Purchasing

Policy Overview

The term policy includes all the directives that designate the aims and ends of an organization and the appropriate means used in their accomplishment.

2

Policy Overview

Policy refers to the set of purpose, principles and rules of actions* that guide an organization

Usually documented in writing

*rules of actions – Standard Operating Procedures along with rules and regulations

3

Pros and ConsAdvantages Disadvantages

1. Provides an opportunity to define and clarify objectives

1.Difficult to communicate throughout large organizations

2. Mean to communicate leadership and views

2. Might be viewed as substitute for effective management

3. Provides framework for consistent decision making and action.

3.Can restrict innovation and flexibility

4. Defines the rules and procedures

4

What makes an Effective Policy?1. Action Oriented Guidelines - involving practical action

to deal with a problem or situation2. Relevant - suitable for a particular purpose3. Concise - short and clear4. Unambiguous - expressed in a way which makes it

completely clear what is meant5. Timely and Current

5

Purchasing Policies

To provide guidance and support to the professional purchasing and support staff.

General outlines clarifying purchasing management on a subject.

6

Objectives of the Purchasing Function

To select suppliers that meet purchase and performance requirements

To purchase material and service that comply with engineering and quality standards

To promote buyer-seller relations and to encourage supplier contribution

To treat all suppliers fairly and ethically

7

Objectives of the Purchasing Function

To work closely with other departments To conduct purchasing operations so they

enhance employee relations To support all corporate objectives and policies To maintain a qualified purchasing staff and to

develop the professional capabilities of the staff

8

PURCHASING PROCEDURES

9

Procedures

• Operating instructions detailing functional duties or tasks

• “how-to”• Should be concise, accurate and complete set of

operating instructions

10

Procurement Contract Contracts are agreements with the vendor to supply materials or services under negotiated conditions and within a certain period.Deals with the use of contracts in procurement activities.Contracts are differentiated as follows:

Quantity contracts: An agreement that a company will order a certain quantity of a product during a specified period.

Value contracts: A contract in which the purchase of goods or services up to a total value is agreed.

11

3-12

Essentials of a Purchase Contract1. The parties must be capable

2. The subject of the matter must be legal and valid 3. There must be mutual consideration

4. The parties must reach an agreement by offer and acceptance.

In summary, under the U.S. Commercial Code, an agreement is a legal transaction that requires all four components given above. The absence of any of the components results in an unenforceable agreement in a court of law

3-13

Oral Contracts Oral contracts occur everyday. Ordering a pizza is an

oral contract. However, oral contracts have no place in the professional purchasing arena. If a supplier refuses to perform, there is no recourse for the buyer.

3-14

TERMS OF A CONTRACT

3-15

Price and Credit Terms The price is determined when the offer is accepted.

In some cases, price escalation clauses are used in a contract.

A price escalation clause is an adjustment that the seller utilizes in order to compensate for variances at delivery

3-16

Delivery Terms Delivery terms are closely related to price terms.

The transportation between the buying and selling firm is usually considered as part of the price. The delivery terms formalize the responsibilities of the buying and selling firm for delivery of the goods.

Supplier Selection

17

What will be covered

Supplier Selection Defined Brainstorming Exercise Supplier Evaluation and Selection Process Real World Example Practice Exercise

18

Supplier Selection Defined

Supplier: “External entity that supplies relatively common, off the shelf, or standard goods or services” (Business Dictionary)

Supplier Selection: “The stage in the buying process when the intending buyer chooses the preferred supplier or suppliers from those qualified as suitable.” (Westburn Dictionary)

19

Brainstorming Exercise

Why is supplier selection so important to your organization?

What can result in your company from having the incorrect supplier?

What is important to you when finding a supplier?

20

Evaluation and Selection Process

1. Recognize the need for supplier selection2. Identify key sourcing requirements3. Determine sourcing strategy4. Identify potential supply sources

21

Evaluation and Selection Process

5. Limit suppliers6. Determine method of supplier evaluation and

selection7. Negotiate and select supplier

22

Recognize Need for Supplier Selection Why are you looking for a supplier?

Have new product Problems with current supplier End of contract

23

Identify Key Sourcing Requirements What do you require from your suppliers? Are your requirements in alignment with

company goals and mission? Consider Carter’s 10 C’s of Supplier Selection

24

Carter’s 10 C’s of Supplier Selection

Competency Capacity Consistency Control of Process Cost/Price

25

• Commitment to quality• Cash/finances• Clean• Culture and relationships• Communication

Determine Sourcing Strategy

How many suppliers are you going to need? Single Source Multiple Source

26

Identify Potential Supply Sources

Where can you find your suppliers? Simple brainstorming activity will generate a long

list of possibilities

27

Limit Suppliers in Pool

Narrow down your choices

28DB C EA

100%100%

75% 75%

25%25%

33%33%

18%18%31%31%

36%36%

40%40%

22%22%

43%43%

57%57%

Determine Method of Supplier Evaluation and Selection

Choose what you would like to evaluate Decide where you will gather your information

from Make selection from your evaluations

29

Vendor Development

30

WHAT IS VENDOR

Vendor means a person (or company) who sells and supplies his (or its) products.

31

A few questions are to be answered before attempting to develop vendors

How much quantity is required to be purchased? How much time is available for making such purchases? Will the material be required repeatedly or

occasionally? What is the volume of purchase of the required

materials? Which is the industry producing the required

materials? What is commercial viability of the materials?32

VENDOR DEVELOPMENT INVOLVES FOUR STAGES:-

First Stage survey stage

Second Stage enquiry stage

Third Stage negotiation & selection stage

Fourth Stage experience & evaluation stage

33

Survey stage-source of information on potential vendors

Survey stage-source of information on potential vendors Survey involves collecting information on different suppliers of the desired materials. The following sources may be consulted:

Trade directories Trade journals Telephone directories Suppliers catalogues Salesmen

34

Enquiry stage- selection of potential suppliers : After a list of possible suppliers is complied, the next step is to inquire

a few of them further. It involves a detailed analysis of supplier’s activities furnished by vendors or collected by the company.

35

Continue…..

Technological competition

Service competition

Price competition

Time based competition (TBC) i. e, response time for delivery.

36

Continue….

Internal facilities of vendors:- Adequate facilities are essential for the manufacture and quality control of items.

37

Continue….. • Financial adequacy and stability:- the financial status

of the vendor company and relations with his bankers should be explored, so that items can be produced and supplied without any financial difficulties at any stage. For this purpose, previous years balance sheets of the company are helpful.

38

Continue…. Reputation of the vendor: Methods of selling and

distribution network are important. The supplier ‘s reputation in the market in regard to prices and promises of delivery dates should be considered.

Location of the vendor’s factory:- It should be nearer to the buyers factory. If it is located at a very distant town. Vendors representative should be available in the locality. after sales service :- In case of equipment, after sales service is essential. The availability of maintenance engineers in the locality or town should be advantageous39

Continue… Industrial relations: Industrial conflicts, frequent strikes, layoffs

etc, seriously affect the supplies. The industrial climate, work culture, employer- employee relationship should be given consideration. Hence, one has to very careful in dealing with such companies. In addition, several other factors should be considered. a) Is the supplier a direct manufacturer or only a agent?

b) Is the buyer looking for one or more suppliers? c) Whether the supplier is small or big?

Hence, full enquiry into all factors should be made in order to arrive at a decision regarding the selection of sources.

Thus short listed suppliers are considered for the third stage.

Negotiation and selection stage- finalization of vendors:

The vendors who are successful in the enquiry stage may be called for negotiations in order to discuss business possibilities.

During this stage, various terms namely credit, quantity discount, quality specifications etc, can be decided.

Finally, a list of approved vendor’s drawn. Accordingly, purchase orders are placed with the

approved vendors. 41

Experience and evaluation stage:

At this stage, the buyer evaluates and appraises the performance of the vendor. The objective is to improve the performance of vendors in which they are deficient.

The evaluation is done especially on two counts, namely quality (judged by rejection of lot- size ) and delivery ( judged by delays on delivery).

42

Vendor Rating: A few ways by which a vendor can be evaluated

are listed below:-

1) categorical method 2) weighted point method 3) cost ratio method

43

Categorical method : The buyer prepares a list of factors, which are considered necessary for evaluation.

At periodic intervals, say once in three- months , the buyer prepares a performance report.

44

The format of such a report is given :

Factors Grading

1. Supplies as per quantity specified

Always9 8 7

Usually6 5 4

Seldom3 2 1

Never 0

2. Deliveries are as per schedule

3.Rigorous follow up are not necessary

4.Solves his raw material problem on his own

5.Willing to accommodate when production schedules are suddenly changed 45

Always9 8 7

Usually6 5 4

Seldom3 2 1

Never 0

6. Helps in emergency

7. Behavior is courteous and considerate8. Reasonable in Pricing

9. Miscellaneous

Factors Grading

46

.

Each supplier is evaluated and a number-score is calculated.

Then, it is converted into word rating. The conversion of scores is as follows:

Point Remark

80-100 Excellent

70-80 Good

60-70 Average

50-60 Very poor

47

Weighted point method : this type of evaluation involves a point rating based on the quality of goods received, the promptness of deliveries made and the quality of the service rendered by the vendor.

The point may be assigned as follows:-

Performance Points

Quantity 50 points

Delivery 30 points

Price 20 points

Total points 100

The performance of each factor is separately quantified.

For example, consider the quality aspect, Assume that 160 lots were received during a year and 16 lots were rejected on account of poor quality, the number lots accepted will be 144.

Quality rating = Number of lots accepted× rating points (i.e., 50 Number of lots received

quality rating = 144 × 50 = 45 160 similarly delivery rating can be obtained using below equation

49

Delivery rating = number of lots delivered in time × rating points total number of lots delivered

The price rating is calculated using equation Price rating = least offer received × rating points

supplier’s offer

50

Cost – ratio method : it is a system of determining the actual costs incurred in purchasing, follow up, transportation, packing, duties, receiving etc,

Based on these costs, the unit cost incurred by the buyer is calculated, the higher the cost, the lower the supplier’s comparative rating .

For example, costs relating to quality works out to be

Rs 2,000 and the total worth of material purchased is Rs 2.0 lacks per year Quality cost ratio = 2,000 : 2,00,000, (i.e., 1%) Similarly, when the cost of delivery is Rs. 1000 then Delivery cost ratio = 1,000 : 2,00,000 (i.e., 0.5%)

Similarly, all types of costs can be calculated. These ratios must be maintained as minimum of possible.

52

. Using the methods mentioned above, a buyer can

exercise better judgment over retaining the vendors. However, many non- quantifiable factors namely

integrity, behavior, attitudes towards progressiveness etc., should also be given importance.

Thus, the buyers experience and judgment would ultimately count.

53

We can understand vendor rating by this example:Ex. The following information is available on 3 vendors: A, B

and C. Using the data below, determine the best source of supply under weighed point method and substantiate your solution.

Vendor A: Delivered 56, lots 3, were rejected 2 were not according to the schedule.

Vendor B: Supplied 38, lots 2 were rejected 3 were late.Vendor C: Finished 42, lots 4 were defective 5 were delayed

deliveries.Give 40 for quality and 30 weightage for service.

54

Solution: Quality performance (40% weightage) = (quality accepted/total quantity

supplied)*40Delivery performance:X, Adherence to time schedule(30%)

=(no. of delivery on the scheduled date/total scheduled deliveries)*30

Y, Adherence to quantity schedule(30%)=(no of correct lot size deliveries/tot no of scheduled deliveries)*30

Total Vendor Rating =X+Y55

Vendor A= (53/56)*40+(54/56)*30 =66.78

Vendor B=(36/38)*40+(35/38)*30 =65.52

Vendor C =(38/42)*40 +(37/42)*30 =62.62

So Vendor A is selected with best rating.

56

Negotiations :- Negotiations may be defined as an art of arriving at a

common understanding through bargaining on the essentials of contract such as delivery, specifications, prices and terms.

Negotiations with the concerned vendor(s) are often necessary before finalizing a purchase contract. The purpose is for fixing and finalizing prices of materials, terms and conditions.

57

Need for negotiations In most cases, purchase orders are decided on the basis of

quotations. Negotiations are required when a change in the scope of a contract is warranted. Negotiations are considered essential in the following conditions:

- prices are related to large volumes or to a large value. - terms and conditions are required for large volumes. - contract is desired for a longer period.

58

Continue….

Variations in quantity to be purchased are possible.

Changes in drawing and specifications are necessary.

Changes in transportation, packing and delivery points are to be decided.

When no acceptable quotations are received from the responding vendors.

59

Process of negotiations : negotiations take place between two individuals or two sets of individuals.

Communication is an important ingredient in the art of negotiation.

Through the communication of ideas, the purchasing department persuades and convinces the vendors to agree with their view point. So that an agreement can be reached.

Negotiations should attempt at a ‘win-win, situation to both parties. It is mutually satisfactory settlement.

60

Negotiate and Select Supplier

Perform negotiations with supplier Choose supplier and agree to terms

61

Procurement Methods

• Have a general understanding of the 5 primary ways to obtain goods and services

• For each, have a general understanding of the timelines, advantages, and disadvantages

Procurement Methods The primary means to obtain goods and services are as

follows:

Requisitions/Purchase orders Non-purchase orders (FAS-12) Procurement cards Internal orders (100Ws) Petty cash reimbursements

Purchase Order A purchase order is the offer of a contract between the

company and an off-campus vendor for the purchase of goods/services.• Delegated buyers need to confirm that the cost of

goods/services is within the allowable buying limit of $5,000.

• After the delegated buyer creates the PO, the status of the PO will remain at “Pending Approval” until it is reviewed for compliance to the Company’s Expenditure Policies and departmental policies.

• If the cost of goods/services is over $5,000, an on-line requisition should be created.

Purchase Order Timeline –If over $5,000, once the requisition has been approved by

the Business Office, you should expect the purchase order within 3 to 5 working days if everything is OK. If purchase exceeds bid limits, expect 3 to 5 weeks to go through the bid process.

Advantages – with a purchase order you have a contract with the vendor to deliver goods and/or services at a specified time and amount. Vendor sends itemized invoice to be approved before payment is issued. Able to take advantage of discounts from vendors as arranged per contracts.

Disadvantages – may take a little more time if additional approvals are needed.

Blanket Purchase Order A blanket purchase order is generally issued to a vendor for

miscellaneous items, that are not specifically listed on the purchase order. Typically, a blanket purchase order does not specify a delivery time period or prices.

Example: A department may issue a blanket purchase order to a vendor for miscellaneous office supplies. Then as the office supplies are needed, the department contacts the vendor and places a phone order.

Blanket Purchase Order

Timeline – (Same as a purchase order).

Advantages – Separate POs are not needed for each time items are requested. Vendor sends itemized invoice to be approved before payment is issued.

Disadvantages – no lock-in on prices. Only one blanket order can be issued per vendor, per organization and fund each year.

Non-PO Voucher (FAS-12)

The non-po voucher is a paper form that designates the items that can be purchased without the creation of a requisition or purchase order

Non-PO Voucher (FAS-12)

Timeline – payment can be made after appropriate paperwork is complete and approved usually within a week (assuming vendor is already setup in the payables system).

Advantages – no need for purchase order. Payment processing is faster.

Disadvantages – restricted use, and information is not included in buying/tracking reports.

Procurement Card Purchases made with the Pcard provide faster payment to the

vendor. Eliminates use of an employee’s own funds. Must uphold our tax-exempt status.

• Does the vendor selected accept the company’s Procurement Card?

• Is the cost of the goods within the allowable limits of your Procurement Card?

Procurement Card

Timeline – immediate ability to purchase goods.

Advantages – billing is automatic through banks

Disadvantages – Purchasing cards have no dispute rights for fraudulent charges. If the card or card number are lost or stolen, the bank can charge the department up to $5,000 (or maximum card limit).

Internal Orders (100Ws) Using the 100W form is a practical and easy method of

procuring goods and services within the University.

Required Controls:• validate a departmental approver signature appears on

the 100W• require a receipt signature for all goods and/or services

provided to initiating department personnel• must maintain security over 100W forms (treat as

signed checks) and log to track use.

Internal Orders (100Ws)

Timeline – purchase of goods or services is immediate

Advantages – internal billing – less paperwork

Disadvantages –Stores is now beginning to require Requisitions and not 100Ws.

Petty Cash Reimbursements A reimbursement is the paying back of money to a staff

member that has been spent on behalf of the Company. Reimbursements differ from refunds in that a refund is the

paying back of money that has been paid to the Company.

• No employee may approve his or her own reimbursement request. The approving authority must hold a higher University rank than the person being reimbursed.

Petty Cash Reimbursements

Timeline – purchase of goods or services in immediate.

Advantages – provides quick and easy way to procure items.

Disadvantages –Employee fronts funds. Maximum reimbursement amount is $50.00 and using Petty Cash for services is prohibited. Considerable paperwork and time required to reimburse petty cash fund.

Thank You