The chapter discusses purchasing procedures, e-purchasing, and systems contracting. It identifies the typical steps in the conventional purchasing cycle as requisitioning materials, determining suppliers, issuing purchase orders, expediting deliveries, receiving materials, and processing invoices. E-purchasing can reduce costs for indirect materials like office supplies through electronic ordering and reverse auctions. However, direct materials purchasing requires close supplier relationships not suited for e-procurement. Electronic data interchange (EDI) allows electronic transmission of orders and invoices but implementation requires overcoming resistance to change.

1. Purchasing and Supply Chain Management
by W.C. Benton
Chapter Seven
Purchasing Procedures,
E-Purchasing, and
Systems Contracting

2. Learning Objectives
1. To identify the steps in the conventional purchasing cycle.
2. To understand the differences between buying and
purchasing.
3. To identify the main activities of a typical purchasing
department.
4. To identify routine versus non routine purchasing/buying
methods.
5. To identify technical requirements for e-purchasing.
6. To identify the differences between EDI and e-purchasing.
7. To introduce the RFID technology.
7-2

3. Manual vs. Systematic Policies
• A typical purchasing department is responsible for
the acquisition of a broad range of materials and
supplies.
• Depending on the sales volume, the number of
employees, and the functional sophistication, the
purchasing activities can be either complex or simple.
• In most cases, large multidivisional firms like IBM,
Apple, and Toyota usually establish a set of
systematic policies based on the overall corporate
missions.
7-3

4. The Purchasing Policy
• The driving force behind any purchasing corporate
policy considers the following objectives:
1. Spend corporate funds wisely.
2. Operate in a professional manner.
3. Purchase the right materials in the right quantities, at
the right time and price, from the right source.
4. Practice the highest level of ethical standards to ensure
confidence among all parties
7-4

5. Purchase
Order
Cycle
7-5

6. Purchasing Procedures
1. Requisition material
A. Storeroom requisition
B. Purchase requisition
C. Traveling requisition—eliminates separate purchase requisitions
2. Determine supplier
A. Price card
B. Traveling requisition—same information as on price card
C. SAL (same as last)
D. Inquiry of potential suppliers—phone or e-mail (request for quotation)
E. Evaluate bids and select supplier. Establish prices, quality, and delivery
7-6

7. Purchasing Procedures
3. Issue a purchase order
• Distribute copies (multiple)
4. Follow and expedite delivery
• Open and close order files
5. Document receipt of material
• Multiple copies required
6. Move to storeroom (or point of use)
7. Receive and handle invoice
Purchasing
Accounts payable
8. Issue payment
7-7

8. Details for the third purchasing objective
became evident when the material requirements
arose:
1. The right material: Vinyl three-hole binder.
2. The right quality: Standard.
3. The right quantity: 2,000 units.
4. The right place: The training area.
5. The right time: Now.
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Thus, based on the above criteria specified by the
using department manager, the main functions of the
purchasing department are to:
1. Determine the supplier.
2. Negotiate the actual price.
3. Determine the delivery date.
7-8

9. Purchasing Procedures
• Most storerooms are full of inexpensive items and 90 percent of
stores transactions are for low-value routine materials related to
nonproductive requirements.
• Acquisition of supplies from the company storerooms in most
cases is a relatively simple process.
• A standard three-part requisition form is usually used to initiate
the transaction. Materials and supplies are usually received by
the requisitioning department in less than 24 hours.
– The inventory system is then updated. This process is continued until
some predetermined reorder point is activated and storeroom
replenishment occurs.
7-9

10. Traveling Requisition
• A traveling requisition also may include information
regarding the order point and economic order
quantity for inventory control purposes.
7-10

11. SYSTEMS CONTRACTING
7-11

12. What Is Systems Contracting?
• Systems contracting is a stockless inventory method for
ordering and stocking MRO and related items. The use of
systems contracting will aid the firm in reducing ordering
and inventory costs.
• The systems contracting process requires the use of a
negotiated agreement between buyers and sellers.
• The agreement includes the following terms: the type of
material, scope of contract, price, billing policy, stocking
policy, and delivery requirements.
• Systems contracting is an efficient form of purchasing
that is based on reductions in processing and
administrative costs. 7-12

13. Systems Contracting
• Systems contracting is a purchasing management
technique that seeks overall reduction in the cost of an
item from the time a need is recognized to the time that
need is fulfilled.
• Recognizing that purchase price is but one element of
the total cost picture, the scope of systems contracting
goes far beyond the purchase price for any given item.
• To extend this commitment to increasing productivity in
all departments within a given facility, many companies
have adopted the concept of profit centers.
– As a profit center, each department makes a direct
contribution to the overall success of the total organization.
7-13

14. The Total Cost of Ownership
• The purchasing function has become an
indispensable part of modern management
effectiveness.
• Purchasing professionals are primarily charged
with the responsibility for controlling the total
cost of ownership (TCO)
7-14

15. The Total Cost of Ownership
• The true cost of an item is its purchase price, plus fixed,
variable, and overhead costs. Beyond the direct costs are
the total procurement costs.
• The cost of procurement includes the following steps:
1. Identify need.
2. Requisition material.
3. Inquire with potential suppliers.
4. Evaluate bids/quotes.
5. Issue purchase order.
6. Expedite order.
7. Document receipt of material.
8. Receive and handle invoice.
9. Issue payment.
7-15

16. E-PROCUREMENT
7-16

17. An Introduction to E-Procurement
• The commercial purchasing literature on e-procurement
has suggested significant savings for businesses and
organizations can be realized by migrating to electronic
procurement systems for all of their purchasing
requirements.
• Many of the e-procurement software vendors fail to take
into account the total cost of implementing these
systems, the difficulty of realizing savings during the
development and deployment phases of the transition,
and the cost of training employees and getting suppliers
to participate in the e-procurement system.
7-17

18. E-Procurement
• Procurement is a very broad term.
• There is a broad push by e-procurement software
vendors for companies to migrate all types of
purchasing to e-procurement.
• In most cases, the best place to apply electronic
procurement is in circumstances where a very close
business relationship must be established and
ongoing cooperation is needed with suppliers,
especially when developing new products or
technologies.
7-18

19. Two Broad E-Procurement
Purchasing Categories
• It is important to first understand the two broad
purchasing categories of purchasing materials, goods,
and services in order to fully appreciate the role of e-
purchasing.
• The two major purchasing categories are direct and
indirect materials.
7-19

20. Direct and Indirect Materials
• Direct materials are directly related to the
production of the finished goods.
• Indirect materials are any commodity or service that
is not directly involved in the production of finished
goods.
7-20

21. Direct Materials
• Direct materials tend to be purchased in quantities
based on complicated production planning and
control systems.
• Some direct material purchasing situations may
involve long intricate negotiations.
7-21

22. Indirect Materials Purchasing
• Indirect purchasing can be divided into two
categories:
– operating resource management (ORM)
– maintenance repair and operations (MRO)
7-22

23. ORM and MRO Items
• ORM purchasing is a term used for purchasing office
equipment, furniture, office supplies, forms,
computers, travel services, maintenance services,
light bulbs, janitorial supplies, and many other
relatively low-cost items.
• MRO purchasing is concerned with critical
maintenance and replacement parts, highly
engineered machine parts, and manufacturing
equipment.
7-23

24. ORM and MRO Purchasing
• Many e-procurement software vendors do not
separate these two categories of indirect costs.
• It is unwise to lump ORM and MRO together.
• It is easy to see that critical-mission-driven machine
parts are more important than office supplies and
light bulbs.
• MRO buyers must select suppliers with high quality
and technical support.
7-24

25. ORM and MRO Purchasing
• The problem with indirect purchasing is the lack of
standardization, tedious paper work, delays, and
errors.
• Another problem is the tendency for employees to
intermittently buy indirect items “off contract.” This
practice is referred to as “maverick buying.”
• E-procurement is an excellent platform for
purchasing indirect materials.
7-25

26. Business to Business Commerce
• The world of business-to-business commerce has
become essential to the purchase of ORM and MRO
items.
• E-purchasing has fundamentally transformed the
traditional indirect purchasing function.
• E-purchasing has lead to significant cost saving and
coordinated efficiency.
• It is not a good idea to implement e-procurement on
systems that have a high supply risk and low profit
impact, especially if there are a very limited number of
suppliers to choose from.
7-26

27. Direct Materials Purchasing
• Critical items and systems are not the first place to
apply a new e-procurement system.
• Anything that will immediately impact profits or
bottleneck your operations is not a good place to
experiment with a new electronic procurement
system.
7-27

28. Effective E-Procurement Implementation
1. Start with non-critical items.
2. Bring all internal stakeholders on board with your
new procurement process to establish internal
customer behavior.
3. Streamline, map, test, troubleshoot, and improve
the process before expanding it to external
suppliers. Work with a favored supplier to test the
system.
4. Leverage your system once it’s running. Exploit
your full purchasing power by using reverse
auctions. 7-28

29. Effective E-Procurement
Implementation, cont.
5. Aggregate buyers within your organization to
increase your purchasing power and gain better
pricing.
6. Use an incremental approach to expand your
system.
7. Once the bumps have been ironed out of the
system, move on to the manufacturing operations.
7-29

30. REVERSE AUCTIONS
7-30

31. What Are Reverse Auctions?
• The Internet has revolutionized commodity
purchasing.
• Firms routinely place orders with suppliers online
and in real time, for example. Perhaps the most
significant change in the purchasing process is the
advent of reverse auctions.
• Businesses that use reverse auctions, or e-auctions,
have given testimonials of savings of more than 50
percent.
7-31

32. Reverse Auction (Example)
• As an example, General Electric reported savings of
more than $600 million in savings by putting $12 billion
in contracts up for bid online.
• The use of reverse auctions also has spread into the
construction industry and governmental agencies
• The purpose of a traditional auction is to create
competition between bidders. A seller offers a good or
service and bidders compete with one another by
increasing the current bid price. At the end of the
auction, the highest bidder wins the item.
7-32

33. Reverse Auctions
• With reverse auctions, conditions are somewhat different.
First, the buying firm initializes the auction by submitting a
description of the product or service.
• Sellers then place bids based on their offer to fulfill the buyer’s
needs.
• The competition between the sellers drives the price down,
instead of up, so the buyer pays less at the expense of the
seller.
• Despite that firms have made significant information
technology investment on supply chain practices, firms have
increasing needs to financially justify the information
technology investment.
7-33

34. Implementing a Reverse Auction
• Implementing the reverse auction process requires
the following steps:
1. Define market specifications
2. Identify suppliers
3. Perform pre-award review
4. Approve suppliers listing
5. Identify specific terms and conditions
6. Invite suppliers
7. Set up auction
8. Conduct auction
9. Write up contract
7-34

35. Reverse Auctions
• Reverse auctions may not be the solution for all commodity
buying. As an example, if there are too few sellers, reverse
auctions will not yield the best price.
• By definition, the price in reverse auctions is driven down by
competition, so if only limited competition exists, then the price
will not decrease enough to save the buyer a substantial
amount of money.
• A more devastating downside of reverse auctions is the
buyer/seller relationship damage that may result from this
method of buying. The buyer runs the risk of alienating both
current and potential sources for the goods/services.
7-35

36. Reverse Auctions
• Reverse auctions should be used to gain market
information (new suppliers, prices, new methods,
etc.) but should not be used as a routine sourcing
method.
• To maintain trust and cooperation between buying
and selling firms, reverse auctions should be used
carefully.
• Requests for quotes (RFQs) are less traumatic for
maintaining healthy relationships between buying
and selling firms.
7-36

37. ELECTRONIC DATA INTERCHANGE (EDI)
AND PURCHASING
7-37

38. What is EDI?
• EDI is the direct computer transmission of orders and
other transaction information.
• In purchasing, EDI is usually used for the electronic
transmission of orders, invoices, and payment
between buyer and seller.
• The main elements of an EDI system are computer
hardware, software, computer compatibility between
the sender and receiver, and subscription to a
common network.
7-38

39. EDI as a Competitive Strategy
• There are many benefits to using EDI. For a smaller
company, EDI may help keep a valued trading
partner or customer or even gain new ones.
• For larger firms, the main benefit is generally the
cost savings, or to be known as a leading-edge
company.
7-39

40. Benefits of EDI
• There are some definite benefits to utilizing EDI. The first
major benefit is reduced labor.
• The overall reduction in document handling is one that saves
time and allows more time for data analysis.
• Higher information quality due to a reduction in data entry
errors also can be attributed to EDI.
• EDI capabilities can show potential customers a supplier’s
willingness to cooperate, which improves relations and leads
to better long-term relationships.
7-40

41. EDI Risks
• There are also some risks when using EDI that should be
considered. EDI is not inexpensive.
• The machine and training cost will add up to a large amount,
and cutting corners may cost a company more than it saves.
• Security is also an issue. Procedural safeguards have not kept
up with technology in this area.
• The problem is exposure to outside users, which opens up a
doorway to false messages. These messages may come in the
form of a person who is not a supplier sending data or the data
being interrupted and/or altered.
• A decision must be made whether to trade singularly through
EDI or use both EDI and traditional methods.
7-41

42. Implementation of New Technologies
• Introducing new technologies into organizations will
almost always result in some combination of social,
technical, psychological, and structural changes.
• When managers or employers resist the logical
arguments presented in support of EDI, they may not
be resisting the technical aspects of the proposed
change as much as the perceived social or
psychological ramifications.
7-42

43. The Change Process
for New Technologies
A concise description of the change process
consists of the following three steps:
1. Unfreezing. Creating an awareness of the need for change
and a climate of receptivity to change.
2. Moving. Changing the magnitude or direction of the forces
that define the initial situation; developing new methods
and/or learning new attitudes.
3. Refreezing. Reinforcing the changes that have occurred,
thereby maintaining and stabilizing a new equilibrium
situation.
7-43

44. EDI Implementation Management
• The way in which the process of developing and implementing
an EDI system is managed can greatly influence the success of
implementation.
• Four key areas are top management support, commitment to
the project, influence, and institutionalization.
• Top management support has long been recognized as one of
the most important ingredients necessary for the introduction
of any organizational change, and the same holds true for the
introduction of an EDI system.
• Commitment to the project relates to management assurance
that the problem the EDI system is designed to improve is
understood and that EDI is the right solution to this problem.
7-44

45. EDI Implementation Management
• Management usually exerts only minimum influence during
the early life cycle phases and very heavy influence
immediately before final implementation.
• Unfortunately, it is at the implementation phase of systems
development when changes are most difficult and costly. If a
change costs $1 when feasibility is being considered, it would
cost $16 at implementation.
• Thus, management tends to spend most of its time at a point
in the development cycle when it will have the least influence
on the overall direction of the system. It is also the time when
exerting influence is the most costly.
7-45

46. The Implementation Team
• In order to orchestrate the various aspects of the
implementation process, a steering committee
guiding various project teams is recommended.
• The steering committee acts as the overseer of the
entire project and represents the functional groups
of the enterprise.
• Its primary concerns are setting policy, exercising
control mechanisms to ensure that the desired
results are achieved, and monitoring to measure the
effectiveness of the EDI system.
7-46

47. EDI in Practice
Possibly one of the largest users of new compute technology and
EDI for purchasing purposes is Wal-Mart. To help in forecasting,
Wal-Mart has developed a system called “traiting” that analyzes
2,500 traits of each store’s environment.
– By using this system, they can accurately predict what products should
be stocked and inventoried in each store.
– Wal-Mart also is experimenting with sharing its point-of-sale data with
vendors.
– Wal-Mart currently allows five suppliers representing 700 fast-moving
items to receive sales data directly from the point of purchase.
– When an item is purchased, an EDI system is used to immediately trigger
an automatic merchandise replenishment process.
7-47

48. FIGURE 7.4
e-Procurement Benefits by Category
7-48

49. RADIO FREQUENCY
IDENTIFICATION (RFID)
7-49

50. What Is RFID and How Does It Work?
• Radio frequency identification, or RFID, is a universal term
given to any technology that uses radio waves to identify and
track items.
• Items such as a product, a container, an automobile, an
animal, or a person can all be automatically identified and
tracked through RFID technology.
• Wal-Mart now requires their top 100 suppliers to use RFID
technology in shipping cases and pallets.
• Before this announcement, everyone questioned whether
RFID technology really worked and offered competitive
advantages, or whether it was all just hype.
7-50

51. RFID and Purchasing
• Wal-Mart believes it has the answer, but even if RFID is appropriate
for the world’s largest retailer, others have to ask whether RFID is
appropriate in their own unique environments, and what strategies
should be used in implementing it.
• The RFID technology can be constructed in many ways, but the
most common procedure is to store a serial number on a microchip
and attach it to a coiled antenna.
• Through this process, RFID, often called inlays , is produced. Inlays
in manufacturing applications can be built directly into the product,
affixed with adhesive paper to form “smart labels,” or combined
with packaging in a myriad of ways.
• Although the technical details vary with different designs, readers
convert radio waves from the tags into data that are decoded and
transformed into information.
7-51

52. Advantages of RFID
An RFID system provides many advantages for companies
suppliers, and retailers. Below is a list of some of the benefits
RFID can offer:
1. Reduced labor costs.
2. Simplified business processes.
3. Improved inventory control.
4. Increased sales.
5. Reduced shrinkage.
Unlike the barcode-based tracking system, a radio frequency
identification system offers a no-contact, no-line-of-sight reading
and tracking system.
This automation provides reductions in the need for the manual
scanning of products and the time required for labor-intensive
duties, which, in turn, can reduce the overall labor costs for
companies. 7-52

53. RFID Advantages
• Another advantage of reducing the labor required for
monitoring goods movement and inventory flow is that it will
free personnel that can be used to provide better customer
support.
• RFID tags can be read through snow, fog, ice, paint, and crusted
grime, unlike the barcode system.
• The tag also can be programmed to hold information such as the
item’s serial number, color, size, manufacture date, and current
price, as well as a list of all distribution points the item reaches
as it moves before arriving at a store.
• This is an advantage for cross-docking, shipping, and receiving
by efficiently locating items to complete shipments.
7-53

54. RFID Implementation
• As RFID systems are implemented, manufacturers will tag
goods from production so information can be provided to
suppliers, manufacturers, logistics teams, and, finally, end
customers.
• With this implementation, everyone benefits from having
access to the same information, which can be used to
coordinate and promote supply chain interactions.
• Consumers also benefit from having RFID tags inserted in
their products, such as increased availability information and
reduced stockouts and prices
7-54

55. RFID Implementation
Companies must ask themselves many questions before
implementing an RFID system. Some such questions are:
1. Does the company need RFID to keep pace with its
competitors?
1. Will RFID offer a competitive advantage for the company?
2. Will the company have the power to manage its business
without accurate information about its processes and
inventory that could be gained from RFID?
3. Will RFID cost effectively improve the ability of the company
to serve its customers?
4. Will RFID save the company money eventually (long term)?
7-55

56. RFID System Requirements
1. The item environment relates to the tagged item’s attributes and
how it is used.
2. What is the item to be tagged?
3. In what ways will the tag be read?
4. Will it be in groups or individually?
5. Over what distances will we need to read?
6. What is the environment to which the item is exposed?
7. What about the temperature, damage potential, handling
equipment, and so forth?
8. What, if any, business processes need to be changed in order to
work with the technology?
9. What, if any, physical changes to the item or its dimensions need
to be adjusted?
7-56

57. RFID System Environment
• System environment is the area in which the tagged items will
be utilized.
• What is the configuration of the manufacturing facility,
warehouse, store, shipping dock, and so on?
• What are the physical surroundings?
• Do the items sit for a long period or are they frequently
moved?
• Is there machinery that can interfere with our system?
• What are the distances involved with reading this item?
7-57

58. Data Requirements
• Tag data storage
• Data transmission requirements.
• Back-end data storage.
• Tag data can be stored and edited.
• Storage size matters.
• Backup or copy of the data needs to be maintained.
• High speed transmission needs to be addressed.
7-58

59. Tag Structure
• Tag structure refers to the physical structure of the
tag.
• Size (affecting performance and antenna positions,
affecting performance).
• Formats (smart label, credit card style, hard tag).
• System environmental affects the antenna
requirements for the tag.
• Item environment drives the requirements for the
tag structure.
7-59

60. Tag Mounting
• The tag must be affixed to the item so that it survives
the system environment. It must protect the tag and
provide a required angle possibly needed by the
system.
• Both the tag and the material that attaches it must
be protected and properly positioned to facilitate
optimal read rates.
7-60

61. Reader Antenna Selection
Capabilities and Placement
• Readers may control • Choosing placement of
multiple antennas. the right type of antenna.
• Multiple connectivity • Consideration of the area
options must allow of coverage desired.
support needed in the • Balance of controlling the
company. RF field and distance.
7-61

62. Software
Support Functions
• Ability to handle multiple simultaneous reads of
multiple items by multiple readers.
• Understanding of the expected number of items in a
read zone.
• Coordination of timing and material flow.
• User feedback features.
• Event management.
• Backend systems update.
7-62

63. E-Sourcing and Purchasing
• As we look into the future the traditional purchasing approach
will be transformed into e-sourcing. E-sourcing will be the tool
that drives supply management..
• As the world market for goods and services become a key
competitive advantage e-sourcing is redefining the way
companies manage their supply chains.
• Buyers and sellers located on different continents can meet
electronically. E-sourcing will also lead to higher transactional
accuracy and cost reductions for the entire supply chain. As
shown on the following slide, E-sourcing creates value by :
1. Reducing the total cost of ownership
2. Streamlining the purchasing process and
3. Business innovation
7-63

64. 7-64