Policy

• The term policy includes all the directives,

both explicit and implied, that designate the
aims and ends of an organization and the
appropriate means used in their
accomplishment.
• Policy refers to the set of purposes, principles,
and rules of action that guide an organization.

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 Effective Policy

• Policies that are subject to different

interpretations will, over a period of time,
result in several possible outcomes.
• This can lead to inconsistent behavior, as
people will simply ignore the policy because it
is so difficult to interpret.

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 “Four Rights of Purchasing”
• The right to challenge specifications.
• The right to choose the method of placement.
• The right to select the supplier.
• The right to control contacts with suppliers.

In the PPM as Corporate Policy!

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 Policies Defining the
Conduct of Purchasing Personnel
• Ethics
– Illegal
– Unethical
– Sharp practices
• Reciprocity
• Follow-on Employment
• Whistle-blowing

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 Policies Defining Social and Minority
Business Issues
• Local Suppliers
• Women and Minority Business Enterprises
(MBE)
– Right thing
– Smart thing
– Sustainability: a new name and expanded
concept for “Corporate Social Responsibility”.

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 Sustainability: The triple bottom line

• “Sustainability” formal definition: “The ability to meet

current needs without hindering the ability to meet the
needs of future generations in terms of social,
environmental, and economic challenges”.
• The basic building block to sustainability is ethics.

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 Policies Defining Buyer-Seller
Relationships

• Equitable treatment of suppliers

• ESI, associated financial obligations, and
non-disclosure agreements
• Supplier Development
• Supplier Evaluation
• Supplier Recognition Programs
• Cross-cultural issues in international
sourcing
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Sourcing Decisions – The Make or
Buy Decision
Outsourcing –
Buying materials and components from
suppliers instead of making them in-house.
The trend has moved toward outsourcing.
Backward vertical integration –
Refers to acquiring sources of supply.
Forward vertical integration –
Refers to acquiring customer’s operations.
The Make or Buy decision is a strategic decision
 Roles of Supply Base

Supply Base - list

of suppliers that a firm uses
to acquire its materials, services,
supplies, and equipment.
– Firms emphasize long-term strategic
supplier alliances consolidating
volume into one or fewer suppliers,
resulting in a smaller supply base.
 Roles of Supply Base

Preferred suppliers provide:

– Product and process technology and expertise
to support buyer’s operations, particularly
new product development and value analysis.
– Information on latest trends in materials,
processes, or designs.
– Information on the supply market.
 Purchasing – Centralized vs.
Decentralized  
Purchasing Organization is dependent on
many factors, such as market conditions &
types of materials required.
– Centralized Purchasing - purchasing
department located at the firm’s corporate
office makes all the purchasing decisions.
– Decentralized Purchasing - individual, local
purchasing departments, such as plant level,
make their own purchasing decisions.
 Purchasing – Centralized vs.
Decentralized (Continued)

Advantages - Advantages -
Centralization Decentralization
– Concentrated volume- – Closer knowledge
– Leveraging purchase volume of requirements
– Avoid duplication – Local sourcing
– Specialization
– Less bureaucracy
– Lower transportation costs
– No competition within units
– Common supply base
Procurement for Government & Non-
Profit Agencies
Public Procurement or Public Purchasing – purchasing & supply
function for government & non-profit sector.

Public Procurement is characterized by:

 Competitive bidding - contract is usually awarded to lowest priced
responsive & responsible bidder.
– Sealed Bids are used to satisfy the Invitation for Bid (IFB) and are opened in
public display.
 Performance Bonds - incentive to fulfill contract.
 Bid or Surety Bonds - successful bidder will accept contrac.t
 Performance Bonds - work will be on time and meet specifications.
 Payment Bonds - protection against 3rd party liens not fulfilled by bidder.
 Sourcing

Sourcing - all of firm’s activities used to manage external

resources.

Strategic sourcing - managing the firm’s external

resources to support firm’s long term goals.
 Sourcing

Drivers of Strategic Sourcing

– Reduce costs & delivery cycle times.
– Improve quality & long-term financial performance.
– Increase number of global competitors.
– Increase customer focus.
– Reduce high costs of globalization & materials.
– Deliver more innovative products more frequently & cheaply than
competitors.
 Ethical and Sustainable Sourcing
Strategies (Continued)

Sustainable Sourcing
– Green purchasing is aimed at ensuring products or
materials meet environmental objectives e.g.
waste reduction, reuse and recycling.
 Early Supplier Involvement

Value engineering activities help the firm to reduce cost,

improve quality & reduce new product development time.