GENERAL MANAGEMENT ISSUES, ETHICS and SOCIAL RESPONSIBILITIES

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. Acquisition strategy and contract type are important here.

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

Explore potential to -

- Eliminate

- Simplify

- Lower mfg. cost

- Substitute

- Standardize

2. Cost vs. Benefit Analysis to assess impact of contemplated changes

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 gain sharing

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 information item)

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

Protected Classes (Minority, Veteran, Women, HUB)

ETHICAL AND PROFESSIONAL STANDARDS

Principles and Standards of Supply Management Practice

Ethical Perceptions

Responsibilities to the Employer

Conflict of Interest

Gratuities

Confidential Information

Treatment of Suppliers

Reciprocity

Governing Laws

Small, Disadvantaged, and Minority Owned Businesses

Personal Purchases for Employees

Responsibilities to the Profession

Global Supply Management

Important Areas Requiring Amplification

Avoid Sharp Practices

Competitive Bidding

Negotiation

Samples

Treating Salespeople with Respect

Substandard Materials and Services

Gifts and Gratuities

Management Responsibilities

Written Standards

Ethics Training and Education

Departmental Environment

Miscellaneous Factors

Dealing with Gray Areas

Survey of 4,035 Employees Across a Variety of Industries

97% said good ethics are good business

67% said that ethical conduct isn’t rewarded in American business

82% believe that managers generally choose bigger profits over “doing what’s right”

25% said their companies ignore ethics to achieve business goals

33% reported that their superiors had pressured them to violate company rules

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

Loyalty to Your Organization

Justice to Those with Whom You Deal

Faith in Your Profession

From these principles 12 standards of supply management practice are derived

Twelve Standards

Ethical Perceptions

Responsibilities to the Employer

Conflict of Interest

Gratuities

Confidential Information

Treatment of Suppliers

Reciprocity

Governing Laws

Small, Disadvantaged, and Minority Owned Businesses

Personal Purchases for Employees

Responsibilities to the Profession

Global Supply Management

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

Pricing and cost date

Bid or quotation information

Formulas and process information

Design information (drawings, blueprints, etc.)

Company plans, goals, strategies, etc.

Personal information about employees or trustees

Supply sources and supplier information

Customer lists and customer information

Computer software programs

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

Avoid using an employer’s purchasing power for special purchases

Make certain of fair arrangements for personal purchase programs

Use caution to ensure that employer-sponsored programs do not force special concessions on the supplier

Suppliers should be made aware that such purchases are not for the employer, but for the firm’s 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

Competitive Bidding

Negotiation

Samples

Treating Salespeople with Respect

Substandard Materials and Services

Gifts and Gratuities

Avoid Sharp Practices

Evasion and indirect misrepresentation

Just short of actual fraud

Sharp practices focus on short-term gains and ignore the long-term implications for a business relationship

Examples of Sharp Practices

A supply manager talks in terms of large quantities to encourage a price quote on that basis

A large number of bids are solicited in hope that the buyer will be able to take advantage of a quotation error

Bids are obtained from unqualified suppliers that the supply manager would not patronize in any case

A supply manager who places in competition the prices of seconds, odd lots, or distress merchandise misrepresents a market

Examples of Sharp Practices

An attempt is made to influence a seller by leaving copies of bids, or other confidential correspondence, where a supplier can see them.

A concession may be forced by dealing only with “hungry” suppliers

Obscure contract terms of benefit to the supply manager’s firm are buried in the small type of contract articles

A supply manager may take advantage of a supplier who is short of cash and who may seek only to cover his/her out-of-pocket costs

Competitive Bidding

Invite only firms to whom they are willing to award a contract to submit bids.

Normally, award the contract to the lowest responsive, responsible bidder.

Keep competitive price information confidential.

Notify unsuccessful bidders promptly so that they may reallocate reserved production capacity.

Competitive Bidding

Treat all bidders alike.

Do not accept bids after the announced bid closing date and time.

Do not take advantage of apparent mistakes in the supplier’s bid.

Do not shop or conduct auctions for low prices. (Unless specifically intended)

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

Many potential suppliers offer, even push, the acceptance of samples—”Just try it and see if it doesn’t do a superior job for you”

When a sample is accepted, supply professionals ensure that appropriate tests are conducted in a timely manner

Treating Salespeople with Respect

Appointments with salespeople should be meticulously kept

A mutually effective policy is for supply management personnel to see every salesperson on his or her first call

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

There’s No Such Thing as a Free Lunch”

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

Traditional Sales Techniques

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

Cultural Ramifications

Management Responsibilities