Supplier Relationships and Procurement Plans

Main Objective of Purchasing: Maintain reliable supply of materials or services at lowest possible price and at desired quality level.

Purchasing decisions

· Cost/value analysis

o Direct Cost: major portion of cost; small reduction means large impact on final cost

§ Direct labor: geographic, union vs. non-union, workforce skills

§ Direct material: purchased, self manufactured

o Indirect Cost

§ Engineering overhead

§ Material overhead

§ General and admin

§ Manufacturing overhead

§ Selling and Marketing

o Price is relative: Total Cost of Ownership is what’s important (returns, bad quality, late shipments, carrying costs, etc…)

o Profit

§ Suppliers need to make a profit

§ Price is always consideration

§ Determination is subjective

o Cost uncertainty

§ Supplier cost responsibility

§ Supplier profit

§ Supplier incentives

§ Risk and uncertainty are related

· Make or Buy

o Cost

o Time

o Capacity utilization

o Production/quality control

o Secrecy

o Supplier expertise/reliability

o Volume

o Workforce

· Award criteria

o Establish prior to submitting requests for quotes

o Quality

o Time

o Security

o Existing suppliers

· Compensation agreements

o Incentive arrangements: motivate supplier to improve performance

§ Target cost

§ Target profit

§ Sharing agreement

o Fixed Price

§ Most common/preferred

§ With economic adjustment: high value RMs

§ Redetermination: fixed in initial period then adjusted per clause

o Cost Plus Fixed Fee

§ Supplier assumes no risk

§ Customer pays allowable costs

§ Customer pays agreed fee

§ Supplier profit is low

· Contractual obligations

o Verbal commitment

o Purchas credit card

o Purchas orders

o Blanket orders/releases

§ Advantages

· Fewer Pos

· Buyers can focus on other areas

· Volume pricing

· Information flow

· Lower inventory/lead times

· Long-term supplier relationship

o Contracts

· Order placement

Pricing Principles

· Economic Considerations

o Variable margin pricing: companies sell line of products and establish prices to generate profit margin for entire line.

o Product differentiation: product really different from other suppliers or just hype?

o Cost plus profit

o Seller’s market

· Price Analysis

o Benchmark total price

o Historical

o Proposal

o Catalog/market

· Discounts

o Quantity

o Seasonal

o Trade

§ Given to buyer or distributor for performing some marketing functions of seller

o Cash

Contracts Elements

· Mutual Obligation

· Agreement or meeting of minds

· Competent parties

· Lawful purpse

Contract Types

· Long-Term

· Definite Delivery: production schedule of entire period known, high degree of certainty

· Indefinite Delivery

o Definite quantity: quantity specified; delivery is to be specified

o Requirements: all requirements for period of time; minimum requirements established; termination protection

o Indefinite quantity: minimum/maximum range specified; delivery to be specified; high and low limits

Order Placement Process:

1. Purchas Req

2. Request for Proposal/Request for Quote (RFP/RFQ)

3. Quote Evaluation

4. Purchas Order (PO)

5. Acknowledgement

6. Approval of invoice

7. Reconciliation


· Accounting pays invoice

· Reconciliations

Supplier Rating Systems

· Metrics to be measured depend on needs of the company

· Balanced Scorecard:

o Financial

o Customer

o Business Process

o Learning and Growth

· Performance measure should address:

o Customer satisfaction/quality

o Time

o Cost

o Quality

o Assets

· Performance Measurement Standards

o Product Quality

o Certification

o Delivery/performance

o Cost performance

o Quantity

o Cooperation

o Oter

Buyer Performance Standards

o Buyer’s Service Level

o Purchasing workload

o Planned number of buyers

o Number of documents per year per buyer

o Input ratio – number of res received/number of orders placed

o Product flow

o Year-to-date expense variance

Ethical Standards

· Ethical perceptions

· Responsibilities to Employer

· Conflict of Interest

· Gratuities

· Treatment of suppliers

· Confidential information

· Reciprocity

· Federal and state laws

· Small, disadvantaged, and minority-owned businesses

· Personal purchases for employees

· Responsibilities to the profession

· International purchasing

International Procurement

· Currency fluctuations

· Transportation

· Cultural

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