Purchasing Policy – Principles and Implementation

Purchasing Policy Principles

The major principles on which purchasing policies should be based are a sound orientation, reflect a cross –functional approach and be directed at improving the company’s bottom line.

i. Business Orientation

Developing a purchasing and supply strategy requires a thorough understanding of the company’s business policies. The following questions are important to determine how purchasing and supply strategies will need to support the company in meeting its goals and objectives:-

  • What end-user market is the company targeting and what are the major developments going on in those markets?
  • What competition is the company suffering from and what leeway does the company has in setting its own pricing policies?
  • To what extent can material’s price increases can be passed onto the last customer or is it impossible?
  • What changes are happening in the company’s product, production and information technologies?
  • What investments will be made by the company in terms of new products and technology?
  • What products will be taken out of the market for the years to come?

ii. Integrated, cross-functional approach

Purchasing decisions cannot be made in isolation, and should not be aimed at optimization of purchasing performance only. Purchasing decisions should be made taking into account the effects of these decisions on other primary activities like:-

  • Production planning
  • Materials management
  • Transportation

Therefore purchasing decisions need to be based on balancing total cost of ownership. When buying for instance, a new packaging line it is important to consider not only the initial investment, but also the costs which will be incurred in the future for buying accessories, spare parts and services. This example itself illustrates the complexity of its type of purchases and the different kind of decisions that need to be made.

Careful decision making in those circumstances, therefore requires a cross functional and team based approach among all the business disciplines affected by it. This can only be done when top managers are involved. The purchasing and supply manager will lead the developing of such views and visions.

iii. Bottom-line orientation

The purchasing should provide a healthy commercial opposition vis-à-vis its internal customers. Through their activities the buyers should make their company more and more cost aware. They should consistently look for improving the price/value ratio of the goods and services bought by the company. To accomplish this, purchasing should be able to suggest alternatives to existing product designs, materials or components to be used and alternative suppliers. Experience with companies in which purchasing is recognized as a bottom-line driven activity shows this function contributes to a permanent reduction in cost price of the end product, whilst stimulating innovation from the suppliers at the same time.

Implementation of Purchase Policy

Important areas to consider when implementing supply and purchase policy are supply, product and supplier quality, materials costs and prices, supplier policy and communication policy

i. Supply

Supply is aimed at the optimization of both the ordering process and the incoming materials flow.

Purchasing order processing entails handling of:-

  • Purchasing requisitions
  • Order processing and expediting
  • Development of efficient, computer –supported order routines

Materials and supply planning relates to:-

  • Issuing materials delivery schedules to suppliers
  • Reducing supplier lead times
  • Troubleshooting in case of delivery problems
  • Reducing (pipeline) inventories
  • Monitoring supplier delivery performance

ii. Product and supplier quality

Central to this aspect are the materials specifications. Two important subjects of concern here are purchasing early involvement in design and product development and improving product and supply quality performance. Activities which may contribute to both areas are:-

  • Standardization of materials – by striving for standardization or simplification of product- specifications, the buyer may reduce product variety resulting in both cost reduction and supplier dependence at the same time;
  • A purchasing policy focused on the life cycle of the end products – there is not much point in investigating material quality improvements used in products which will be eliminated shortly;
  • Specific quality improvements – negotiating targets on improving reject rates, reducing incoming inspection, and negotiating quality agreements;
  • Agreeing on and gradually extending permanent warranty conditions that are to be provided by the supplier;
  • Initiating special programmes in the field of value analysis to simplify product design and/or reduce product costs;

iii. Materials cost policy

The objective of cost policy is twofold:

  1. First to obtain control of materials cost and prices in such a way that suppliers are unable to pass on unjustified price increases to the company.
  2. Second, to systematically reduce the supplier’s materials cost through joint, well prepared action plans.

In order to be successful in both aspects a thorough knowledge of the supplier’s pricing policies and cost structure is required. Understanding and knowledge of the market structures and of their susceptibility of the price paid to market and cost factors is necessary. It should be decided for what products to build detailed cost models, for what models to monitor underlying cost factors, and for what products to develop detailed materials budget estimates.

iv. Supplier policy

The supplier policy is focused on the systematic management of the company’s supplier base.

  • Decisions need to be made for what commodities to pursue a multiple sourcing strategy or to go for single sourcing or a partnership relationship.
  • Suppliers who perform best should be rewarded with more business in the future.
  • Targets and possible projects for future co-operation should be determined carefully.
  • Relationships with suppliers who consistently fail to meet the company’s expectations should be terminated.

However such decisions need to be made based on detailed data on how the supplier performed in the past and be implemented carefully.

v. Communication policy

The company’s purchasing policies need to be communicated both internally and to suppliers. Companies use the Intranet for the former and many employ their own Purchasing Websites in order to communicate their future materials requirements and ways of working to their suppliers.

The next step is that preferred suppliers have access to the customer’s Intranet through which internal users can order directly from them through their electronic catalogues.

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