Policies for Selection of Vendors and Purchase of Goods and Services

A business often contracts with outside parties for services and projects that the business’ own personnel cannot perform cost-effectively; or call for skills beyond the business’ resources. Although varied, these services commonly include professional, such as legal and accounting services; research and development; manufacturing, sales, and maintenance of products sold to customers; data and records services; computer services; security services; and maintenance of the business’ equipment.  A business may also contract with consultants and independent contractors under special circumstances, such as during vacations of regular employees, or for servicing products sold by the business to customers in locations that the business’ own personnel cannot economically service.

As a business grows the volume and complexity of agreements for services and maintenance increases and it is important to develop and enforce formal rules and procedures for selection of vendors and negotiation and completion of procurement transactions.  In many cases the responsibility for procurement of services, as well as tangible goods, will be vested in a purchasing department that will assume the leadership role for purchasing goods and services on behalf of the company.  In order to achieve its goals and objectives the purchasing department should prepare and disseminate a policy that covers purchasing authority, including the signatures and other approvals required for certain types of contracts and expenditure amounts; evaluation and selection of vendors, including bidding procedures and prohibitions on conflicts-of-interest; delivery and inspection procedures; invoicing and payment procedures; and contract review and approval procedures.

Each requisitioning department (i.e., the department that is actually requesting the particular product or service) should be expect to contribute to the process through preparation of purchase requisitions with sufficient lead time to allow the purchasing department to complete bidding requirements and/or process orders, provide accurate specifications when requested, verifying that funds are available and securing the appropriate budget manager’s signature, and verifying delivered orders for accuracy.  Additional rules may apply to the purchase of specific products and services such as computer equipment, construction services, consulting and professional services and maintenance agreements and it is important to have the departments with the most expertise involved in the procurement process (e.g., the legal department should not be ordering software without input from the information technology department).

As with any other policy, plans should be made for reviewing the effectiveness of the purchasing procedures on a regular basis and the review should be conducted against very specific performance metrics outlined in the policy itself such as incurring the lowest cost in the fulfillment of specified needs with appropriate levels of quality and service; developing and implementing a strategic procurement plan that ensures that goods and services will be acquired after consideration of needs, alternatives, timing, and availability of funds; identifying and satisfying all relevant legal and ethical obligations (including vetting of potential conflicts of interests) in the acquisition of goods and services by purchase or lease; and establishing a core competency in purchasing techniques by recruiting and training skilled professionals on negotiating, contractual terms and conditions, cost reduction techniques, and cooperative buying processes.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (Fall 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

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