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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.

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 Cons


Advantages
1. Provides an opportunity
define and clarify objectives

Disadvantages
to 1.Difficult
to
communicate
throughout large organizations

2.
Mean
to
communicate 2.
Might
be
viewed
as
leadership and views
substitute
for
effective
management
3. Provides framework for 3.Can restrict innovation and
consistent decision making and flexibility
action.
4. Defines
procedures

the

rules

and

What makes an Effective


Policy?
1. Action Oriented Guidelines - involving
practical action to deal with a problem or
situation
2. Relevant - suitable for a particular purpose
3. Concise - short and clear
4. Unambiguous - expressed in a way which
makes it completely clear what is meant
5. Timely and Current

Purchasing Policies
To

provide guidance and support to the


professional purchasing and support
staff.
General outlines clarifying purchasing
management on a subject.

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

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

Essentials of a Purchase
Contract
1. 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
3-12

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.

3-13

TERMS OF A
CONTRACT

3-14

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

3-15

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.

3-16

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.

2.
3.
4.

Recognize the need for supplier


selection
Identify key sourcing requirements
Determine sourcing strategy
Identify potential supply sources

21

Evaluation and Selection


Process
5.
6.

7.

Limit suppliers
Determine method of supplier
evaluation and selection
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 Carters 10 Cs of Supplier
Selection

24

Carters 10 Cs of Supplier
Selection
Competency

Commitment to
Capacity
quality
Consistency
Cash/finances
Control of Process Clean
Cost/Price
Culture and
relationships
Communication
25

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


33%
33%

40%
40%

75%
75%
100%
100%

43%
43%
36%
36%

22%
22%

25%
25%

57%
57%
31%
31%

18%
18%

28

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

Second
Third

Stage

Stage

survey stage
enquiry stage
negotiation & selection

stage
Fourth

Stage

experience & evaluation

stage
33

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 suppliers activities furnished by
vendors or collected by the company.

35

Continue..
Technological
Service
Price

competition

competition

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 vendors 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 advantageous
39

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 vendors 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 threemonths , the buyer prepares a performance


report.

44

The format of such a report is


given :
Factors

Grading

1. Supplies as per
quantity specified

Always
9
8
7

Usually
6
5
4

Seldom
3
2

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

Never
0

Factors

Grading
Always
9
8
7

Usually
6
5
4

Seldom
3
2

Never
0

6. Helps in
emergency
7. Behavior is
courteous and
considerate
8. Reasonable
in Pricing
9.
Miscellaneous
46

Each

supplier is evaluated and a numberscore 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.
Performance
Points
The point may be assigned as follows: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 suppliers 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 suppliers
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)*40
Delivery 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+Y
55

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 Companys 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
employees own funds. Must uphold our taxexempt status.

Does the vendor selected accept the


companys 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