Global Purchasing and Supply Management (eBook)

Dedication 5
Contents 6
Preface 8
Foreword 11
Acknowledgments 13
I FROM BUYING TO STRATEGIC CONTRIBUTOR 15
1 THE ROLE OF THE PURCHASING AND SUPPLY FUNCTIONS 16
1. PURCHASING OBJECTIVES 19
2. IMPACT ON PROFITABILITY 20
3. CONTROLLING THE PROCESS 23
4. THE BUYING JOB 24
4.1 The Accountability Concept 25
4.2 Buying Influences 25
5. CHANGING DEMANDS ON THE JOB 30
5.1 Socioeconomic Programs 30
6. PURCHASING REDEFINED 31
2 EVOLUTION OF PURCHASING AND SUPPLY MANAGEMENT 33
1. SPAN OF CONTROL 37
2. CENTRALIZED VERSUS DECENTRALIZED DEPARTMENT 38
2.1 Advantages of Centralization 38
2.2 Advantages of Decentralization 39
2.3 Titles Used in Purchasing 40
2.4 Where Should Purchasing Report? 41
3. THE MATERIALS MANAGEMENT ORGANIZATION 41
3.1 Why Do Some PMs Not Embrace MM? 43
4. REENGINEERING THE PURCHASING ORGANIZATION 44
4.1 Organizational Structure and Relationships 45
4.2 Authority to Commit Independent of the Organization 46
5. DAY-TO-DAY VERSUS LONG-RANGE BUYING 49
6. “PURCHASING AND SUPPLY MANAGEMENT” COMES OF AGE 51
3 STRATEGIC PURCHASING SUPPLY INITIATIVES 55
1. SELECTION OF STRATEGIES LEADS TO ACTION 57
2. SUPPLY BASE MANAGEMENT STRATEGY 60
3. SUPPLY PLANS TO CONTROL MAJOR COMMODITIES 63
4. SEEK LEVERAGE WITH BUYING TEAMS 64
5. TACTICS TO CARRY OUT STRATEGIC PLANS 68
6. EMERGING STRATEGIC OPPORTUNITIES 69
II CREATING THE VISION 71
4 THE PURCHASE ORDER PROCESS 72
1. FUNDAMENTAL STEPS TO COMPLETE A PURCHASE 73
1.1 Editing the Requisition 73
1.2 Issuing the Purchase Order ( PO) 74
1.3 Blanket Orders. 75
1.4 Use of Blanket Orders for Repetitive Purchases 78
2. TERMS OF PURCHASE 79
2.1 Shipment Terms 80
2.2 Change Notices 80
3. COMPLETING THE PURCHASE 81
3.1 Follow Up and Expediting 81
3.2 Receiving and Price Checking 82
4. ADDITIONAL CONSIDERATIONS FOR INTERNATIONAL PURCHASES 83
5. ELECTRONIC PURCHASE ORDER PROCESS 86
5.1 Purchasing Cards/ Procurement Cards 87
5.2 E- Procurement or e- Commerce 88
5.3 Direct Purchases and e- Commerce 92
5 BUYING FROM THE RIGHT SUPPLIER 95
1. SOURCE SELECTION 95
1.1 Request for Quotation ( RFQ) 96
1.2 Buyer’s Checklist for Selecting New Suppliers 97
2. TEAMWORK AND COOPERATION 100
3. QUALIFICATION OF NEW SUPPLIERS 100
3.1 How Many Sources of Supply? 101
4. SOURCES OF SUPPLIER INFORMATION 104
5. SUPPLIER FINANCIAL STABILITY 106
5.1 Credit Rating Reports 107
5.2 Financial Statements 108
5.3 Ratios as Guides 110
6. SEARCH FOR LOW-COST SUPPLIERS 112
6.1 Computing Total Landed Cost of Acquisition 113
6.2 Post- Selection Supplier Evaluation 115
6.3 How Valid Are These Ratings? 119
6 CREATING A GLOBAL VISION 121
1. THE UNITED STATES AND WORLD TRADE 122
1.1 The U. S. Trade Deficit 123
1.2 North American Free Trade Agreement 123
2. BILATERAL AND MULTILATERAL TRADE AGREEMENTS 125
2.1 Regional Trade Agreements 126
3. THE PURCHASING ROLE 127
3.1 The Expanded Role into Global Purchasing 127
3.2 Emergence of the Global Corporation 128
3.3 Expansion of Countertrade 128
3.4 Offshore Sourcing Issues 129
4. HOW TO CONDUCT A GLOBAL BUYING EFFORT 130
5. ENTRY STEPS TO CLEAR CUSTOMS 133
5.1 Immediate Delivery ( I. D.) Entry 134
5.2 Types of Transportation Entries 135
5.3 Customs Duty Valuation 135
5.4 Examination 136
5.5 Country of Origin Marking 136
5.6 Certificate of Origin 136
5.7 Appraisement 137
5.8 Liquidation 137
5.9 Methods of Payment 137
5.10 Letter of Credit 139
5.11 Banker’s Acceptance 141
6. GENERALIZED SYSTEM OF PREFERENCES 141
6.1 Harmonized Tariff Schedule of the U.S. Annotated (HTSUSA) 142
7. PROGRAMS BENEFITING THE IMPORTING BUYER 144
7.1 Benefits from Foreign Governments 144
7.2 Foreign “ Free Trade” Zones and Sub zones 145
7.3 Duty Drawback Savings 145
8. THE INTERNET AND GLOBAL INFORMATION NETWORKS 146
7 BUILDING RAPPORT WITH SUPPLIERS 149
1. SUPPLIER PARTNERING RELATIONSHIPS 152
1.1 Implications to the supply organization 154
2. CHANGE “BACKDOOR” SELLING TO “FRONTOFFICE” COLLABORATION 156
2.1 Overcoming “ Backdoor” Behavior 158
3. CONFLICT RESOLUTION: WORKING WITH OTHERS 159
3.1 Taking positive action 160
3.2 A Time to Do Nothing! 162
4. ETHICAL ISSUES IN BUYING 162
4.1 Where to Draw the Line 163
4.2 Buying Practices 165
4.3 Gifts from Suppliers 167
4.4 Lunches and Entertainment 168
4.5 The Ethical Double Standard 168
5. DO’S AND DON’TS OF DEALING WITH SUPPLIERS 169
8 QUALITY AS A COST IMPROVEMENT TECHNIQUE 171
1. QUALITY DEFINED 172
2. SIX-SIGMA AND TOTAL QUALITY MANAGEMENT 173
2.1 Cost of Quality 174
3. STATISTICAL PROCESS CONTROL 176
4. SPECIFYING WHAT TO BUY 180
4.1 Efforts to Ensure Quality Through International Standards ( ISO 9000 Series) 182
4.2 Cooperation with the Quality Function Pays Off 183
5. WORKING WITH SUPPLIERS TO MANAGE QUALITY 185
5.1 Certification Clause 185
5.2 Quality and Reliability Clause 185
5.3 Early Supplier Involvement 186
5.4 Qualification and Pre- qualification 187
9 PURCHASING’S STRATEGIC APPROACH TO INVENTORY MANAGEMENT 189
1. DRIVERS OF INVENTORY 189
1.1 Types of Inventory 191
1.2 Who controls inventory? 192
2. GOALS OF INVENTORY CONTROL 192
3. ASSET MANAGEMENT ( CONTROL OF INVENTORY COST) 193
3.1 Record Keeping Systems 194
3.2 Methods of Inventory Valuation 195
3.3 Financial Analysis of Inventory 196
3.4 Inventory Turnover 196
3.5 Physical Control of Inventory 198
4. DECIDING WHEN AND HOW MUCH TO BUY 200
4.1 Economic Order Quantity 201
4.2 Order Quantity Methods 202
4.3 Statistical Reorder Point 203
4.4 Time- Phased Order Point 204
4.5 Materials Requirement Planning 205
5. LEAN MANUFACTURING AND JUST-IN TIME 206
6. PROCESS IMPROVEMENT AND INVENTORY 207
6.1 Leadtime as an Inventory Driver 207
6.2 Quality and Lot Size as Inventory Drivers 208
6.3 Information Provides Opportunity 209
7. PURCHASING’S ROLE IN SUPPORTING INVENTORY OBJECTIVES 210
7.1 Supplier- Managed Inventory 211
10 PROACTIVE TECHNOLOGY MANAGEMENT STRATEGY FOR COMPONENT OBSOLESCENCE 213
1. THE CHALLENGE OF OBSOLESCENCE 214
1.1 Obsolescence as an Incurable Disease 215
1.2 The Ideal Obsolescence Management System: “Clean Sheet of Paper” Design 216
1.3 Conflicting Challenge: Managing Obsolescence and Change Issues while Optimizing Inventory 218
2. OBSOLESCENCE MANAGEMENT SOFTWARE: HOW IT WORKS 218
3. THE LIFE CYCLE CONCEPT 222
4. BENEFITS OF A SOUND OBSOLESCENCE MANAGEMENT PROCESS 223
5. SO WHO NEEDS OBSOLESCENCE MANAGEMENT TOOLS? 224
5.1 The Old Way Versus the New Way... 225
5.2 How to Win a Spares Contract and Lose your Shirt! 225
5.3 How to Win a Spares Contract and Win Big! 226
6. THE FUTURE AND THE WAY FORWARD... HOW TO SELECT THE RIGHT TOOLSET 227
11 BUYING AT THE “RIGHT” PRICE 228
1. HOW PRICES ARE SET 229
1.1 Market- based and cost- based prices 231
2. PRICE AND COST ANALYSIS 232
2.1 An Exercise to Compute Price of Paint 234
2.2 Cost analysis 234
2.3 Cost Analysis Tips for Buyers 235
2.4 Break- even Analysis 239
3. MEETING TARGET COSTS FOR NEW DESIGNS 241
3.1 Price, Cost, and Value Relationships 241
4. PRODUCER PRICE AND CONSUMER PRICE INDEXES 242
4.1 Your Company Market Basket Index 244
5. USE OF STANDARD COST 244
6. PRICE FORECASTING 246
7. STRATEGY OF HEDGING VERSUS FORWARD BUY 249
7.1 Ways to Minimize Risk 250
7.2 How a Futures Hedge Works 251
12 NEGOTIATIONS 253
1. CREATING THE NEGOTIATION ENVIRONMENT 254
2. NEGOTIATION STRATEGY 255
2.1 Address Alternative Solutions to Gain Concessions 257
3. IMPLEMENTING TACTICS AND NEGOTIATION CHECKLIST 259
3.1 Negotiation Checklist (“ Do’s and Don’ts”) 259
4. NEGOTIATION FUNDAMENTALS FROM A GLOBAL PERSPECTIVE 260
4.1 Canadian Culture 262
4.2 Mexican Culture 263
4.3 Negotiation Sensitivity 264
4.4 Avoiding the Pitfalls — How to Blow It! 265
5. A NEGOTIATION SETTLEMENT 267
13 GLOBAL SUPPLY DEMANDS TECHNICAL BUYING COOPERATION 269
1. ORGANIZING TO ACHIEVE TECHNICAL COMPETENCE 270
2. THE DESIGN ENGINEERING PROCESS 271
2.1 Need for Follow-up of Design Programs 272
3. THE REENGINEERING PROCESS 273
4. STRATEGIC TECHNICAL SUPPORT ACTIVITIES 275
4.1 Manage Conflict with Design Engineers 276
5. REVIEW OF THE TECHNICAL BUYER AND PURCHASING ENGINEER JOBS 280
5.1 The Role of Purchasing Engineers 280
6. MAKE-OR-BUY STUDIES 281
6.1 Purchasing’s Role in Make-or-Buy 287
14 USING COST REDUCTION TECHNIQUES 289
1. SIX-SIGMA METHODOLOGY 292
1.1 Value and Engineering Analysis 295
1.2 Overcoming Resistance to Change 297
2. REDUCING COMPLEXITY - STANDARDIZATION AND SUBSTITUTION 299
2.1 Simplification 300
3. OUTSOURCING AND LEASE- VERSUS- BUY 300
3.1 Lease- Versus- Buy 302
3.2 Methods of Acquisition 303
3.3 Other Leasing Considerations 304
3.4 Tax Advantages 305
4. USE OF THE LEARNING CURVE 305
4.1 How the Learning Curve Works 306
5. TRACKING COST SAVINGS RESULTS 310
15 LEGALITIES IN BUYING 313
1. KEY ELEMENTS OF EVERY CONTRACT 313
2. THE UNIFORM COMMERCIAL CODE 314
3. CONTRACT TERMS AND CONDITIONS 315
3.1 Word Processing Templates 315
3.2 Warranties 315
3.3 Epidemic Failure Clause 316
3.4 Liability Insurance 317
3.5 Force Majeure 317
3.6 Contract Cancellation or Termination 318
3.7 Indemnification of Buyer 318
3.8 Patents, Proprietary Information, and Disclosure 319
3.9 Other Suggested Purchase Order Clauses 321
4. SOCIOECONOMIC AND ENVIRONMENTAL LAWS 322
5. ANTITRUST LAWS 323
6. UNITED NATIONS CONVENTION 324
7. GENEVA AGREEMENT ON TARIFFS AND TRADE 325
8. GLOBAL TRADE BARRIERS 325
8.1 Boycotts 325
8.2 Cartels and Closed Countries 326
8.3 Counterfeiting and Piracy of Property 326
8.4 Import Customs Laws and Regulations 327
8.5 Unfair Pricing and Protectionism 327
8.6 Antidumping Duties 328
8.7 Countervailing Duties 329
9. BATTLE OF THE FORMS 330
9.1 Dispute Settlements 330
9.2 Alternative Dispute Resolution 332
9.3 Mediation 333
10. FOREIGN CORRUPT PRACTICES ACT 335
11. THE BUYER AND LEGAL ISSUES 336
16 SERVICES AND MRO BUYING 338
1. BUYING IN SERVICE ORGANIZATIONS 338
1.1 Distribution Buying 340
1.2 Merchandise ( Retail) Buying 341
1.3 Hospitals and Health Maintenance Organizations 341
1.4 Schools and Educational Buying 342
1.5 Government Procurement and Military Buying 342
2. CO- OP AND CONSORTIUM BUYING 343
2.1 Consortium Purchasing 343
3. BUYING FOR MAJOR PROJECTS 345
3.1 Construction Contracting 346
3.2 Recycling and Trash Removal 346
3.3 Use of Bids 346
4. SYSTEMS CONTRACTS FOR MRO SUPPLIES 347
5. INSTANT CASH AND THE PROCUREMENT CREDIT CARD 348
5.1 The Procurement Card 349
5.2 “ Smart Cards” 350
17 TRANSPORTATION STRATEGIES TO REDUCE LOGISTICS COSTS 351
1. DEVELOPMENTS WITH A PROFOUND IMPACT ON TRANSPORT 352
2. SIGNIFICANT BUYING ISSUES 354
2.1 Freight Consolidation 356
3. MODES OF TRANSPORT 357
4. TRANSPORTATION CONTRACT CONTENTS 359
4.1 Ocean Carriage Contracts 361
4.2 Containers 362
4.3 Insurance 363
4.4 Cost Analysis of Motor Carriage Transportation 364
4.5 Negotiating Rates with Deregulated Carriers 364
5. COMMERCIAL TERMS OF SALE 365
6. CLAIM SETTLEMENTS AND ADJUSTMENTS 370
7. AUDITS OF FREIGHT BILLS 371
8. THIRD PARTY LOGISTICS 372
III LEADING AND MANAGING TO FULFILL THE VISION 375
18 IMPROVING MANAGEMENT OF THE PURCHASING FUNCTION 376
1. APPLICATION OF MANAGEMENT PRINCIPLES TO PURCHASING 377
1.1 Theory “ X” and “ Y” 379
1.2 Theory Z 380
2. APPLY SOUND THEORY TO PURCHASING 381
3. EFFECTIVE COMMUNICATIONS, BOTH EXTERNAL AND INTERNAL 382
3.1 Productive Work Habits 385
4. NEED TO SUPPORT EDUCATION AND BUYER DEVELOPMENT 386
4.1 Pursue Buyer Development Programs 388
4.2 Certified Purchasing Manager Program 389
4.3 Accredited Purchasing Practitioner Program 389
5. USE OF JOB DESCRIPTIONS AND A PURCHASING MANUAL 390
5.1 Develop and Use a Purchasing Manual 391
19 MEASUREMENTS OF PURCHASING PERFORMANCE 398
1. VARIOUS KINDS OF MEASUREMENTS USED 401
1.1 Internal Audit 402
1.2 Management by Objectives 403
2. INDICATORS OF PURCHASING EFFICIENCY 404
3. BENCHMARKING 408
4. THE TREND MEASUREMENT SYSTEM 409
5. STANDARD COST AS A PERFORMANCE MEASUREMENT 412
6. HOW THE PURCHASING DOLLAR IS SPENT 412
6.1 Computing a Company’s Productivity 413
7. REPORTS TO MANAGEMENT 416
8. SUPPLY MANAGEMENT PROCESS MEASUREMENT 418
20 A LOOK INTO THE FUTURE 422
1. SIGNIFICANT TRENDS 423
1.1 The Realities of a Global Economy 424
1.2 Buyers Should Avoid Chasing Low Cost Labor 425
2. CHANGES IN THE PROFESSION 426
2.1 Strategic Development Becomes Critical 427
2.2 Tactical Methods Remain Important 428
3. FULFILL THE VISION! 429
Appendix 432
Index 439
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Chapter 4 THE PURCHASE ORDER PROCESS (p. 63-64)

Before getting into specific purchasing tasks, and ultimately considering how to improve the job, it is worthwhile to first review the purchasing process itself. The first portion may be a refresher for experienced purchasing managers, but is essential to understanding for non-purchasing personnel seeking insights into the profession. The latter sections provide an enlightening view of how e-commerce tools are redefining the fundamental procurement process.

This chapter will briefly outline the basic steps in the purchase order process, including some of the more common clauses used in purchase contracts. (The more detailed discussion of purchase order clauses will be covered in chapter 15.) The discussion will conclude with an overview of some of the information technology and Internet tools currently available to assist in this fundamental purchasing workflow.

Let’s begin with the mechanics of the buying process (refer to Chapter 1, Figure 1-3) that is initiated by a requisition or other definition of need from within the organization. The buyer will analyze the requisition and ultimately complete it by adding the pertinent purchase data. To edit the requisition, buyers will also need their company’s forms and records, supplier catalogue, purchase history records, and purchase order number file (unless forms are pre-numbered). Of course, if the department has become "paperless," then the ensuing information will relate to the electronic medium in use.

Much has been written about the basic records needed by the buyer. Buyers are urged to use as a desk reference, The Purchasing Handbook, Sixth Edition, by editors in chief Joseph Cavinato and Ralph Kauffman and published by McGraw Hill.

Several key items listed below need to be available to the buyer: Supplier identification records, containing source information and addresses.

Supplier profiles for major suppliers, listing key contact people, phone numbers, e-mail addresses, Web sites and the like. Price history records that are essential, and which should include alternate suppliers and their current pricing information.

1. FUNDAMENTAL STEPS TO COMPLETE A PURCHASE

In the context of the overall process of completing a buy, editing the requisition is among the first administrative steps taken by a buyer. The fundamental administrative steps to the purchase are: Editing the requisition

Making purchase decisions (source(s), split of business, pricing and terms of purchase)

- Issuing the purchase order (PO)
- Issuing change notices (as required)
- Receipt of order acknowledgment
- Follow up and expediting
- Receiving records
- Invoice reconciliation and approval
- Corrections or changes, if needed
- Recording purchase transaction and closing the PO

1.1 Editing the Requisition

The first step in buying is always recognition of a need. It may be a request to replenish stock on a repetitive item, or it could be a special onetime buy of a less frequently ordered item. It may be for commodities, components, or services and it may be for a few dollars or millions of dollars. It is best to be in written form, usually a requisition ("req") that represents an unfulfilled need. Today this data is frequently transmitted electronically over intra-company computer networks, or sometimes via facsimile.