Chapter 2
Purchasing objectives
1.Supply continuity.
Purchasers must perform a number of activities to satisfy the operational
requirements of internal customers, which is most often done by buying services,
raw materials, components, subassemblies, and repair and maintenance items. They
may also support the requirements of physical distribution centers , engineering and
technical groups.
Enterprises are relying increasingly on external suppliers to provide not just
materials and products, but information technology, services, and design activities
as well. As a greater proportion of the responsibility for managing key business
processes shifts to suppliers, purchasers must support this strategy by providing an
uninterrupted flow of high-quality goods and services that internal customers
require. Supporting this flow requires purchasers to do the following:
- Source products and services at the right price.
- Source them from the right source.
- Source them at the right specification that meet user’s needs.
- Source them in the right quantity.
- Arrange for delivery/service performance at the right time to the right internal
customer.
Backdoor buying is a practice often used when internal customers don’t have
confidence in the purchasers. Then they might try to negotiate contracts
themselves.
2. Manage the sourcing process efficiently and effectively
Purchasing must manage its internal operations efficiently and effectively by
performing the following:
- Determine staffing levels.
- Developing and adhering to administrative budgets.
- Providing professional training and growth opportunities for employees.
- Introducing improved buying channels within the procure to pay systems that
lead to improved spending visibility, efficient invoicing and payment, and user
satisfaction.
Purchasers must utilize their limited resources. Procurement people must focus on
continuously improving transactional-level work through efficient purchasing
systems that keep suppliers satisfied, which makes life easier for internal users.
3. Develop supply base management
Supply base management is the selection, development, and maintenance of
suppliers. Purchasing must keep in mind current conditions in supply markets to
ensure that purchasing:
- Selects suppliers that are competitive.
- Identifies new suppliers that have the potential for excellent performance and
develops closer relationships with these suppliers.
- Improves existing suppliers.
, - Develops new suppliers that aren’t competitive with current suppliers.
Supply base management requires that purchasing pursue better relationships with
external suppliers and develop reliable, high quality supply sources.
4. Develop aligned goals with internal customers
Purchasing must communicate closely with other functional groups, which are
purchasing’s internal customers(also called stakeholders in that they have a
significant stake in the effectiveness of purchasing performance).
5. Develop integrated purchasing strategies that support organizational
goals and objectives.
This implies that purchasing can directly affect the long-term growth, revenue, and
operating outcomes and plans of internal customers. Unfortunately, supply
management often fails to develop strategies and plans that align with or support
organizational strategies or the plans of other business functions. There are a
number of reasons for that:
- Purchasing personnel have not historically participated in senior-level
corporate planning meetings, because they were often viewed as providing a
tactical support function.
- Executive management has frequently been slow to recognize the benefits
that a world-class purchasing function can provide.
A purchasing department actively involved within the corporate planning process
can provide supply market intelligence that contributes to strategic planning.
Effective supply market intelligence involves the following:
- Monitoring supply markets and trends, and interpreting the impact of these
trends on company strategies.
- Identifying the critical materials and services required to support company
strategies in key performance areas, particularly during new-product
development.
- Developing supply options and contingency plans that support company
plans.
- Supporting the organization’s need for a diverse and globally competitive
supply base.
Strategic supply management roles and responsibilities
Span of control or function’s responsibility means that functional groups carry out
certain duties on behalf of the organization. It is established through senior
management policies and support. This section details those decision areas that are
rightfully part of purchasing’s operating authority in most organizations.
1. Spend analysis
Is the process of collecting historical data by commodity, relative to demand from
the lines of business, with the exception of personnel expenses, occupancy, and
corporate spend. The data should go into the appropriate level of unit-level detail
required for analysis and commodity management, and should also be rolled up at
an aggregate level on every element of what we spend. The result is a common
,understanding of historical spend relative to demand from each end user within an
organization, based on accurate information collected through defined and
automated procure-to-pay systems. Spend analysis requires that you drive all spend
to a unit of consumption and a rate of consumption. The output is used to drive
demand management, commodity management, and risk management strategies.
2. Demand management and specifications/SOW’s
Demand management is the process of using unit and rate consumption levels to
forecast and estimate future consumption in an internal functional customer, and
providing guidance and input on how to optimize usage and educating the user on
the tradeoffs. Activities may involve:
- Optimization of sourcing strategies based on how much the team projects
they will be buying.
- Proactively setting policies, procedures and measurement systems that
throttle the consumption and total expenditures of a unit of category of
spend.
- Ensuring appropriate levels of capacity in the supply base required to
minimize risk.
- Establishing a fixed set of standards to limit options, and restricting the
supply base to include only preferred suppliers who comply with risk and
compliance requirements.
Purchasing may also have the authority to review material specifications. The right
to question allows purchasing to review specifications when needed.
3. Category management and supplier evaluation/selection.
Category management is the process of developing external industry intelligence
and analysis, internal demand, supply base capabilities and operational risks, and a
strategy to approach that marketplace with our needs to match it with what
suppliers can offer. Sourcing events are a specific activity contained within the
strategy used to explore the market to identify competitive value. A critical element
in the strategy is a business case that identifies the rationale for the plan, a risk
mitigation plan, and the business value derived from the strategy. The output of a
category strategy is a plan for negotiating a contract, a supplier scorecard used to
monitor the relationship, as well as a sourcing work plan developed for
communication of the strategy to the internal user.
In many cases, category management requires having senior executives
acknowledge that purchasing has the strategic responsibility to evaluate and select
supplier. This can avoid maverick buying and selling, which occurs when sellers
contact and attempt to sell directly to end users. Sales representatives may interact
with non-purchasing personnel, but no commitment can be made without formal
interaction with the purchasing personnel.
,4. Contract management
An important are of control is that purchasing has the right to determine how to
award purchase contracts(competitive bidding, negotiation, or a combination).
Involving other people from functional areas can improve the transfer of information
and knowledge between buying and selling organizations.
Contract management is a process associated with defining the contract, defining
roles and responsibilities of both parties, and advising when to modify and ensure
appropriate escalation. In doing so, purchasing ensures accuracy of contracting
terms and conditions(T’s / C’s), and alignment with the category strategy, required
service level agreements, and periodic audits to ensure that post-delivery invoices
are aligned with contracted requirements. In addition, contract management should
be used to trigger proactive sourcing events before contracts expire.
5. Cost management
Is the understanding of the true underlying cost of what is purchased. This involves
a process of unbundling the price paid and other components of price over the life
cycle of a product or service, to deliver a target cost and a unit rate to determine if it
is priced competitively in the marketplace. It may involve different decision support
tools and databases to create insight into:
- The cost of supporting a process or commodity.
- The gap between cost drivers and the assumed business case.
- Identifying the business case.
- The total cost of offering a service, including all of the elements of receiving,
use, and disposal over the life cycle of the offering.
6. Managing the procure to pay process(P2P)
Improving involves automation of all transactional activities associated with the
thread of events that occurs from the time of buying a good or service, through the
release mechanism, to the point of issuing payment, including:
- Requisitioning.
- RFX.
- Contract award.
- Orders.
- Approval.
- Receipt.
- Payment.
P2P process improvement is associated with establishing controls on the front end of
this process tom minimize the need to monitor the back end and drive efficiencies,
which free resources to work on strategic initiatives.
7. Supplier relationship management
Is the end-to-end process of managing a supplier through the entire sourcing life
cycle, which includes first identifying abilities of a particular company with regard to
, performing a service for the internal customer, completing a sourcing event,
negotiating a contract, executing an order, and determining payment. It includes:
- Day to day transactions.
- Identification and mitigation of operational risk and deliverables.
- Business continuity planning.
- Understanding the suppliers’ business challenges.
- Identification of opportunities to improve value and reduce cost.
- Establishing scorecard metrics for improvement and reviewing progress
towards these objectives.
- Contracts T’s and C’s.
- Leveraging the flow of information between key internal process owners and
the supplier to create value.
8. Establish a supply management strategy
Is an overarching plan for designing the organization, assigning resources, and
aligning these resources against the demands placed on the supply chain by the
business. They are reviewed at the highest level of the organization, and drive a
work plan that establishes how different businesses must work together to meet the
organizational needs through stable and robust processes. It includes:
- A repeatable and well-defined process for building strategy and governance
around defining, planning, managing, and receiving products and services for
a business.
- Clear alignment with executive vision and internal user-specific business
goals.
- A process based on well-developed supplier market intelligence and input
from executives and internal customers.
- Established goals and metrics for short-term project plans, as well as a
definite five-year plan.
- Established communication plan to inform senior management and all lines of
business updated and reviewed quarterly against defined goals and
objectives.
Chapter 3
Introduction
Purchasing policies should be reviewed and updated when required from time to
time, because the company’s environment is changing, which creates a need to
keep up with these changes and provide guidelines and directions to employees
regarding how these changes will impact their ways of working. Policies provide the
basis for action on the part of sourcing professionals, as well as a set of guidelines
for the appropriate way to deal with new situations. Policies provide guidance and
operating constraints on personal behavior.
Policy overview
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
