Purchasing Policies and Procedures: Roles, Conduct, and Operations

This report provides a comprehensive overview of purchasing policies and procedures, crucial for effective business operations. It begins with a policy overview, detailing the advantages and disadvantages of policies, characteristics of an effective policy, and policy hierarchy. The report then delves into specific purchasing policies, categorizing them into policies defining the role of purchasing, the conduct of purchasing personnel (including ethics and reciprocity), social and minority business objectives, buyer-seller relationships, and operational issues. Key areas covered include the origin and scope of purchasing authority, objectives of the purchasing function, corporate purchasing office responsibilities, ethical considerations, supplier relations, and operational aspects such as hazardous materials and defective materials. The report concludes with a discussion of purchasing procedures, including the purchasing cycle, the use of purchasing forms, the development of legal contracts, and operational procedures. The report emphasizes the importance of regularly reviewing and updating policies and procedures to adapt to changing business environments and provide clear guidelines for employees.

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Table of Contents
1. Policy Overview.............................................. 3
1.1. The Advantages and Disadvantages of Policies ............. 3
1.2. Characteristics of An Effective Policy ................... 4
2. Purchasing Policies – Providing Guidance & Direction......... 5
2.1. Policies Defining the Role of Purchasing ................. 5
2.1.1. Origin and Scope of Purchasing Authority ............. 5
2.1.2. Objectives of the Purchasing Function ................ 6
2.1.3. Corporate Purchasing Office Responsibilities ......... 6
2.2. Policies Defining the Conduct of Purchasing Personnel .... 8
2.2.1. Ethics Policy ........................................ 8
2.2.2. Reciprocity Policy ................................... 8
2.2.3. Contacts and Visits to Suppliers ..................... 9
2.2.4. Former Employees Representing Suppliers .............. 9
2.2.5. Reporting of Irregular Business Dealings with Suppliers
............................................................... 9
2.3. Policies Defining Social and Minority Business Objectives10
2.3.1. Supporting Minority Business Suppliers .............. 10
2.3.2. Environmental Issues ................................ 12
2.4. Policies Defining Buyer-Seller Relationships ............ 13
2.4.1. Supplier Relations .................................. 13
2.4.2. Qualification and Supplier Selection ................ 14
2.4.3. Principles and Guidelines for Awarding Purchase Contracts
.............................................................. 14
2.4.4. Labor or Other Difficulties at Suppliers ............ 15
2.4.5. Other Policies Dealing with Buyer-Seller Relations .. 15
2.5. Policies Defining Operational Issues .................... 16
2.5.1. Hazardous Materials ................................. 16
2.5.2. Supplier Responsibility for Defective Material ...... 17
2.5.3. Purchased Item Comparisons .......................... 18
2.5.4. Other Operating Policies ............................ 18
3. Purchasing Procedures....................................... 19

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3.1. Definition .............................................. 19
3.2. Purchasing Procedural Areas ............................. 21
3.2.1. The Purchasing Cycle ................................ 21
3.2.2. The Proper Use of Purchasing Forms .................. 21
3.3.3. The Development of Legal Contracts .................. 21
3.3.4. Operational Procedures .............................. 22

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CHAPTER 3 – PURCHASING POLICY & PROCEDURES
From time to time, it is important to review the purchasing policy
and update them as required! Because the company’s environment is
constantly changing, there is a need to keep up with these changes and
provide guidelines and directions to employees regarding how these
changes will impact their ways of working. Policies provide the basis
for action on the part of sourcing professionals, as well as a set of
guidelines for the appropriate way to deal with new situations. As the
purchasing and technology environment changes, policies and procedures
must be kept up to date with these changes.
Most organizations have a set of policies outlining or detailing
the directives of executive management across a range of topics. These
directives provide guidance while at the same time placing operating
constraints on personal behavior. This chapter, divided into three
major sections, discusses the role of purchasing policy and procedures
in today’s business environment. The first section provides a general
overview and discussion of policy. This includes defining policy, the
characteristics of an effective policy, the advantages and
disadvantages of policy, and the policy hierarchy. The second section
focuses on specific categories of purchasing policies, with a special
emphasis on one area known as maverick spending. The third section
presents purchasing procedures, which are operating instructions
detailing functional duties and tasks.
1. Policy Overview
The term policy includes all the directives, both explicit and
implied, that designate the aims and ends of an organization and the
appropriate means used in their accomplishment.
Policy refers to the set of purposes, principles, and rules of
action that guide an organization. Rules of action refer to standard
operating procedures along with any rules and regulations. Although
policies are usually documented in writing, unwritten or informal
policies can also exist. Informal policies are understood over time
and eventually become part of an organization’s culture.
1.1. The Advantages and Disadvantages of Policies
Having written and implied policies is an opportunity to define and
clarify top management objectives. Policy statements are a means for
executive management to communicate its leadership and views.
Executive management should develop a series of high-level policy
statements that provide guidance to employees at all levels.

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Another advantage is that policies provide a framework for
consistent decision making and action. In fact, one of the primary
objectives of a policy is to ensure that personnel act in a manner
consistent with executive or functional management’s expectations.
Finally, an effective policy provides an additional advantage by
defining the rules and procedures that apply to all employees.
There are also potential disadvantages to policy development.
First, a policy is often difficult to communicate throughout large
organizations. Second, employees might view policies as a substitute
for effective management. Policy statements are guidelines that
outline management’s belief or position on a topic. They are not a set
of how-to instructions designed to provide specific answers for every
business decision. Third, policy development can also restrict
innovation and flexibility. Too many policies accompanied by
cumbersome procedures can become an organization’s worst enemy.
1.2. Characteristics of An Effective Policy
Several characteristics of a policy render it effective. Effective
policies are action-oriented guidelines that provide guidance. They
provide enough detail to direct behavior toward a specific goal or
objective but are not so detailed that they discourage personnel from
following the policy.
An effective policy is relevant (avoiding trivial or unimportant
issues) and concise (stating a position with a minimum number of
words). An effective policy is unambiguous, allowing personnel little
doubt as to how to interpret the policy’s intent and direction.
Policies that are subject to different interpretations will, over a
period of time, result in several possible outcomes. This can lead to
inconsistent behavior, as people will simply ignore the policy because
it is so difficult to interpret.
Another characteristic of effective policies is that they are
timely and current, which assumes that they are periodically reviewed
for clarity and conformance.
A policy is ineffective or counterproductive if it is confusing,
ignored, or outdated. For example, in the opening vignette, each cement
plant was operating under a different set of rules, and everyone was
essentially ignoring the fact that a common set of policies or
procedures existed! Policy formation and review should be a dynamic
activity undertaken at least once every year or so. A policy may be
timely and correct but not properly enforced by management. In this
case, it is management’s responsibility to re-educate the workforce
about the policy’s intent. There is no other substitute for detailed

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training on policies, to ensure that everyone understands how to do
their jobs.
The following characteristics apply to effective policies:
• Action oriented
• Relevant
• Concise
• Unambiguous/well understood
• Timely and current
• Guide problem solving and behavior
2. Purchasing Policies – Providing Guidance &
Direction
Purchasing management develops policies to provide guidance and
support to the professional purchasing and support staff. These
policies are general outlines clarifying purchasing management’s
position on a subject. Although many purchasing policies exist, most
fall into one of five categories:
• Policies defining the role of purchasing
• Policies defining the conduct of purchasing personnel
• Policies defining social and minority business objectives
• Policies defining buyer-seller relationships
• Policies defining operational issues
The following discussion does not include all possible purchasing
policies. Organizations will also develop policies to meet unique
operational requirements.
2.1. Policies Defining the Role of Purchasing
This set of policies defines purchasing’s authority. It usually
addresses the objectives of the purchasing function and defines the
responsibilities of the various buying levels. These policies often
serve as a general or broad policy statement from which more detailed
or specific policies evolve.
2.1.1. Origin and Scope of Purchasing Authority
Personnel at all levels must be aware of purchasing’s authority to
conduct business and to represent organizational interests. An
executive committee usually grants this authority and develops this
policy. This policy may also detail the authority of purchasing to

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delegate certain tasks or assignments to other departments or
functions.
An important section of this policy describes the areas where
purchasing authority does or does not exist. The policy may exclude
the purchasing function from any responsibility for purchasing real
estate, medical insurance policies, or other areas where purchasing
may not have direct expertise. (However, purchasing is increasingly
becoming involved in all types of purchases, including these
nontraditional areas.) This policy outlines the overall authority of
purchasing as granted by the executive committee while describing the
limits to that authority.
2.1.2. Objectives of the Purchasing Function
As noted in Chapter 2, purchasing generally has the final authority
over a certain spending area. This is typically set forth in a policy
describing the general objectives or principles guiding the purchasing
process. The following describes one company’s purchasing objectives
or principles:
• To select suppliers that meet purchase and performance
requirements
• To purchase materials and services that comply with engineering
and quality standards
• To promote buyer-seller relations and to encourage supplier
contribution
• To treat all suppliers fairly and ethically
• To work closely with other departments
• To conduct purchasing operations so they enhance community and
employee relations
• To support all corporate objectives and policies
• To maintain a qualified purchasing staff and to develop the
professional capabilities of that staff
Although these objectives or principles appear broad, they are
important because they set forth, in writing, management’s commitment
to achieving a professional level of purchasing behavior. These
principles are also important because they give rise to other policies
that directly support purchasing activities.
2.1.3. Corporate Purchasing Office Responsibilities
It is also useful to understand the duties and responsibilities of
the central or corporate purchasing office (if a central office
exists). This policy may also detail the relationship of the corporate

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office to purchasing centers located at the divisional, business unit,
or plant level. The corporate purchasing office is usually a staff
position directing, supporting, and coordinating the purchasing
effort.
This policy can provide guidance concerning the role of the
corporate purchasing staff in the following areas:
• Carry out executive policies
• Develop and publish functional purchasing and material policies
and procedures to support efficient and effective purchasing
operations at all levels
• Coordinate strategy development between purchasing departments
or centers to maximize purchasing leverage of critical
commodities
• Evaluate the effectiveness of purchasing operations

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• Provide expert support to purchasing departments (e.g.,
international sourcing assistance, contract negotiations,
systems development)
• Perform other tasks typically associated with a corporate
support staff. Exhibit 3.1 illustrates a policy detailing
corporate purchasing office responsibilities.
2.2. Policies Defining the Conduct of Purchasing
Personnel
These policies outline management’s commitment to ethical and
honest behavior while guiding personnel who are confronted with
difficult situations. Some business practices are technically not
illegal but are potentially unethical or questionable.
Because of this, purchasing management must develop policies that
provide guidance in these gray areas. Because purchasing personnel act
as legal agents and representatives, they must uphold the highest
standards as defined by executive policy and the law.
2.2.1. Ethics Policy
Most organizations, particularly medium- and larger-sized ones,
have a written policy describing management’s commitment to ethical
purchasing behavior. Chapter 15
discusses purchasing ethics in considerable detail.
2.2.2. Reciprocity Policy
A formal policy often exists detailing management’s opposition to
reciprocal purchase agreements. Reciprocity occurs when suppliers are
pressured to purchase the buyer’s products or services as a condition
of securing a purchase contract. A reciprocity policy usually
describes management’s opposition to the practice and lists the type
of behavior to avoid. Personnel must not engage in behavior that
suggests any of the following:
• A buyer gives preference to suppliers that purchase from the
buyer’s organization.
• A buyer expects suppliers to purchase the buying company’s
products as a condition for securing a purchase contract.
• A buyer looks favorably on competitive bids from suppliers that
purchase the buyer’s products.
This area requires an executive management policy because
disagreement occurs regarding this topic. Reciprocity is relatively
easy to control once management issues a policy on the subject.

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2.2.3. Contacts and Visits to Suppliers
An understanding must exist regarding direct visits or other
communication contacts with suppliers or potential suppliers. This
policy should address not only purchasing personnel but also other
departments or functions that visit or contact suppliers. Purchasing
wants to control unauthorized or excessive contacts or visits because
these can impose an unnecessary burden on suppliers.
Also, unauthorized supplier visits or contacts by non-purchasing
personnel undermine purchasing’s legitimate authority as the principal
commercial contact with suppliers. Purchasing wants to avoid
situations where suppliers might interpret statements and opinions
offered by non-purchasing personnel as commitments.
2.2.4. Former Employees Representing Suppliers
Occasionally, an employee may leave to work for a supplier. This
is a concern because the former employee probably has knowledge about
business plans or other confidential information that might provide
an unfair advantage over other suppliers. One way to address this
issue is to establish a policy prohibiting business transactions with
suppliers that employ former employees known to have inside or
confidential information. This exclusion can range from a period of a
few months to several years, depending on the employee and the
situation. Another possibility involves including a clause in the
employee’s original employment contract prohibiting employment with a
competitor or a supplier for a specified time. This can offset the
advantage a former employee may have from his or her previous
employment.
2.2.5. Reporting of Irregular Business Dealings with
Suppliers
This policy may establish a reporting mechanism for buyers or other
employees to report irregular business dealings. Examples of irregular
dealings include accepting bribes from suppliers, cronyism, accepting
late bids, owning a stake in a supplier’s company, and other types of
behavior that are not considered part of the normal course of business.
The policy can specify the proper office to which to report the
irregularity, the safeguards in place to protect the reporting party,
and the need to report suspected irregularities as soon as possible.
This policy sends the message that management will not tolerate
irregular business transactions involving employees.

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2.3. Policies Defining Social and Minority Business
Objectives
In the long run it is likely in a purchaser’s best interest to use
its power to support social and minority business objectives. This may
include supporting and developing local sources of supply or awarding
business to qualified minority suppliers.
Purchasing’s actions help shape a perception of good corporate
citizenship. Pursuing social objectives may require the development
of policies specifically defining management’s position. A list of the
top companies engaged in minority supplier development is shown in
Sourcing Snapshot: The Best Companies for Minority Supplier
Contracting.
2.3.1. Supporting Minority Business Suppliers
Supporting minority suppliers is not only the right thing to do,
it is also the smart thing to do. As the nature of America’s
demographics and workforce continually changes, organizations will
need to hire and train people with multicultural backgrounds and
promote relationships with suppliers and customers from diverse
backgrounds. At the same time, it is important to recognize that
minority suppliers are a special class of supplier. As such, they face
many problems that are unique to their special status, while also
facing many of the same problems that confront nonminority suppliers.
Several factors lie at the core of these problems: lack of access to
capital; large firms’ efforts to optimize their supply bases;
inability to attract qualified managers and other professionals; and
minority suppliers’ relatively small size, which may lead to over-
reliance on large customer firms.
Management’s position concerning transactions with minority
business suppliers provides guidance to buyers. A minority business
supplier is a business that is run or partially owned by an individual
classified as a minority by the U.S. government. Such policies
typically state that these suppliers should receive a fair and equal
opportunity to participate in the purchasing process. The policy may
outline a number of steps to achieve the policy’s objectives, including
the following:
• Set forth management’s commitment on this subject
• Evaluate the performance potential of small and disadvantaged
suppliers to identify those qualifying for supplier assistance
• Invite small and disadvantaged suppliers to bid on purchase
contracts

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• Establish a minimum percentage of business to award to qualified
small and disadvantaged suppliers
• Outline a training program to educate buyers regarding the
needs of the small and disadvantaged suppliers
Policies supporting disadvantaged suppliers are common in contracts
with the U.S. government, which encourages awarding subcontracts to
small and disadvantaged suppliers. Other companies have formal
procedures for including minority business suppliers. For instance,
one large pharmaceutical company has developed a process for
identifying minority suppliers, which includes the following
questions:
• Is the supplier fully qualified?
• Does the supplier satisfy U.S. government criteria defining a
minority business?
• Does the supplier meet our standard performance requirements?
• Is the supplier price competitive?
• How much business can we give the supplier given its capacity?
Links and information having to do with minority business
development can be found at http://www.mbda.gov.
A recent study on best practices conducted by the Supply Chain
Resource Cooperative at NC State University emphasized that companies
in many industries are making great improvements in minority supplier
development programs. However, until organizations can devote more
resources to actively improving minority suppliers through focused
supplier development programs, growth of minority suppliers in the
supply base will remain problematic.
The research also suggested that almost all industries have limited
resources for supplier diversity programs. One interesting observation
regarding resource allocation is that industries that are rife with
financial difficulties do not have the luxury to dedicate additional
resources for these programs. However, in industries that are not
experiencing financial difficulties, the research found that there was
often a lack of executive sponsorship, which led to the same outcome:
Diversity does not get enough attention or budget allocation for its
progress. Two important features of any supplier development
initiative were identified: process improvement and
leadership/corporate commitment. These elements were viewed by many
executives as critical foundational elements for any minority supplier
development initiative. The industryspecific best practices in how

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organizations developed their policies and procedures include the
following:
• Mandate Tier 1 suppliers to have a Tier 2 diversity spend goal
and incorporate the terms in the contracts. Tier 1 suppliers
should be able to record their diversity spend online through the
customer’s website. Increasing Tier 2 diversity spend offsets to
some extent the effect of diminishing opportunities for minority
suppliers due to increased global sourcing and offshore
contracting. Online tracking of minority spend in Tier 2
suppliers also increases visibility and compliance.
• Include minority suppliers in all RFQs, without exception.
Policies may be defined on the basis of mutually agreed-upon
terms between business units and the organization’s Supplier
Diversity Council. Awarding of RFQs should in all circumstances
be tied to performance.
• Tie the goals and objectives of the supplier diversity program
(SDP) to supply chain management strategies and supply chain job
functions. Business units should also have diversity goals tied
to performance to increase participation and commitment to the
program.
• Incorporate supplier diversity programs within the corporate
procurement organization and assign supplier diversity advocates
to specific business units. These advocates can provide training
and support to buyers and drive compliance. This approach also
enables consolidation of spend with the minority suppliers that
are being developed by the corporate supplier diversity programs.
• Incorporate all corporate functions in which suppliers are
selected and procurement commitments are made. Corporate supplier
diversity committees should include management representatives
from all such cross-functional areas: Advertising, Public
Relations, Finance, Legal, R&D, Human Resources, Engineering,
Real Estate, Traffic and Distribution, Sales, and Corporate
Office Administration. This is in recognition of the fact that
SDP should be a supply chain accountability and not just a
corporate accountability.
2.3.2. Environmental Issues
A set of policies outlining a position related to environmental
issues is becoming increasingly important. Moreover, governments are
now requiring such policies by law. These policies include the use of
recycled material; strict compliance with local, state, and federal
regulations; and proper disposal of waste material. The Clean Air Act