Materials Management BUS 3 – 141 Purchasing Process Overview Week of Jan 29, 2007

1. Materials ManagementBUS 3 – 141Purchasing Process OverviewWeek of Jan 29, 2007

2. Agenda • Questions from Last Week • “Deal of the Weekend” • How Supply Management supports overall strategy • Initial elements the Supply Management Process

3. How Supply ManagementSupports Overall Strategy

4. An Aligned Approach to Strategic Planning on Three Levels * • What Business are we in? • How will we allocate resources among these businesses? Corporate • How do we contribute to corporate strategy Business Unit • How does each function contribute to the business strategy? • How does each function involve the allocation of internal resources? Function * Adapted from Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

5. Supply Strategy Interpreted in Organizational Strategy * Supply Objectives Organizational Objectives Supply Strategy Organizational Strategy * Adapted from Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

6. Supply Strategy Links Current and Future Markets to Current and Future Needs* Current Needs Future Needs Current Markets Future Markets * Adapted from Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

7. Social issues and trends Government regulations and controls Financial planning with suppliers Product liability exposure Economic trends and environment Organizational changes Product or service line Competitive intelligence Technology e-Commerce Investment Mergers/acquisitions/ disinvestment Time-based competition Potential Business-Strategy Contribution Areas * It’s not just about COST! * Adapted from Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

8. Tactical Elements of theSupply Management Process

9. The 9 Elements of the Supply Management Process Supply Mgmt Customer Service Production Customer Demand Shipping Production Schedule Maintain Records Process Payment Receive & Verify Follow-Up & Expedite Issue Purchase Order Select Supplier(s) Assess Suppliers Establish Specifications Identify Requirements

10. 1. Identify Requirements Identify Requirements Maintain Records Process Payment Follow-Up & Expedite Receive & Verify Issue Purchase Order Select Supplier(s) Identify Suppliers Establish Specifications • Direct and Indirect • Material Requisitions • MRP Output • Impact of Lead Time • Other items to consider • As availability becomes scarce, Purchasing alerts users • Recommending subassemblies instead of components • Proposing substitute items, where appropriate

11. 2. Establish Specifications Establish Specifications Maintain Records Process Payment Follow-Up & Expedite Receive & Verify Issue Purchase Order Identify Requirements Select Supplier(s) Identify Suppliers • Engineering Drawings and Specifications • Samples • Requisition Details (electronic or paper) • Date originated, Document Number, Dept, Account Number, Signature(s) • Complete description of material or service required • Quantity and date required • Shipping / delivery instructions • Authorization to Buy • Impact of Lead Time • Other items to consider • Understanding ultimate purpose (Are they asking for a Mercedes or just a car?) • Catalogues and standard items • Supplier Input

12. 3. Identify Suppliers Identify Suppliers Process Payment Maintain Records Follow-Up & Expedite Receive & Verify Issue Purchase Order Establish Specifications Identify Requirements Select Supplier(s) • History and Geography • Request for Quotation • Request for Proposal • Request for Bid • Other items to consider • Input from Technical Staff • Other

13. 4. Select Suppliers Select Supplier(s) Maintain Records Process Payment Identify Suppliers Follow-Up & Expedite Receive & Verify Issue Purchase Order Establish Specifications Identify Requirements • Supply Capability • Quality • Capacity • Reliability • Many other factors to be covered later in semester

14. 5. Issue Purchase Order Issue Purchase Order Identify Suppliers Maintain Records Select Supplier(s) Follow-Up & Expedite Process Payment Establish Specifications Identify Requirements Receive & Verify • Relationship to Material Requisition • The Requisition provides the information that populates several Purchase Order data fields (see Requisition Details) • Ensure Risk Management • Acknowledgement • Internal Controls • Budgets • Approvals • Recurring Purchase Order Releases • Pre-negotiated contracts • Other items to consider • ALWAYS ensure that the terms and conditions are in WRITING. A Purchase Order is a CONTRACT Continued on next Slide

15. 5. Issue Purchase Order, continued Issue Purchase Order Identify Suppliers Maintain Records Select Supplier(s) Follow-Up & Expedite Process Payment Establish Specifications Identify Requirements Receive & Verify • Discrete Orders • Pre-negotiated Blanket • Pre-negotiated Vendor-Managed • Maintenance, Repair, and Operating Supplies (MRO) • Bid and Auction • Corporate Purchase Card (pCard)

16. 6. Follow-Up and Expedite Follow-Up & Expedite Process Payment Identify Suppliers Maintain Records Select Supplier(s) Issue Purchase Order Receive & Verify Establish Specifications Identify Requirements • ERP Applications assume that scheduled dates will be received on time • A Scheduled delivery date needs to be monitored and managed • Possible missed dates must be identified in advance and avoided • If delays are inevitable, recovery plans must be developed and managed • Other items to consider • An understanding of the Supplier’s production process, capacity, and constraints is critical to collaborative problem solving • Expediting should be on an exception basis. If it is determined that a particular supplier is consistently being expedited, corrective action should be initiated

17. 7. Receive and Verify Receive and Verify Process Payment Identify Suppliers Maintain Records Select Supplier(s) Issue Purchase Order Follow-Up & Expedite Establish Specifications Identify Requirements • Relationship to Material Requisition and Purchase Order • Key data elements travel throughout • Key objectives • Confirm receipt of goods • Ensure proper physical condition, quantity, documentation • Quality parameters met • Cross functional activity among Purchasing, Receiving, Materials, and Finance • Other items to consider • Receiving is technically a “non-value-added” activity. It is designed to ensure that something that should have been done properly actually was. The goal is to ensure quality throughout, and eliminate the need for inspection

18. 8. Process Payment Process Payment Receive & Verify Identify Suppliers Maintain Records Select Supplier(s) Issue Purchase Order Follow-Up & Expedite Establish Specifications Identify Requirements Key Document Flow Payment Requisition Purchase Order Packing Slip (Receiving) Invoice • Match the data in the Purchase Order, Packing Slip, and Invoice • Discrepancies must be reconciled before payment is issued • Some level of discrepancies can be ignored (e.g. if +/- 5% or +/- $25) • Audits of all • Discounts for early payment are often available and should be taken whenever possible • Other items to consider • Chronic discrepancies from a single Supplier could lead to a change

19. 9. Maintain Records Maintain Records Receive & Verify Identify Suppliers Process Payments Select Supplier(s) Issue Purchase Order Follow-Up & Expedite Establish Specifications Identify Requirements • Purchase Orders should be archived for up to 7 years • Key Records to be Maintained (from p.77) • Purchase Order Log of all PO’s • Copies of Purchase Orders • Commodity file • Supplier history file • Outstanding Contracts against which PO’s are placed • Other items to consider • Can be electronic or paper • Paper can be managed by a third party