The Ins and Outs of Purchasing for the New Buyer. Chris Cady Manager of Supply Chain & Facilities Aiken Electric Cooperative, SC

Transcription

1 The Ins and Outs of Purchasing for the New Buyer Chris Cady Manager of Supply Chain & Facilities Aiken Electric Cooperative, SC

2 Use of, or plagiarism of, any website, article, professional organization, commercial program, copyrighted material, corporation, proprietary information, recipes, logos, or other intellectual properties is accidental and without malice. Any such information or property is being used for educational purposes and in accordance with the owners rights and use agreements. Nothing in the presentation is meant to endorse or detract from any person s rights and ownership of their property. The presentor does not recommend, sanction, commission, or receive payment from anyone or any product or service mentioned in this presentation. Nothing in this presentation should be construed as legal or professional advice. This is just examples from my research and experience.

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7 Best Practices ISM states that a best practice is only a best practice if it works in a given situation. Best practices are proven and documented strategies or tactics that deliver measurable improvements in efficiency and/or results. 1. They support the firm s vision, mission, and strategies 2. Executive management supports them 3. They are accessible 4. People have been trained to use them 5. They are used consistently

8 The Leader s Role in SM Supply management should: Be a business partner not just a buyer; respond proactively to broader goals Look at innovative value, not just the price; readjust to capability sourcing Manage suppliers and support the full contribution potential of strategic suppliers Look for low-cost sources

9 The Leader s Role in SM (Cont.) Bring together a skilled and committed team Communicate a clear understanding of the vision to stakeholders Build credibility by consistent behaviors that support and promote the supply strategy Empower people to own the vision and make it happen

10 Building Credibility To build credibility, supply managers must inspire belief in their characters, words, and actions. Components of credibility are: Ethics, integrity, trustworthiness, and reputation Demonstrated performance and good reputation A clear and consistent message Commitment

11 Identifying Savings Opportunities The goal of a supply management professional is purchasing a specified item or service of the best possible quality at the least expensive price from qualified suppliers. Purchasing techniques: Implement an ABC stratification system Foster competition among suppliers Design for reuse Be selective in single sourcing Standardize goods/services Insist on a highly capable supply management staff Understand the impact of changes in operations Manage consumption

12 Supplier Relationships Advantages to developing mutually beneficial relationships with suppliers: Assist in meeting organizational objectives Decreased total costs Improved speed to market Process innovations Achievement of diversity initiatives Confidentiality Policies: Policies regarding the possession, use, and return/disposal of supplier s or organization s property (intellectual and physical) Organization policies for suppliers regarding IP

13 Sourcing Strategy Once we fully understand our needs and the market, a sourcing strategy can be developed. Key questions to ask are: Is it a buyer s or a seller s market? Are there many competitors who can satisfy the needs? Is this a strategic item for the cooperative or a routine purchase where cost is the key factor? Does the cooperative buy enough to be an important customer to the seller? Is the cooperative a small buyer in a market filled with large companies?

14 Standard Elements of an RFI Company background information List of top ten customers and percent of sales they represent Financial data: annual report or key ratios Quality history and plans Supplier capabilities regarding the specific products or services Description of company s mission and long-term plans List of equipment and processes (relevant to the request) Manufacturing locations and/or distribution channels Current and planned capacity and current capacity utilization Statements as to how supplier can support your objective

15 RFQ Requirements How or whether a supplier bids on a product or service is predicated on the information contained in the solicitation. All requests for quotes must include: Quantity Contact for information Quality requirements for questions and bid Specifications, drawings, submission standards or constraints Terms and conditions Pricing and unit of Deadline for bidding measure Criteria for awarding the Lead time business Delivery place and times Criteria for rejecting the Shipping/delivery method offer Payment terms Expected award timeframe

16 Methods of Procurement More frequently used purchasing methods: Contract Purchase order Blanket order Systems contracting Telephone order/fax order Electronic order system Petty cash/local small purchase Credit card/procurement card

17 Definition of Contract vs. Agreement The term contract is often used interchangeably with agreement, but has a different definition in the law. Contract: Defined in UCC 1-201(11) as the total obligation which results from the parties agreement as affected by this Act and any other applicable rules of law. Agreement: Defined in UCC 1-201(3) as the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance Whether an agreement has legal consequences is determined by the provisions of the Act, if applicable; otherwise by the law of contracts.

18 Four Essential Elements of a Contract The parties may agree to and create a contract for anything, as long as it is legal and meets the basic obligations of good faith, diligence, and reasonableness. Four Essential Elements of A Contract: Mutual assent: Offer and acceptance Consideration Competent parties Legality of purpose Under basic principles of contract law, consideration is the answer to the question, "Why are you entering this contract?" or "What are you receiving for being a party to this contract? In order for any agreement to be deemed legally binding, it must include consideration on the part of every person or company that enters the contract.

19 Types of Obligation Documents A contract may be formed orally or in writing, however only in rare instances is it appropriate to issue an oral contract. Written contract: A written contract is preferable because oral an contract is difficult to prove. Oral contract: Only in rare instances is it appropriate to issue an oral contract. The parties should then write down the agreement so that it is understood and enforceable. Electronic: With the passage of the E-Sign Act, E-commerce applications are commonly being used. Purchase order: May serve as an offer, acceptance, confirmation of an oral agreement, or trigger periodic performance. Letter of intent: A pre-contractual document used to express expectation of contract formation in the future.

20 Warehousing Considerations Facility designs Virtual vs. real warehouse Third-party Space requirements Fixed or random space Materials handling equipment Labor intensive vs. mechanized Order picking systems Docks Safety Security Sanitation Material handling systems Software support

21 The Importance of Supply Chain Management Identify key tracking trends that help quantify impacts Calculate and compare the value of a dollar saved to margins from sales Describe leading practices as used by others, to evaluate your supply management function Define organizational barriers to highlighting the value of supply management

22 Key Tracking Items Inventory Investment (RUS Form 7 or Form 12) Inventory as a percentage of Utility Plant in Service Carrying Cost Safety Stock Level Inventory Turnover Ratio Percentage of Inventory Invested in Safety Stock Importance of Reducing Cost

23 Components of Carrying Cost: Interest on Inventory Investment Insurance Taxes Storage Obsolescence & Deterioration

24 Components of Carrying Cost: Carrying Cost is the cost added to inventory staged waiting to be used to support existing facilities or build new facilities. Average Inventory ($3,267,861.50) Cost of Money (4.87%) Overhead (Insurance, Labor, Damages, and Taxes)(23%) Example: [$ (0.0487) + $761087] / $ ($ $761087) / $ % or $ Form 7 Part A Line 4 11 and divided by Part 0 Line 12 (Expenses divided by Revenue)

25 Maintain Proper Stock Levels Inventory Turns Ratio (Form 7 Part F) Calculated by dividing total inventory chargeouts in dollars by the average inventory. Beginning Inventory: $ 2,170,161 Ending Inventory: $ 2,182,781 Total Inventory Chargeouts: $ 4,312,071 Inventory Turnover = $ 4,312,071 (2,170, ,182,781)/2 Turns Ratio = 0.76

26 Maintain Proper Stock Levels Safety Stock Maximum monthly usage average monthly usage times lead time in months Example: Maximum Monthly Usage = 40 units Average Monthly Usage = 30 units Lead time = 2 months Safety Stock = (40-30)X2 = 10X2 = 20 Units

27 Maintain Proper Stock Levels Reorder Point Average monthly usage X lead time in months +safety stock Maximum Monthly Usage = 40 units Average Monthly Usage = 30 units Lead Time = 2 months Safety Stock = 20 units Reorder Point = (30X2)+20 = = 80 units

28 Maintain Proper Stock Levels If you have a $ 3,267,861 inventory and 30% of that is unnecessary Stock, your inventory cost of it is $980,360 $980,360 x 28% is equal to $274,500 per year to carry that Extra Stock Question is : Does everyone in your organization realize this, and consider it when making operational decisions?

29 Maintain Proper Stock Levels Inventory Turns Ratio Calculated by dividing total inventory chargeouts in dollars by the average inventory. Beginning Inventory: $ 2,170,161 Ending Inventory: $ 2,182,781 Total Inventory Chargeouts: $ 4,312,071 Inventory Turnover = $ 4,312,071 (2,170, ,182,781)/2 Turns Ratio = 0.76 Average Inventory = $3,267,861

30 Maintain Proper Stock Levels Inventory Turns Ratio Calculated by dividing total inventory chargeouts in dollars by the average inventory. Beginning Inventory: $ 625,797 Ending Inventory: $ 683,874 Total Inventory Chargeouts: $5,358,959 Inventory Turnover = $5,358,959 (625, ,874)/2 Turns Ratio = 8.18 Average Inventory = $1,309,671

31 Maintain Proper Stock Levels Inventory as percentage of Total Utility Plant If your ratio is 2%, It means that for every $100 of TUP, your system has $2 in materials on the shelf or in the yard. The ratio measures the relationship between the TUP and the materials needed to support construction and maintenance of the existing plant in place at the Cooperative. Inventory (Part C, Line 23) {$2,182,781} divided by TUP (Part C, Line3) {$205,472,877} multiplied by 100 to give Percent %

32 What this all means in Dollars 2% = $2 of every $100. Small savings add to large reductions. Reduce Inventory Reduce Purchase Price Reduce Expense

33 The Importance of Supply Chain Management All of the funds expended by the Cooperative (Utility) is received from the payments of the members. By design we place all cost into the rate base. In order to lower the members rate, we must lower the cost at the utility. We can not increase sales to cover increase cost, and we can t control all cost.

34 The Importance of Supply Chain Management However, we can do our best to save as much cost whenever procuring supplies, materials, and capital items. We have greater impact on the rates, by saving money than anything else. No new program or energy efficiency discovery nor generation technology can lower rates faster and lower than good old fashion thriftiness at the Cooperative Office.

35 Questions? Thank You for attending. Remember ISM-CU Roundtable Peer to Peer Discussion is today at 1:15pm. In Room 312A in this building.