Purchasing Guidebook Steven M. Bragg
Chapter 1 Overview of Purchasing... 1 Learning Objectives... 1 Introduction... 1 The Purchasing Function... 1 Purchasing within the Organization... 2 The Supply Chain... 5 Purchasing Planning... 6 Reactive Purchasing... 6 System-Generated Purchasing... 6 Proactive Purchasing... 6 Summary of Purchasing Planning... 7 Purchasing Positions... 7 Purchasing Manager... 7 Buyer... 8 Supply Chain Inventory Planner... 8 Purchasing Department Relations... 8 Purchasing Ethics... 9 Summary... 11 Review Questions... 12 Review Answers... 13 Chapter 2 Purchasing Processes... 15 Learning Objectives... 15 Introduction... 15 Purchasing Objectives... 15 Purchase Notification Alternatives... 16 The Purchase Requisition... 17 The Statement of Work... 20 Automated Materials Orders... 20 Manual Reorder Point Notifications... 21 Purchase Order Issuance Procedure... 21 Variations on the Purchasing Procedure... 26 The Bidding Procedure... 27 E-Procurement... 29 Summary... 29 Review Questions... 30 Review Answers... 31 Chapter 3 Procurement Cards... 33 Learning Objectives... 33 Introduction... 33 When and How to Use Procurement Cards... 33 Additional Procurement Card Topics... 34 Card Issuer Relations... 34 Card Rebates... 34 Cash Flow Management... 35 Card User Relations... 35 Departure of Card Users... 35 International Purchases... 35 Summary... 36 Review Questions... 37 Review Answers... 38
Chapter 4 Supplier Selection... 39 Learning Objectives... 39 Introduction... 39 Overview of Supplier Selection... 39 General Considerations... 39 When to Conduct a Supplier Selection... 41 Locating Suppliers... 41 Supplier Selection Criteria... 42 Mandated Suppliers... 42 Selection Rigor... 42 Selection Criteria... 43 Supplier Financial Analysis... 43 Supplier Capability Analysis... 44 Supplier Responsiveness Analysis... 45 Other Analysis Issues... 46 Site Visits... 46 Supplier Scoring... 49 Preferred Suppliers... 51 Summary... 51 Review Questions... 52 Review Answers... 53 Chapter 5 Supplier Management... 55 Learning Objectives... 55 Introduction... 55 Commodity Strategy... 55 Supplier Relations... 55 Attending to Supplier Needs... 56 The Supplier Scorecard... 56 Supplier Performance Index... 58 Other Supplier Monitoring Systems... 59 Supply Chain Improvement... 60 Supplier Risk Management... 61 The Maverick Supplier... 64 Summary... 65 Review Questions... 66 Review Answers... 67 Chapter 6 Competitive Bidding... 69 Learning Objectives... 69 Introduction... 69 When to Use Competitive Bidding... 69 Types of Bidding Requests... 69 Third-Party Assistance... 70 Contents of a Bid Package... 70 Locating Suppliers... 71 The Bidding Process Flow... 72 Handling Inquiries... 73 Handling Complaints... 73 Reverse Auctions... 73 Unethical Supplier Bidding Practices... 74 Summary... 74 Review Questions... 75 Review Answers... 76 Chapter 7 Supplier Negotiations... 77 Learning Objectives... 77 ii
Introduction... 77 The Need for Negotiations... 77 The Negotiation Team... 78 Initial Positions... 78 Negotiation Tactics... 79 Negotiation Sessions... 80 Negotiator Characteristics... 81 Negotiation Topics... 82 Negotiation Considerations... 83 Negotiation Failures... 84 Negotiation Follow-Up... 84 Summary... 85 Review Questions... 86 Review Answers... 87 Chapter 8 Contract Management... 89 Learning Objectives... 89 Introduction... 89 Contract Terms and Conditions... 89 Commercial Terms... 91 The Employee or Contractor Designation... 92 Contract Pricing Arrangements... 93 Firm Fixed Price... 93 Fixed Price with Adjustments... 94 Cost plus Pricing... 94 Time and Materials Pricing... 95 Summary of Pricing Arrangements... 96 Contract Templates... 96 Duration-Based Contractual Issues... 97 Contract Approval Process... 98 Contracts and Purchase Orders... 99 Change Order Management... 99 Contractual Disputes... 100 Document Retention... 100 Summary... 101 Review Questions... 102 Review Answers... 103 Chapter 9 Inventory Management Issues... 105 Learning Objectives... 105 Introduction... 105 Types of Inventory... 105 Excessive Inventory Issues... 106 Inventory Record Accuracy... 109 Operating with Reduced Inventory... 110 Basic Inventory Reduction Activities... 110 Advanced Inventory Reduction Activities... 110 A Reduced-Inventory Environment for Suppliers... 111 Bottlenecks in the Supply Chain... 111 Reasons to Retain Some Inventory... 112 Other Inventory Best Practices for Suppliers... 113 Supplier Lead Times... 113 The Total Inventory Concept... 113 Downstream Postponement... 114 Suppliers Own On-Site Inventory... 114 Suppliers Pre-Configure Goods... 115 Parts Standardization... 115 iii
Design for Broad Tolerance... 115 Design around Limited Availability Components... 115 Design around Lifetime Buy Decisions... 115 Advance Material Purchase Issues... 116 Inventory Disposal... 116 Summary... 117 Review Questions... 119 Review Answers... 120 Chapter 10 Logistics... 121 Learning Objectives... 121 Introduction... 121 Purchasing Responsibilities... 121 Free on Board Shipping Terms... 122 FOB Destination... 122 FOB Shipping Point... 122 Creating a Logistics System... 123 Transportation Brokers... 125 Just-in-Time Deliveries... 125 Additional Logistics Topics... 126 Summary... 126 Review Questions... 127 Review Answers... 128 Chapter 11 Spend Management... 129 Learning Objectives... 129 Introduction... 129 The Spend Database... 129 Spend Management Activities... 130 Spend Compliance... 131 Implications of Spend Management... 132 Rollout of Spend Management... 132 Summary... 132 Review Questions... 133 Review Answers... 134 Chapter 12 Quality Management... 135 Learning Objectives... 135 Introduction... 135 Quality from a Supplier s Perspective... 135 Quality from the Company s Perspective... 135 Quality Costs... 136 Quality Improvement Considerations... 137 Six Sigma... 137 International Quality Standards... 138 The Quality Message to Impart... 138 Summary... 139 Review Questions... 141 Review Answers... 142 Chapter 13 Cost Management... 143 Learning Objectives... 143 Introduction... 143 Types of Analysis... 143 Commodity Cost Management... 144 Price Analysis... 144 Supply and Demand... 144 iv
Supplier Pricing Strategies... 145 Volume Discounts... 147 Contract Duration... 149 Materials Sourcing Considerations... 149 Unique Product and High Value-Added Cost Management... 150 Target Costing... 151 The Basic Steps of Target Costing... 152 Value Engineering Considerations... 153 The Cost Reduction Program... 154 The Milestone Review Process... 154 Problems with Target Costing... 155 The Members of a Design Team... 155 Data Sources for Target Costing... 156 The Product Life Cycle and Target Costing... 156 Target Costing Summary... 156 Inter-Entity Price Reductions... 157 Maintenance, Repair, and Operations Cost Management... 157 Product Recycling... 159 Cost Management Failures... 159 Summary... 160 Review Questions... 161 Review Answers... 162 Chapter 14 Purchasing Financial Analysis... 163 Learning Objectives... 163 Introduction... 163 The Lease or Buy Decision... 163 Leasing Concerns... 165 Leasing Advantages... 166 The Make or Buy Decision... 167 The Outsourcing Decision... 170 Learning Curve Analysis... 171 Quantity Discount Analysis... 173 Early Payment Discounting... 174 Summary... 175 Review Questions... 176 Review Answers... 177 Chapter 15 Supply Chain Financing... 179 Learning Objectives... 179 Introduction... 179 Supply Chain Financing... 179 Summary... 180 Review Questions... 181 Review Answers... 182 Chapter 16 Purchasing Measurements... 183 Learning Objectives... 183 Introduction... 183 Overview of Purchasing Measurements... 183 Cost Change... 184 Proportion of Purchase Orders above Threshold... 185 Procurement Card Usage Percentage... 185 Proportion of Spend Managed... 186 Proportion of Spend with Preferred Suppliers... 187 Proportion of Certified Suppliers... 187 Supplier Performance Measurements... 188 v
Supplier Fulfillment Rate... 188 Supplier Defect Rate... 189 Supplier Billed Price Variance... 190 Perfect Order Percentage... 191 Premium Transportation Charges... 191 Proportion of Targeted Inventory Dispositioned... 191 General Management Measurements... 192 Negative Effects of Measurements... 192 Summary... 192 Review Questions... 194 Review Answers... 195 Chapter 17 Applicable Information Technology... 197 Learning Objectives... 197 Introduction... 197 Enterprise Resource Planning (ERP)... 197 Supplier Relationship Management (SRM)... 197 Dependent Demand Reordering Systems... 198 Warehouse Management System... 199 Distribution Requirements Planning... 200 Advance Shipping Notices... 201 Backflushing... 201 Electronic Catalogs... 202 Electronic Requisitions... 202 Electronic Tools... 202 Inventory Data Collection Methods... 203 The Customized Systems Conundrum... 205 Impact of information Technology on Purchasing... 206 Summary... 206 Review Questions... 207 Review Answers... 208 Glossary... 209 Index... 213 vi