SSM BOOK U1

RVS Institute of Management Studies
(Approved by AICTE, New Delhi & Permanently Affiliated to Anna University, Chennai),
Kumaran Kottam Campus, Trichy Road, Kannampalayam, Coimbatore-641 402.
BA4052 SOURCING AND SUPPLY can vary from one organization to another,
MANAGEMENT but there are some common key elements.
 A purchasing process is made up of all the
steps required to fulfill payment for any
UNIT - I INTRODUCTION TO goods/services that have been requested for
PURCHASING AND SUPPLY CHAIN purchase. This may vary based on company
MANAGEMENT process structures and needs, but steps in
this process typically involve: Reviewing
The Purchasing Process - Purchasing and approving purchase requisitions.
Policies and Procedures - Supply  Purchasing is the buying or acquiring goods
Management Integration for Competitive and services on behalf of a business or
Advantage - Purchasing and Supply company. It is an organized process within
Management Organization. a business that ensures that the company
Key Objectives: acquires the items that it needs, when it
needs, and at a reasonable cost. The
 To provide a basic understanding of purchase function of a business is vital in a
procurement and supply chain manufacturing company.
management concepts.  Purchasing is the process of obtaining
 To teach strategies for sourcing goods or services in exchange for money. It
materials and services efficiently. is the process of acquiring goods or services
 To explore techniques for managing in order to satisfy a company’s needs or
and optimizing inventory levels. objectives. The purchasing department is
 To focus on building and maintaining responsible for managing all aspects of the
effective relationships with suppliers. purchasing process, from finding and
 To learn methods for controlling costs evaluating suppliers to negotiating
and improving the overall supply contracts and ensuring that orders are
chain. fulfilled on time and within budget.
PURCHASING PURCHASING PROCESS
Purchasing is the practice of The purchasing process is a
purchasing goods and services. Sounds structured sequence of activities and steps
obvious, but it can get confused with other that an organization or individual follows to
areas of procurement. acquire goods or services. It can vary in
To be more specific, purchasing is complexity and formality depending on the
part of the procurement process that nature of the purchase and the
involves making the actual purchase. It organization's specific procedures. Here is
includes identifying a need, getting internal a brief overview of the typical steps in the
approval, and sending a formal purchase purchasing process:
order (PO) to vendors. Step 1: Identifying Needs:
DEFINITION OF PURCHASING The process begins with identifying the
 Purchasing is the process a business or need for a product or service. This could be
organization uses to acquire goods or triggered by various factors, such as
services to accomplish its goals. depleted inventory, changing business
 Purchasing is the formal process of buying requirements, or new projects.
goods and services. The purchasing process Step 2: Requisition:
1
SOURCING AND SUPPLY LOGISTICS AND SUPPLY CHAIN G. KATHIRESAN, ME.,MBA
MANAGEMENT MANAGEMENT Assistant Professor - RVSIMS
A requisition is created to formalize the organization's budget and procurement

need. This document outlines what is policies.
needed, the quantity required, and any
Step 9: Purchase Confirmation:
specific requirements.
The supplier receives the PO and confirms
Step 3: Vendor Selection:
their ability to fulfill the order. Any
After the requisition is approved, the discrepancies or issues are resolved at this
organization identifies potential suppliers stage.
or vendors. This might involve researching,
Step 10: Order Fulfillment:
soliciting bids, or using pre-approved
vendor lists. The supplier delivers the products or
services as specified in the PO, and the
Step 4: Request for Quotation (RFQ) or
organization receives and inspects them to
Request for Proposal (RFP):
ensure they meet the agreed-upon quality
Depending on the complexity of the standards.
purchase, an RFQ or RFP may be issued to
Step 11: Invoice and Payment:
vendors. An RFQ typically requests pricing
information, while an RFP seeks detailed The supplier sends an invoice for the
proposals for more complex projects. delivered goods or services. The
organization processes the invoice and
Step 5: Evaluation and Comparison:
makes payment as per the agreed terms.
The organization evaluates the responses
Step 12: Receipt and Record Keeping:
from vendors, considering factors like
price, quality, reputation, and delivery The organization keeps records of the
times. This often involves a cross- purchase order, invoice, and other relevant
functional team or a procurement documents for accounting and auditing
department. purposes.
Step 6: Supplier Negotiation: Step 13: Supplier Performance
Evaluation:
Negotiations with the selected vendor(s)
may take place to finalize terms and After the purchase, the organization may
conditions, pricing, and any other assess the supplier's performance, including
contractual details. factors like on-time delivery, product
quality, and customer service.
Step 7: Purchase Order (PO)
Generation: The purchasing process aims to
ensure that an organization acquires the
Once negotiations are complete, a purchase
right products or services at the right price,
order is generated. This document
on time, and in accordance with its quality
formalizes the agreement and specifies the
standards. It also promotes transparency,
product or service, quantity, price, and
accountability, and efficiency in
delivery terms.
procurement activities. The specific steps
Step 8: Approval and Authorization: and procedures may vary between
organizations and industries, but this
The PO is reviewed and approved by
overview provides a general idea of how
relevant parties, ensuring it aligns with the
the process works.
2
PURCHASING POLICY procurement department. That means

purchasing is done within individual
A purchasing policy is a collection
departments.
of rules that control the requisition process.
Purchasing policies help procurement If the decision-maker in that
administrators implement their department decides to make a purchase
procurement strategy by creating a policy from a friend or relative, Is that acceptable
structure that is aligned with the within your company, or is that considered
organization's strategic purchasing a conflict of interest?
requirements.
 Example 2 – Personal Incentives For
Purchasing policy removes the The Buyer
ambiguity around purchasing products and
It is not uncommon for vendors to
services from your vendors. When you are
entertain the decision-makers during the
a small company, purchasing is performed
evaluation process or after they are selected
by very few employees. So you already
as a vendor.
have shared norms and you probably don’t
need a written policy. The question is to what extent?
However, as the company grows Let’s say the vendor takes the
from a few employees to a large number of decision-maker to Vegas for a trip just
employees or to multiple locations, this before the purchasing decision is made.
approach doesn’t work. If you don’t set up
a purchasing policy from the beginning, You should not be surprised that the
every department evolves with its own set vendor is selected for that product or
of processes. service.
As the company continues to grow, Is that acceptable behaviour in your

these individual policies become the new company?
norm, and it becomes difficult if not The point is that no matter what is
impossible, to consolidate these into one acceptable and what is not acceptable,
cohesive policy. Having a purchasing having a common standard across the board
policy from the start allows you to establish helps employees make their day-to-day
a standard set of guidelines across the purchasing decisions.
different locations.
Along with a purchasing policy, you
As you scale the operations, you can could implement a purchase approval
update the purchasing policy to process to mitigate unauthorized purchases
accommodate any specific requirements for or purchases from non-preferred vendors.
a location or department.
ROLE OF PURCHASING
ACCEPTABLE BEHAVIOR
If you do have a purchasing
These are your purchasing department, then a purchasing policy helps
commandments for your employees. Let’s you elevate the value of the procurement
look at some examples: department.
 Example 1 – Conflict Of Interest Just defining the role of purchasing
If you don’t have a purchasing will not help increase procurement
policy, you probably don’t have a dedicated
3
engagement with stakeholders. We wish it whether it is not OK for suppliers to bring

were that simple! any gifts.
However, by setting up a By defining guidelines for your
purchasing policy, you are letting suppliers, you can streamline the
employees know about the role of communication and engagement process
purchasing and how to engage with with your company.
purchasing.
CREATING A PURCHASING
A purchasing policy also helps you POLICY: STEP-BY-STEP PROCESS
establish and communicate a standard
In this section, we will cover the key
purchasing process for the company.
sections you need in a purchasing policy.
If you are using a purchasing system We will cover the table of contents first and
then a purchasing policy can help drive then go into each section.
adoption for that system.
 The objective of the purchasing policy
 ENGAGING WITH EXTERNAL  Role of purchasing
STAKEHOLDERS  Vendor setup and on boarding process
Purchasing policy is not just for  Contract signing authority
your employees but it also provides  Purchasing authority levels
standard guidelines for your suppliers on  The delegation of authority
how to engage with your company. If there  Purchasing process and accepted norms
is no purchasing policy, there are no  Invoices and accepted norms
guidelines for your suppliers.  Competitive Bidding
 Ethical purchasing and Conflict of
Following are some of the areas
Interest
where a purchasing policy can help
 Supplier diversity
 How to engage with your company. If  Record retention
potential vendors want to reach out to
Let’s look at each one of them now.
talk about their capabilities, how they
should engage? 1. The Objective Of The Purchasing
 What is acceptable and what is not Policy
acceptable? We talked about how
Keep the objective simple. You should
vendors can try to influence the
cover the why and scope of the purchasing
decision by engaging in unacceptable
policy.
behaviour. Now you can control that by
ensuring that your decision-makers For example –
behave ethically.
“The role of the purchasing policy
The alternative would be to define is to define standard methods and
this in your purchasing policy for your procedures for the Company to purchase
suppliers. products and services from different
vendors. This policy covers all expenses for
For example, you can define an
the company including items like taxes,
acceptable gift policy where you either
payroll payments, etc. Those are defined as
mention what kind of gifts are ok or
exceptions in the policy and proper
4
procedures are defined to manage these

payments.
A word of caution, Don’t get overly
Compliance with this policy is prescriptive on how purchasing would
mandatory for all employees. perform activities at this time. That should
Noncompliance with this policy could lead be handled by the control mechanism you
to action including termination of have in place. For example, if you have an
employment. The purchasing department is eSourcing tool, then that tool will take care
responsible for maintaining and of the scoring, evaluation ratings, etc.
implementing the processes defined in this
3. Vendor Setup and Onboarding
policy.
Process
2. Role Of Purchasing Department
The intent of this section is to
The purchasing policy is not the communicate to the company regarding the
only document where you should talk about vendor setup and onboarding process. The
the role of the procurement or purchasing purpose of this is two-fold.
department. But certainly doesn’t hurt to
You can help your employees
talk about the role of purchasing in your
understand the new vendor selection
company.
process.Your employees understand what
It varies by each company so documents they need from the vendor to set
customize this section based on your needs. them up. That allows the employees to set
You could add something simple like up the expectation with their vendors.
“The role of the purchasing What should be covered here?
department to help the organization get the
You should cover the process and
best value for the product and services we
supporting documents. Something on the
purchase, reduce cost, reduce supply risk,
lines of
and enabling stakeholders to reach their
business goals.” “All new vendors should be vetted
by the purchasing department to ensure that
Also, you can add a brief about the
they meet various predefined criteria for
role of the purchasing department in day-to-
vendor selection. If required, the evaluation
day activities. Something on the lines of:
should be conducted by inviting multiple
“Purchasing department is vendors to bid and then selecting the best
responsible for running the vendor value match vendor for the company.
selection process by working with different
Please note that this process is
stakeholders. The purchasing department
applicable to standard vendors. There are
would be the main point of contact for the
exceptions that would not be vetted by the
suppliers during the vendor evaluation and
purchasing department. Those exceptions
selection process. Purchasing will
include
coordinate the activities, schedule, and
scoring of the vendor responses by working 1. Taxes
with both internal and external
stakeholders” 2. Interest and bank payments
Use this section to introduce the 3. Government payments.

procurement value to the organization. All your other exceptions here”
5
The next section is to define the A TCV is calculated by taking the

vendor setup process. An example would annual committed amount X number of
be contract years. For example, if you are
committing $100,00 for 3 years, then the
“ All vendor setup requests should
total contract value is $300,000.
be sent to the A/P department with
supporting documents (include a link to the Before you do this, a quick
supporting documents). All requests must question.
be approved by the immediate manager and
Do you want the business to sign the
the approval should be attached to the
contract?
vendor setup request”
By business, we mean the budget
If you have a system to manage the
owner or the department which is
vendor request process then define the
committing to spend the money.
process here. If that is not the case, you
probably can accept setup requests through Or do you want signing authority to
email. We generally recommend setting up be centralized in a single place?
a generic mailbox to receive a supplier
onboarding request. For example We highly recommend that you
vendorsetup@yourcompany.com centralize the review and the signing
authority to a single group. We have seen
4. Contract Signing Authority this function sits within purchasing or legal.
Before we get into who can sign the Centralizing the review and signing
contract, it is important to identify when authority has two major benefits
you need a contract.
1) It is easy to ensure that the corporate
Some companies have a dollar standard is followed. The standards
threshold, for example – a contract is only could be legal terms like indemnity,
required over $50,000 in Total Contract insurance, or the law of a specific city.
Value (TCV). It could be commercial terms like
payment terms etc.
In other cases, we have seen that
2) By centralizing the review and signing
companies take a more holistic approach
authority, you can ensure that all
when it comes to contracts. They focus on
contracts are stored in a single place. It
risk rather than the dollar value.
becomes much easier to track contracts
If there is a risk that needs to be and renewals once you have contracts in
mitigated, they will put a contract together, a single place. Collaborate with your
no matter what the dollar amount is. legal team and set up a contract review
process. Some purchasing departments
The intent of this section is to define
have a more hands-on approach where
two things:
they review and sign contracts until the
a) Who can sign a contract and commit to contract is within the fallbacks defined
the company on behalf of the by the legal team. And in some
organization. companies, every contract must be
b) Are there different levels or individuals reviewed and signed by legal. There is
who can sign contracts based on the no right and wrong answer here, to
Total Contract Value (TCV). define what is more efficient for your
company.
6
2. Keep in mind the approval cycle

when you set up approval authority limits.
Signing authority
For example, if you set up approval
Once you have established who can authority in such a way that managers can
sign the contracts, the next step is to define only approve up to $5,000 then consider the
different levels at which contracts can be cost of sending every purchase for approval
signed. up the chain.
For example – in case of contracts You need to balance risk and

are signed within purchasing, you can set accountability.
up authority as following:
We suggest that you look at your
average order amount. If you don’t have
purchase orders, look at the average invoice
amount for vendor payments ( that excludes
payroll, finance payments, etc.)
Based on the amount, you can
define a threshold on what needs to be
5. Purchasing Authority Levels
approved at each level. Keep your process
Purchasing authority levels specify simple, because the approval cycle adds to
what amount is authorized at what level of the cost of the purchase order.
the organization before a purchase order
With that said, the simplest way to
(PO) can be issued to a supplier.
define a purchasing authority level is by job
This is also applicable to other titles or job levels. Here is an example:
expenses and non-PO invoices.
Why a different contract signing
authority and purchasing authority?
If you have centralized the
contracting authority, let’s say with
purchasing or legal. In that case, you still
want the actual purchases to be approved by When it comes to authorization
the business so that they are aware of where limits, it is a fine balance between risk and
they are spending their money. accountability. If your company culture
promotes accountability, then, by all
Moreover, not every purchase means, have a higher approval limit at
requires a contract, hence the need to define every level.
a separate purchasing approval authority.
But if you are focused on cost
Some considerations while defining control, maybe you want to define lower
the approval authority. limits so that all purchases are reviewed at
1. Keep it simple. If every time your a director level and above.
employees have to look up the policy to
6. Delegation Of Authority
understand where the approval should
come from, then it is not simple! The intent of Delegation of
authority is to define a process for an
7
approver to delegate their approval Requisition Process

authority levels to someone else.
This section covers how the
A delegation of authority can be requisitions should be submitted by the
temporary – for example, someone is on employees. If you have a purchasing
vacation, or it could be a permanent system, then mention that system here. In
delegation of authority, for example, an some cases, companies have different
executive permanently delegates the systems for different types of purchases.
approval authority to her executive admin. For example, Direct material requisitions
are created in the ERP system and Indirect
You should have a bare minimum of
materials are purchased through a different
two things in the delegation of authority
system.
The process for delegation of
In case you have a manual system,
authority.The levels to which delegation
then define the requirements for a
can be done.
requisition. For example, buying
The delegation process is justification, line-item details, preferred
straightforward, it is the standard process vendors, associated contracts, etc.
one has to follow to delegate the authority.
Approval Process
If you have a purchasing system, then most
systems have the ability for the users to This section covers how the
delegate their approval authority to requisitions would be approved and who
someone else. needs to review them before an order can be
created.
The second aspect of delegation is
to define the levels to which the authority If you have an automated
can be delegated. purchasing system, then you can just
mention that the approval authority is
For example, A person can delegate
defined in the system and the system would
one level up or one level down. The idea is
automatically route the requisition for
to ensure that even though the authority is
approval based on the purchasing policy.
delegated, it is delegated at a level where
the person can use the right judgment to In case this process is not
approve expenses. automated, then you should instruct your
employees to ensure that the spend is
That means, a manager can delegate
authorized at the right level based on the
to Sr manager or Director but can’t delegate
corporate spend policy.
down. Similarly, a Director can delegate
down to a Sr. Manager but not to a Purchase Order Process
manager.
This section covers how the
7. Purchasing Process And Accepted purchase orders would be generated and
Norms sent to the vendor.
This section is an opportunity for If the process is fully automated,
you to define a standard purchasing process then you can just mention that the system
you would like your employees to follow. would take care of sending the purchase
orders to the vendors.
Things which should be covered in
this section
8
In case this process is manual, you 8. Supplier Invoices And Accepted

can define your purchase order generation Norms
process in this section.
This section defines how the company is
More automation not just leads to going to accept the invoices from the
simplification of the process, it also reduces vendors: (see Fig 1)
the transaction cost of processing a
Invoice Submission Process
purchase order.
This section outlines the process
This is covered in Section 7
which the vendors need to follow to submit
“Purchasing process and accepted norms”
the invoices. The same is applicable to
of the purchasing policy template.
internal users too, in case they need to
Blanket Purchase Orders submit a request for payments or other
invoices where a purchase order is not
A blanket purchase order is a set
applicable.
amount that is preauthorized for a vendor.
In general, there are two approaches
For example, your cleaning supply
to submit invoices
vendor sends you a monthly bill for
cleaning services.  Send it to an email box – for example,
ap@yourcompany.com. Having a
Since the services are not fixed, the
simple email makes it easy for everyone
bill could be different from month to
to remember the email address. When
month.
your employees are communicating
So instead of creating a purchase with your vendors, they can ask them to
order every month, a blanket order allows send the invoices to this email address.
you to authorize an approximate amount  If you have an e-invoicing solution,
(Let say for a year) and the vendor can keep then you want to encourage your
on invoicing against that order till the vendors to use the e-invoicing solution
amount is exhausted. to submit the invoices. There are many
benefits of e-invoicing, some of which
If your company allows purchase
we have covered in different procure-
orders, then this section should define the
to-pay use cases.
following:
Whether your suppliers are sending the
 Who can issue blanket orders and for
invoices to an email box or using an e-
what type of purchases. For example –
invoicing solution, your goal should be to
blanket orders are generally accepted
avoid paper invoices, so that you are
for services and not materials.
spending resources on scanning the
 Duration of the blanket order – Is there invoices.
is a maximum duration of the blanket
order. We recommend a maximum of 6 It might not be possible all the time to
months. receive digital invoices, for example –
 The approval process for blankets if it is Utilities.
different from standard requisitions.
Do You Always Require A Purchase
Some companies do set up a separate
Order?
process to have more visibility into
blankets.
9
Some companies have a No PO, No Pay competitive bid requests in a timely

policy – that means a vendor will not be fashion.
paid unless an invoice is associated with a
Who will perform the competitive
valid purchase order number.
bidding, is it always the purchasing
It is certainly a best practice and we department, or do you want to enable your
encourage you to adopt these best practices stakeholders to get their own bids. In our
while setting up the purchasing policy. experience, it is a combination of both –
you let stakeholders get their own bids and
Make sure, you communicate the
some are supported by the purchasing
expectations to end-users. For this to work,
department.What happens when a
users need to create purchase orders in
competitive bid is not possible? You should
advance so that vendors can invoice against
clearly define those scenarios so that your
them.
employees/stakeholders are clear when a
If you don’t use purchase orders, then this bid is not required. Some examples
might be a hard sell. areRenewal of software maintenance. This
is generally from the OEM and hence there
An exception to the above process is limited opportunity to send it for bid.
Not all vendors would have purchase orders Sometimes you have a single source
or your employees would need to make vendor or sole source vendor. In that case,
payments, for example – regulatory a competitive bid is not possible.
payments. In that case, clearly identify
those exceptions so that there is no Here is the difference between sole
ambiguity in the process. and single-source vendors. In a single-
source scenario, there are multiple vendors
9. Competitive Bidding available but you have decided to purchase
Simply put competitive bidding is products or services from only one vendor.
the process to get bids from different That is a strategic relationship and doesn’t
suppliers so that you can pick up the best want to bid the purchases every time.
deal for your company. Best a deal doesn’t A sole source vendor is a scenario
always mean the lowest price. The best deal where there is only one source available for
or best value means the product or service the product you are purchasing. This is
which meets your expectations at the lowest often the case with your Direct material
value possible. suppliers because you are purchasing a
What to define in a competitive bid policy? unique product and you are often working
with suppliers to develop their capabilities.
A dollar threshold after which every
purchase must go through a competitive bid Here is an example of how you can
process. Depending upon the average define this (see fig 2).
purchase order Spend and control required, 10. Ethical Purchasing And Conflict Of
this could be as low as $10,000.
Interest
You have to balance the compliance This is an important topic and you
requirements with user experience and the should not only spend time adding this to
resources available. Assuming you go with your purchasing policy but also ensure that
a $10,000 limit, then do you have the you are often communicating this to your
resources who can support all the stakeholders and purchasing department.
10
Let’s first define a conflict of entertainment (Lunch, Dinner) during

interest. The meaning is an evaluation process. Our
recommendation is no but that is
“a situation in which the concerns or
completely up to you.
aims of two different parties are
 Whether purchasing professionals or
incompatible.”
any officer of the company can accept
In other words, if the person making gifts from the vendor.
the purchasing decision is somehow going  In some countries, a bribe from vendors
to benefit from the purchase transaction, is acceptable. We don’t condone it and
then there is a conflict of interest. should be completely prohibited.
Let’s take an example 11. Supplier Diversity

Bob is the head of engineering and Supplier diversity is not a good
he is looking for a vendor to provide corporate practice but it is also a way for
machined parts as per company your company to improve the community in
specifications. He calls a company which you live.
“Machine Parts Inc” which is owned by his
Here are a few things you can cover
brother in law and decides to purchase parts
in your purchasing policy. If you do
from him. That is a conflict of interest.
promote supplier diversity then here are
The same is applicable for the few things which you should cover in the
purchasing team too policy
Let’s say a purchasing professional  Do you have a stated goal for the
knows that the company often outsources inclusion of diverse suppliers? It is
software development work. He opens up common in public sector procurement
his own shop and become a supplier to the that a certain % of spend must come
company. That is a conflict of interest. from diverse suppliers. If you do
mention that in the purchasing policy
There are two approaches you can document.
take to avoid conflict of interest  Is there a certain category of supplier
Don’t do business where there is a diversity you are trying to promote?
conflict of interest.If there is a conflict of Some of the common ones are
interest, then it must be declared and the o Small Business – SBE
person who has a conflict of interest should o Small Disadvantaged business –
not be part of the evaluation process. SDM
o Women-owned business –
Ethical purchasing on the other WBE
hand is how purchasing professionals o Minority-owned business –
should behave when dealing with vendors MBE
You should explicitly define in the o Veteran owned business –
policy what that means and what are the VOBE
consequences of a policy violation.  Also, it would be beneficial to define
and communicate a process for
Things to cover engaging diverse suppliers. For
 Whether purchasing professionals example, you might want to define
should accept vendors’ invitations to certain categories where you want more
11
diverse suppliers. You would also want With that said, let’s look at some
to provide some resources on your key considerations for defining your
corporate website for diverse suppliers company’s purchasing policy.
so that they can know more about your
1. Keep It Simple
program.
Are we stating the obvious? Yes and
12. Record Retention
No
This may or may not be a part of the
Everyone has heard this advice
purchasing policy document at your
before but you would be surprised to see a
company because certain companies
lot of purchasing policies that are full of
maintain a separate document retention
pages and pages of legal and procurement
policy that covers all documents across the
jargon.
board.
So the obvious question is – for
If you do cover this in the policy,
whom are we writing this policy? Is this
connect with your legal and tax department
policy for the purchasing team or is this
and they can help you with understanding
policy for the employees of the company?
the document retention policy.
It is for the employees of the
Tax likes to keep to retain
companies so that they understand how you
purchasing records for tax audits and other
conduct purchasing in this company.
reference purposes. Generally, the policy is
for 7 years. Here is a good source for So if you are thinking that your
different categories and record employees are going to read pages and
retention(Fig 3) pages of the purchasing policy document to
understand how to buy something, good
Considerations For A Purchasing Policy
luck with that!
Though the procurement function
Here are a few suggestions on
has some common traits from company to
keeping the purchasing policy simple
company, it is highly dependent on the
nature of the company and the type of Short And Concise
Spend.
Keep the purchasing policy as short
as possible. How short?
We would recommend not more
than 6-8 pages. That should be sufficient to
communicate all you have to say about your
The same is true for the purchasing purchasing policies. We don’t have any
policy. You might be able to adopt a scientific data to prove this but based on our
standard template but then you need to experience, this seems to be the optimum
consider whether those policies are length.
applicable to you are not. That is why we Use Simple Language
are not providing you a template for a
purchasing policy but an approach and the Don’t use jargon in the document,
important points you should cover in the use normal language. For example, instead
purchasing policy. of saying RFI or RFP, you can say we
12
would send this out for bid to different Let’s say as part of the purchasing
suppliers. policy, you have defined a new set of
authorization levels for approval of
Keep The Jargon Limited.
purchases.
A good way to check the jargon
So you currently may have a simple
density is by asking a non-finance and
purchase approval process where the
procurement person to proofread the policy.
approval always comes from the manager
That would help you weed out the but now your new process requires
unnecessary jargon in the document. approval for different stakeholders based
on the total spend. You also incorporated a
Give Examples new approval requirement from
You can significantly increase the procurement.
chance of purchasing policy adoption by Can this new approval process be
providing examples for each of the easily implemented?
scenarios.
Yes, if you have a purchasing
For example, if you are talking system with flexible workflow support.
about a sole source (if there is the only
vendor who can suffice your needs) vendor No, if you have a manual approval
then provide an example where that would process and now the users are left to
be applicable in your company. Let’s say interpret the approval process.
you already have a sole source vendor for a
This is just one example but
given category or widget, then use that
needless to say, it is not going to help to
example.
have a strong purchasing policy if it can’t
Similarly, if you are talking about be implemented.
ethical purchasing and conflict of interest.
Adoption Challenge
Give a hypothetical example. For example,
Bob is responsible for purchasing cleaning We talked about providing
and janitorial services. Purchasing it from a examples, so here is one more example
company where he is a part-owner and his
Let’ say your company decided to
wife is the CEO is a conflict of interest.
implement a No PO, No Pay policy. In
Your employees need to understand simpler words, every purchase must be a
the optics of the situation from other purchase order before the supplier can be
perspectives to better relate to such issues. paid.
2. Implementation And Adoption First Your organization is used to just
calling the vendors and have them send the
The policy is of no use if the policy
invoice for payment.
can’t be easily adopted by your employees
or it can’t be implemented. So do you have an adoption
challenge at hand?
We will explain a few example
cases It looks that way. How do you
overcome that?
Implementation Challenge
You can make the change gradually
over a period of time. For example, first,
13
move the credit card users to purchase 4. Resource Requirements

orders for all material items and then move
Are you staffed adequately to
to service orders in the next stage.
support your purchasing policy?
3. Communication
A purchasing policy is a great start
Most of the purchasing departments but make sure that you have sufficient staff
have this expectation that every employee to support your purchasing policy.
must be aware of the company purchasing
Let’s say as a part of the purchasing
policies.
policy, you implement a bid policy. A bid
Just having a purchasing policy policy defines the process for evaluating
doesn’t mean people are reading it! suppliers.
You have to continuously Now one of the bid requirements is
communicate the purchasing policy out to that every purchase greater than $x amount
your employees and especially new should follow a 3 bid and buy process. That
employees. means you at least have 3 bids from
different suppliers before you can make a
We suggest that you create a cheat
decision.
sheet (not more than one page) that lists the
key areas you want your employees to be Let’s say everything goes per your
aware of. At a bare minimum, you should plan and now everyone is following a 3 bid
have the following process.
1. Purchase approvals Do you have enough purchasing
team members to support the new bid
2. Need for purchase orders
process?
3. Contract authorization limits and
Do you have an SLA defined with
who can sign a contract.
your stakeholder at which time you need to
To ensure the adoption of the get back to them?
policy, make frequent contact with your
All these are practical
employee base through emails, lunch, and
considerations to ensure that what you are
learn events, etc.
putting out there is fully adopted by your
For new employees – talk to your employees.
HR team and see if the purchasing cheat
If you don’t have enough data to
sheet can be introduced in the employee
understand your resource requirements,
onboarding guide or training.
make an educated guess. The other
Purchasing policy adoption needs approach would be to start small, for
continuous communication and reminder. example, set up a higher amount above
which the bid process needs to be followed.
One more thing, seek continuous
feedback on how the policy is working and 5. Intent And Control
incorporate that feedback. You as the
When defining the corporate
policy owner would not know all the
purchasing policy, also called corporate
purchasing scenarios, so continuously ask
spend policy – you should focus on two
for feedback and improve the purchasing
things
policy.
14
You explained the intent to

employees but you have control to ensure
1. What is the intent for each policy
they follow the policy.
in the purchasing policy
If you have a purchasing system that
2. What controls are available or
is required to be used for purchasing
what controls needs to be implemented to
anything in the company, then you can
ensure compliance
build an approval workflow to ensure that
Here is why they are important all purchases are reviewed by purchasing to
enforce compliance.
In our experience, employees adopt
the policy when they understand the intent The other control mechanism is No
behind it. Just asking them to do something purchase, No pay policy. This will ensure
without explaining the need for it would not that a purchase order is always created. We
lead to the desired adoption levels. assume that you have controls to review all
purchase orders before it is sent to the
Let’s take an example – Bidding supplier.
policy to ensure that you are getting the best
rate possible. Intent and control go hand in hand.
You might be able to explain the intent but
If you are implementing a bid without a compensating control, you would
policy, most of the employees watch this as not achieve 100% purchasing compliance.
policing by corporate and unnecessary
delays for them in making vendor selection By implementing a purchasing
decisions policy, you get the following benefits:
However, you should make every  A process to control cost through an

attempt to explain the intent behind the effective purchasing process.
policy whether in writing or verbal  Less time spent on approving purchase
communication. requests.
 Reduced opportunity for fraud.
For example, the intent behind the
bidding policy is to enable an objective SUPPLY MANAGEMENT
evaluation of the suppliers to get the best INTEGRATION FOR COMPETITIVE
deal for the business and company. We ADVANTAGE
achieve this by running a formal evaluation
Supply Chains are being recognized
process. Our process is agile to adapt to
as the single most important channel to
your needs so that we can enable you to
differentiation and competitive advantages.
make faster and better vendor selection
As part of their quest to improve product
decisions.
marketing, companies strive to establish
Now let’s talk about control, by strong, high-performing supply chains that
control, we mean methods, procedures, will speed up, increase efficiency and
tools, etc. which would use to implement become more economically advantageous
and track compliance with the purchasing compared to their competition.
policy.
In business, supply chain
Let’s continue with the above competitiveness encompasses an approach
example of the bidding policy. based on enabling the customer to gain a
15
competitive advantage through value A company’s success depends heavily

derived from Supply Chain excellence. on how well and effectively its Supply
Chain is managed. It is possible to enhance
Several studies indicate that higher
customer service through exceedingly good
SCM levels can result in both greater
SCM. In general, cash flows increase
business agility and stronger organizational
directly due to the timely delivery of goods,
performance on competitive issues.
by consistently meeting and exceeding
Additionally, competitive advantage has
consumers (customer’s) ever-increasing
the potential to impact results positively for
expectations
organizations.
For Supply Chains to function
How Supply Chains Create a Competitive
effectively, new processes and technologies
Advantage?
must be implemented/used to be able to
 Planning Supply Chain related fully satisfy the demands and expectations
activities in real-time is becoming of customers.
increasingly important.
PURCHASING AND SUPPLY
 Having a Supply Chain Strategy based
MANAGEMENT ORGANIZATION.
on collaboration builds further
competitiveness. Purchasing Organization:
 Increasing efficiency through
A purchasing organization, in a
automation of Supply Chain processes
business context, refers to a dedicated
builds responsiveness.
entity or department within a company that
 Agile focused Supply Chain processes
is responsible for managing and overseeing
are more efficient.
the procurement process. The primary
 Understanding Supply Chain cost
function of a purchasing organization is to
drivers allows businesses to be more
ensure that the company acquires the goods
competitive.
and services it needs in an efficient, cost-
 Utilizing technology and AI in Supply
effective, and timely manner.
Chains provides businesses with
multiple sustainable competitive Key responsibilities of a purchasing
advantages. organization typically include:
A company’s success depends heavily Supplier Management: Identifying,
on how well and effectively its Supply evaluating, and selecting suppliers/vendors
Chain is managed. It is possible to enhance who can provide the required goods or
customer service through exceedingly good services. This involves negotiating
SCM. In general, cash flows increase contracts, establishing relationships, and
directly due to the timely delivery of goods, monitoring supplier performance.
by consistently meeting and exceeding
consumers (customer’s) ever-increasing Sourcing and Procurement: Determining
expectations the best sources for materials, components,
or finished goods. This may involve
In order for Supply Chains to function assessing both local and global markets to
effectively, new processes and technologies find the most cost-effective and reliable
must be implemented/used to be able to suppliers.
fully satisfy the demands and expectations
of customers. Cost Negotiation: Negotiating prices,
payment terms, and other conditions with
16
suppliers to achieve the best possible deals Purchasing organizations can take
for the organization. various forms depending on the structure,
size, and needs of a business. Here are some
Order Processing: Managing the process
common types of purchasing organizations:
of placing and tracking orders, ensuring
that the right quantities of products are 1. Centralized Purchasing:
acquired at the right time.
In a centralized purchasing organization, all
Risk Management: Assessing and purchasing activities are concentrated
mitigating risks associated with the supply within a single department or team. This
chain, such as potential disruptions, quality centralization allows for better
issues, or changes in market conditions. coordination, standardization of processes,
and often results in economies of scale as
Compliance: Ensuring that the
bulk purchasing can lead to cost savings.
procurement process complies with
relevant laws, regulations, and internal 2. Decentralized Purchasing:
policies.
In contrast to centralized purchasing,
Relationship Management: Cultivating decentralized purchasing involves
strong relationships with key suppliers to distributing procurement responsibilities
foster collaboration, innovation, and across different departments or locations
continuous improvement. within a company. Each department or
branch may have its own purchasing team,
Budget Control: Monitoring and managing
making decisions based on local needs and
the budget allocated for procurement
requirements.
activities to ensure cost-effectiveness.
3. Hybrid Purchasing:
The size and structure of a
purchasing organization can vary Some organizations adopt a hybrid
depending on the size and complexity of the approach, combining elements of both
business. In some cases, small businesses centralized and decentralized purchasing.
may have a single individual responsible Certain procurement functions may be
for procurement, while larger organizations centralized for efficiency, while others are
may have dedicated teams or even entire decentralized to address specific local or
departments devoted to purchasing departmental needs.
activities.
4. Global Purchasing:
Effective management of a
Global purchasing organizations operate on
purchasing organization is crucial for a
an international scale, managing
company's overall success, as it directly
procurement activities across multiple
impacts costs, quality, and the ability to
countries. This type is common among
meet customer demands. Modern
multinational corporations that seek to
procurement practices often involve the use
leverage global markets, optimize costs,
of technology, such as procurement
and ensure a consistent supply chain across
software and e-procurement systems, to
various regions.
streamline processes and enhance
efficiency. 5. Strategic Purchasing:
The Different Types of Purchasing In a strategic purchasing organization, the
Organizations: focus is on aligning procurement activities
17
with the overall strategic goals of the Chain Management (SCM) organization, is
company. This involves not only obtaining responsible for overseeing and managing
goods and services but also considering the entire supply chain process within a
factors such as innovation, risk company. The supply chain encompasses
management, and long-term supplier all the activities involved in the production
relationships. and delivery of goods and services, from
the acquisition of raw materials to the
6. Category Management:
delivery of the final product to customers.
Some organizations structure their The primary goal of a Supply Management
purchasing functions based on product or Organization is to ensure the efficient, cost-
service categories. Category managers are effective, and seamless flow of materials,
responsible for specific types of goods or information, and processes throughout the
services, overseeing the entire procurement supply chain.
process for those categories and working to
Key functions and responsibilities
optimize performance within their assigned
of a Supply Management Organization
areas.
include:
7. Project-Based Purchasing:
Strategic Planning:Developing and
In project-based organizations, purchasing implementing strategic plans for the supply
activities are organized around specific chain to align with the overall business
projects. Project managers work closely objectives. This involves considering
with procurement teams to acquire the factors such as market demand, production
necessary resources and materials for the capabilities, and distribution networks.
successful completion of a particular
Supplier Relationship Management:
project.
Establishing and maintaining relationships
8. Outsourced Purchasing: with suppliers to ensure a reliable and high-
quality supply of materials. This includes
In certain cases, companies may choose to negotiating contracts, monitoring supplier
outsource their purchasing activities to performance, and managing risks
external procurement specialists or associated with the supply base.
organizations. This can be a cost-effective
solution, particularly for smaller businesses Procurement and Sourcing: Managing the
that may not have the resources to maintain procurement process, including sourcing
an in-house purchasing department. raw materials, components, and finished
goods. This involves working closely with
The choice of purchasing purchasing organizations to optimize costs,
organization type depends on factors such quality, and lead times.
as the company's size, industry,
geographical reach, and strategic priorities. Inventory Management: Optimizing
Additionally, technological advancements, inventory levels to balance the costs of
such as the use of e-procurement tools and holding stock against the risks of stockouts.
software, can influence the structure and This includes implementing inventory
efficiency of purchasing organizations. control systems, demand forecasting, and
order fulfillment strategies.
Supply Management Organization.
Logistics and Distribution: Coordinating
A Supply Management the movement of goods from suppliers to
Organization, often referred to as a Supply
18
manufacturers and from manufacturers to covering multiple functions. Overall, an

distributors and retailers. This involves effective Supply Management
selecting transportation methods, managing Organization plays a critical role in a
warehouses, and optimizing distribution company's competitiveness and ability to
networks. meet customer expectations.
Demand Planning and Forecasting: Types of Supply Management
Analyzing market trends, historical data, Organization:
and other factors to forecast demand for
Supply Management Organizations can
products. Accurate demand forecasting
be categorized based on different factors,
helps in managing inventory levels and
including their structure, focus, and
production schedules efficiently.
strategic approach. Here are several types
Risk Management: Identifying and of Supply Management Organizations:
mitigating risks throughout the supply
1. Centralized Supply Chain
chain, such as disruptions in the supply of
Organization:
materials, geopolitical issues, natural
disasters, and other external factors that In a centralized model, all supply chain
could impact operations. functions are consolidated into a single unit
or department. This structure promotes
Technology Integration: Implementing
standardization, efficiency, and centralized
and leveraging technology, including
decision-making. It is common in
supply chain management software and
organizations seeking tight control over
systems, to enhance visibility,
their entire supply chain.
collaboration, and efficiency across the
supply chain. 2. Decentralized Supply Chain
Organization:
Continuous Improvement: Implementing
processes and initiatives to continuously A decentralized model distributes
improve the performance of the supply supply chain functions across various
chain. This involves analyzing key business units or regions. Each unit or
performance indicators (KPIs) and location may have its own supply chain
identifying opportunities for optimization. team, allowing for greater flexibility and
adaptability to local conditions. This model
Compliance and Sustainability: Ensuring
is often employed by large, diversified
that the supply chain operations comply
companies.
with relevant regulations and standards.
Additionally, incorporating sustainable 3. Integrated Supply Chain
practices into the supply chain, considering Organization:
environmental and social factors.
An integrated supply chain organization
The structure and complexity of a emphasizes collaboration and seamless
Supply Management Organization can vary coordination between different supply
depending on the size and nature of the chain functions. This approach aims to
business. Larger companies may have break down silos and optimize end-to-end
dedicated teams or departments for each processes, fostering better communication
aspect of supply chain management, while and efficiency.
smaller businesses may have individuals or
teams with broader responsibilities 4. Outsourced Supply Chain
Organization:
19
Some companies choose to outsource 9. Digital Supply Chain

certain aspects of their supply chain Organization:
management to third-party logistics
With the increasing role of
providers or supply chain management
technology, a digital supply chain
firms. This allows the organization to focus
organization leverages digital tools and
on its core competencies while leveraging
technologies, such as data analytics,
external expertise.
artificial intelligence, and IoT (Internet of
5. Strategic Supply Chain Things), to enhance visibility, efficiency,
Organization: and decision-making throughout the supply
chain.
In a strategic model, the supply chain
organization is closely aligned with the 10. Sustainable Supply Chain
overall strategic goals of the company. It Organization:
involves considering the supply chain as a
A sustainable supply chain
strategic asset and using it to gain a
organization integrates environmental,
competitive advantage, whether through
social, and ethical considerations into its
cost efficiency, innovation, or
operations. It focuses on responsible
responsiveness.
sourcing, reducing environmental impact,
6. Lean Supply Chain and promoting social responsibility
Organization: throughout the supply chain.
A lean supply chain organization The choice of the supply chain
focuses on eliminating waste and organization type depends on factors such
optimizing efficiency. This approach often as the nature of the industry, company size,
involves adopting lean principles, such as geographical reach, and strategic goals.
just-in-time inventory management and Many organizations may incorporate
continuous improvement, to minimize costs elements from multiple types to create a
and enhance overall value. customized approach that aligns with their
unique needs and challenges.
7. Agile Supply Chain
Organization:
An agile supply chain organization is
designed to quickly respond to changes in
market conditions, customer demands, and
disruptions. It emphasizes flexibility, rapid
decision-making, and adaptability to
navigate uncertainties effectively.
8. Demand-Driven Supply Chain
Organization:
In a demand-driven model, the supply
chain organization places a strong emphasis
on understanding and responding to
customer demand. This often involves real-
time data analysis, dynamic planning, and a
focus on customer satisfaction.
20
21
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RVS Institute of Management Studies

A requisition is created to formalize the organization's budget and procurement

PURCHASING POLICY procurement department. That means

As the company continues to grow, Is that acceptable behaviour in your

engagement with stakeholders. We wish it whether it is not OK for suppliers to bring

procedures are defined to manage these

Use this section to introduce the 3. Government payments.

The next section is to define the A TCV is calculated by taking the

2. Keep in mind the approval cycle

For example – in case of contracts You need to balance risk and

approver to delegate their approval Requisition Process

In case this process is manual, you 8. Supplier Invoices And Accepted

Some companies have a No PO, No Pay competitive bid requests in a timely

Let’s first define a conflict of entertainment (Lunch, Dinner) during

Let’s take an example 11. Supplier Diversity

move the credit card users to purchase 4. Resource Requirements

You explained the intent to

However, you should make every  A process to control cost through an

competitive advantage through value A company’s success depends heavily

manufacturers and from manufacturers to covering multiple functions. Overall, an

Some companies choose to outsource 9. Digital Supply Chain

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