Purchasing and Supply Management Chapman & Hall Materials Management/Logistics Series Eugene L Haqad, Series Editor William Rainey Uarper College

Total Materials Management: Achieving Maximum Profits through Materials/Logistics Operations, Second Edition by Eugene L. Magad and John M. Amos

International Logistics, by Donald Wood, Anthony Barone, Paul Murphy and Daniel Wardlow

Global Purchasing: Reaching for the World, by Victor Pooler

MRP II, by John W. Toomey

Distribution: Planning and Control, by David F. Ross

Purchasing and Supply Management: Creating the Vision, by Victor Pooler and David Pooler

Competing through Supply Chain Management by David E Ross Purchasing and Supply Management

Creating the Vision

Victor«. Pooler, C.P.H., P.E., President, Pooler & Associates, DeWitt, NY David J. Pooler Vice President, Global Business Development for Tachtech, Inc, Yorba Linda, CA

•JJ SPRINGER-SCIENCE+BUSINESS MEDIA, B.V. I©P® "Practical Handbook of Warehousing" is intended to present technically accurate and authoritative information from highly regarded sources. The publisher, editors, authors, advisors, and contributors have made every reasonable effort to ensure the accuracy of the information, but cannot assume responsibility for the accuracy of all information, or for the consequences of its use. JOIN US ON THE INTERNET WWW: http://www.thomson.com EMAIL: [email protected] thomson.com is the on-line portal for the products, services and resources available from International Thomson Publishing (ITP). This Internet kiosk gives users immediate access to more than 34 ITP publishers and over 20,000 products. Through thomson.com Internet users can search catalogs, examine subject- specific resource centers and subscribe to electronic discussion lists. You can purchase ITP products from your local bookseller, or directly through thomson.com.

Visit Chapman & Hall's Internet Resource Center for information on our new publications, links to use• ful sites on the World Wide Web and an opportunity to join our e-mail mailing list. Point your browser to: http://www.chaphall.com A service of I®I* Cover Design: Said Sayrafiezadeh, Emdash, Inc. Copyright © 1997 by Springer Science+Business Media Dordrecht Originally published by Chapman & Hall in 1997 Softcover reprint of the hardcover 1st edition 1997

All rights reserved. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, or information storage and retrieval systems—without the written permission of the publisher. 2 3 4 5 6 7 8 9 10 XXX 01 00 99 98 Library of Congress Cataloging-in-Publication Data Pooler, Victor H. Purchasing and supply management: creating the vision / by Victor H. Pooler and David J. Pooler, p. cm. Includes bibliographical references and index. ISBN 978-1-4613-7762-7 ISBN 978-1-4615-6027-2 (eBook) DOI 10.1007/978-1-4615-6027-2 1. Industrial procurement—Management. 2. Materials management. 3. Business logistics. I. Pooler, David J. Ü". Htle. HD39.5.P659 1997 658.7'2—dc21 96-46666 CIP British Library Cataloguing in Publication Data available This book is dedicated to Michael, Amanda, Christian, Danielle, and Richard Pooler Contents

Preface xi

1. The Role of the Purchasing and Supply Functions 1 Purchasing Objectives 3 Impact on Profitability 5 The Buying Job 8 Changing Demands on the Job 15 Purchasing Redefined 16

2. Evolution of Purchasing and Supply Management 18 Centralized Versus Decentralized Department 22 The Materials Management Organization 25 Reconsidering Organization Concepts 29 Day-to-Day Versus Long-Range Buying 34 "Purchasing and Supply Management" Comes of Age 37

3. Developing Purchase Order Procedures 39 Fundamental Steps to Complete a Purchase 40 Terms and Conditions of Purchase 45 Buying Documents to Complete an International Purchase 48 Use of the Computer in Buying 51 Tapping into the Internet 54

4. Strategic Purchasing Supply Initiatives 56 The Role of the Purchasing Manager 58 Selection of Strategies Leads to Action 60 Develop and Use a Purchasing Manual 63 Supply Plans to Control Major Commodities 69 Seek Leverage with Buying Teams 71 Tactics to Carry Out Strategic Plans 74

vii viii / Contents

5. Buying from the Right Supplier 76 Source Selection and Development 76 Qualification of New Suppliers 81 Prime Sources of Supplier Information 84 Search for Low-Cost Suppliers 91 Postselection Supplier Evaluation 93 6. Develop a Global Vision! 99 The Expanded Role into Global Purchasing 102 How to Start a Global Program 106 Entry Steps to Clear Customs 109 Harmonized Tariff Schedule of the U.S. 117 U.S. Programs Benefiting the Importing Buyer 117 7. Building Rapport with Suppliers-Transition from Supplier to 121 Business Partner Supplier Partnering Relationships 122 "Backdoor" Selling (How to Handle Difficult Salespeople) 124 Conflict Resolution: Working with Others 126 Ethical Issues in Buying 133 "Do's and Don'ts of Dealing with Suppliers 141 8. Buying the Right Quality 143 Quality Defined 143 Deciding What to Buy 145 Total Quality Management 148 Working with Suppliers to Manage Quality 152 Statistical Process Control 157 9. Purchasing's Strategic Approach to Inventory Management 163 Inventory Objectives 164 Asset Management (Cost and Control of Inventory) 167 Goals of Inventory Control 169 Deciding When and How Much to Buy 174 The Just-in-Time (JIT) Approach 184 Buying for Just-in-Time Delivery Requirements 186 Purchasing's Role in Supporting Inventory Objectives 187 10. Buying at the "Right" Price 191 How Prices Are Set 191 Price Inflation: The Key to Price Forecasting 195 Price, Cost, and Value Relationships 197 Producer Price and Consumer Price Indexes 207 Use of Standard Cost 209 Strategy of Hedging Versus Forward Buy 211 Contents / ix

II. Negotiations-Keystone of Effective Buying 215 The Negotiation Environment 216 Negotiation Strategy 217 Negotiation Fundamentals From a Global Perspective 220

12. Global Supply Demands Technical Buying Cooperation 229 The Reengineering Process 230 Strategic Technical Support Activities 234 Review of the Technical Buyer and Purchasing Engineer Jobs 238 Make-Versus-Buy Studies 240

13. Using Cost Reduction Techniques 247 Standardization and Substitution 249 Value and Engineering Analysis 250 Use of the Learning Curve 255 Leasing Versus Buying 260 Tracking Cost Savings Results 263

14. Legal Issues in Buying 266 Key Elements of Every Contract 266 Uniform Commercial Code 267 Rejection of Goods 270 Socioeconomic and Environmental Laws 274 Antitrust Laws 274 United Nations Convention 276 Geneva Agreement on Tariffs and Trade 276 Global Trade Barriers 277 When Title Passes 281 Dispute Settlements 283 Foreign Corrupt Practices Act 287 Summary: The Buyer and Legal Issues 288

15. Buying for Service-Type Companies, and MRO 291 Co-op and Consortium Buying 294 Buying for Major Projects 296 Systems Contracts for MRO Supplies 298 Program Evaluation and Review Technique 298 Instant Cash and the Procurement Credit Card 300

16. Improving Management of the Purchasing Job 303 Application of Management Principles to Purchasing 304 Effective Communications, Both External and Internal 307 Need to Support Education and Buyer Development 311 x / Contents

17. Transportation Strategies to Reduce Logistics Costs 316 Significant Buying Issues 319 Modes of Transport 321 Transportation Contract Contents 323 INCOTERMS 329 Claim Settlements and Adjustments 332 Audits of Freight Bills 333

18. Measurements of Purchasing Performance 335 Various Kinds of Measurements Used 338 Indicators of Purchasing Efficiency 341 Benchmarking 344 The TREND Measurement System 345 Use of Standard Cost as a Measurement 347 How the Purchasing Dollar Is Spent 350

19. A Look into the Future 359 Appendix-Job descriptions 364 Manager of Purchasing 364 Buyer 365 Purchasing Engineer 366 Selected Bibliography 369 Index 373 Biographies of the Authors 381 Preface

This book is unique! Until now, purchasing and materials management books have had a primarily domestic outlook. This book has global vision tied into management principles based on an understanding of the basic job of purchasing and supply management, as both authors have held high level positions directing the effort. This book is also unique because management philosophy, ideas, and opinions are expressed in an attempt to reengineer and shape a progressive vision of the purchasing and supply management concepts. Purchasing and Supply Manage• ment: Creating the Vision! will be ofinterest to professional managers and buyers charged with the responsibility of integrating outside supply with a company's needs. It is the only management book that the newly appointed manager from another business function can read that applies to the disciplines of purchasing and supply. Practitioners can use this book as a buyer's handbook-a reference and "How• to" manual. On the job, the book's outline allows easy access to specific topics. Because it is written for the professional by practitioners, all students of purchas• ing will find meaty material from this technically detailed text. Some educators have called for such a book from which teachers can gain experience and material to teach their students. This book fills that need as well, and can be used as a textbook for colleges that offer purchasing and supply management subjects in a business curriculum. Much survey data were collected from seminars conducted by Pooler and Associates for numerous corporations, including the following:

World Trade Institute at the World Trade Center National Association of Purchasing Management

xi xii I Preface

American Management Association The American Supply Education Foundation

As with any major undertaking, success can be achieved only with much coordinated collaboration to create a comprehensive and quality result. This book is no exception, as a number ofindividuals were especially helpful and supportive in the completion of this work. The authors acknowledge Professor Eugene L. Magad of William Rainey Harper College who persistently encouraged the writing of this book. It is part of the publisher's Materials Management/Logistics series that he has developed as the Series Editor. Professor Magad is an author, teacher, and consultant with wide experience. The authors also acknowledge the efforts and enthusiastic support of the following who served as an authoritative body of experts to review this work: Samuel Farney, Senior Manager ofCorporate Purchasing, United Technologies Corporation, Corporate Purchasing. He was the publisher's official reviewer, and has been in charge of Career Development and Training, and participated in many NAPM activities. Sam was especially helpful in the management and measurement areas because of his experience in purchasing engineering and purchasing techniques. John Burlew, President, Hemstreet Tool & Die Co., Syracuse, NY. Mr. Burlew is a pioneer in the application of engineering techniques to purchasing. He has held positions as Commodity Purchasing Manager, Planning Manager, Material Control Manager, Materials Manager, Director of Quality Assurance, and Corpo• rate Director of Productivity and Advanced Manufacturing Process. John has lectured with Pooler & Associates in seminars about purchasing engineering and quality. Thanks to Allen Elliott of Carlyle Compressor Company, Division of Carrier Corporation, Syracuse, NY, for his insightful and helpful charting and critiques for Chapter 8. AI, a Quality Control Manager, teaches quality courses, and helped assure the quality issues are well and accurately covered. He created the innovative statistical process control and bell curve charts in cooperation with the authors. Steven M. Pooler, Business Unit Manager, former Supervisor of Operations Planning and Procurement, and former Manager of Production Scheduling, and Manager of Manufacturing, Crouse Hinds Division of Cooper Industries, Syra• cuse, NY. A strong supporter of the buyer/planner concept, Steve is well versed in both the positive aspects as well as the shortcomings of controlling inventory. He largely shaped Chapter 9 about modem inventory management thinking. Furthermore, the authors thank him for his insightful suggestion for the subtitle of this book-"Creating the Vision!" Tomas R. Serrano of ATServices, as with our past works, has transformed our sketches into fine graphics. Herbert P. Mehlhorn, who specializes in research- Preface / xiii ing data, secured accurate updated statistical information on GDP and trade data that was provided by DRIIMcGraw-Hill. All the above generously gave of their talents to make this book what it is. While we've used many, though not all, of their suggestions, the authors are solely responsible for the material. We believe this book will speak for itself. Hopefully, you will agree with several reviewers' comments that this is the most advanced, technically detailed, management book about purchasing and supply management written to date! Purchasi ng and Supply Management