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 whats 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 Sellers 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 Invoicing 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 Buyers 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