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
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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
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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
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