Purchasing Policy
and Procedures
Chapter 3
The Term “Policy”
 Refers to set of purposes, principles,
and rules of action that guide an
organization
 Standard operating procedures
 Rules and regulations
 Formal (written) vs. informal policies
 Part of organizational culture
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Advantages of Using Policies
 Define and clarify top management
objectives
 Means for executives to communicate
their leadership and views
 Provides framework for consistent
decision-making and action
 Defines rules and procedures for all
employees
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Disadvantages of Using Policies
 Often difficult to communicate
throughout large organizations
 Might be viewed as substitute for
effective management
 Not a set of “how-to” instructions
 May restrict innovation and flexibility
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What Makes for an Effective Policy?
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Action-oriented guidelines
Relevant
Concise
Unambiguous/well-understood
Timely and current
Helpful in solving problems
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Categories of Purchasing Policies
 Defining role of purchasing
 Defining conduct of purchasing
personnel
 Defining social and minority business
objectives
 Defining buyer-supplier relationships
 Defining operational issues
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Defining the Role of Purchasing
 Origin and scope of purchasing
authority
 Objectives of purchasing function
 Corporate purchasing office
responsibilities
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Objectives of Purchasing Function
 Select suppliers that meet requirements
 Purchase materials and services that
comply with appropriate standards
 Promote buyer-supplier relations and
encourage supplier contribution
 Treat all suppliers fairly and ethically
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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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Defining the Conduct
of Purchasing Personnel
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Ethics policy (Caterpillar case p.103)
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 condition for securing
purchase contract
 Looking favorably on competitive bids
by suppliers who buy from you
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Former Employees
 Access to insider knowledge
 Include ban for a stated period of time in
employee contracts
 Knowledge of policies and procedures
 Relationships with buyer’s personnel
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Irregular Business Dealings
 Establish reporting mechanism
 Specify proper office for reporting
 Create safeguards to protect reporting
party
 Report suspected irregularities as soon
as possible
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Examples of Irregular Dealings
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Accepting bribes or kickbacks
Cronyism
Accepting late bids
Owning a stake in supplier’s company
Other behavior not considered part of
the “normal” course of doing business
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Defining Social and Minority
Business Objectives
 Support minority business suppliers
 The best companies for minority
supplier contracting (p 97)
 Challenges
 Lack of access to capital
 Inability to attract qualified managerial and
technical professionals
 Relatively small size
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Identifying Minority Suppliers
 Is supplier fully qualified?
 Does supplier satisfy U.S. government
criteria by definition?
 Does supplier meet our standard
performance requirements?
 Is supplier price competitive?
 How much business can we award
supplier given its capacity?
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Corporate Social Responsibility
 Low-cost country sourcing
 Environmental issues
 Labor and human rights
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Environmental Policies
 Now required by governments,
investors, and major customers
 Use of recycled materials
 Strict compliance with local, state, and
federal regulations
 Proper disposal of waste materials
 Documented disposal of hazardous
materials
 Implement back through supply chain
 IBM Example (p 99)
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Labor and Human Rights Policies
 Also now required by governments,
investors, and major customers
 Ethical treatment of suppliers’ employees
 Living wages
 Safety and security
 Overtime
 Implement back through supply chain
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Defining Buyer-Supplier
Relationships
 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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Defining Buyer-Supplier
Relationships
 Developing open communications
channels
 Informing suppliers as to why they did
not receive purchase contract
 Establishing fair and transparent
process to award purchase contracts
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Qualification and Selection
 Price/cost
competitiveness
 Product quality
 Delivery performance
 Financial condition
 Engineering and
manufacturing
technical
competence
 Management of own
suppliers
 Management
capability
 Ability to work with
buyer
 Potential for
innovation
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Labor or Other Difficulties
at Suppliers
 Guidelines for strikes or labor problems
at supplier facilities
 Legal removal of company-owned
materials, inventory, and/or tooling
 Address emergency disruptions to
supply chain
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Defining Operational Issues
 Hazardous materials
 Supplier responsibility for defective
material
 Purchased item comparisons
 Other operating policies
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Hazardous Materials
 Controlling and/or minimizing waste
generation
 Obeying environmental laws
 ISO 14000
 Environmental management system
 Proper handling of toxic and hazardous
waste
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Supplier Responsibility
for Defective Material
 Charge-back costs due to supplier
nonperformance
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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 comparison and
evaluation of supplier’s competitors
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Cost
Quality
Delivery
Technology
 Requesting new bids for item from
qualified suppliers
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Other Operating Policies
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Compliance with laws and regulations
Restrictions on “maverick spending”
Proper disposal of material 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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