Skip to content
Quick Start for:
Chapter 7
Purchasing and Warehousing

An effective purchasing system allows a college or university to provide quality materials, supplies, and equipment in the right quantity in a timely, cost-effective manner.

Purchasing includes those activities involved in the identification and purchase of supplies, equipment and services needed by the institution, as well as the storage and distribution of goods. An institution of higher education may acquire goods or services by the method that provides the best value to the institution. (Consider HB1545).

This module focuses on the overall purchasing system including purchase order procedures, bidding practices, internal controls, warehousing, and integration of systems in the following areas:

Part 1
7.A. Organization and Staffing
7.B. Policies and Procedures
7.C. Operations and Bid Processes
7.D. Management Tracking, Monitoring and Oversight

Part 2
7.E. Warehouse Operations (Central Stores)
7.F. Contracting Process
7.G. "Yellow Pages" Test

PART 2

7.E. Warehouse Operations (Central Stores)

Data Needs

  • Federal, state and local rules and regulations
  • Policies and procedures
  • Organization chart (department)
  • Job descriptions
  • Inventory and equipment lists
  • Statistical information on number and type of supplies maintained in the warehouse inventory orders issued and requisitions filled, computing reorder quantities, frequency of shelve restocking or "picking," frequency of supply delivery to users or any other information that is readily available about workloads (if traditional warehousing function)
  • Location, size and primary usage of warehouse facilities in the institution
  • Copies of just-in-time (JIT) delivery model agreements/contracts
  • Customer satisfaction surveys or comment cards (if applicable)
  • Pertinent internal audit reports

Possible People to Interview

System administrator with assigned responsibility
Vice president with assigned responsibility
Warehouse director/supervisor
Purchasing director/agent (if applicable)
Deans/campus-based personnel
Other selected department head(s) as applicable
Internal auditor

Activities to Perform

7.E.1.Tour the warehouse(s) and evaluate the maintenance of inventories, general cleanliness, the "picking systems" that facilitate removing stock from shelves to fill orders, equipment such as forklifts, and security for high theft items.
7.E.2.Prepare a staffing chart of all warehouse, receiving and delivery personnel and determine, based on peer department or institution comparisons and/or industry standards, whether the staffing is appropriate.
7.E.3.Prepare a list of vehicles, machinery and equipment used by the warehouse and determine the age; mileage (as applicable); how it is maintained, whether on contract or by institution personnel; and the budgeted replacement schedule.
7.E.4.Diagram the paperwork and process flow within the warehouse system including the supply requisition and delivery system, the receiving system, the delivery system, and the technology used to support the ordering, receiving and warehousing functions and show how the warehousing function is technologically connected to user departments. Show time lapses between processes and to the extent possible determine the average time to deliver supplies to the users from the time the order is submitted.
7.E.5.By examining the latest inventory records and determining the inventory turnover or annual usage rates for sample items (if available), evaluate whether inventory items are being ordered in the right quantities and at the right intervals to control the amount of inventory on hand without experiencing an out of stock condition.

Questions to Ask

How do users rate the warehousing function? Does the institution provide users an opportunity to comment on the service provided by the warehouse and delivery operation?

What kinds of inventories are stocked in the warehouse? Are these the items that are most frequently asked for by users? Does a traditional central receiving and warehouse model for all goods serve users best or should the college or university adopt a just-in-time (JIT) delivery model for some or all items? Does the department or institution receive or warehouse hazardous material? If so, is the environmental safety office informed? Is there special tracking of such materials? Is there training concerning hazardous materials? Does the department or warehouse maintain records of hazardous materials?

Does the warehousing/purchasing system (either automated or manual) provide for:

  • Automatic reorder points for stock replenishment?
  • Follow-up on back orders and partial shipments to assure receipt of proper quantities?
  • Matching purchase orders and receiving documentation for verification of receipt of material to ensure proper payment of invoices?

Are inventories physically safeguarded with fenced compounds, storerooms, cribs, or similar areas with restricted access and security?

Do warehousing and inventory controls provide for:

  • Receipt of incoming goods with appropriate receiving documentation?
  • Timely reporting to purchasing and/or accounts payable regarding materials received?
  • Notification to the ordering department and subsequent disposition or delivery?
  • Inventory control to accurately account for items received and disbursed?
  • Monitoring of inventory turnover with legal disposition of items that are inactive. (Items that are inactive for twelve months should be considered for disposal)?
  • Warehouse space planning that uses available space efficiently (such as ten-foot aisles)?
  • Proper segregation of duties of warehouse personnel that seeks to prevent sole custody of inventories? (One person is not responsible for receiving, disbursement, and preparation of transaction documentation.)
  • Previously transferred/shipped materials and supplies that were not used by the ordering department to be returned to the warehouse inventory?
  • Separate areas for receiving, storing, and shipping of inventories?
  • Periodic (at least annual) physical inventories as an independent means of establishing accountability for the inventories that should be on hand?
  • Physical inventory adjustments to be reviewed and approved by persons who do not have sole custody of inventories?

7.F. Contracting Process

Data Needs

  • Copies of all service contracts
  • Status reports on services performed
  • Feasibility studies
  • Cost benefit analyses
  • Performance data
  • Copies of MOUs
  • Copies of shared services or inter-local agreements
  • Pertinent internal audit reports

Possible People to Interview

System administrator with assigned responsibility
Physical Plant Director
Vice president with assigned responsibility
Business or finance director or manager
Purchasing department
General counsel
Vendors
Internal auditor

Activities to Perform

7.F.1.Compile all major (as defined by institution policy) contracts with external entities including but not limited to contracts for depository banks, legal services and external auditing services; contracts for outsourced operations or management services for operations such as maintenance, food service, transportation, printing, and the like; shared services contracts and memorandas of understanding (MOUs), and ongoing consulting contracts. Prepare a table listing the general service provided through the contract, contract expiration date, the total contract amount and/or annual payment amounts, the department or individual assigned to oversee the contract, and briefly describe general terms and conditions. Note any areas of overlap or contracts that are currently under renegotiation.

Questions to Ask

Bid process
If any services performed or contracted for through private companies or interlocal agreements, was a cost benefit analysis and feasibility study performed prior to bidding the service and entering into the contract? What was bidding process used? Did it comply with state law? Was a written bid used? Did face-to-face negotiations occur? Were all stakeholders in the service represented in the negotiation and in the evaluation? Did vendor due diligence occur as part of the evaluation process? How were bid proposals evaluated?

Were vendor references checked? Were quantitative and qualitative measures used in evaluating each proposal? Did vendor presentations or interviews take place and how was this information used in the bid process? Did staff document the evaluation process and make written recommendations?

Contract negotiation
Was a contract awarded to the best value viable vendor? Was the contract written by the institution or by the vendor or collectively? Were the terms and conditions negotiated? Was purchasing and finance involved in the evaluation? Did an institution employed or institution hired attorney draft or review the final contract prior to signature? Were all relevant documents referenced in the contract for future reference? What are the basic terms and conditions of the contract? Is the contract written?

Did both the department or institution and the vendor sign the contract? Does the department or institution have a way to shift services back in-house should in-house operations prove the most efficient way to do things? Is the contractor required to report regularly to the administration? If so, how do they report? If so, are they reporting as required? Does the contract include a contract change mechanism? Did the contract include all relevant terms and conditions required by board or department policy, local, state and federal law and the uniform commercial code? Are specific steps outlined in the contract for dispute resolution? What is the institution's liability and what is the vendor's liability? When does the contract expire?

Contract management
Did the institution dedicate correct and sufficient contract management resources to the contract? Who is responsible for managing the contract in the department? In the institution? Does this person have the authority to enforce or change the contract? Does the contract include the name of the contract manager and who represents the institution as the final authority for contract disputes? What reports does the vendor have to provide the institution and when do they have to be provided?

What mechanisms are in the contract for providing the vendor with feedback on its performance? Does the vendor have to account for any cost changes to the institution? Does the institution require the vendor to notify the institution in the event the vendor changes suppliers for items included in the service agreement? Does the contract outline how the department or institution can terminate the contract for poor performance or failure to perform without liability to the department or institution? How are risks to the department or institution managed by the contract?

Vendor performance evaluation
Is a specific individual responsible for reviewing and documenting vendor performance? Does the contract specifically outline minimum and preferred performance standards? Can the department or institution measure the standards objectively? Does the contract describe each service to be performed in sufficient detail? Does the contract describe specific levels of performance the vendor must meet in performing the service? Are these performance measures tracked by the institution or by the vendor?

How is performance measured relative to payment? Does the contract include remedies in the event the vendor fails to perform the contract or fails to perform acceptably? What types of options does the institution have in remedying poor performance or terminating the contract? Is payment tied to performance? Are performance measures related to quality and quantity of activities performed by the vendor? Does the contract include specific periods in which the service must be performed? Is a vendor's performance on a prior contract with the institution recorded? If so, is the performance considered in awarding new contracts? Does the department or institution check vendor's standing with the state comptroller's office?

Contract costs
Are escalator clauses tied directly to changes in the market that affect the vendor's costs? Are increases in contract costs tied directly to rising labor or supply costs? Are terms of the contract favorable in comparison to market rates for services? Are cost controls part of the contract and are costs monitored for changes?

Contract renegotiation
Are there options to renew or renegotiate the contract as the period of performance ending? Are there options to renegotiate the contract in the event of changes in institution needs or market conditions?

&.G. "Yellow Pages" Test
Comptroller Rylander says that all goods and services should be put to the "Yellow Pages test." Government should do no job if there is a business in the Yellow Pages that can do that job better and at a lower cost. Whether an institution has decided to contract out the operation of some function in its entirety, contract for management services, or conduct all phases of the operation in-house, regular evaluation is necessary to ensure that the highest quality services are delivered at the lowest price. Simply put, when analyzing the operations of the various functional areas, regular cost/benefit analyses are needed to evaluate whether there are goods or services that can be obtained from the private sector at a lower cost, higher quality or both. The evaluation of current contracts to determine whether the institution could perform these functions better in-house is addressed in 7.F. Contracting Processes shown above.

Data Needs

  • In applying the "Yellow Pages" test to any operation, the following critical pieces of information should be examined in-house:
  • Cost of materials
  • Cost of labor including benefits
  • Cost of overhead including utilities, management oversight, facilities, maintenance and custodial services, and the like
  • Quality of service provided in-house as evidenced by the product produced
  • Quantity and type of service provided as evidenced by annual productivity reports
  • Availability of staff as evidenced by turnover rates, current or ongoing vacancies, and substitute needs
  • Training or certification requirements of staff
  • Customer satisfaction as evidenced by and user surveys
  • Organizational stability
  • Pertinent internal audit reports

Possible People to Interview

System administrator with assigned responsibility
Vice president for the area under review
Managers and supervisors for the area under review
Workers in the area under review
Users or customers
External vendors
Customers of vendors
Internal auditor

Activities to Perform

Before beginning to perform this evaluation, some preliminary work will need to be accomplished to determine if there are vendors capable of providing all or part of these services should the results of the analysis prove that contracting is a viable alternative. If there are no vendors available, STOP HERE.

7.G.1.Through interviews with board of regents or administration, users and staff compile a list of the critical success factors for the area under review. These success factors will vary by area, but should be the five to ten critical elements that must be met for this area to be deemed successful. Based upon quantifiable and supported documentation gathered from the Data Needs shown above and compare the current operations of the area or department to the critical success factors and note any area where performance falls short of success.
7.G.2.Obtain copies of budgets and staffing information for the area under review and determine, to the extent possible, the fully loaded cost for the services being provided in-house. Where possible reduce that cost to a per-unit-produced number. For example, in a print service that might end up being a cost per impression. In an alternative education program it may be the annual or daily cost per student served in the program.
7.G.3.Contact external vendors and provide them the data compiled in 7.G.1 and 7.G.2 above, and ask them for an informal, non-binding proposal for the cost of delivering similar services that addresses the following:
  • Cost of services
  • Types of services available
  • Ability of the vendor to handle emergency or change orders
  • Comparable quality of service
  • Contract oversight

Ask them to note any areas where they could not do what the institution is doing now, or where they could improve upon what the institution is doing. Compare the results to institution run operations and determine if contracting is a viable option.

Additional Questions to Ask

What internal conditions exist that are not necessarily financial in nature that might make it desirable for the institution to examine contract opportunities for the area of institution operations? What internal conditions exist that, despite the financial considerations, would make it difficult for the institution to consider contract opportunities for the area of institution operations?

What contracting opportunities are peer institutions using that are not being used by this institution? Are these arrangements working well in those institutions? What elements of the contracting arrangement are peers having difficulty with?

Has the institution attempted to contract for these specific services in the past? If so, what caused the institution to reverse the decision?

If a decision is reached that contracting is a viable option, how will the institution ensure that current employees are treated appropriately in the transition? What processes would be necessary to bring employee organizations into the decision-making process? What information will the board need to help them understand the issues and make a fact-based decision?

Steps in the Process

Step 1: Clearly define the component activity.
A clear definition of the component activity should include a description of its current budget and staffing, existing performance measurements, if they exist, the location of the function on the institution's organizational chart and a description of the product or service delivery standards that are currently demanded.

This step also should include the determination of specifications to be required of potential vendors, based on the expected levels of service needed to meet or exceed the institution's standards.

Step 2: Determine total in-house costs.
In determining in-house costs, the institution should use generally accepted accounting principles; maintain extensive documentation of all calculations and assumptions; include anticipated increases or decreases in future costs; include all costs, regardless of where they are located for budgeting or appropriation purposes; and include all costs whether or not the cost would be avoided if the service was outsourced.

In addition, an analytical framework for comparing costs can be enhanced by including a cost analysis of the past fiscal year and estimated (or budgeted, if available) costs for the next two years.

The following formula, which borrows heavily from the Council on Competitive Government cost methodology, illustrates the methodology to use for determining total in-house costs:

Total In-House Costs = Direct Costs + Department Indirect Costs + Institution Indirect Costs

Direct costs, as defined by the TCCG, include salaries and wages (including overtime pay), fringe benefits and allowances, supplies and materials, rent, telecommunications, utilities, equipment maintenance and repair and the depreciation of assets.

Indirect costs include appropriate percentages of costs for items such as institution central support activities, personnel and legal services, as well as equipment and TAFR services. In addition, any administrative services provided by the department that contains the component activity also should be considered, such as the percentage of costs for a department director with direct oversight of the staff performing the function.

Indirect costs can be allocated using one of several approaches, including the simplified method, a multiple base method, a single step-down method or a multiple step-down method. Again, the state's competitive cost methodology should be consulted for further direction on the appropriate approach to use.

Step 3: Request proposals for alternative providers of service.
After the determination of in-house costs, the institution should make additional determinations of factors such as its ability to step in quickly if a vendor fails to perform and reasonable yet substantive liquidated damages for such failures. At that point, the component activities to be put up for competitive bidding should be advertised to the general public and the community of vendors identified on the Ameritech web site. While the institution should create appropriate standards for the sake of fair evaluation, a reasonable amount of creativity should be allowed so that vendors can propose creative new methods for service delivery that meet or exceed current standards. In addition, existing employees should be allowed time and access to internal resources to prepare bids for alternate, more efficient and effective methods of delivering services.

Step 4: Determine total cost to contract.
The formula given in the TCCG methodology for determining the total cost to contract is:

Total Cost to Contract = Contractor Cost + Contract Administration Cost + One-Time Conversion Costs + Unavoidable Institution Costs + Loss on Assets - Gain on Assets

Contractor costs are, of course, the fees and expenses proposed by a qualified vendor to provide the service being considered. Administration costs are the expenses involved in negotiating, executing, monitoring and evaluating the contract, including personnel costs as well as facility and equipment charges, maintenance and other costs.

Unavoidable costs are those that will continue to be borne by the institution even if a particular component activity has been outsourced. An example might be the costs of a divisional supervisor who oversees a specific component activity. If that particular activity is outsourced, the services and therefore costs of the supervisor may still be required to continue other functions.

The gain or loss on assets, such as building space or equipment that is unnecessary after a successful outsourcing, also should be included in the final cost determination.

Step 5: Request Proposals from Vendors.
RFPs should be prepared for component activities offering significant potential for savings and/or service improvements. Both private and public potential vendors should be solicited. All competitive cost review information about the specific service should be made public. Vendors should be allowed a large degree of flexibility in providing creative solutions towards accomplishing the recognized performance standards for the particular service and asked to create performance measurements that can be developed into eventual contractual obligations should the service be outsourced.

Step 6: Determination of Savings.
Savings are the difference between total in-house costs, both direct and indirect, and the total cost to contract, which is determined if and when a qualified vendor is selected and the service is performed for at least one year.

Additional Resources:
National Association of Purchasing Management <http://www.napm.org/>
National Association of Educational Buyers http://www.naeb.org/ <http://www.naeb.org/>