7 Star Purchasing Report PDF

This Report is brought in co-operation with Cattan Service Group.
Cattan
Service Group, Inc.
By Thomas L. Tanel, C.P.M., CTL, CCA, CISCM, President & CEO
And Loran K. Boenig, CIPME, CO & Treasurer
2009 Cattan Services Group, Inc.
Seven-Star Purchasing: Beyond the World Class Paradigm

Purchasing & Procurement Center is an organisation whose sole focus is on procurement,
sourcing, contracts consultancy, training and software solutions. Below is a summary of our services.
I. Procurement Consultancy Services
Setting Up New Procurement Department

Results Expected: A world class Procurement
Department with comprehensive processes, policies
and procurement systems.
Procurement & Purchasing Cost Reduction
Results Expected: Typical results you can expect are
anywhere from 5% to 20% savings.
Procurement Gap Analysis & Best Practices
Implementation
Results Expected: At the end of the project your team
will have a plan that outlines the actions to take to
close the gap.
Customized Consultation Based on Special
Requirements
Results Expected: In-depth implementation of your
organization procurement plans.
Supplier Development & Relationship
Management.
Results Expected: Proper processes to select and
qualify suppliers, plus strategies to manage supplier
relations and development.
II. Procurement Software

E-Purchasing
PPC E-Purchasing handles both direct and indirect
goods and services purchase and automates and
streamlines the purchasing process. PPC EPurchasing includes: RFQ, Quotation, Purchase
Order, Delivery Order, Invoice, Reporting, Catalogue
etc.
E-Bidding (Reverse Auctions)
E-Bidding is a sophisticated eBidding Solution
designed to deliver significant purchasing savings.
PPC E-Bidding is a web-based solution and is
accessible on the web.
E-Tenders
E-Tender is a sophisticated web-based solution
designed to cover the entire tendering process from
tender specifications right up to tender approval and
award.
III. Procurement Trainings Outsourcing

You can outsource training your procurement staff, by
sending them to attend our public courses or running a
course only for your team. Below is a list of some of the
course that we do.
Procurement Trainings
Best Procurement Practices
Cost Reduction in Purchasing
Purchasing Performance Measurement
Purchasing Negotiations
Capital Equipment Purchasing
Leading & Managing For Procurement
Category Management in Procurement
Preventing & Managing Backdoor Selling
Purchasing for Non-Purchasing Professional
Excellence in the Procurement of Services
MRO Purchasing
Commercial Contracts
Contract Management & Administration
Contract Development
Contract Negotiations
Contract Terms
IT Contracts
Oil & Gas Contracts
Construction Contracts
Tender Management
Contract Specification Writing
Strategic Sourcing
Seven Step Strategic Sourcing
Implementing Global Sourcing
Strategic Sourcing for Best Supplier Selection
Materials & Inventory
Materials & Demand Planning
Inventory Management
Warehouse Management
Supplier/Vendor Managed Inventories
Supplier Management & Development
Improving Supplier Performance Thru Audits &
Surveys, Supplier Relationship Management &
Development, Supplier Selection & Qualification &
Certification, Supplier Risk Management
Supplier Rating & Collaboration
All Procurement Trainings: http://www.purchasing-procurement-center.com/procurement-trainings.html
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Contact Us for A Free 30 Mins Consultation at info@purchasing-procurement-center.com

INTRODUCTION
This whitepaper describes Seven-Star Purchasing: Beyond the World Class Paradigm, encouraging
purchasing and supply management professionals to move these organizational functions toward
seven critical areas of excellence. Though we recognize that some organizations, including public
sector, governmental agencies, notforprofit institutions, and nongovernmental agencies, are
bound by unique regulatory and legislative requirements, they nevertheless can profit by some of
the approaches proposed here.
BEYOND THE BUZZWORDS AND BACK TO THE BASICS

We have observed a fairly disturbing trend: Many organizations are heavily engaged in
reengineering or change management efforts that are focused on best practices, benchmarking,
balanced scorecards, metrics and KPIs, etc. in order to become agile, customer-relationship-centered,
world class entities.
Additionally, many young professionals are learning purchasing based
primarily on the use of their organizations resident computer systems and software rather than
learning the basics of the purchase process itself. While these may be useful tools, they are no
substitutes for the logical processes and foundational principles they execute. Without knowing
how and why these tools work, the purchasing professional is reduced to wooden puppetry, unable
to respond with the intelligence and self-directed agility needed to cope with todays challenging
purchasing environment.
Such fad-oriented tools and techniques may be based on good intentions, but they are undoubtedly
of more benefit to the self-labeled gurus, evangelists, masters, and thought leaders who generate and
publicize them. We need to get beyond the buzzwords and back to the basics. In reality, the
purchasing profession, which we call ours, is not a simplistic craft or a job, nor is it grounded on the
latest techno-babble. It is a blend of both art and science. At its best, it is based on fundamental
facts, application of the basics, and good practices rather than on elusive jargon, formulaic processes,
or canned computer software magic. While never losing sight of its foundation, sound purchasing
keeps a skeptical eye on the latest fad, hype, trend, or new practice before implementing it.
In truth, the concepts of structuring supplier relationships, vendor managed inventory, conflict
resolution, risk management, SOW and specification development, teamwork, total cost of
ownership, and cost targeting are not new ideas. Rather than representing a new paradigm, they are
tried-and-true areas of excellence that have long been driving forces in the purchasing and supply
management field. Sometimes, its easy to get lost in the intricacies of aiming while losing sight of
the target.
In an attempt to move to a world class mode, many companies focus on the
technicalities of achieving the paradigm in lieu of achieving the true goal: to master the basic processes
that will produce excellence in the end result.
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Dont be fooled. You may be tempted to make the kind of mistake being made by so many
purchasing and supply management professionals todaythinking that the more traditional
purchasing skills they have honed in the past are no longer needed. Ironically, forgetting the basics
can make them more vulnerable to purchasing cut-backs, job attrition, or downsizing efforts in
organizations that increasingly rely on automated systems to do their thinking for them. Even more
ironically, it is not a computerized system or a fancy buzzword but the well-grounded purchasing
professional who has the flexibility to be truly responsive to an ever-evolving supply management
environment.
So lets get back to rediscovering and perfecting the basics, what we call the Seven-Star Purchasing
Areas of Excellence:
SEVEN-STAR PURCHASING AREAS OF EXCELLENCE

1. Think strategically about how to add value.
2. Encourage training and development of purchasing personnel.
3. Use cost-price analytics and techniques.
4. Develop structured supplier relationships for your commodity/service group.
5. Advance your communication and negotiation skills.
6. Cultivate inbound freight control opportunities.
7. Focus on enhancing the contracting process.
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1. Think strategically about how to add value.

This strategic area includes selling the importance of Purchasing, Procurement, and Supply
Management to the C-level (CEO, COO, CFO) executives responsible for strategy involvement.
If purchasing cannot prove it is adding value to the organization, the function my face
outsourcing or elimination or downsizing. According to the Center for Advanced Purchasing
Studies Report on CEOs/Presidents Perceptions of the Purchasing Function, the problems that
purchasing has to deal with are these:
1. Many firms feel their purchasing and procurement function is not very effective.
2. In the eyes of many CEOs and presidents, purchasing is not a major contributor in most
business decision making.
It follows that there are two possible reasons why the purchasing and supply management
profession today does not command higher, value-added respect by an organizations C-level
management:
3. Purchasing is actually not adding much value to the bottom line.
4. The purchasing department is indeed adding value, but it is not communicating it in a
manner readily understood by senior management.
Without knowing what performance measures or metrics to use, how can you help C-level
(CEO, COO, CFO) executives understand how the function is adding value? How do you know
whether you are doing a good job if you dont know where you began versus where you are
now?
Therefore, every purchasing executive should have a set of key metrics or Key
Performance Indicators (KPIs) for their organization.

Each metric or KPI should have pre-established targets, which may be subject to change along
with the performance evaluation needs of the department. Metric or KPI development is an
ongoing process that should be improved continually.
It depends heavily on the strategic
information available on your computer system as well as data governance issues such as
enterprise-wide data naming conventions and standards; data quality, availability, timeliness,
latency; and spend management information. Without KPIs or other established metrics, you
will find it challenging to document the data and demonstrate to upper management the
improvements purchasing has madeand can maketo the organizations bottom line.
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2. Encourage training and development of purchasing personnel.

Purchasing executives must be a combination of talent scout and mentor, with a passion for
seeking out raw talent and developing it into strong, qualified, well trained, functional
personnel. Such development should cover core supply chain content knowledge and process
skills as well as the interpersonal skills needed to operate in a cross-functional team
environment.
As the profession becomes more and more sophisticated and environmental change accelerates,
the need for personal professional development becomes proportionally important. Training
purchasing professionals, however, needs to be smart trainingthe type of development that
focuses first on making sure professionals are comfortable with the basics before tackling the
esoteric.
There are many avenues for acquiring essential skills: via public seminars offered through trade
associations, universities, or professional seminar providers; through customized corporate inhouse training; and/or through focused topics presented in webinars or e-learning forums. Some
of this training can even build toward certification in specific areas, which enhances your
companys profile and makes the purchasing professional more indispensible to the
organization.
As a people-oriented function, purchasing professionals need development in these three
primary skill sets:
CORE BASIC KNOWLEDGE
SKILLS
PROCESS KNOWLEDGE
SKILLS
INTERPERSONAL
KNOWLEDGE SKILLS
General business acumen
Strategic planning
Interpersonal relations
Commodity or service
Process redesign, policy and
Coaching, counseling, and
marketplace/supply base
procedure development
mentoring
Solicitation process for
SOW and specification
Team development and
quotes, bids, tenders, etc.
origination
management
Logistic, inventory, and
Total landed cost analysis
Internal customer focus and
transportation options
and measurement
facilitation
Price and financial analysis
Should cost analytics
Problem solving
Terms and conditions
Contract writing
Written communication
Negotiations
Conflict resolution
Change advocacy
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Successful purchasing organizations are increasingly aware that they must put an end to silo
buying and begin to form and utilize cross-functional teams. In order to increase coordination,
internal linkages, communication, resource utilization, focus, efficiency, creativity, and overall
effectiveness, cross-functional teams must be trained and developed to assist in guiding the
purchasing process.
Finally, with supply management becoming more complex daily, its also important for
professionals to go beyond the scope of their own functional areasto explore the complete
supply chain and its interrelated components. Training provides a venue for such exploration.
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3. Use cost-price analytics and techniques.

This requires an understanding of the global economy, such as marketplace infrastructures,
supply chain requirements, logistical channels, and total landed costs. Specifically, this area
emphasizes the following factors:
5.
6.
7.
8.
The market determines the selling price.

Prices fluctuateboth up and down.
Prices have a tendency to react faster to upward pressures than to downward pressures.
Downward pressures include lack of customers, vigorous competition, and insufficient total
demand.
9. The buyer needs to understand the difference between price and cost.
10. The knowledge of prices and costs is a powerful tool in negotiations when determining what
something should cost.
11. The buyer must ensure that the prices offered are fair, reasonable, and affordable.
Purchasing management makes significant contributions to the control of vital organizational
resources, and the quality of these contributions greatly impacts the organizations financial
condition. Therefore, there should be mutual objectives existing for both finance/accounting and
purchasing/procurement, the goal of which is to optimize organizational operations by:
12. Minimizing costs
13. Maximizing profit or revenue
14. Maximizing the value of the organization
Purchasing and procurement can significantly affect the organizations ability to control costs
and thereby improve profitabilitymuch more so than you might expect. For example, lets
assume your organization makes a 5% net profit after taxes.
To produce this level of
profitability, lets compare what it would take for purchasing to produce such results versus the
equivalent profitability generated through marketing or sales:
SAVINGS THROUGH PURCHASING
EQUALS SALES OF:
$10,000
$200,000
$100,000
$2,000,000
$1,000,000
$20,000,000
Clearly, effective purchasing can have a profound effect on the bottom line.
This often
overlooked source of profitability is ripe for exploration by many companies who have long
emphasized their sales as the primary vehicle for fiscal strength. With the current state of the
economy and its negative ramifications in the marketplace, purchasings cost-price analytics
should be employed with even more fervor than ever to eke out elusive profitability.
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4. Develop structured supplier relationships for your

commodity/service group.
Suppliers play a critical role in the success of an
organizations
operations.
However,
Alliances
different
suppliers require different management techniques.
Partners
A stratification of the supply base not only

identifies the depth of your relationship with
the supplier but assists purchasing and
supply
management
resources
in
effectively
utilizing
during
its
Suppliers/Contractors
its
management of the supply base.
Vendors
Normally, most organizations will

categorize
the
supply
base
relationship into four tiers:
These tiers will formally define the level of your relationship with the supplier, determine types
and frequency of formal communications, and outline the overall program management
structure. Here is a description of the 4 tier-based system:
SUPPLY BASE RELATIONSHIP CRITERIA
VENDO
SUPPLIER
PARTN
ALLIAN
RS
S OR
ERS
CES
Superior
performan
ce on
quality
and
delivery
Mutual
ly
advant
ageous
to both
parties
Corporate
ly
contracted
but nonexclusive
Bound
ed
relatio
nship
Mutual
depende
nce
beyond
supply
&
technolo
gy
CONTRAC
TORS
Little or
no
differen
tiation
in
product
s or
services
Focus
on
lowest
price
Transac
tional
busines
s
Specific,
available,
off-theshelf
products
Focuse
d
interac
tion
and
signific
Unboun
ded
open
relations
hip
Broader
business
operatin
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relation
ship
No
contract
term
commit
ment
As
needed
Spottype
purchas
es
or
standard
type
services
Multiproduct/s
ervice
offering
ability
Trust has
to be
earned
Seeking
longer
term
relationshi
p; usually
contractin
g for 6
months to
a year
ant
valueadded
Negoti
ated
formul
a type
pricing
Establi
shed
level of
trust
Sharin
g&
exchan
ge of
abilitie
s and
ideas
Multiyear
contrac
t in
place
of 1-3
years
or
evergr
een
contrac
t
g arena
Total
landed
cost
Unique
commit
ments
Joint
longterm
broadbased
plannin
g for the
most
complex
of
relations
hips
Multiyear
contract
in place
of 4-5+
years
To achieve excellence in this area effectively, most organizations have gone through a strategic
sourcing program that allows them to focus on their most important structured supplier
relationships. A good rule of thumb is that approximately 5-20% of your supplier base will
account for 70-85% of your organizations purchase spend, which accounts for 10-25% of the
materials and services that you procure on an annual basis.
Strategic sourcing is itself a benchmark. It relates to getting the best products and services at the
best value and lowest overall cost. It is designed to segment external spend and ensure that
procurement resources are focused on the most important sourcing purchase categories. What
sets strategic sourcing apart is its continuous attention to improving and re-evaluating the
purchasing activities of a company, thus enabling organizations to adapt to changing market
forces.
The structuring of supplier relationships also depends on the sourcing group strategy chosen.
The first step is to place your types of sourcing into strategic categories:
15. Category 1Non-critical:
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Usually, indirect materials and services, standard off-the-shelf items, and MRO-type items
16. Category 2Leverage:
Usually, components, parts, and raw materials that enter into the composition of the end
product
17. Category 3Bottleneck:
Usually, a one-time purchase of fixed assets, capital equipment, facilities, or technology
18. Category 4Strategic:
Usually, high spend-type services like security, travel, maintenance, transportation,
engineering, etc.
Remember that supply market characteristics and commodity/service importance can drive your
procurement strategies as well as being a strategic component used to drive maximum
organizational competitive advantage.
The following model can help you visualize what type of impact these purchasing categories can
have on your business in relation to market complexity and can assist you in procuring specific
goods and services:
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PURCHASE CATEGORY ASSESSMENT
PURCHASE CATEGORY ASSESSMENT POSITIONING GRID
Categorys Business Impact
HIGH
LOW
LEVERAGE
STRATEGIC
CATEGORY 2
CATEGORY 4
Supplier consolidation
Strategic relationship
Volume leveraging
Global sourcing
NON-CRITICAL
BOTTLENECK
CATEGORY 1
CATEGORY 3
Best price evaluation
Process improvement
Categorys Supply Market Complexity
Volume leveraging
HIGH
Process redesign
For example, in this Purchase Category Assessment Positioning Grid, you can see, based on each
categorys business impact and each categorys supply market complexity, that Category 4
Strategic should be your highest priority. Therefore, using the purchasing strategic relationships
of alliance or partnering in conjunction with global sourcing, you will be most apt to achieve
purchasing excellence for your organization. Applying this logic to the remainder of the grid
should help you determine progressively those areas that demand your attention most.
5. Advance your communication and negotiation skills.

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With so much procurement taking place on a global level, one needs to hone the ability to
negotiate effectively, especially across international boundaries.
In short, a cross-cultural
negotiator has to be a good communicator. It may sound obvious, but communication impacts
everyone and has a profound influence on how we act and respond. It is the way people create,
send, process, and interpret information.
Once negotiators establish cross cultural rapport, barriers disappear, trust grows, and an
exchange of information follows. This means negotiators must be aware of:
19. Their own culture
20. The recipients culture
21. The expectations surrounding the situation at hand
To function successfully in a variegated worldreflecting multi-national, multi-ethnic, multienvironment, and multi-functional factorsyou should strive to be as comfortable doing
business internationally with your global colleagues as you are at home.
Even the most
successful native negotiator will need to keep abreast of ever-evolving cultural influences as he
inevitably ventures into the realm of foreign negotiations.
The study of paralanguage (also known as paralinguistics), which focuses on the verbal aspect of
communication, opens up the most direct avenue of understanding other cultures which may
have been elusive to us in the past.
Beyond paralanguage, studies also show that we are more comfortable with certain cultures and
have an easier time establishing rapport there than we do in less familiar cultures. Those
cultures that are more difficult will require the negotiator to work harder to establish rapport so
that barriers disappear, trust grows, and an exchange of information flows freely. It is therefore
essential to become aware of key cultural variables that can affect the communication process,
thereby influencing perceptions during the negotiation process.
Negotiation can be considered a very specialized form of communication. More specifically, it is:
22.
23.
24.
25.
26.
A specialized process of communication called bargaining

A mutual discussion and arrangement of the terms of a transaction or agreement
The use of argumentation and persuasion to resolve issues in a business arrangement
An attempt to find a win-win solution which will maximize the interest of both parties
The application of facts and logic supported by the strengths of a bargaining position to
achieve valid and necessary business objectives
27. A give-and-get situation, where the purpose is to exchange a material, item, product, or
service for monies or value in order to reach agreement
12

The successful negotiator deals most effectively when he/she has identified his/her strongest
points and uses them strategically. Here is the essence of the negotiation process:
THE NEGOTIATION PROCESS
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6. Cultivate inbound freight control opportunities.

Management of the inbound freight function is one of the most overlooked areas for significant
cost reduction. Some estimates rate inbound freight costs as high as 35% of the total logistics
cost for many companies. Remember that any savings in inbound freight costs can go directly to
the bottom line. Most successful organizations who have paid attention to inbound freight view
inbound freight management as controlling their inventory in transit.
Since your inventory is, in many cases, your largest asset, the management of this asset is critical
to your business success. The proper management of this function plays a key role in achieving
supply management inventory, productivity, and service goals. Inbound freight involves the
management and control of freight from domestic and offshore suppliers, consolidation of
vendor shipments, direct (drop) shipments to customers, multiple shipping points, and
warehouse cross dock opportunities for replenishment and backorder processing.
Effectively controlling the inbound flow of materials/product to your organization is a
complicated process, and it is becoming more complex as customer demands increase in terms of
their expectations of service levels. As you begin to analyze your inbound freight practices, you
should establish objectives that will help guide your decision making process. Objectives can be
established in the following areas; among others:
28.
29.
30.
31.
32.
33.
34.
35.
Reduced freight costs and improved bottom line

Improvement in on-time deliveries
Reduction in purchasing lead times
Fewer handlings and less damage
Lower inventory levels and reduced carrying costs
Providing maximum visibility into the receiving process
Improvement in warehouse productivity
Increased customer service
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7. Focus on enhancing the contracting process.

Sometimes the most difficult part of the contracting process is knowing when you truly have a
contract and when you do not. There are a number of quasi-contractual situations that have
caught many purchasing professionals off guard and cost their organizations dearly.
Conducting the contracting process across international boundaries can complicate matters
further.
For example, the UN Convention for International Sale of Goods (CISG) permits all types of
evidence, including that developed prior to, during, and subsequent to the formation of the
contract.
Sometimes, international parties in a negotiation may be motivated to take your
discussions as offers. Under the CISG, there is no provision for preventing assertions that
contracts have been concluded solely on the basis of oral statements. The message to purchasers
is to maintain more copious records of all negotiations with international suppliers in order to be
able to come forth with complete evidence if called upon to interpret a contract under the CISG.
To avoid committing yourself, especially in international settings, follow these guidelines:
36. Document your conversations.
37. Conclude conversations with, You, of course, recognize that we do not have a contract until
.
38. Send a follow-up letter, facsimile, or e-mail that sets forth the precise status of your
negotiations.
The concept and design stage for your internal customer involves the introduction and
specification design of a product or a service project SOW, or it can involve an improvement or
modification made to an existing product or ongoing service. It is during this stage when
purchasing has the most impact on reducing costs.
There are plenty of acronyms to go around in the contracting process, and choosing the right tool
for the task at hand often proves perplexing to even seasoned purchasing professionals. RFX, for
example, is one of the most common acronyms in strategic sourcing and procurement. It is a fillin-the-blank type of reference. The RF represents Request For and the X is just a placeholder
for I, P, B, and/or Q. In other words, RFX is a term that captures all references to RFI, RFP, RFQ,
or RFB. The RFX process, for example, includes Request for Information (RFI), Invitation for Bid
(IFB), Invitation for Tender (IFT), Request for Bid (RFB), Request for Quote or Quotation (RFQ),
and Request for Proposal (RFP).
Their purpose is to provide a solicitation platform for a
purchaser to gather information from suppliers in various manners that will allow them to make
educated decisions on whom to purchase from, which products or services to buy, and under
what terms.
The goal of an effective RFX process is to deliver the greatest value to your organization through
a course of action that provides a true and solid means of obtaining information from your
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supplier. It is a means of assembling all the information required to arrive at a well-grounded
conclusion. Without the ability to select and apply the correct RFX tool at the correct time, the
solicitation process can suffer timing setbacks, miscommunicated terms, and even the need for
complete redefinitionall of which adversely affect the desired end result.
Here is a snapshot way to determine what RFX formats to use in certain sourcing conditions:
RFX FORMATS & SOURCING FACTORS CONDITIONS

SOURCING FACTOR
R FI
R FQ
RFB/IFB/IFT
R FP
CONDITIONS
DEFINABLE OR
AVAILABLE
Known and
Known off-the-shelf
Known goods and
Unknown detail,
unknown
goods and standard
services
providing the what
SPECIFICATIONS OR
services
and why
REQUIREMENTS
AVAILABILITY OF
Known & unknown;
Known, usually
Known & unknown,
Known, if RFI has
SUPPLIER CAPABILITY
depends on
qualified supplier
depends on
been used
OR COMPETITIVE
preferred or
list
preferred or
SUPPLIER BASE
USER OR INTERNAL
approved supplier
approved supplier
lists
lists
Encouraged by early
Completed, off the
Usually completed
Required through
CUSTOMER
purchasing
shelf goods or
early purchasing
COLLABORATION
involvement
standard type
interaction
services
LEVEL OF SUPPLIER
COLLABORATION OR
COMMERCIALLY
Encouraged by early
Completed since it is
Completed since it is
Required through
supplier or vendor
commercially
commercially
supplier and vendor
involvement
attractive
attractive
value proposition
ATTRACTIVE
analysis
NEED FOR DETAILED
No, but standard
Yes, based on trade
Yes, based on your
Yes or no, according
PRICING
pricing acceptable
custom/practice
bid/tender
to RFP format
INFORMATION
POTENTIAL SAVINGS
guidelines
Low potential
OPPORTUNITIES
INHERENT SOURCING
RISK
Low risk
Low potential, but
It depends if sealed
Very high,
possibly negotiable
bid or subject to
depending on spend
BAFO
category
Medium risk, more
High risk
Low to medium risk
so if sole source
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Though each type of RFX has a unique function and place in the solicitation process, it is
amazing how few purchasing professionals know when and how to apply them accurately. So
one of the first challenges to achieving excellence is learning how to make the most of these tools
in the appropriate context. Your sophisticated suppliers will know the difference, and so should
you!
In todays litigious and competitive business world it is also important for contracts to reflect
accurately the rights and obligations of the parties. Increasingly, purchasing departments and
purchasing professionals are being held responsible for assuring that appropriate language is
included in contracts to ensure that the purchaser obtains the goods and services desired at a fair
price and their interests are appropriately protected.
Why have contracts?
39. To obtain needed goods and services on schedule
40. To create a meaningful relationship between parties
Agreements define rights and obligations
Breaches have legal consequences
41. To create a lasting relationship between parties
Contracts are documents that memorialize agreement about the relationship
They enable separation of formation and performance
42. Contracts are risk management tools
And lets not forget that the primary purpose of a contract is to obtain goods or serviceson
schedule. As such, the most constructive way to resolve contractual difficulties is through the
negotiation process.
To create sound contracts, though, purchasing personnel have to go beyond the negotiation
process. They cannot rely on busy legal staff to review all their actions; rather, they must
understand the laws and business environments relating to the contract and know when to seek
additional legal advice.
Purchasing provides the most value when it anticipates events and mitigates loss and risk.
When negotiating contracts, the parties try to anticipate likely and unlikely situations that may
arise and provide for their solutions. When this fails, parties often resort to formal dispute
resolution methods such as litigation or arbitration.
It is therefore critical for purchasing
personnel to become actively involved in avoiding contractual problems and resolving legal and
business disagreements early in the process, limiting or eliminating the subsequent need to resort
to formal dispute resolution or claims in a court of law.
Essentially, as a purchasing professional, your role in creating contracts is twofold:
1. Make sure that what the internal customer or user wants is in the contract.
2. Make sure that the contract contains the necessary clauses for the type of purchase at hand.
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WHY SEVEN-STAR PURCHASING MAKES SENSE FOR YOURIGHT NOW
CPO Priorities, a report by Aberdeen Research Group, shows a marked acceleration in the
significance of procurement's current role. Although it remains the extreme exception for
procurement to be considered the leading competency of an enterprise, 89% of the survey
respondents indicated that the procurement function has grown more strategic over the past three
years. Procurement's continued stride forward is also evidenced by the fact that nearly a fifth of all
Chief Purchasing/Procurement Officers (CPOs) now report directly to the president or CEO of their
organization. More than ever before, purchasing managers are seen as needing an increasing array
of tools and best practices that can be leveraged to reduce costs and increase procurement
effectiveness.
According to another new study sponsored by KPMG International, Beyond Purchasing: Next Steps
for the Procurement Profession, procurement management has taken on an increasingly strategic
and important role at many companies, but in many respects still has a long way to go to reach
maximum performance. The report, based on surveys of nearly 600 company executives from across
the globe, was conducted by the Economist Intelligence Unit. A full 74% of respondents consider
purchasing/procurement performance to be either high or very high on the corporate priority
listperhaps not surprising in a period of rapidly rising commodity-related costs, but also
undoubtedly reflective of a growing appreciation for the role that purchasing/procurement can play
in improving the supply chain and bottom line.
Why is this important to you? As we move into a new era of great expectations for the purchasing
and supply management executive, each of the Seven-Star Purchasing Areas of Excellence will
represent areas that need to be handledand handled wellby tomorrow's purchasing and supply
management functions. Keeping up with the fads simply wont keep you competitive: Perfecting
the basics will.
Please note that the Seven-Star Purchasing Areas of Excellence presented in this whitepaper are
prescriptive rather than diagnostic.
Our goal is to provide you with a catalyst for ongoing
discussion about identifying your top improvement opportunities. With a plethora of distracting
tips, techniques, and technologies competing for your attention, its all too easy to overlook the less
glamorous fundamentals, those that may be considered pass but will nevertheless provide you
with the surest foundation for achieving purchasing excellence and corporate profitability. Amid
the critical challenges, talent shortages, tightening constraints, cloudy strategies, and ever-increasing
pace of todays purchasing environment, we urge you to focus first on what is vital. Acquiring skills
relating to the Seven-Star Purchasing Areas of Excellenceand being able to use them with
agilitywill ultimately yield the greatest possible ROI for you and your organization.
ABOUT US
18
PURCHASING & PROCUREMENT CENTER

The Purchasing & Procurement Center provides comprehensive information for Purchasing &
Procurement Professionals. Within its scope the Purchasing & Procurement Center ensures that you
get all your needs covered through web based information, Reports & White Papers, and more
importantly thru personal assignments of in-house trainings, consultations etc. You can contact us at
info@purchasing-procurement-center.com for a Free 30 Minutes Consultation of your purchasing &
procurement needs.
CATTAN SERVICES GROUP, INC.

CATTAN is a consulting and training firm specializing in Procurement & supply chain
management.
Cattans cooperation with Purchasing & Procurement Center extends in jointly
providing seminars, in-house trainings, consultations etc.

Cattans success is based primarily on the high level functional expertise of our staff. We offer our
clients value through a very unique combination of advanced degrees and certifications as well as
line, staff, and consulting experience, thereby providing a unique blend of theoretical values mixed
with firing line, hands-on experience to ensure bottom-line results. Simply put, we practice what
we teach. To find out more Cattan, see www.cattan.com.
19

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This Report is brought in co-operation with Cattan Service Group.

Seven-Star Purchasing: Beyond the World Class Paradigm

I. Procurement Consultancy Services

Setting Up New Procurement Department

II. Procurement Software

III. Procurement Trainings Outsourcing

All Procurement Trainings: http://www.purchasing-procurement-center.com/procurement-trainings.html

Seven-Star Purchasing: Beyond the World Class Paradigm

BEYOND THE BUZZWORDS AND BACK TO THE BASICS

Additionally, many young professionals are learning purchasing based

In an attempt to move to a world class mode, many companies focus on the

Seven-Star Purchasing: Beyond the World Class Paradigm

SEVEN-STAR PURCHASING AREAS OF EXCELLENCE

Seven-Star Purchasing: Beyond the World Class Paradigm

1. Think strategically about how to add value.

Performance Indicators (KPIs) for their organization.

It depends heavily on the strategic

Seven-Star Purchasing: Beyond the World Class Paradigm

2. Encourage training and development of purchasing personnel.

General business acumen

Process redesign, policy and

Coaching, counseling, and

Solicitation process for

SOW and specification

Team development and

quotes, bids, tenders, etc.

Logistic, inventory, and

Total landed cost analysis

Internal customer focus and

Price and financial analysis

Should cost analytics

Terms and conditions

Seven-Star Purchasing: Beyond the World Class Paradigm

Seven-Star Purchasing: Beyond the World Class Paradigm

3. Use cost-price analytics and techniques.

The market determines the selling price.

To produce this level of

EQUALS SALES OF:

Seven-Star Purchasing: Beyond the World Class Paradigm

4. Develop structured supplier relationships for your

suppliers require different management techniques.

A stratification of the supply base not only

management of the supply base.

Normally, most organizations will

relationship into four tiers:

SUPPLY BASE RELATIONSHIP CRITERIA

Seven-Star Purchasing: Beyond the World Class Paradigm

Seven-Star Purchasing: Beyond the World Class Paradigm

Seven-Star Purchasing: Beyond the World Class Paradigm

PURCHASE CATEGORY ASSESSMENT POSITIONING GRID

Categorys Business Impact

Best price evaluation

Categorys Supply Market Complexity

5. Advance your communication and negotiation skills.

Seven-Star Purchasing: Beyond the World Class Paradigm

Even the most

A specialized process of communication called bargaining

Seven-Star Purchasing: Beyond the World Class Paradigm

THE NEGOTIATION PROCESS

Seven-Star Purchasing: Beyond the World Class Paradigm

6. Cultivate inbound freight control opportunities.

Reduced freight costs and improved bottom line

Seven-Star Purchasing: Beyond the World Class Paradigm