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
2
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
3
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
4
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
5
Effective Policy Characteristics






Action-oriented
Relevant
Concise
Unambiguous and well-understood
Timely and current
Guides problem-solving and behavior
Purchasing & Supply Chain Management, 4e
6
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
7
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
8
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
9
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
Purchasing & Supply Chain Management, 4e
10
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
Purchasing & Supply Chain Management, 4e
11
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
Purchasing & Supply Chain Management, 4e
12
Conduct of Purchasing Personnel




Ethics policy
Reciprocity policy
Contacts and visits to suppliers
Former employees representing
suppliers
 Reporting of irregular business dealings
with suppliers
Purchasing & Supply Chain Management, 4e
13
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
Purchasing & Supply Chain Management, 4e
14
Examples of Irregular Dealings




Accepting bribes or kickbacks
Cronyism
Accepting late bids
Owning a stake in a supplier’s
company
 Other behavior not considered part of
the “normal” course of doing business
Purchasing & Supply Chain Management, 4e
15
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
Purchasing & Supply Chain Management, 4e
16
Social and Minority Objectives
 State management’s 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
Purchasing & Supply Chain Management, 4e
17
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?
Purchasing & Supply Chain Management, 4e
18
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
Purchasing & Supply Chain Management, 4e
19
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
Purchasing & Supply Chain Management, 4e
20
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
Purchasing & Supply Chain Management, 4e
21
Qualification and Selection
 Price/cost
competitiveness
 Product quality
 Delivery
 Financial condition
 Engineering and
manufacturing
technical
competence
 Management of its
own supply base
 Management
capability
 Ability to work with
buying organization
 Potential for
innovation
Purchasing & Supply Chain Management, 4e
22
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
Purchasing & Supply Chain Management, 4e
23
Awarding Purchase Contracts
 Buyer’s 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
Purchasing & Supply Chain Management, 4e
24
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
Purchasing & Supply Chain Management, 4e
25
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
Purchasing & Supply Chain Management, 4e
26
Operational Issues
 Hazardous materials
 Supplier responsibility for defective
materials
 Purchased item comparisons
 Other operating policies
Purchasing & Supply Chain Management, 4e
27
Hazardous Materials
 Controlling and/or minimizing waste
 Obeying environmental laws
 ISO 14000
 Environmental management system
 Handling hazardous waste
Purchasing & Supply Chain Management, 4e
28
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
Purchasing & Supply Chain Management, 4e
29
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
Purchasing & Supply Chain Management, 4e
30
Hazardous Waste Contractors
 Detail of specific process used to
control hazardous material once it
leaves buyer’s control
 Evidence of adequate liability
insurance
 Evidence that the hazardous waste
transporter used properly certified
disposal sites
Purchasing & Supply Chain Management, 4e
31
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
Purchasing & Supply Chain Management, 4e
32
Purchased Item Comparisons
 Periodic market evaluation of supplier’s
competitors




Cost
Quality
Delivery
Technology considerations
 Requesting new bids for an item from
existing suppliers
Purchasing & Supply Chain Management, 4e
33
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
Purchasing & Supply Chain Management, 4e
34
Purchasing Procedures
 Operating instructions detailing
functional duties or tasks
 “How-to” manual
 No uniform set of procedures that
apply to every situation
Purchasing & Supply Chain Management, 4e
35
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
Purchasing & Supply Chain Management, 4e
36
Procedural Areas




The purchasing cycle
Proper use of purchasing forms
Development of legal contracts
Operational procedures
Purchasing & Supply Chain Management, 4e
37
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
Purchasing & Supply Chain Management, 4e
38
Legal Contract Procedures
 Formal competitive contracting
procedures
 Contract development process
 Examples of sample agreements
 Legal definitions
 Use of formal contract clauses
Purchasing & Supply Chain Management, 4e
39
Purchasing Forms
 Description of proper use
 Detailed meaning of each information
field
 Description of proper handling and
storage
 Where?
 How long?
 Approval process
Purchasing & Supply Chain Management, 4e
40
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
Purchasing & Supply Chain Management, 4e
41
Development of Legal Contracts
 Formal competitive contracting
procedures
 Contract development process
 Examples of sample agreements
 Legal definitions
 Use of formal contract clauses
Purchasing & Supply Chain Management, 4e
42
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
Purchasing & Supply Chain Management, 4e
43
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
Purchasing & Supply Chain Management, 4e
44