The Procurement and Supply Manager s Desk Reference

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3 The Procurement and Supply Manager s Desk Reference

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5 The Procurement and Supply Manager s Desk Reference Second Edition FRED SOLLISH, MS JOHN SEMANIK, MBA John Wiley & Sons, Inc.

6 Copyright 2012 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) , fax (978) , or on the Web at Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) , fax (201) , or online at Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) , outside the United States at (317) or fax (317) Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at Library of Congress Cataloging-in-Publication Data: Sollish, Fred. The procurement and supply manager s desk reference / Fred B. Sollish, John Semanik. 2nd ed. p. cm. Includes index. ISBN (hardback); ISBN (ebk); ISBN (ebk); ISBN (ebk) 1. Industrial procurement Handbooks, manuals, etc. 2. Purchasing Handbooks, manuals, etc. 3. Materials management Handbooks, manuals, etc. I. Semanik, John. II. Title. HD39.5.S dc Printed in the United States of America

7 Contents Preface to the Second Edition Acknowledgments xi xiii CHAPTER 1 Procurement and Best Business Practices 1 Understanding Procurement 1 Understanding and Conveying Requirements 2 Creating Strategic Plans and Tactics 4 Finding Innovative Methods and Exploring Alternatives 5 Providing Procurement Services 6 Accepting Orders 7 Placing Orders 10 Mastering Procurement and Business Tactics 13 Budgets and Expense Allocation 13 Internal Control Systems 14 Establishing Procurement Methods 15 Internal Cost-Related Analysis Tools 18 Keeping Supplier Information 22 Summary 23 CHAPTER 2 Sourcing Management 25 Establishing Requirements 25 Creating and Organizing Requirements 25 Developing Specifications and Formats 27 Statement of Work 31 Terms and Conditions 32 Specification Traps 32 Locating and Developing Sources of Supply 33 Types of Competition 36 Locating Suitable Suppliers 37 Market Analysis: Determining Changing Marketplace Factors 39 Obtaining Bids and Proposals 41 v

8 vi Contents Bidding Guidelines 41 Formulating the Bid or Proposal Type 42 Managing Sourcing Data 45 Categories of Existing Sources 45 Maintaining Sourcing Lists 47 The Strategic Sourcing Plan 47 Operational Sourcing Strategy 54 Summary 57 CHAPTER 3 Solicitation of Bids and Proposals 59 Solicitation Planning 59 Solicitation Methods 66 Summary 68 CHAPTER 4 Supplier Selection Criteria 69 Selecting the Supplier and Awarding the Contract 69 Operational Measures and Measures of Efficiency 75 Applying Selection Criteria 77 Administering the Contract 86 Summary 87 Note 88 CHAPTER 5 Contracts and the Legal Aspects of Procurement 89 Contract Essentials 89 Contract Requirements 91 Contract Types 92 Other Contract Types 98 Methods of Exchange 99 Other Contract Elements 100 Legal Authority and the Buyers Responsibilities 101 Reviewing Contracts for Legal Requirements 103 Aligning Contracts and Practices with Policy 105 Maintaining Procurement Documents and Records 107 Summary 108 CHAPTER 6 Supplier Diversity 109 Diversity Programs 110 U.S. Small Business Support 112 The U.S. Small Business Administration (SBA) 112 Contracting 113

9 Contents vii The Business Case for Diversity 115 Supplier Diversity Best Practices 116 Global Supplier Diversity 118 Diversity Advocacy Organizations 119 Summary 123 CHAPTER 7 Risk Management 125 TheNatureofRisk 125 Why Is Understanding Risk Important? 125 Risk Management Principles 126 Resources for Additional Information 134 Summary 136 CHAPTER 8 Sustainability 137 Issues in Sustainability 137 Guidelines 146 Lean Six Sigma 149 Criteria for Supplier Evaluation 150 Institute for Supply Management s Principles of Sustainability and Social Responsibility 151 Examples of Corporate Sustainability Efforts 152 Summary 154 Notes 154 CHAPTER 9 Negotiation 155 Assessing the Negotiating Environment 155 Gathering Information and Analysis 158 Preparing for the Negotiation 161 Conducting the Negotiation 167 Summary 172 CHAPTER 10 Contract Formation and Administration for Optimum Supplier Performance 173 Managing Contract Compliance 173 Tracking and Expediting Deliveries 179 Handling Supplier-Related Deviations 181 Summary 188 CHAPTER 11 Project Management 189 The Five Project Management Processes 189 Stage One: Initiating a Project 191

10 viii Contents Stage Two: Project Planning 193 Stage Three: Project Execution 199 Stage Four: Project Controlling 203 Stage Five: Project Closeout 206 A Key Knowledge Area: Project Procurement Management 207 Using a Matrix Model for Project Staffing 210 Summary 212 Notes 212 CHAPTER 12 Quality 215 Managing Quality Performance 215 Ensuring Quality Performance 220 Summary 226 CHAPTER 13 The Procurement Function s Internal Relationships 227 Understanding Key Departmental Roles 227 Developing Good Working Relationships 233 Participating in Cross-Functional Operations 237 Reengineering Supply Management 240 Summary 245 CHAPTER 14 Supplier Relationship Management (SRM) 247 Managing Productive Supplier Relationships 247 Developing Continuous Improvement 254 Pricing Factors and Supply 257 Representing the Organization 261 Summary 265 Note 265 CHAPTER 15 Leveraging Computer Systems 267 Using Basic Information Technology Processes 268 Using Software for Procurement 271 Sourcing Supply Management Tools 279 Summary 281 CHAPTER 16 Financial Decisions for Sourcing 283 Performing Make-or-Buy Analysis 283 Performing Lease-or-Buy Analysis 288 Formulating Financial Strategies 291 Summary 296

11 Contents ix CHAPTER 17 Source to Settle 297 Why Source to Settle? 297 Implementing an S2S Process 303 Managing the S2S Process 307 Outsourcing the S2S Process 308 Summary 309 CHAPTER 18 Material Management and Supply Operations 311 Inventory Control and Management Systems 311 Physical Management and Inventory Accounting 321 Disposition of Surplus Assets 323 Summary 326 CHAPTER 19 Logistics 327 The Logistics Process 327 Modes of Transportation 332 Traffic Management 335 Customs 336 Logistics in the Context of International Trade 339 Supplemental Information 345 Links 347 Summary 348 Notes 349 CHAPTER 20 Regulatory Compliance 351 Regulatory Factors Governing Procurement 351 Government Organizations and Roles, Regulations, and Controls 358 Tax Laws 363 FASB 364 Conformance to Law 364 Preventing Workplace Discrimination and Harassment 364 Summary 368 Note 368 About the Authors 369 About the Website 371 Index 373

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13 Preface to the Second Edition This book, now in its second edition, is written for the procurement and supply chain management professional needing a reference to the working methods available today for use on the job. It also has in mind the newly appointed executive or the staff member with only a cursory knowledge of the workings of procurement and supply management. It provides, we trust, a complete compendium of the information that is required to effectively carry out the responsibilities incumbent in the procurement and supply management area. Leading-edge business enterprises constantly look for ways to remain competitive. The procurement and supply chain management processes outlined in this book are just some of the ways business supply managers can make key contributions to their company s bottom line. The modern world of outsourcing requires proficient expertise in procurement and supply chain management that has not been seen in any other period during our lifetimes. The future is bound to rely even more on the expertise of effective leverage and the management of supply resources. Change is inevitable. And our profession is changing now even more rapidly than it has in the past. Therefore, we also hope this book will enable you to assess the value of new concepts and processes in our field, and assist you in keeping up with these changes. To be successful you must stay well ahead of the curve yet be ever mindful of the responsibility that rests with your choices. Make the right choices and you will succeed. Should you wish to contact us with input, comments, or suggestions about any subject in the book, please us at custsvc@supplyknowledge.com. Fred Sollish, MS, C.P.M. San Francisco, California John Semanik, MBA, C.P.M. San Jose, California xi

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15 Acknowledgments The information in this book is largely based upon the experience we acquired over several decades as practitioners and teachers. A thank-you goes out to those we have worked with and those who have taught us, and those professional organizations that have provided support...but mostly we want to thank our students, whose challenging questions sent us scurrying to learn more about our profession. Fred Sollish and John Semanik xiii