be used > 1 year
Standard general equipment vs. customized equipment
Features of CE procurement
Irregular frequency
Requires large sums of money
Highly sensitive to general economic conditions
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Transportation and 3PLs
Specialized type of services procurement
Need to evaluate and select transportation services providers just like production item suppliers
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Improving the Purchasing Process
Online requisitioning systems from users to purchasing
Procurement cards issued to users
E-commerce using the Internet
Longer-term purchase agreements
Online ordering systems to suppliers
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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 from multiple users into single order
Faster order cycle time
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Improving the Purchasing Process
Purchasing process redesign
Coordination of subprocesses
Electronic data interchange (EDI)
Online ordering through e-catalogs
Allowing users to contact suppliers directly
Convenience ordering system
Reduced administrative burden
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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
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Selected Activities
Sourcing Process
Profile the Sourcing Group
Select Sourcing
Strategy
Generate Supplier
Portfolio
Select Implementation
Path
Confirm user requirements
Develop category definition
Define basic characteristics
Understand industry/supply markets
Assess bargaining position
Evaluation alternative strategies
Select appropriate approaches and techniques
Identify qualified suppliers
Determine supplier value-added capabilities
Develop supplier “short list”
Verify and adjust sourcing strategy
Develop implementation plan
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FedEx Strategic Sourcing Process
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Selected Activities
Plan negotiation strategy
Evaluate supplier proposals
Conduct negotiations with suppliers
Recommend sourcing decision
Plan and implement transition to new suppliers relationships
Link key processes
Conduct joint process improvement activities
Monitor market conditions
Assess new technology and best practices impact
Conduct benchmarking activities
Determine appropriateness for reexamining category
Sourcing Process
Negotiate and Select Suppliers
Operationalize Supplier Integration
Benchmark the Supply Market
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