The purchasing handbook

THE PURCHASING

HANDBOOK

A Guide for the Purchasing and

Supply Professional

SIXTH EDITION

JOSEPH L. CAVINATO, Ph.D., C.P.M.

RALPH G. KAUFFMAN, Ph.D., C.P.M.

EDITORS IN CHIEF

Sponsored by the National Association of Purchasing Management

Contact NAPM at P.O. Box 22160, Tempe, Arizona 85285-2160

800/888-6276, fax: 480/752-7890, Web site: www.napm.org

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DOI: 10.1036/0071395482

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Copyright Page

The following chapters are copyrighted by the contributor, and as such no part of these

chapters may be reproduced or distributed in any form or by any means, or stored in a

database or retrieval system, without the prior written permission of the contributor.

Chapter 2—‘‘Creating Supply Advantage by Leveraging the Strategic Nature of

Procurement’’

Chapter 19—‘‘Supplier Price and Cost Analysis’’

Chapter 32—‘‘Purchase of Raw Materials and Commodities’’

Chapter 34—‘‘Software and Intellectual Property’’

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v

CONTENTS

Contributors ix

Preface xiii

PART ONE THE STRATEGIC CONTRIBUTIONS OF

PURCHASING AND SUPPLY

Introduction 1

Chapter 1

The Future of Purchasing and Supply 3

Chapter 2

Creating Supply Advantage by Leveraging the Strategic

Nature of Procurement 35

Chapter 3

Purchasing in the New Firm of the Future 61

PART TWO THE STRATEGIC APPROACHES OF

PURCHASING AND SUPPLY

Introduction 79

Chapter 4

Development of Supply Strategies 81

Chapter 5

Knowledge of Supply Markets 99

Chapter 6

Purchasing as Relationship Management 127

Chapter 7

Introduction to Supply Chain Management 145

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vi Contents

Chapter 8

Strategic Alliances and Partnerships 167

Chapter 9

Global Procurement Synergies 205

Chapter 10

Challenges of Outsourcing in Supply Chain Procurement:

How Best to Cope with the Changing Opportunities 221

Chapter 11

Identification and Evaluation of Sources 235

PART THREE ORGANIZATION AND COMPETENCIES OF

PURCHASING AND SUPPLY

Introduction 277

Chapter 12

Competencies and Skills in Today’s Purchasing 279

Chapter 13

Developing a Purchasing Organization 291

Chapter 14

Re-engineering Purchasing and Supply 311

Chapter 15

Human Resource Management 331

Chapter 16

Purchasing Performance Evaluation 357

Chapter 17

Ethics and Responsibility 375

PART FOUR COMPONENTS AND CAPABILITIES

Introduction 409

Contents vii

Chapter 18

Electronic Opportunities and Electronic Commerce—

New Technologies for Purchasing 411

Chapter 19

Supplier Price and Cost Analysis 437

Chapter 20

Total Cost of Ownership 485

Chapter 21

Purchasing and Supply Negotiations 499

Chapter 22

Contract and Subcontract Administration and Management

527

Chapter 23

Quality Assurance 553

Chapter 24

Value Analysis 585

Chapter 25

A Practitioner’s Guide to Forecasting 607

Chapter 26

Inventory Management 641

Chapter 27

Legal Aspects of Purchasing 665

Chapter 28

Investment Recovery 703

Chapter 29

Managing Budgets and Operations 741

Chapter 30

Marketing Purchasing and Supply 755

viii Contents

Chapter 31

Supplier Performance Evaluation 779

PART FIVE ITEM AND INDUSTRY PRACTICE

Introduction 807

Chapter 32

Purchase of Raw Materials and Commodities 809

Chapter 33

MRO Materials 833

Chapter 34

Software and Intellectual Property 855

Chapter 35

Capital and Its Impact on the Organization 881

Chapter 36

Services and Nontraditional Goods 925

Chapter 37

Construction Services Procurement 939

Chapter 38

Transportation and Related Services 963

Chapter 39

Purchasing in the Service Industry 993

Chapter 40

Purchasing and Supply Management in the Process and

Extractive Industries 1015

Chapter 41

Public/Private Purchasing 1029

PART SIX PURCHASING AND SUPPLY INFORMATION

RESOURCES 1071

Index 1075

ix

CONTRIBUTORS

Mir F. Ali, MBA, Ph.D. Managing Director, AIM/AMC Corporation,

Las Vegas, Nevada (CHAP. 23)

Richard Antus, CMIR Manager, Investment Recovery, GTE Supply, Ir￾ving, Texas (CHAP. 28)

William Atkinson Freelance Writer, Carterville, Illinois (CHAP. 3)

Jack Barry President, E-time, Inc., Fairfield, Connecticut (CHAPS. 10 and

33)

William Boan, CMIR Clinton, Missouri (CHAP. 28)

Ron Brooks, CMIR Central Zone Manager, Weyerhaeuser Company,

Hot Springs, Arkansas (CHAP. 28)

Martin J. Carrara, J.D., C.P.M. Attorney, Staten Island, New York

(CHAP. 27)

Joseph R. Carter, D.B.A., C.P.M. NAPM Professor and Chair of the

Supply Chain Management Department, Arizona State University,

Tempe, Arizona (CHAP. 4)

Lawrence J. Clark, C.P.M. Purchasing Manager, Burleigh Instruments,

Fishers, New York (CHAP. 24)

Gary Colgrove Manager of Resource Recovery, 3M Company, St. Paul,

Minnesota (CHAP. 28)

Thomas A. Crimi Supply Chain TeamCoordinator, Texaco, Inc., Hous￾ton, Texas (CHAP. 40)

Richard Cuniberti, C.P.M., CMIR Supply Manager, Resource Recovery

and Ecology Services, BASF Corporation, Mount Olive, New Jersey

(CHAP. 28)

Constance Cushman, J.D., C.P.M. Attorney, New York, New York

(CHAP. 27)

Ed Dauginas Director of Purchasing, Raw Materials, Unilever Home

and Personal Care USA, Trumbull, Connecticut (CHAP. 9)

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x Contributors

Thomas M. De Paoli, Ph.D., C.P.M., SPHR Principal, Apollo Solutions

Consulting, Apollo Solutions, Sheboygan, Wisconsin (CHAP. 14)

Lisa M. Ellram, Ph.D., C.P.M., A.P.P., CPA, C.M.A. Associate Professor

of Supply Chain Management, College of Business, Arizona State Uni￾versity, Tempe, Arizona (CHAP. 20)

M. Theodore Farris II, Ph.D., C.T.L. Faculty, University of North Texas,

Denton, Texas (CHAP. 38)

Donavon J. Favre Associate Partner, Global Supply Chain Management

Practice, Andersen Consulting, Cleveland, Ohio (CHAP. 1)

Henry F. Garcia, C.P.M. Director of Administration, Center for Nuclear

Waste Regulatory Analyses, San Antonio, Texas (CHAPS. 29 and 36)

Larry C. Giunipero, Ph.D., C.P.M. NAPM Professor of Purchasing and

Supply Management, Florida State University, Tallahassee, Florida

(CHAP. 11)

Frank Haluch, C.P.M. President, Haluch & Associates Ltd., Trumbull,

Connecticut (CHAPS. 19 and 32)

Mary Lu Harding, C.P.M., CPIM, CIRM Consultant, Harding & As￾sociates, Bristol, Vermont (CHAP. 31)

Michael Harding, C.P.M., CPIM Consultant, Harding & Associates,

Bristol, Vermont (CHAP. 31)

Carolyn Jackson, CMIR ARCO Western Energy Company, Taft, Cali￾fornia (CHAP. 28)

Steve Kesinger, C.P.M., A.P.P. President, The Kesinger Group, Katy,

Texas (CHAP. 6)

Dennis Knutz, CMIR, ASA Director, Investment Recovery, Weyer￾haeuser Company, Tacoma, Washington (CHAP. 28)

Roland Kotcamp, C.P.M., CMIR Director, Niagara Mohawk Power

Corporation, Liverpool, New York (CHAP. 28)

Brian G. Long, Ph.D., C.P.M. President, Marketing and Management

Institute, Inc., Kalamazoo, Michigan (CHAP. 21)

Arnold J. Lovering, J.D., C.P.M. Director, Supply Chain Management,

Raytheon Company, Lexington, Massachusetts (CHAP. 17)

Jane Male, CAE Executive Director, The Investment Recovery Associ￾ation, Mission, Kansas (CHAP. 28)

Contributors xi

Leslie S. Marell Attorney at Law, Law Offices of Leslie S. Marell, Her￾mosa Beach, California (CHAP. 34)

William J. Markham Principal, Global Strategic Sourcing Practice, A.T.

Kearney, Inc., Chicago, Illinois (CHAP. 2)

Deverl Maserang Corporate Director, Routing and Logistics, Pepsi Bot￾tling Group, Somers, New York (CHAP. 38)

Paul A. Matthews Managing Partner, Global Supply Chain Manage￾ment Practice, Andersen Consulting, Wellesley, Massachusetts (CHAP. 1)

Mark S. Miller, C.P.M., CIRM Manager, Materials Control, Case Cor￾poration, Racine, Wisconsin (CHAP. 26)

Jose´ T. Morales Vice President, A.T. Kearney, Inc., Chicago, Illinois

(CHAP. 2)

Michael P. Niemira Vice President and Senior Economist, Bank of

Tokyo-Mitsubishi, Ltd. Research Department and Adjunct Professor of

Economics, Stern School of Business, New York University, New York,

New York (CHAP. 25)

Robert A. Novack, Ph.D. Associate Professor of Business Logistics, The

Pennsylvania State University, State College, Pennsylvania (CHAP. 7)

James T. Parker, C.P.M. Director of Purchasing, University of Utah, Salt

Lake City, Utah (CHAP. 18)

Terrance L. Pohlen, Ph.D. Assistant Professor of Business Logistics,

College of Business Administration, University of North Florida, Jack￾sonville, Florida (CHAP. 38)

Michael Rhodes, CMIR Corporate Investment Recovery, Virginia Elec￾tric & Power Company, Richmond, Virginia (CHAP. 28)

Thomas H. Slaight Vice President, A.T. Kearney, Inc., Chicago, Illinois

(CHAP. 2)

Linda L. Stanley, Ph.D. Associate Professor, School of Business, Our

Lady of the Lake University, San Antonio, Texas (CHAP. 16)

James Tognazzini Facility and Operations Manager, UPS Worldwide

Logistics, Irving, Texas (CHAP. 38)

Richard J. Toole Associate Partner, Global Supply Chain Management

Practice, Andersen Consulting, Atlanta, Georgia (CHAP. 1)

xii Contributors

Robert J. Trent, Ph.D. Associate Professor of Management, Lehigh Uni￾versity, Bethlehem, Pennsylvania (CHAP. 8)

Virginia M. Tucker, Ph.D. Associate Dean for Executive Education and

Associate Professor of Business Administration, The Pennsylvania State

University, State College, Pennsylvania (CHAP. 12)

Roland R. Tunez Director–Supply Chain Management, Network Pur￾chasing Team, BellSouth Telecommunications, Inc., Atlanta, Georgia

(CHAP. 13)

Elaine N. Whittington, C.P.M., A.P.P., CPCM Educator, G & E Enter￾prises, Sunland, California (CHAP. 22)

Alvin J. Williams, Ph.D. Chair and Professor, Department of Manage￾ment and Marketing, University of Southern Mississippi, Hattiesburg,

Mississippi (CHAP. 30)

Donald L. Woods, J.D., C.P.M. State and Local Government Consult￾ant, Las Vegas, Nevada (CHAP. 41)

Bruce J. Wright President, B. Wright & Associates and Total Systems,

Inc., Midvale, Utah (CHAPS. 35 and 37)

Joseph A. Yacura Senior Vice President, Worldwide Procurement,

American Express, New York, New York (CHAP. 39)

Rene A. Yates, C.P.M. Director of Materials, B.A. Ballou & Company,

Inc., East Providence, Rhode Island (CHAP. 15)

William Yerkey General Manager, Investment Recovery, Union Car￾bide Corporation, South Charleston, West Virginia (CHAP. 28)

Richard R. Young, Ph.D., C.P.M. Assistant Professor of Business Ad￾ministration, Academic Program Director for Purchasing Continuing Ed￾ucation, The Pennsylvania State University, State College, Pennsylvania

(CHAP. 5)

xiii

PREFACE

The Purchasing Handbook—A Guide for the Purchasing and Supply Profes￾sional reflects the field at a milestone in its evolution and sets the tone

for its contributions to organizations for the first five years of the next

millennium. The book builds upon the tradition of the field as reflected

by its long history fromits first publication in the 1920s. But unlike pre￾vious editions, which captured the field’s state of the art at a moment in

time, this edition has a future orientation that assists the reader in pre￾paring for newly demanded processes, skills, and systems. This edition

contains contributions fromfield leaders that point to a new direction of

‘‘supply’’ that is in addition to the traditional buying role in the firm.

This edition parallels the National Association of Purchasing Manage￾ment’s (NAPM) change and shift forward as it continues to identify how

the world of purchasing and supply is changing and prepares its mem￾bership to attain the levels of contributions now demanded of it.

Many new topics and much new material are included in this edi￾tion. Purchasing as a strategic activity blended with that of the firmor

organization is contained within Part 1. This is followed by chapters

devoted to marketplace intelligence, purchasing as relationship manage￾ment, electronic systems and e-business opportunities, outsourcing/in￾sourcing, supply, and the need to market purchasing and supply within

the firm.

Several chapters are updates of concepts that have been evolving

during the 1990s. Re-engineering, outsourcing, total cost of ownership,

and others are now accepted parts of the field. Each chapter on these

evolving topics contributes new material for the benefit of readers in

their careers and in their roles in their organizations.

The book also provides a solid base of updated material of the

field’s core concepts. These include, but are not limited to, such topics

as MRO, contracting, forecasting, inventory management, legal aspects,

and budgeting. Together, these build a showcase of the field’s state of

practice.

We would like to give hearty thanks to each of the authors for their

contributions to this edition and the field; to their employers, countless

co-workers, family members, and friends who no doubt served as read￾ers, proofreaders, and sounding boards; and lastly, to those persons in

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xiv Preface

the lives of the authors who no doubt endured weekends and evenings

without the benefit of their company while they toiled to develop and

write their chapters. Thank you, all.

Joseph L. Cavinato, Ph.D., C.P.M.

Ralph G. Kauffman, Ph.D., C.P.M.