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Article Review


Read the assigned article from this week’s readings. Consider yourself as a project manager at American Airlines, and John MacLean is your project sponsor. Describe some example projects you could be the leader for, and how an efficient supply chain process can support the profitability of American Airlines. Submit a two –to - three pages, APA style paper. Use concepts from the text for purchasing links to profitability and your knowledge of project management to support your views.

Required Article:

Teague, Paul. (2009, October 15). John MacLean, supply chain manager of the year. Purchasing, 138(10), 12. Retrieved from the ProQuest database.

·This article is a professional example of procurement planning in a large organization. You will need to read this article to complete your written assignment this week.

Required Text:

Benton, W.C. Jr. (2014). Purchasing and supply chain management (3rd ed.). Retrieved from https://www.redshelf.com:

·Chapter 1: Purchasing and Supply Chain Management

·Chapter 2: Purchasing Decisions and Business Strategy

·Chapter 3: The Legal Aspects of Purchasing

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Purchasing and Supply Management by W. C. Benton Chapter One Purchasing and Supply Management McGraw-Hill/Irwin Copyright ©2007 The McGraw-Hill Companies, All Rights Reserved Learning Objectives 1. To understand the purchasing function’s contribution to profitability. 2. To identify the relationship between the purchasing function and other functional areas. 3. To understand the evolution of the basic materials management concept. 4. To differentiate between purchasing, materials management, and supply chain management. 5. To explore the basic historical development of the purchasing function. 1-2 Objectives Continued 6. To understand the relationship between the purchasing function and inventory, ordering and transportation costs. 7. To learn the advantages and disadvantages of centralized purchasing organizational designs. 8. To identify various purchasing organizational designs. 9. To learn about purchasing careers 1-3 Markets in Transition ▪ In certain industries, Asian manufacturers dominate the United States’ consumer market. Third-world nations continue to attract U.S. manufacturers seeking low wages for laborious tasks. ▪ The American war on terrorism has restricted the free flow of goods, services, and technology between global trading partners. ▪ In addition to significant events that have impacted the world’s business environment, individual firms have had to change radically in response to burgeoning technologies 1-4 Background ▪ Historically, the management of materials and component parts was the most neglected element in the production process. ▪ In the past businesses emphasized minimizing the cost of capital and labor. ▪ The focus on labor was logical because the industrial revolution had generated many labor-intensive manufacturers. ▪ Producing large standardized batches represented the norm for some manufacturers. 1-5 Setting the Stage ▪ As a functional area within a firm, purchasing and supply management grappled with the stigma of being labeled a clerical function. ▪ However, in the past 25 years, purchasing has made many strides toward shedding this label and has emerged as a viable professional career path. 1-6 Setting the Stage for Change ▪ Businesses have had to change radically in response to burgeoning technologies ▪ The reality is that technology is rapidly displacing labor. ▪ During the next decade, the supply management function is likely to contribute to profits more than any other function in the company. ▪ See the next two slides 1-7 Purchasing vs. Fabrication-Past RM = Raw Materials FG = Finished Goods CP = Component Parts Triangle = Inventory Storage 1-8 Purchasing vs. Fabrication-Present RM = Raw Materials OPR 1 = Operation 1 FG = Finished Goods CP = Component Parts triangle = Inventory Storage 1-9 Purchasing Managers, Buyers, and Purchasing Agents ▪ Seek to obtain the highest-quality merchandise at the lowest possible purchase cost for their employers. ▪ Purchasers buy goods and services for use by their business organization. ▪ Buyers typically buy items for resale. 1-10 Purchasers and buyers: ▪ ▪ ▪ ▪ determine the best value, choose the appropriate suppliers negotiate the best price, and award contracts that ensure that the correct amount of the product or service is received at the appropriate time. 1-11 Purchasers and Buyers ▪ Purchasing managers, buyers, and agents must become experts on the services, materials, and products they purchase. ▪ Purchasing managers, buyers, and purchasing agents evaluate suppliers on the basis of price, quality, service support, availability, reliability, and selection. ▪ Once all of the necessary information on suppliers is gathered, orders are placed and contracts are awarded to those suppliers who meet the purchaser’s needs. 1-12 Factors That Influence ▪ Changing economic and political environments, emerging technology versus labor, and the changing nature of purchasing as a discipline—must influence the role of purchasing and supply management . 1-13 The Supply Management Process ▪ In most firms, functional managers within each area make independent decisions using similar techniques. ▪ The objective is to provide high-quality customer service while minimizing the cost of producing the service. ▪ Purpose of supply management is to support the transformation of raw materials and component parts into shipped or inventory goods. 1-14 Purchasing Dollar Responsibility ▪ The cost of acquiring, storing, and moving materials is an increasingly large portion of the cost of goods sold. ▪ Consider the dollar responsibility of one General Motors’ materials management groups: 1.Parts and (materials) = 10 times direct labor dollars 2.Supply management expenditures = $100 billion 3.Transportation bill = $3 billion 4.Purchasing buys 97 percent of all component parts. 1-15 Ratios Of Materials Related Costs ▪ The following are ratios of materials-related costs that are typically cited in fabrication–assembly industries, for example, consumer durable goods. – – – – Cost of purchase = 80 percent of sales Cost of marketing (sales) = 10 percent of sales Cost of transportation = 10 percent of sales These ratios are increasing for various reasons: material shortages, increased use of synthetic materials, inflation, and thoroughly complex highvalue products. 1-16 Ratios Of Materials Related Costs ▪ These ratios are increasing for various reasons: – – – – – Material shortages Increased use of synthetic materials Inflation Complex high-value products. Where else is the potential for cost reduction and competitive advantage so great? 1-17 Potential For Profit ▪ All supply management activities have potential for cost reduction and hence increased profit. ▪ Many opportunities exist to reduce the cost of purchases. ▪ If the firm’s sales remained the same, the effect on profit, given the 2 percent reduction of material cost, would look like that in figure 1.4. ▪ For each $1 reduction of material cost, there is a $1 increase in profit. The ratio is 1:1. 1-18 Potential For Profit ▪ What increase in sales would be necessary to increase profit by $10,000 if material costs were not reduced? Let x be the required sales; then 0.5x is the cost of materials and 0.2x is labor cost. Sales = Variable cost + Fixed cost ± Profit x = 0.5x + 0.2x + 250 + (10+50) x = $1,033,333 1-19 Integrated Supply Management (Ism) ▪ Achieving integration is a challenge. ▪ The decisions of a production-inventory control (PIC) manager may maximize utilization of production equipment, yet poorly serve the requirements of the marketing manager. ▪ The decision of the purchasing manager affects not only the purchasing function, but other materials functions. ▪ It is the objective of ISM to manage the related considerations. Purchasing should consider the nonpurchasing consequences of its decisions. 1-20 Integrated Supply Management (Ism) ▪ Example The significance of average inventory is that inventory cost is a function of average inventory. Inventory is an asset. Working capital is tied up in material rather than an alternative asset. Opportunity costs as well as costs of storing, insuring, and handling are incurred when inventory exists. 1-21 Annual Inventory-orderingtransportation Costs ▪ How can the best decision be made—one that provides the desired customer service at minimum cost? ▪ The customers are manufacturing, sales, distribution, the final consumer, and, of course, purchasing, which is the supplier’s customer. ▪ The costs of satisfactory customer service are only partly identifiable and quantifiable. 1-22 Annual Inventory-orderingtransportation Costs ▪ The opportunity costs of poor customer service is also incomplete. Yet decisions must be made while recognizing that system wide decision criteria are 1.Multiple 2.Complex 3.Conflicting 1-23 A Developing Discipline ▪ Supply management is a developing discipline and an area of management specialization. ▪ Measures of customer service are usually expressed in terms of the availability of material. ▪ Did the plant ship on time? Was the product on the shelf when the customer entered the shop? ▪ While important, availability is only one dimension of customer service. 1-24 A Developing Discipline. ▪ As these areas develop, purchasing and distribution cost accounting will become part of the accounting-information system. Standard costs to create the time and place utilities will be calculable. ▪ Budgeting for materials management activities will have the detail and reliability of budgeting in manufacturing. ▪ When supply management costs become more visible, their control becomes more feasible 1-25 Organizing For Purchasing ▪ Supply coordination involves both structure and design of the organization. ▪ In any purchasing organization, two major problems must first be considered. 1. The first issue has to do with where the purchasing function should be located in the organization. 2. The second issue is, what level of authority should the purchasing function have? Given the evolution of outsourcing, the purchasing function is expected to gain authority in the corporate hierarchy 1-26 CENTRALIZED VERSUS DECENTRALIZED PURCHASING 1-27 1-28 Advantages of Centralized Purchasing • Centralized purchasing results in lower costs because of the availability of purchase quantity discounts. • If all material uses are coordinated into one major purchase, the supplier will work harder to service the buying firm. • Large dollar purchase quantities equals buying power. 1-29 Advantages of Centralized Purchasing ▪ Centralized purchasing promotes the effective use of purchasing professionals because it allows the materials manager more authority and credibility. • Each buyer can easily become an expert on associated buys (commodities and non-commodities) Expertise will be developed when there is a critical mass. • General Motors, Dell, Wal-Mart, and IBM all use centralized purchasing and have in-house expertise ranging from engine parts to rental cars to office equipment to pharmaceuticals 1-30 Advantages of Centralized Purchasing ▪ Centralized purchasing enables the buying firm to do a better job monitoring various changes throughout the industry. • Centralized purchasing also lends itself to periodic (1) reviews of purchasing activities, (2) evaluation of suppliers, and (3) the development of purchasing training programs. 1-31 Disadvantages of Centralized Purchasing • High engineering involvement in procurement decision making • High need to coordinate purchased parts with production schedules • High need to buy from local community. 1-32 The Future Organization Concept ▪ The future outlook is that the majority of significant dollarvalued purchases will continue to be centralized. ▪ This trend also will be the result of increased computerbased management information systems. – As firms become lean, centralized purchasing will become a major focus. Long-term agreements will be more frequently negotiated to stabilize prices. ▪ Honda of America is an excellent example of a firm that uses centralized procurement as a competitive weapon. Approximately 75 percent of the sales dollar for each automobile manufactured in Marysville, Ohio, is purchased from Japanese firms. 1-33 Reporting Assignment ▪ The status of the purchasing professional in an organization is determined by the capacity structure. In the majority of the Fortune 500 firms, the purchasing professional reports directly to the manufacturing vice president. ▪ The purchasing organizational structure also should be different for service-based firms. ▪ A Center for Advanced Purchasing (CAPs) study found that in 16 percent of the firms surveyed, purchasing managers reported directly to the president. ▪ In smaller firms, more than one-third of the purchasing professionals report to the V.P. of manufacturing. What’s more, in firms with sales between 5.1 and 10 billion dollars, 61 percent report to either the president or executive V.P. 1-34 The Supply Management Concept ▪ To summarize The supply management concept is a formal organizational concept that is involved with the flow of materials through a manufacturing firm. ▪ The functional areas affected include (1) purchasing, (2) inventory control, (3) traffic, (4) production control, and (5) stores 1-35 Careers in Purchasing and Supply Management ▪ In 2002 purchasing professionals accounted for 527,000 jobs. Approximately 42 percent of the positions held were in the manufacturing and wholesaling sectors. ▪ The retail trade accounted for another15 percent of the jobs. ▪ The remaining 43 percent worked in service establishments, such as hospitals, or different levels of government. 1-36 Purchasing and Supply Management by W. C. Benton Chapter Two Purchasing Decisions And Business Strategy McGraw-Hill/Irwin Copyright ©2007 The McGraw-Hill Companies, All Rights Reserved Learning Objectives 1) To learn the role of purchasing in the corporate strategy. 2) To learn the most important elements of the strategic planning process for purchasing. 3) To learn about the components of purchasing strategy. 4) To learn how sourcing is integrated into corporate strategy. 5) To learn how purchasing strategy is linked to other functional areas. 2-2 Learning Objectives 6) To understand the impact of purchasing decisions on supply chain management. 7) To learn how the sourcing audit can be used to formulate purchasing objectives and strategy. 8) To learn about the supply chain relationship pegging analysis. 9) To learn how to develop a strategic purchasing plan. 2-3 Introduction to Purchasing Strategy ▪ In most industrial firms, material constitutes 60–80 percent of the total revenue dollars. ▪ Purchased inputs offer a potential source for helping a company develop leverage against its competitors. ▪ Purchasing can give the firm advantages over its competitors. ▪ In essence, firms must design their purchasing actions to emphasize the competitive strategy. 2-4 Purchasing and Competitive Strategy Linkage ▪ Purchasing professionals are expected to develop options that can help business units remain competitive. ▪ Purchasing managers need to devise purchasing actions such that they are consistent with each other and with the firm’s competitive strategy. ▪ The competitive priorities are a key determinant of the importance given to different criteria in purchasing material. ▪ The buyer performance measures or reward criteria are other factors that influence the purchase criteria. 2-5 Strategic Purchasing ▪ Purchasing decisions or actions that constitute purchasing strategy are determined by the firm’s competitive priorities, its resource capabilities, and the environment. ▪ In the formulation of purchasing strategy, the organization’s competitive priorities, the organization’s strengths and weaknesses, and the competitive environment must be considered. 2-6 Competitive Strategy • A firm can compete in two broad alternate ways. It can either seek competitive advantages on cost or choose to differentiate itself from its competitors on some attributes of the product or in the way it markets its product. – Cost and differentiation—is important but too broad to be useful for management faced with day-to-day decision making. – The competitive strategy must be articulated in terms of competitive priorities. Key environmental factors also must be considered. 2-7 Competitive Priorities ▪ The competitive priorities operationalize the firm’s competitive strategy. ▪ The two generic competitive advantages— delivery speed and reliability—are operationalized in terms of cost, quality performance, quality conformity, product flexibility, volume flexibility, and customer service. 2-8 Purchasing Criteria The criteria in buying material must reflect firms’ competitive priorities. ▪ A firm competing on cost must give high priority to purchasing costs. A firm competing on flexibility must give high priority to lead time in buying material. ▪ With short lead times, the company can be more flexible; and develop the ability to respond to changing situations quickly. Lead times are also important in achieving superior customer service. ▪ Suppliers with short lead times and who are reliable in meeting their due dates minimize the problem of material shortages for the manufacturer; as a result, the company’s production can be more dependable in meeting the customers’ due dates. 2-9 Purchasing Criteria ▪ The criterion on which the buyer’s performance is evaluated can influence the effectiveness of purchasing actions and effectiveness in making the firm competitive. ▪ Cost variance seems to be the dominant criterion in evaluating performance of purchasing decision makers. 2-10 Supply Chain Strategy ▪ As competitive forces increase, customers demand better products, faster delivery, increased service, and decreased costs. ▪ As firms become more competitive, a rippling effect is experienced by the suppliers. ▪ As inventory levels are reduced throughout the supply chain, each member becomes less insulated from demand variation. 2-11 Supply Chain Strategy ▪ Companies participate in a variety of supplier relationships and take on a variety of roles. ▪ Each company can be a supplier, customer, or end-user of products. ▪ Supplier partnerships can be categorized using five factors: (1) degree of risk/reward, (2) type of relationship, (3) information, (4) planning, and (5) asset ownership. 2-12 Supply Chain Strategy The characteristics of buyer-seller relationships exist on a continuum beginning with the traditional approach of open-market, with a single short-term contract that presents minimal risk to both parties. The opposite extreme is vertical integration, where the parties are fully integrated as one unit. ▪ Partnerships are a hybrid of these extremes with each party retaining an individual identity. ▪ A long-term relationship provides the ability to share assets and integrate planning, technology, and processes. ▪ In theory, partnership members equally share risk and rewards. 2-13 The Supply Chain Relationship Environment ▪ In dynamic business environments, maintaining a competitive advantage is a major survival factor. ▪ The advent of supply chain management has led to a more complicated operating environment. ▪ Not only does the individual firm have to maintain its competitive edge, the entire supply chain must be competitive. ▪ Competitive and industrial ranking can be used as a tool for achieving continuous improvement in the industrial supply chain. 2-14 Supply Chain Relationship Pegging ▪ The supply chain relationship pegging system consists of four phases. ▪ Phase I is an assessment of the current performance gaps in the process. In this phase, the performance gaps should be prioritized based on the firm’s strategic direction and the relative cost of taking action versus not taking action. ▪ Phase II consists of questionnaire development, interviews, or other data collection methods. ▪ Phase III is the classification and analysis phase. ▪ The final phase (Phase IV) is the interpretation stage. 2-15 The Integrated Buying Model ▪ The decision maker faces multiple goals in making the buying decision. ▪ The cost per unit, quality, and lead time are some of the issues that a decision maker faces in making the buying decision. – Cost – Quality Level – Lead Time 2-16 Materials Cost ▪ The cost per unit of material depends on the volume or amount purchased, the quality level desired, and the desired lead time. ▪ Material procured in larger volume enables the firm to buy at discounts. 2-17 ▪ QUALITY LEVEL ▪ LEAD TIME 1. The quality level of material purchased must meet the desired objective as defined by the firm’s competitive priorities. – The lower the acceptable defect rate, the higher the quality level of the material purchased. 1. Supplier lead time affects a firm’s flexibility and service to its own customers. Firms that compete in volatile markets and face rapidly changing product or technology require greater flexibility than firms competing in stable markets. 2. Six sigma suppliers focus on (1) defects per million units as a standard metric, (2) provision of extensive employee training, and (3) the reduction of nonvalue-added activities. – 2. With short lead times, the company can be responsive to external changes. The more uncertainty there is in a vendor’s lead times, the more difficult it is to manage the production process. 2-18 Constraints ▪ A buyer must not only satisfy cost, quality, and leadtime goals, but also stay within quantity and budgetary constraints. ▪ The buyer must ensure that the right quantity of material is purchased to satisfy the demand; otherwise, shortages may occur, resulting in poor customer service. ▪ The budget limitations may constrain the amount of material that can be purchased at any instant. The buyer may have to give up quantity discounts, if the storage or budget resource is not available. 2-19 The Purchasing Strategic Plan ▪ There are a number of important challenges facing materials managers and executives in the future. ▪ The opportunities, if pursued, will be unlimited; if not pursued, devastating to the firm’s survival. ▪ In order to take full advantage of the challenges, the purchasing function must be integrated into the firm’s overall strategic plan. 2-20 Developing a Strategic Sourcing Plan The development of a strategic purchasing plan requires the following: 1. A complete understanding of corporate strategies and marketing plans 2. An extensive evaluation/study of current suppliers, how performance is measured, and the expectation of suppliers relative to the industry. 3. Study of the degree of global purchasing opportunities. 4. Identification of total costs associated with current purchasing department/function, budgets, staffing, and so forth. 2-21 Developing a Strategic Sourcing Plan ▪ Phase 1. Sourcing Audit – The sourcing audit is used as a diagnostic process that identifies opportunities for increased profitability. 2-22 The Strategic Sourcing Plan ▪ Phase 2. Organizational Development – This phase involves development of sourcing strategies; setting of clearly outlined areas to cut costs and improve profitability; establishment of a sourcing control system based on frequent analysis and systematic approach; formulation of incentive programs; and provisions for training by taking advantage of local ISM seminars and inhouse sessions on how to establish purchasing monitoring systems. 2-23 The Strategic Sourcing Plan ▪ Phase 3. Implementation and Evaluation – In this phase, a thorough indoctrination of the company with sourcing strategy, implementation of new procedures, monitoring of sourcing activities, feedback mechanism for evaluation, and refinement of sourcing processes is conducted. 2-24 The Strategic Sourcing Plan ▪ Phase 4. In-House Training Sessions Classes should be conducted in groups of no more than 15 individuals. • Appropriate purchasing and other management personnel from the company will attend these sessions to learn state-of-the-art purchasing techniques, negotiation strategies, and cost-containment methods. 2-25 Purchasing Strategy Trends ▪ The NAPM and Center for Advanced Purchasing Studies produced a study entitled “The Future of Purchasing and Supply: A Five- and Ten-Year Forecast.” ▪ The 1998 study reported the results of a comprehensive survey on the evolving responsibilities of the purchasing function during the periods between 1998 and 2008. 1. Linking to organizational objectives. 2. Linking to supply chain objectives. 3. Competitive advantage and purchasing strategies. 2-26 Purchasing and Supply Management by W. C. Benton Chapter Three The Legal Aspects of Purchasing McGraw-Hill/Irwin Copyright ©2007 The McGraw-Hill Companies, All Rights Reserved Learning Objectives 1. To understand the legal aspects of the purchasing function. 2. To understand what factors are involved in the selection of the purchasing manager 3. To understand the extent of the purchasing professional’s legal authority. 4. To understand how contracts and purchase orders are legally executed. 5. To understand the essentials of a binding purchasing contract. 3-2 Learning Objectives 6. To be able to distinguish between an offer and a non offer. 7. To learn about the possible outcomes of an offer. 8. To understand the terms of an enforceable contract. 9. To understand the legal implications of leasing. 10. To understand the legal implications of the information age. 3-3 Learning Objectives 11. To understand how to comply with women business enterprise (WBE), minority business enterprise (MBE), and disadvantaged business enterprise (DBE) programs. 12. To learn about the importance of ethics in purchasing. 13. To learn about electronic contracts and signature. 3-4 The Legal Aspects Of Purchasing ▪ The purchasing manager is an agent for the firm. The terms purchasing manager, buyer, and purchasing agent will be used interchangeably. ▪ The purchasing manager administers the purchasing function. ▪ The purchasing function consists of many tasks within the business entity, including supporting the company with the required (1) materials, (2) supplies, and (3) services. 3-5 The Title and Duties-Purchasing Agent ▪ The most important task that the purchasing officer is involved in is representing the principal in the development and negotiation of contracts with third parties. ▪ The title purchasing agent is a generic legal term. 3-6 The Title-Purchasing Manager ▪ Recently, the term has been superseded by vice president of purchasing, vice president of materials management, and vice president of supply management. ▪ From a legal standpoint, the term purchasing agent accurately defines the individual who deals with a third party for a principal 3-7 Legal Status of Purchasing Manager ▪ From a legal point of view, the following factors are associated with the appointment: 1. The purchasing manager must be granted the authority to make purchase contracts. 2. The purchasing manager accepts the contracting authority. 3. The employer accepts the commitments that were made to the purchasing manager. 3-8 Authority of the Purchasing Manager ▪ The three types of purchasing authority are express authority, implied authority, and emergency authority. 1. Express authority 2. Implied authority 3. Emergency authority ▪ It is strongly recommended that the authority of the purchasing manager be clearly written and communicated. 3-9 Execution Of Contracts and Purchase Orders ▪ Purchasing personnel routinely sign purchase orders and contracts committing the company to the specific terms and conditions of purchase orders and contracts. The purchasing official has no personal liability providing that the following requirements are met: 1. The name of the principal or company is shown on the document. 2. All parties involved know that the purchasing agent is acting on behalf of the company or principal. 3. The agency relation is shown on the document. 4. The purchasing agent is acting within the scope of his or her authority for the transaction. 3-10 Essentials of a Purchase Contract 1.The parties must be capable 2. The subject of the matter must be legal and valid 3. There must be mutual consideration 4. The parties must reach an agreement by offer and acceptance. In summary, under the U.S. Commercial Code, an agreement is a legal transaction that requires all four components given above. The absence of any of the components results in an unenforceable agreement in a court of law 3-11 Offers ▪ Purchasing agents receive numerous offers on a daily basis and must be able to identify complete legitimate offers. The three necessary components of an offer are: 1. Intent to make an offer 2. Communication of the offer intent 3. Identification of the specific subject matter 3-12 Invitation To Do Business ▪ In most instances, the purchasing official initiates an invitation to do business. The purchasing official issues a request for quotation. ▪ The RFQ is an excellent way for the buying firm to test the market without making a legal commitment to purchase. • The RFQ lacks the intent component. When the intent component is missing, the document is merely an invitation to bid. 3-13 Counteroffers ▪ The negotiations process between the buyer and the seller usually leads to many offers and counteroffers. ▪ A counteroffer is legally binding if it contains the components that institute an offer. 3-14 The Time Limits of an Offer 1. The offer may lapse 2. The offer may be rejected 3. The offer may be revoked 4. The offer may be accepted 3-15 Firm Offers ▪ The firm offer question should be raised when quotations are requested. This approach gives the supplier equal opportunity to consider the risks before quoting. ▪ Quotations as a result of this RFQ are enforceable. It must be made clear to the supplier that any supplier that submits an offer without this guarantee will not be considered. 3-16 Option Contracts ▪ In case the supplier is unwilling to give the buying firm a firm offer, the purchasing professional should attempt to offer the seller an option contract. The seller will make an agreement to allow the buyer a specific time limit to make the purchase. Consideration will pass from the offeree to the offeror in return for a firm commitment. ▪ This option contract is enforceable because of the payment of the $ 1,000 consideration. 3-17 Bid Bonds ▪ A bid bond enlists a third party into the transaction. ▪ The supplier secures a bonding company to guarantee that the supplier will enter into a contract if they are awarded the contract. ▪ A bid bond condition is usually motivated by a federal or state regulation. Bonding is used to protect governmental agencies from unqualified bidders 3-18 Promissory Estoppels ▪ The construction industry is unique in that the general contractor accepts offers from subcontractors in expectation of being awarded a project from a third party 3-19 Promissory Estoppels (Example) ▪ There is a famous case in which a prime contractor solicited a telephone bid from a paving contractor. A paving subcontractor failed to perform after the prime contractor was awarded the project. The court ruled in favor of the prime contractor 3-20 Oral Contracts ▪ Oral contracts occur everyday. Ordering a pizza is an oral contract. However, oral contracts have no place in the professional purchasing arena. If a supplier refuses to perform, there is no recourse for the buyer. ▪ The courts are silent on enforcing oral contracts that exceed $500 3-21 TERMS OF A CONTRACT 3-22 Quantity 1. Concrete is quoted in cubic yards. 2. Lumber in board feet. 3. Bales of hay. 4. Barrels of oil. 5. Gallons of fuel. Quality ▪ The purchasing professional must pay close attention to the quality term of the contract. Quality should not be over specified or underspecified 3-23 Price and Credit Terms ▪ The price is determined when the offer is accepted. In some cases, price escalation clauses are used in a contract. ▪ A price escalation clause is an adjustment that the seller utilizes in order to compensate for variances at delivery 3-24 Delivery Terms ▪ Delivery terms are closely related to price terms. ▪ The transportation between the buying and selling firm is usually considered as part of the price. The delivery terms formalize the responsibilities of the buying and selling firm for delivery of the goods. ▪ As an example, FOB shipment, means free on board (f.o.b) at a named place 3-25 Leasing ▪ Leasing is becoming more attractive for both consumers and businesses. Consumers are leasing automobiles in record numbers. ▪ One reason for the increase in consumer leasing is the tax effect of the leased automobile for small businesses. ▪ If the automobile is partially used for the business, a portion of the monthly lease payment is tax deductible. 3-26 The Legal Impact of the Information Age ▪ The Internet has infiltrated every aspect of the world. E-mail has outpaced the postal system as the primary communication mode in the developed world. ▪ Nine-year-old kids are buying and selling through ebay. ▪ In some instances, purchasing professionals are requiring the supplier to meet minimum levels of connectivity, which is not easily done 3-27 The Impact of the Information Age ▪ More and more consumers and businesses are contracting internationally. The legal difficulties of Internet transactions are apparent. ▪ During the next decade, I expect the case law to be voluminous. Consider the requirements for an offer and legally binding contract discussed earlier and it should be apparent that very little of the current law applies. 3-28 Electronic Contracts and Signatures ▪ In 1996 the United Nations Commission on International Trade Law (UNCITRAL) adopted the Model Law on Electronic Commerce, which offers member states of the United Nations methods to address barriers to the use of electronic communications in their commercial law. 3-29 Electronic Contracts ▪ A secure signature should be such that it can be used to identify the signer. This does not mean that the signature itself must consist of or include the signer's name. Identification by reference to other sources of information would be sufficient. ▪ Thus, for example, a digital signature may identify the signer by reference to a certificate issued by a certification authority. ▪ A secure signature must be linked to the data message being signed, in such a manner that if the message is changed the signature is invalidated. Such a linkage may be regarded as a crucial requirement for a secure signature, since otherwise the signature could be simply excised from one data message and pasted onto another. 3-30 Cryptographic Signatures (PKI) ▪ Cryptography is the science of securing information. The technology is based on scrambling information and then unscrambling it. ▪ Many businesses consider the cryptographic signature method known as Public Key Infrastructure (PKI) as the most secure and reliable method of signing contracts online. 3-31 The Federal Electronic Signatures in Global and National Commerce Act (ESGICA) ▪ The federal Electronic Signatures in Global and National Commerce Act (ESGICA), or E-Sign, went into effect on October 1, 2000. ▪ The law made online contracts for a variety of business transactions more clearly enforceable. ▪ The law will allow businesses to satisfy their obligation to provide legally required notices to buyers and sellers by sending notices electronically, once respondents provides consent for such online communication. 3-32 Purchasing and Ethics ▪ In society, some people are respected based on the amount of money they have, regardless of the money’s sources and methods of obtaining it. ▪ However, in business environments, ethical behavior is the foundation of trust. ▪ Purchasing agents are governed by the company’s ethical policies, the Uniform Commercial Code and the Securities and Exchange Commission and many other state and local laws. ▪ Purchasing agents who violate ethical codes could easily go to jail 3-33 Women and Minority Compliance ▪ Government contractors, under certain conditions must award subcontracts to minority or disadvantaged bidders. ▪ Several Fortune 500 companies have implemented measures to encourage purchasing managers to purchase from a variety of diverse suppliers. ▪ To be eligible to participate in some federal programs, a company must be certified as at least one of the following: – Women-owned business – Minority-owned business 3-34
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