Developing and Managing the Buying Plan

 

Reactive vs. Proactive Purchasing

 

Annual Operating Plan

 

     Forecasts Key Operating Activities, i.e:

 

     Sales

     Production

     Purchasing Plan and Materials Budget

 

Purchasing Plan and Materials Budget can only be fixed to the accuracy of Sales and Production Forecasts - normally not accurate to annual basis but requirement adjustment throughout the production year

 

Materials Budget contains information concerning:

 

     Estimated materials prices for the period

     Timing of purchases to establish obligation rates for the period

 

Forward buying can be arranged commensurate with planning levels and accuracy. 

 

     Forward buying attempts to purchase quantities to levels approximating foreseeable requirements. 

     "Hand to Mouth" buying is buying material to satisfy current operating requirements, oftentimes at less than optimum economic quantities.

 

Forward buying consists of advanced arrangements such as:

 

     Blanket Purchase Agreements

     Contract Purchases (IDIQ, Requirements, etc.)

 

Long term forward buying arrangements should include provisions to mitigate risks associated with market volatility (swings either upward, to protect supplier, or downward, to protect buyer)

 

Market Stability influences purchase timing

 

     Stable markets may allow orderly purchases of uniform quantities

     Unstable markets may provide opportunities to be either seized or avoided

     Proper market timing can be a hedge against rising prices of commodities

 

Volume purchased can influence prices (and also the cost of capital) while avoiding the negative impact of numerous small purchases

 

It is important to emphasize that Strategic Materials Planning considers long-term material requirements and market projections

 

     In strategic materials planning, the focus is on the corporate position over the long haul, not short term gratification

 

     Potentially critical materials for future needs are identified and sources developed

 

     Consumer demand and product/materials innovation must be considered

 

     Political and economic environments in source countries must be assessed

 

     Competitor demands for like commodities must be considered

 

     Strategic materials planning should maximize benefits derived from second or alternative sourcing agreements by injecting competition, ensuring product availability

 

     Materials projected in short supply should be considered for substitution/replacement and vice versa

 

     Make or buy decisions should be included where outsourcing of components is a concern or potentially risky

 

 

VALUE ANALYSIS/VALUE ENGINEERING

VA - Orients on existing product.  Steps include:

 

1.  Design analysis - view of individual parts, components -  evaluate their contribution to the whole system (end item) -

 

Explore potential to -

 

            - Eliminate

            - Simplify

            - Lower mfg. cost

            - substitute

            - standardize

 

(Firm must be willing to accept fundamental changes in products/processes)

 

2.  Cost vs. Benefit Analysis

 

3.  Brainstorming

 

4.  Supplier Input - (remember procurement is manager of outside manufacturing)

 

VE - Orients on new products or effort.

 

VE includes supplier input and provides a contractual incentive in the form of gainsharing

 

APPRAISAL AND CONTROL

1.  Problem Prevention - Detection - Correction

 

            Problem Prevention -

 

                        - Buyer commitment limits

                        - Requirement for competition

                        - Policy regarding when to use negotiation vs. formal advertising

                        - Policy regarding vendor qualification/selection (how, who, why, other?)

 

            Problem Detection -

 

                        - Develop performance standards (MOE's)

                        - Obtain feedback

                        - Compare - Evaluate

                       

            Problem Correction -

 

                        - Adjust, revise, eliminate, other measures?

                        - Problems may be external or internal - examples of each?

 

Measuring Buyer Effectiveness -

 

            Responsiveness -

                        - % of overdue orders

                        - Backlog

                        - Rush orders/premium transportation costs incurred

                        - Line stoppers due to materials related causes

                        - Stock outages due to late delivery

           

            Cost Control -

                        - Target vs. actual prices paid

                        (target = market, GSA, Commodity Price Index )

                        - Degree to which Volume Buying is used

                        - Contribution of Forward Buying

-         Level of unpriced orders processed

 

            Quality -

                        - Reject levels

                        - Number of  "Certified Suppliers"

                        - Supplier QC program effectiveness

                        - Volume of production design changes resulting in contract change orders

 

            Source Reliability -

                        - Report:  % of late deliveries, rejects

                                        % of incorrect shipments - either item or quantity

                        - transportation issues - timeliness, cost

 

            Supplier Relations -

                        - Responsiveness

                        - Level of Service

                        - Fairness (both ways)

                       

            Internal Coordination -

                        -Manufacturing

                        -Engineering

                        -Finance

 

Purchasing Workload Measurement - (management info)

 

1.  # PR's received from customers

 

2.  # PO's issued in response to above  (consider requests for duplicate items, degree of order consolidation)

 

3.  # Long term K's - new, existing (opportunity to consolidate orders, requirements)

 

4.  Average $ per PO

 

5.  # Rush orders (% of total)

 

6.  # Change orders issued

 

7.  Other issues?

 

Social Responsibility -

                        Orders to:  Small Business

                                        Local Business

                                        Minority Business

 

 

Assignment:  Select a major item to acquire (i.e. a building, a piece of capital equipment, a weapon system, etc.) and develop a written acquisition strategy to accomplish the acquisition.  Use FAR Part 7, your text, or other sources of information to obtain your format and cite the source.

 

ETHICAL AND PROFESSIONAL STANDARDS

 

Survey of 4,035 Employees Across a Variety of Industries

Professional Supply Management Ethics

The pressures that the marketplace exerts on supply management departments and on individual buyers make it essential that top management and supply management recognize and understand both the professional and ethical standards required in the performance of their duties

Principles of Supply Management Practice

From these principles are derived 12 standards of supply management practice

Twelve Standards

1. Ethical Perceptions

Avoid the intent and appearance of unethical or compromising practice in relationships, actions, and communications.

2. Responsibilities to the Employer

Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer, using reasonable care and only the authority granted.

3. Conflict of Interest

Refrain from any private business or professional activity that would create a conflict between personal interests and the interests of the employer.

4. Gratuities

Refrain from soliciting or accepting money, loans, credits, or prejudicial discounts, and the acceptance of gifts, entertainment, favors, or services from present or potential suppliers that might influence, or appear to influence, supply management decisions

Guidelines in Dealing with Gratuities

Business Meals

»   Occasionally appropriate

   For specific business purpose

   Frequent meals same supplier should be avoided

   Attempt pay for meals as frequently as the supplier

Global Supply Management

»   Foreign cultures, special circumstances

»   Reciprocal gift giving of nominal value

»   Careful evaluation of nominal value

5. Confidential Information

Handle confidential or proprietary information belonging to employers or suppliers with due care and proper consideration of ethical and legal ramifications and governmental regulations

Examples of Confidential Information

6.  Treatment of Suppliers

Promote positive supplier relationships through courtesy and impartiality in all phases of the supply management cycle.

7.  Reciprocity

Refrain from reciprocal agreements that restrain competition

8. Governing Laws

Know and obey the letter and spirit of laws governing the supply management function, and remain alert to the legal ramifications of supply management decisions

9.  Small, Disadvantaged, and Minority Owned Businesses

Encourage all segments of society to participate by providing access for small, disadvantaged, and minority-owned businesses.

10. Personal Purchases for Employees

Discourage supply management’s involvement in employer-sponsored programs of personal purchases that are not business related

Recommended Guidelines for Personal Purchases for Employees

11.  Responsibilities to the Profession

Enhance the proficiency and stature of the supply management profession by acquiring and maintaining current technical knowledge and the highest standards of ethical behavior.

12. Global Supply Management

Conduct international supply management in accordance with:

»   the laws, customs, and practices of foreign countries,

»   consistent with your country’s laws,

»   your organization’s policies,

»   and these Ethical Standards and Guidelines

Important Areas Requiring Amplification

 

Avoid Sharp Practices

Examples of Sharp Practices

Examples of Sharp Practices

Competitive Bidding

Competitive Bidding

Negotiation

A professional should maintain high ethical standards, such as:

»   Competitors are informed of the factors that will be involved in source selection.

»   All potential suppliers are given equal access to information and are afforded the same treatment.

»   Supply professionals strive to negotiate terms that are fair to both parties

»   Do not take advantage of mistakes in the supplier’s proposal  

Samples

Treating Salespeople with Respect

Substandard Materials and Services

Two proprieties:

»   The supplier should be given prompt notice.

»   The appropriate supply manager should conduct negotiations for adjustments with the appropriate sales personnel in the supplier’s organization.

Gifts and Gratuities

»   A minority of supply professionals feel that any form of gratuity constitutes a conflict with ethical standards

»   The majority consider many of gifts and gratuities to be traditional sales tools

Management Responsibilities

The Four Way Test

Concluding Remarks

»   How did you treat other people?

»   Did you touch the lives of others?

»   What would you want it to say about your ethics?

»   You are writing your obituary each day of your life by the way you choose to live

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