Chapter 02 The Purchasing Process

Chapter 2
The Purchasing Process
Monczka/Handfield/Giunipero/Patterson, Purchasing & Supply Chain Management, 6th Edition. © 2016 Cengage. All Rights
Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter Overview
• Purchasing objectives
• Strategic supply management roles and responsibilities
• Improving the procure-to-pay process
• Approval, contract, and purchase order preparation
• Types of purchases
• Improving the purchasing process
Roles and Responsibilities
Elements of the Purchasing Process (1 of 2)
• Identify user requirements

• Evaluate user needs effectively and efficiently
• Identify suppliers to meet that need
• Develop agreements with suppliers
Elements of the Purchasing Process (2 of 2)
• Develop ordering mechanism

• Ensure payment occurs promptly
• Ascertain that need was effectively met
• Drive continuous improvement
Purchasing Objectives
• Supply assurance
• Manage sourcing process efficiently and effectively
• Supplier performance management
• Develop aligned goals with internal stakeholders
• Develop integrated supply strategies that support business goals and
objectives
Supply Continuity
• Source products/services at right price

• Source them from right source
• Source them at right specification that meets users’ needs
• Source them in right quantity
• Arrange for delivery/service performance at right time to right internal
customer
Manage Sourcing Process
• Determine staffing levels

• Develop and adhere to administrative budgets
• Provide professional training and growth opportunities for employees
• Introduce improved buying channels within procure-to-pay systems
Supplier Performance Management
• Select competitive suppliers

• Identify new suppliers with high potential and develop closer relationships
• Improve existing suppliers
• Develop new suppliers that are not competitive with current suppliers
Develop Aligned Goals with Internal Stakeholders
• Consider internal customers as stakeholders

• Establish strong cross-boundary communication
• Develop cross-functional coordination and collaboration
• Develop positive, problem-solving relationships
Develop Integrated Strategies that Support Goals
and Objectives
• Match functional supply goals with organizational goals
• Become mutually-supportive, not counter-productive
• Leverage supply management’s substantial impact on firm’s bottom line
• Utilize supply management as strategic core competency
Reasons for Not Being Strategic
• Supply management personnel have not historically participated in

senior-level corporate planning
• Executive management has not always recognized benefits of world-
class supply management
Supply Market Intelligence
• Updates on supply market conditions and trends

• Identify emerging materials and service technologies
• Develop supply options and contingency plans to reduce risk
• Support requirements for diverse and globally competitive supply base
Strategic Supply Management Roles and
Responsibilities (1 of 2)
• Spend analysis
• Demand management and specifications/statements of work
• Category management and supplier evaluation/selection
• Contract management
Strategic Supply Management Roles and
Responsibilities (2 of 2)
• Cost management
• Managing procure-to-pay process
• Supplier relationship management
• Establish a supply management strategy
Spend Analysis
• Process of collecting historical data by commodity

• Drive all spend to a unit or rate of consumption
• Used to drive strategies in …
• Demand management
• Commodity management
• Risk management
Demand Management and Specifications/SOWs (1 of 2)
• Process of using consumption data to forecast and estimate future

consumption
• Optimize sourcing strategies
• Proactively set policies, procedures, and measurement systems
• Ensure appropriate levels of capacity in supply base to minimize risk
Demand Management and Specifications/SOWs (2 of 2)
• Establish fixed set of standards to limit options

• Restrict supply base to include only preferred suppliers that meet risk and
compliance requirements
• Challenge product and service specifications to drive out costs
• Review and develop statements of work
Category Management and Supplier
Evaluation/Selection (1 of 2)
• Process of developing insights into…
• Stakeholder requirements
• External industry intelligence
• Supply base capabilities
• Operational risks
• Strategy development
• Identify competitive value
Category Management and Supplier
Evaluation/Selection (2 of 2)
• Category strategy elements
• Business case to identify rationale for plan
• Risk mitigation plan
• Business value derived from implementation
• Negotiation plan
• Supplier scorecard
• Sourcing work plan
Contract Management (1 of 3)
• How to award contracts

• Competitive bidding
• How many suppliers to bid?
• Negotiation
• Use of cross-functional team?
• Some combination of both
• Supply management has ultimate responsibility for the contract
• Definition
• “A process associated with defining the contract, defining roles and
responsibilities of both parties, and advising when to modify and ensure
appropriate escalation.”
• Need for …
• Accuracy in terms and conditions
• Alignment with category strategy, required service levels, and periodic audits
• Need to trigger proactive sourcing prior to contract expiration

• Maintenance of contract database
• Initiation of compliance and/or improvement actions when less-than-desirable
supplier performance occurs
Cost Management (1 of 2)
• Understand true cost of purchased goods and services

• Unbundling price paid and various components over product lifecycle
• Deliver a target cost and a unit rate
• Use of decision-support tools and techniques
Cost Management (2 of 2)
• Develop insights to …
• Cost of supporting a process or commodity
• The gap between cost drivers and assumed business case
• Identify the business case
• Total cost of offering a service
• Development of cost models
Managing the Procure-to-Pay Process
• Automation of all transactional activities including …

• Requisitioning
• RFX (i.e., RFI, RFP, RFQ)
• Contract award
• Orders
• Approval
• Receipt
• Payment
Supplier Relationship Management (1 of 2)
• Day-to-day transactions
• Identification and mitigation of operational risk and deliverables
• Business continuity planning
• Understanding suppliers’ business challenges
• Identification of opportunities to improve value and reduce cost
Supplier Relationship Management (2 of 2)
• Establishing supplier scorecard metrics and reviewing progress

• Contract terms and conditions (i.e., the T’s and C’s)
• Leveraging flow of information between key internal process owners and
suppliers
Establish a Supply Management Strategy (1 of 2)
• Repeatable and well-defined process for building strategy and governance

• Clear alignment with executive vision and internal user-specific business
goals
• Process based on well-developed supplier market intelligence and internal
stakeholder inputs
Establish a Supply Management Strategy (2 of 2)
• Established goals and metrics for short-term project plans and longer term
plans
• Established procurement transformation initiatives
• Established communication plan to inform senior management
• Update and review against defined goals and objectives
Improving the Procure-to-Pay Process
• How much relative effort a company spends on P2P differs greatly between
sourcing situations
• Companies can use a superior P2P process to create competitive advantage
Stages of the Procure to Pay Process
• Forecast and plan requirement

• Need clarification (requisition)
• Supplier identification/selection
• Contract/purchase order generation
• Receipt of material or service and documents
• Settlement, payment, and measurement of performance
Benefits of E-Procurement
• Virtual elimination of paperwork

• Reduced time between need recognition and order release and receipt
• Improved communication
• Reduction in errors
• Reduction in overhead costs
• Reduction in P.O. and invoice processing time
Procure to Pay Process Map
Forecast and Plan Requirement (1 of 2)
• Need is beginning of purchasing cycle

• Sources of need
• Annual or biannual planning process
• New product development process
• Operational needs
• Extensive information flows
• Sometimes, actual needs are difficult to define clearly
Forecast and Plan Requirement (2 of 2)
• Types of needs
• Components
• Raw materials
• Subassemblies
• Finished goods
• Services
• Unplanned needs
• Ongoing need vs. spot buy
Needs Clarification: Requisitioning
• Purchase requisitions and/or statements of work

• Traveling purchase requisitions and/or bar codes
• Forecasts and customer orders
• Reorder point system
• Stock checks
• Cross-functional sourcing teams
Elements of a Purchase Requisition
• Description of required material or service

• Quantity required
• Estimated unit cost
• Operating account to be charged
• Date of requisition
• Date required
• Authorized signature
Statement of Work (1 of 2)
• Used for procuring services

• Specifies …
• Work to be completed
• When it is needed
• What type of service provider required
Statement of Work (2 of 2)
• Other details
• Required training
• Site safety
• Liability and insurance
• Uniforms
• Background checks
Traveling Purchase Requisition/Bar Codes
• Printed card, label, or bar code

• Description of item
• List of approved suppliers
• Prices paid to suppliers
• Reorder point
• Record of usage
• Conserves time for ordering routine materials and supplies
Forecasts and Customer Orders
• Anticipated customer orders

• Actual customer orders
• Customized product orders for specific customers
• New product development
• MRP systems
Reorder Point System
• Computerized system to track on-hand inventories, order quantities, and

demand forecasts
• Predetermined order point and order quantity
• When on-hand inventory level hits order point, standard order quantity is
generated
Stock Checks
• Sometimes called cycle counts

• Physical checking of inventory
• Verify actual on-hand inventory (POH)
• Make necessary adjustments to item inventory record
• Inventory may be misplaced, lost, damaged, short-shipped, or stolen
• Results in inaccurate inventory records (ROH)
Cross-Functional Sourcing Teams
• Used to proactively determine sourcing needs

• Identify potential suppliers before need occurs
• Faster order cycle times
• Better supplier evaluation and selection
Description (1 of 2)
• By market grade or industry standard

• Well-understood specifications for standard items
• Common agreement on what terms mean
• By brand
• Proprietary or unique products
• Brand provides perceived advantage to user
Description (2 of 2)
• By specification
• Materials used
• Manufacturing or service steps required
• Physical dimensions
• By performance characteristics
• Focus on customer’s desired outcomes
• Prototypes or samples
Supplier Identification and Selection (1 of 2)
• Existing supplier
• Familiarity and track record
• List of preferred suppliers
• New supplier
• Problem of maverick spending
• Need to identify potential suppliers
• Need to evaluate and qualify
• Negotiate or competitive bidding?
Maverick Spending
• User selects different supplier than supply management has approved

• May be acceptable when there is small chance of risk
• Loss of opportunity to control cost and/or leverage purchase volume
• Exposes firm to greater risk
Supplier Identification and Selection (2 of 2)
• Bidding versus negotiating

• Request for quotation
• Specifications or blueprints
• Supplier evaluation
When to Use Competitive Bidding (1 of 2)
• Volume is sufficiently high

• Specifications or requirements are clear to supplier
• Marketplace is competitive (i.e., adequate # of suppliers)
• Buyers solicit bids only from technically qualified suppliers who want contract
When to Use Competitive Bidding (2 of 2)
• Adequate time is available for suppliers to evaluate RFQ

• Buyer does not have preferred supplier for particular item
When to Use Negotiation (1 of 2)
• Any criteria for competitive bidding are missing

• Purchase requires agreement on wide range of performance factors other
than price
• Buyer requires early supplier involvement
When to Use Negotiation (2 of 2)
• Supplier cannot determine risks and costs before contract is awarded

• Supplier requires substantial lead time to develop and produce requested
item(s)
Request for Quotation
• Supply management invites quotes or bids from pool of potential suppliers

• Consists of necessary information to allow supplier to accurately respond
• Includes due date of bid
• Defines whether substitute offers are acceptable
• Normal practice is minimum of 3 bids
Specifications or Blueprints
• Used for …
• Complex products or services
• Untested or new production processes
• Consists of …
• Detailed blueprints
• Samples
• Technical drawings
• May include use of RFP
Evaluate Suppliers
• Evaluation of potential supplier pool

• Pre-qualification of capable suppliers
• Development of selection criteria
• Design supplier evaluation process
• Reverse auctions (or e-auctions)
• Low bids garnered electronically in real-time
Purchase Order (1 of 2)
• Drafted after supplier evaluation and selection is completed

• Legally-binding document (i.e., contract)
• Carefully define terms and conditions
• Standard legal language (i.e., “boilerplate”)
• Offer and acceptance
• Visibility throughout company
Purchase Order (2 of 2)
• Quantity
• Material specification
• Quality requirements
• Price
• Delivery date
• Method of delivery
• Ship-to address
• P.O. number
• Order due date
• Name and address of buyer
Typical Purchase
Order Form
P.O. Visibility
• Accounting (accounts payable)

• Requisitioner or requesting department
• Receiving
• Traffic management
• Supply management
• Quality control
Blanket Purchase Order
• Usually open for 1 year

• Used for repeated purchases of item or family of items
• Release materials as needed vs. issuing new P.O. each time
• P.O. remains open during specified term
• Importance of escape clause
Blanket Purchase
Order Form
Material Purchase Release
• Used to release shipments under blanket P.O.

• Provides notification to supplier about forecasted and actual needs
• User oftentimes makes actual order release
• Increasingly electronic
Types of P.O.s (1 of 2)
• Fixed-price contracts
• Financial risk – market fluctuations
• Industry competition
• Levels of supply
• Market prices
• Technology risk
Types of P.O.s (2 of 2)
• Cost-based contracts
• Expensive, complex, and critical purchases
• Risk of large contingency fee
• Need to identify and monitor relevant supplier costs
Receiving Process
Receipt and Inspection (1 of 2)
• Electronic vs. paper documents

• Acknowledgement and receipt
• Material packing slip
• Details contents of shipment
• Bill of lading
• Transfers ownership and possession
• Receiving discrepancy report
• Shortages and overages
Receipt and Inspection (2 of 2)
• Invoice settlement and payment

• Records maintenance
• Supplier performance database
• Continuously measure and manage supplier performance
• Purchasing cycle does not end with receipt of goods or services
• Frequency of evaluation and feedback
Invoice Settlement and Payment
• 3-way match required to pay invoice

• P.O.
• Invoice
• Receiving report
• Electronic funds transfer (EFT)
• Summarized monthly payments versus paying for each P.O. individually
• Mostly done electronically
Reengineering Procure to Pay (1 of 2)
• Secure top management support for initiative and project budget

• Map existing P2P process, highlighting problems
• Understand needs and requirements of user groups
• Utilize cross-functional review team, including users and suppliers as
appropriate
Reengineering Procure to Pay (2 of 2)
• Explore technology solutions with ERP systems

• Define new process and conduct pilot test
• Train and deploy other users (rollout)
• Monitor, update, and improve system
Types of Purchases (1 of 2)
• Raw materials
• Semifinished products and components
• Finished products
• Maintenance, repair, and operating (MRO) items
Types of Purchases (2 of 2)
• Production support items

• Services
• Capital equipment
• Transportation and third-party logistics providers
MRO Purchasing
• Most organizations do not track MRO items with same intensity as with
production items
• There are typically too many MRO suppliers
• There are too many small orders which take up too much time
Procuring Capital Equipment
• Assets to be used > 1 year

• Standard general equipment versus customized equipment
• Features of CE procurement
• Irregular frequency
• Requires large sums of money
• Highly sensitive to general economic conditions
Transportation and 3PLs
• Specialized type of services procurement

• Need to evaluate and select transportation service providers just like
production item suppliers
• Evaluate capability of service providers to coordinate wide range of logistics
services
Improving the Purchasing Process (1 of 2)
• Online requisitioning systems from users to purchasing

• Procurement cards issued to users
• E-commerce using the Internet
• Longer-term purchase agreements
• Cloud-based ordering systems
Advantages of Cloud-Based Ordering
• Immediate visibility to backorders

• Faster order input time
• Reduced ordering errors
• Order tracking capability
• Order acknowledgement from supplier
• Ability to batch multiple items from multiple users into single order
• Faster order cycle time
Improving the Purchasing Process (2 of 2)
• Purchasing process redesign

• Coordination of subprocesses
• Electronic data interchange (EDI)
• Online ordering through e-catalogs
• Allowing users to contact suppliers directly
• Convenience ordering system
• Reduced administrative burden

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Chapter 2

The Purchasing Process

• Identify user requirements

• Develop ordering mechanism

• Source products/services at right price

• Determine staffing levels

• Select competitive suppliers

• Consider internal customers as stakeholders

• Supply management personnel have not historically participated in

• Updates on supply market conditions and trends

• Process of collecting historical data by commodity

• Process of using consumption data to forecast and estimate future

• Establish fixed set of standards to limit options

• How to award contracts

• Need to trigger proactive sourcing prior to contract expiration

• Understand true cost of purchased goods and services

• Automation of all transactional activities including …

• Establishing supplier scorecard metrics and reviewing progress

• Repeatable and well-defined process for building strategy and governance

• Forecast and plan requirement

• Virtual elimination of paperwork

• Need is beginning of purchasing cycle

• Purchase requisitions and/or statements of work

• Description of required material or service

• Used for procuring services

• Printed card, label, or bar code

• Anticipated customer orders

• Computerized system to track on-hand inventories, order quantities, and

• Sometimes called cycle counts

• Used to proactively determine sourcing needs

• By market grade or industry standard

• User selects different supplier than supply management has approved

• Bidding versus negotiating

• Volume is sufficiently high

• Adequate time is available for suppliers to evaluate RFQ

• Any criteria for competitive bidding are missing

• Supplier cannot determine risks and costs before contract is awarded

• Supply management invites quotes or bids from pool of potential suppliers

• Evaluation of potential supplier pool

• Drafted after supplier evaluation and selection is completed

• Accounting (accounts payable)

• Usually open for 1 year

• Used to release shipments under blanket P.O.

• Electronic vs. paper documents

• Invoice settlement and payment

• 3-way match required to pay invoice

• Secure top management support for initiative and project budget

• Explore technology solutions with ERP systems

• Production support items

• Assets to be used > 1 year

• Specialized type of services procurement

• Online requisitioning systems from users to purchasing

• Immediate visibility to backorders

• Purchasing process redesign

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