Chapter 3 & Chapter 4

MGMT1017 Purchasing
Practices
Supply Organization
Supply Processes and Technology
Notes Based on the Content Found in: P. Fraser Johnson, Purchasing and Supply Management, 16th
Edition. McGraw-Hill.
 Overview

 Traditional v. Modern View of Supply Chain

 Supply Chain Steps

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 Traditional View of Supply Objectives

Obtain the:
1. right materials/services (meeting quality
requirements),
2. in the right quantity,
3. for delivery at the right time and right place, from the
right source (a supplier who is reliable and will meet its
commitments in a timely fashion),
4. with the right service (both before and after the sale),
5. and at the right price in the short and long term.

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 Nine Goals of Supply

1. Improve the organization’s competitive position

2. Provide an uninterrupted flow of materials, supplies and services
required to operate the organization
3. Keep inventory investment and loss at a minimum
4. Maintain and improve quality
5. Find or develop best-in-class suppliers
6. Standardize, where possible, the items and services bought and
the processes used to procure them
7. Purchase required items and services at lowest total cost of
ownership
8. Achieve harmonious, productive internal relationships
9. Accomplish supply objectives at the lowest possible operating
costs

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 Purchasing Activities

 Purchasing/buying
 Purchasing research
 Inventory control
 Transportation
 Environmental and investment recovery/disposal
 Forecasting and planning
 Outsourcing and subcontracting
 Nonproduction/nontraditional purchases
 Supply chain management

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 (Chapter 4 Starts Here) Reasons to
Develop Robust Supply Processes
 Large number of items
 Large dollar volume involved
 Need for an audit trail
 Severe consequences of poor performance
 Potential contribution to effective organizational
operations inherent in the function

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 Essential Steps in the Supply Process

1. Recognition of need
2. Description of need
3. Identification and analysis of possible sources of
supply
4. Supplier selection and determination of terms
5. Preparation and placement of the purchase order
6. Follow-up and/or expedite the order
7. Receipt and inspection of goods
8. Invoice clearing and payment
9. Maintenance of records and relationships

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 Step 1: Recognition of Need

 A person or a system identifies a definite need in

the organization—what, how much, and when
needed
 The greatest opportunity to affect value is when
needs are recognized and described (product
conception and design)
– Supply and supplier(s) can contribute more in these
steps than later in the acquisition process

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 Step 2: Description of Need

 Needs should be driven by external customers.

– External customer needs → Internal customers →
Purchasers → Potential suppliers
 An accurate description of the need (good,
service, or combination) is essential
– Unclear or ambiguous descriptions, or over-specified
materials, services, or quality = unnecessary costs
– Supply management and the internal customer or
cross-functional sourcing team share responsibility for
accurate descriptions

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 A Requisition

 A “gatekeeping tool”
 Good practice for when there are 2 or more employees in
an organization
 Manage the flow of information through three gates:
(1) authority: Does the requisitioner have the authority to
make the specified request at the specified budget level?
(2) internal clarity: Is the need described in a clear and
unambiguous way?
(3) internal clearance: Is the description ready for
communicating externally with potential suppliers?

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 Information Needed for Requisitions

 Date
 Number (identification)
 Originating department
 Account number
 Complete description of material or service and
quantity
 Date material or service needed
 Any special shipping or service-delivery instructions
 Signature of requisitioner

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 Step 3: Identification of Potential
Sources

 Online tools
 Colleagues
 Existing suppliers

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 Issue an RFx (RFx = RFI, RFP, RFQ)

 One optional communication tool that is NOT a

solicitation for business:
(1) request for information (RFI)
 Three options for soliciting business:
(1) request for quotation (RFQ)
(2) request for proposal (RFP)
(3) request or invitation for bid (RFB or IFB)

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 Step 4: Supplier Selection and
Determination of Terms

 Analysis of qualified potential sources, source

selection, and determination of terms
– Applicable tools range from a simple bid analysis form
to complex negotiations

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 Step 5: Preparation and Placement of
Purchase Order

 Several order placement tools available:

– A purchase order
– The supplier’s sales agreement
– A release against a blanket order
 Failure to use the proper contract form may
result in legal complications or improper
documentation
 Purchase order format and routing vary

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 Step 6: Follow-up and Expediting

 Follow-up: routine order tracking to ensure the

supplier can meet delivery promises
 Expediting: the application of pressure on a supplier
to meet the original delivery promise, to deliver
ahead of schedule, or to speed up delivery of a delay
 Expediting:
– may be caused by poor planning inside the buying or the
selling organization
– may indicate the need for process improvements.

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 Step 7: Receipt and Inspection

 The prime purposes of receiving are to:

1. Confirm receipt of order placed
2. Confirm shipment arrived in good condition
3. Ensure quantity ordered has been received
4. Forward shipment to proper destination (storage, inspection,
or use)
5. Ensure proper documentation is registered and accessible to
appropriate parties
One goal of supply management is to ensure that quality is
built in and that incoming inspection can be reduced, if not
eliminated

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 Step 8: Invoice Clearing and Payment

 An invoice is a claim against the buying

organization
 Payment for services may vary from payment for
goods.
 Invoice clearance procedures are not uniform
 Checks and audits of invoices are based on
cost-benefit analysis

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 Improving the Procure-to-Pay Process

 Procure-to-pay (P2P) is a term used to describe the

steps in the purchasing process from issuance of
the purchase order (step 5) to payment of the
invoice (step 8).
 Focuses on the transactional steps in the supply
chain that control the flow of information, delivery of
materials and services, and financial transactions.
 Making this process as seamless as possible can
reduce order cycle times, decrease administrative
costs, and improve the satisfaction of internal
customers and suppliers.

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 Step 9: Maintenance of Records and
Relationships

 Update records based on law, accounting

standards, company policy, and judgment
 Update supplier performance scorecards
 Link data to future decisions

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 A Sample Sourcing Process and
Flowchart

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 Strategic versus Nonstrategic Spend

 Strategic spend: goods or services critical to the

mission of the organization
– May be high- and low-dollar-value purchases
 Nonstrategic (non-mission critical) spend
– Dollar value and repetitiveness drive decisions
– Establish a small dollar threshold
– Prequalify suppliers
– Use efficient order placement tools

Purchasing Practices
 Effectiveness Tools that Optimize
Strategic Spend

 Goal: Assure continuous availability at the lowest total

cost of ownership
– A cross-functional sourcing team especially during
need recognition and description
– Early supply and supplier involvement (ESI)
– Use information management tools that enable
communication and support decision making
– Apply time, money, people and other resources
– Favor effectiveness over efficiency

Purchasing Practices
 Efficiency Tools that Reduce
Transaction Costs

 Stockless buying and systems contracts

 Procurement cards (P-cards)
 Blanket P.O.s
 EDI- and Internet-based systems
 Online reverse auctions
 Changing authority levels and bidding practices
 Single sourcing
 Outsourcing small value order processing
 Standardization
 Batch orders
 Set requisition schedule
 Invoiceless payments
 Users pay directly
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 Internal Information Flows to
Purchasing

sales
forecasting engineering
production control planning
new products production

inventory control budgeting

Purchasing

quality control financial control

receiving legal accounting

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 External Information Flows to
Purchasing

general
sources market product
of conditions information
supply new product
information
suppliers’ capacity
transportation
Purchasing availability
suppliers’
production rates

labor conditions sales and prices and

use taxes, discounts
customs

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 Internal Informational Flows from
Purchasing

General
Management Product
Engineering
Development
Source, product, Economic Product and
price information conditions price information
Production
Competitive
conditions
Marketing
Product availability,
lead time, price
and quality
Purchasing
Budget
commitments
Contracts
Costs, prices
Orders adjustments Finance
Legal placed

Stores Accounting

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 Potential Benefits of Information
Systems Technology

 Cost reduction and efficiency gains

 Data accessibility
 Speedier communication
 Dedicate resources to strategic issues
 Data accuracy
 Systems integration
 Monetary control

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 What’s Coming Up in the Next 3
Weeks…

 Week 4- Hansen Case

 Week 5- Quiz 1
 Week 6- Thanksgiving, no class 

Purchasing Practices