Supply Chain Purchasing Management: Procurement, Sourcing, and Supplier Selection

What is procurement?

The process of selecting and vetting suppliers, negotiating contracts, establishing payment terms, and purchasing goods and services.

What does procurement encompass?

It encompasses acquiring all goods, services, and work vital to an organization.

What is the difference between procurement and purchasing?

Procurement is the overarching term that includes the action of purchasing.

What is a Request for Proposal (RFP)?

A detailed document used to evaluate a supplier's capability and interest in producing a customized product or service.

What is a Request for Quote (RFQ)?

A document used to solicit bids from qualified suppliers for goods or services needed by an organization.

Define 'Bid' in purchasing terms.

A tender, proposal, or quotation submitted in response to a solicitation like an RFP or RFQ.

What is competitive bidding?

Offers submitted by multiple individuals or firms competing for a contract or right to supply specified services or merchandise.

What is a Purchase Requisition?

An internal document that defines the need for goods and/or services and does not constitute a contractual relationship.

What is a Purchase Order (PO)?

The Buyer's offer to the supplier to acquire goods or services, becoming a legally binding contract upon acceptance by the supplier.

What are the primary goals of purchasing?

Ensure uninterrupted flows of materials and services at the lowest total cost, improve quality of finished goods, and optimize customer satisfaction.

How does purchasing contribute to organizational objectives?

By seeking better materials and reliable suppliers, and involving suppliers in new product design and development.

What is the first step in the purchasing process?

Identifying a need and issuing a Purchase Requisition.

What follows after a Purchase Requisition is issued?

A request for goods or services is submitted to the Procurement/Purchasing organization for action.

What is the purpose of obtaining authorization in the purchasing process?

To ensure that the Purchase Requisition is approved based on the type of material or service and its dollar value.

What is the role of a Request for Information (RFI)?

To collect information from potential suppliers on their capabilities and interest in supplying the material or service.

What happens during supplier selection?

A supplier is chosen based on criteria like price, availability, quality, and delivery costs from RFP or RFQ bids.

What does a Purchase Order identify?

The items to be procured, quantity required, requested delivery dates, price, delivery location, and terms and conditions.

What is the significance of supplier confirmation of the Purchase Order?

It formalizes the supplier's agreement to supply the items as per the specifications and terms outlined.

What is involved in the fulfillment step of the purchasing process?

The supplier ships/delivers the items to the buying organization as per the Purchase Order.

What occurs upon receipt of goods?

The Buyer checks the items to ensure they conform to the Purchase Order details, including quality and quantity.

What does the supplier prepare after delivering goods?

An invoice for the items ordered, which may accompany the goods or be sent separately.

What is reconciliation in the purchasing process?

The process of matching the invoice to the purchase order and goods receipt before payment is made.

What is the role of a Chief Procurement Officer?

To oversee the procurement function as part of the executive leadership team in many companies.

What is the importance of supplier relationship management?

To maintain effective partnerships with suppliers, ensuring quality and reliability in the supply chain.

What is strategic sourcing?

A procurement process that continuously improves and re-evaluates the purchasing activities of a company.

What is the significance of international purchasing?

To source goods and services from global suppliers, potentially reducing costs and increasing quality.

What challenges might government and non-profit purchasing face?

Regulatory constraints, budget limitations, and the need for transparency in procurement processes.

What is world-class procurement?

An approach that emphasizes best practices in procurement to achieve superior performance and competitive advantage.

What is a 3-way match in procurement?

A payment process where the invoice, purchase order, and received items are matched to ensure accuracy before payment.

What is the purpose of reclamation of taxes in purchasing?

To allow buyers to retain some or all of the tax charged by suppliers based on corporate status.

What should be done when a Purchase Order (PO) is complete?

The PO should be closed out in the purchasing system.

What does analysis in procurement involve?

Measurements of efficiency and accuracy of the procurement process using specific PO data.

What is e-Procurement?

The automation of non-strategic and transactional procurement activities through web-enabled tools.

What are some processes typically automated by e-Procurement tools?

Solicitation development, execution and analysis, and reverse auction capabilities.

When might e-Procurement not be effective?

For mission-critical items, low inventory items, complex negotiations, or minimal cost reduction potential.

What are the advantages of an e-Procurement system?

Time savings, cost savings, accuracy, real-time communication, mobility, trackability, and better management.

How can small value purchase orders minimize processing costs?

Through methods like credit cards, blanket purchase orders, and accumulating small orders into larger ones.

What is the Profit-Leverage Effect in purchasing?

A decrease in purchasing expenditures directly increases profits before taxes.

What does a high Return on Assets (ROA) indicate?

Managerial effectiveness in generating profits with lower spending.

What does inventory turnover represent?

The number of times a company sells through its inventory in a given time period.

What is Total Cost of Ownership (TCO)?

The sum of all costs associated with every activity in the supply stream of a product.

What are the four elements of cost in TCO?

Quality, Service, Delivery, and Price (QSDP).

What is the significance of the acquisition cost in TCO?

It often accounts for only 25% to 40% of the total cost for most products.

How does procurement relate to purchasing?

Procurement is the overarching term that includes the action of purchasing.

What is the impact of a 10% cost reduction in purchasing?

It generates significantly more profit before tax than a 10% increase in sales.

What is the relationship between inventory and financial capital?

Inventory represents financial capital tied up and not available for other business uses.

What should procurement professionals recognize about purchase price?

It is important, but only one part of the total cost of ownership.

What is the role of purchasing personnel in procurement?

To spend less time on processing orders and more time on strategic purchasing activities.

What is the goal of supplier performance meetings?

To analyze specific PO data and improve procurement efficiency.

What is the purpose of blanket or open-end purchase orders?

To facilitate small value purchases and minimize processing costs.

What does a low inventory turnover ratio indicate?

The company is not selling products efficiently and may have excess inventory.

What is the main insight regarding TCO?

Acquisition costs are often a small portion of the total cost of ownership.

What is the significance of closing out a Purchase Order?

It confirms that all terms and conditions have been met and the transaction is complete.

What is the primary purpose of procurement?

To acquire goods and services needed for an organization.

What are the five key processes in supply chain management?

Plan, Source, Make, Deliver/Return, and Enable.

What is the Make versus Buy Decision?

The decision to produce an item internally or buy it from an outside supplier.

What are quantitative factors in the Make versus Buy decision?

Incremental costs of making or purchasing, such as manufacturing facilities and capacity.

What are qualitative factors in the Make versus Buy decision?

Subjective factors like quality control, supplier reliability, and customer impact.

List one reason for making products internally.

To protect proprietary technology.

List one reason for buying products from suppliers.

Cost advantage due to suppliers providing economies of scale.

What is in-sourcing?

Reverting to in-house production when external quality does not meet expectations.

What is co-sourcing?

Sharing a process or function between internal staff and an external provider.

What does backward vertical integration involve?

A company acquiring one or more of its suppliers.

What does forward vertical integration involve?

A company acquiring one or more of its customers.

What are some risks associated with outsourcing?

Potential loss of control and increased reliance on suppliers.

What are some benefits of outsourcing?

Allows concentration on core capabilities and reduces internal management problems.

What is the role of a cross-functional team in supplier selection?

To evaluate and select suppliers based on multiple criteria.

Name a commonly used criterion in supplier selection.

Reliability.

What is centralized purchasing?

A purchasing department at the corporate office makes all purchasing decisions.

What is decentralized purchasing?

Local purchasing departments make their own purchasing decisions.

List one advantage of centralized purchasing.

Leveraging purchase volume to negotiate better prices.

List one advantage of decentralized purchasing.

Knowledge of local requirements for better sourcing.

What are some reasons for global sourcing?

Access to low-cost labor and materials.

What is the financial significance of purchasing?

Purchasing decisions impact overall costs and profitability.

What is the basic purchasing process?

Identifying needs, selecting suppliers, placing orders, and managing deliveries.

What is the role of supplier management?

To maintain relationships and ensure supplier performance meets expectations.

What does the term 'extended workbench' refer to?

Using external capacity to supplement internal capacity during constraints.

What is the impact of the Make versus Buy decision on customers?

It can affect product quality, availability, and pricing.

What is the importance of communication capability in supplier selection?

Effective communication ensures alignment and understanding between the buyer and supplier.

What are some reasons companies pursue international purchasing?

To take advantage of tax breaks, low trade tariffs, access better technology, and respond to changes in the domestic business environment.

What is the definition of tariffs?

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

What are non-tariff barriers?

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

What is countertrade?

International trade by exchange of goods rather than by currency.

What are some challenges of international purchasing?

Knowledge of trade policies, awareness of tariffs, communication difficulties, sourcing issues, payment management, and cultural problems.

What is the role of import brokers?

Agents licensed to conduct business on behalf of importers, handling paperwork and customs clearance.

What do import merchants do?

They purchase and sell imported commodities for profit, taking title to the goods.

What is the function of trading companies in international purchasing?

They buy products in one country and sell them in different countries, often dealing with high production volume products.

What is competitive bidding in public purchasing?

A transparent procurement method inviting bids from suppliers through open advertising.

What is a sealed bid?

A document submitted in response to an invitation to bid, enclosed in a sealed envelope.

What is the difference between open and closed competitive bidding?

Open bidding allows anyone to attend the bid opening, while closed bidding is restricted to authorized personnel.

What is a bid bond?

A guarantee that the successful bidder will accept the contract once awarded.

What is a performance bond?

A guarantee that the work will be completed on time and meet specifications.

What is a payment bond?

A guarantee against third-party liens not fulfilled by the bidder.

What is benchmarking in sourcing practices?

Measuring what other businesses do best and matching their performance to improve supply chains.

What are some resources for learning about sourcing practices?

The Center for Advanced Purchasing Studies, CSCMP, and ISM.

What are key assessment criteria for improving the purchasing function?

Participating in multifunctional teams, optimizing supply base, and contributing to new product development.

What skills are required for modern purchasing professionals?

Interpersonal communication, analytical skills, negotiation skills, and strategic thinking.

What characterizes world-class procurement organizations?

Being trusted advisors, driving supplier innovation, providing analytics-backed insights, and managing risks effectively.

How do world-class procurement organizations approach staffing?

They invest in training and retention, pay higher salaries, and maintain productivity with fewer full-time employees.