Purchasing_Chapter 3: Purchasing Policy and Procedures

Policy

Refers to set of purposes, principles, and rules of action that guide an organization:

• Standard operating procedures

• Rules and regulation

Could be formal (written) vs informal policies

Advantages of Policies

• Define and clarify top mgmt objectives

• Provide framework for consistent decision-making and action

• Define rules and procedures for all employees

Disadvantages of Policies

• Restrict innovation and flexibility

• Might be viewed as substitute for effective management

Effective Policy

• Timely and current

• Relevant to work environment, culture

• Brief

• Well understood

• Helpful in problem solving

Categories of Purchasing Policies

• Corporate Purchasing Objectives

• Objectives of Purchasing Function

• Defining buyer-supplier relationship

• Defining operational issues

Corporate Purchasing Objectives

• Carry out executive policies

• Coordinate strategy development

• Evaluate purchasing effectiveness

Objectives of Purchasing Function

• Support all corporate objectives and policies

• 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

Defining the Conduct of Purchasing Personnel

• Ethics policy

• Former employees representing suppliers

  Access to insider knowledge

  Relationships with buyer’s personnel

• Reporting of irregular business dealings with suppliers (Ex: bribery, accepting rewards, late bids, owning a stake in supplier’s company)

Social and Minority Business Objectives

Support and develop minority business suppliers

Challenges:

• Relatively small size

• Inability to attract qualified managerial and technical professionals

• Lack of access to capital

Minority Business Supplier Policy

• State management’s commitment

• Evaluate performance potential of small and/or disadvantaged suppliers

• Invite minority bids on new contracts

• Establish minimum % of business for qualified small and minority suppliers

• Create training program to educate buyers

Environmental Policies ; Labor Human Right Policies

• Required by governments, investors and major customers

• Implement back through supply chain (so everyone is aware of)

Defining Buyer-Supplier Relationships

• Develop open communications channels

• Inform suppliers as to why they did not receive purchase contract

• Establish fair and transparent process to award purchase contracts

• Encourage suppliers to submit innovative ideas and joint sharing of benefits

Qualification and Selection (Maybe not testable?)

• 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

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

Operational Issues

• Hazardous materials

• Supplier responsibility for defective material

• Purchased item comparisons

• Other operating policies

Supplier 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

Purchased Item Comparisons

Periodic market comparison and evaluation of supplier’s competitors

• Cost

• Quality

• Delivery

• Technology

Procedure Manual

• Acts as reference guide (especially valuable to new employees)

• May specify industry best practices

• Must be reviewed periodically to ensure that it is timely and accurate

Purchasing Forms

• Description of proper use

• Detailed meaning of each information field

• Description of proper handling and storage of forms (Where, How long?)

• Approval process