cisb243 – lecture 12 pn. hidayah sulaiman. procurement means acquiring goods and/or services from...

Lecture 9:Project Procurement Management

CISB243 – Lecture 12Pn. Hidayah Sulaiman

Meaning of Procurement

Procurement means acquiring goods and/or services from an outside source

Other terms include purchasing and outsourcing

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Why Outsource?

To reduce both fixed and recurrent costs

To allow the client organization to focus on its core business

To access skills and technologies To provide flexibility To increase accountability

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Project Procurement Management Processes and Key Outputs

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Project Procurement Management Processes

Procurement planning: determining what to procure and when

Solicitation planning: documenting product requirements and identifying potential sources

Solicitation: obtaining quotations, bids, offers, or proposals as appropriate

Source selection: choosing from among potential vendors

Contract administration: managing the relationship with the vendor

Contract close-out: completion and settlement of the contract

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Procurement Planning

Procurement planning involves identifying which project needs can be best met by using products or services outside the organization. It includes deciding whether to procure how to procure what to procure how much to procure when to procure

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Procurement Planning Tools and Techniques

Make-or-buy analysis: determining whether a particular product or service should be made or performed inside the organization or purchased from someone else. Often involves financial analysis

Experts, both internal and external, can provide valuable inputs in procurement decisions

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Types of Contracts

Fixed-price or lump-sum: involve a fixed total price for a well-defined product or service

Cost-reimbursable: involve payment to the seller for direct and indirect costs

Time and material contracts: hybrid of both fixed-price and cost-reimbursable, often used by consultants

Unit price contracts: require the buyer to pay the seller a predetermined amount per unit of service

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Cost Reimbursable Contracts Cost plus incentive fee (CPIF):

the buyer pays the seller for allowable performance costs plus a predetermined fee and an incentive bonus

Cost plus fixed fee (CPFF): the buyer pays the seller for allowable

performance costs plus a fixed fee payment usually based on a percentage of estimated costs

Cost plus percentage of costs (CPPC): the buyer pays the seller for allowable

performance costs plus a predetermined percentage based on total costs

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Figure 12-2. Contract Types Versus Risk

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Statement of Work (SOW)

A statement of work is a description of the work required for the procurement

Many contracts, or mutually binding agreements, include SOWs

A good SOW gives bidders a better understanding of the buyer’s expectations

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Figure 12-3. Statement of Work (SOW) Template

I. Scope of Work: Describe the work to be done to detail. Specify the hardware and software involved and the exact nature of the work.

II. Location of Work: Describe where the work must be performed. Specify the location of hardware and software and where the people must perform the work

III. Period of Performance: Specify when the work is expected to start and end, working hours, number of hours that can be billed per week, where the work must be performed, and related schedule information.

IV. Deliverables Schedule: List specific deliverables, describe them in detail, and specify when they are due.

V. Applicable Standards: Specify any company or industry-specific standards that are relevant to performing the work.

VI. Acceptance Criteria: Describe how the buyer organization will determine if the work is acceptable.

VII. Special Requirements: Specify any special requirements such as hardware or software certifications, minimum degree or experience level of personnel, travel requirements, and so on.

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Solicitation Planning Solicitation planning involves

preparing several documents: Request for Proposals: used to solicit

proposals from prospective sellers Requests for Quotes: used to solicit

quotes for well-defined procurements Invitations for bid or negotiation and

initial contractor responses are also part of solicitation planning

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Outline for a Request for Proposal (RFP)I. Purpose of RFP

II. Organization’s Background

III. Basic Requirements

IV. Hardware and Software Environment

V. Description of RFP Process

VI. Statement of Work and Schedule Information

VII. Possible Appendices

A. Current System Overview

B. System Requirements

C. Volume and Size Data

D. Required Contents of Vendor’s Response to RFP

E. Sample Contract

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Solicitation

Solicitation involves obtaining proposals or bids from prospective sellers

Organizations can advertise to procure goods and services in several ways approaching the preferred vendor approaching several potential vendors advertising to anyone interested

A bidders’ conference can help clarify the buyer’s expectations

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Source Selection

Source selection involves evaluating bidders’ proposals choosing the best one negotiating the contract awarding the contract

It is helpful to prepare formal evaluation procedures for selecting vendors

Buyers often create a “short list”

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Sample Proposal Evaluation Sheet

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Detailed Criteria for Selecting Suppliers

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Be Careful in Selecting Suppliers and Writing Their Contracts

Many dot-com companies were created to meet potential market needs, but many went out of business, mainly due to poor business planning, lack of senior management operations experience, lack of leadership, and lack of visions.

Check the stability of suppliers Even well-known suppliers can impede

project success. Be sure to write and manage contracts well with all suppliers

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Contract Administration

Contract administration ensures that the seller’s performance meets contractual requirements

Contracts are legal relationships, so it is important that legal and contracting professionals be involved in writing and administering contracts

Many project managers ignore contractual issues, which can result in serious problems

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Suggestions on Change Control for Contracts

Changes to any part of the project need to be reviewed, approved, and documented by the same people in the same way that the original part of the plan was approved

Evaluation of any change should include an impact analysis. How will the change affect the scope, time, cost, and quality of the goods or services being provided?

Changes must be documented in writing. Project team members should also document all important meetings and telephone calls

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Contract Close-out Contract close-out includes

product verification to determine if all work was completed correctly and satisfactorily

administrative activities to update records to reflect final results

archiving information for future use Procurement audits identify lessons

learned in the procurement process

Procurement Process

PlanningTender Notice

Receipt of bids

Tech bidEvaluation

Fin. bidEvaluation

AwardReceipt of GoodsPayment

What is E-Procurement?

SuppliersBuyer

Web Based

Application

Software

E-Procurement is the value-added application of Internet and e-commerce solutions to facilitate, integrate and streamline the entire procurement process, from buyer to supplier and back.

Supports Online Reverse AuctionSupports Online Reverse Auction

Core ObjectivesOf e-procurementCore Objectives

Of e-procurement

Real Time MonitoringReal Time Monitoring

Process Efficiency Process Efficiency

New supplier discovery

New supplier discovery

Cost Reduction

Cost Reduction

Paper less environmentPaper less

environment

Transparency

Transparency

Benefits of e-Procurement

StreamliningProcurementprocesses

Benefits of e-Procurement Strategic Benefits

Align Procurement strategy with procurement Goals

Strengthen Alliances for product innovation combining complementary capabilities in

discovery and development stage. Exchanging key suppliers with market

information

Reduces Risks Diversify risk with key suppliers for product

failure.

Reduces Spending and Time 90% Conversion of spot purchasing into

contract purchasing

Cost Benefits

Cost reduction by 10% * e-Tender, e-Auction and e-Contract

Management Avoid grouping of Bidders Avoid Mafia User friendly and paperless procurement

process

Savings in processing time by 30% - 40% * From e-Indent to decision making

Supplier Selection

Best Practice Benefits Challenges E-procurement Solution Feature

Able to generate prospective list

of suppliers from existing

database

Drastically cut time

and logistics bills

Lack of data aggregation,

Cleansing and analytical

capabilities

Category Management,

Search Capabilities and friendly user

interface

Accurate evaluation of suppliers based on

multiple factors with attached

documents

Cuts time and cost in

evaluation and reduce

bias in supplier selection

Difficulty in defining and integrating quantitative and

qualitative parameters

Portals for better internal

collaboration, integration tools and analytics to

evaluate bid options

Contract Management

Best Practice Benefits Challenges E-procurement Solution Feature

Clear definition of roles of people,

process and standards

Brings Accountability, Sets Standards reduces

maverick spending, cuts overheads

Resistance to change Change Management Contract Compliance

tools

Standards and targets for contract set

Improves performance Lack of Analytics to measure performance

Contract evaluation

Strong external compliance

To ensure reliability and compliance of

appropriate contract terms

Inability to real time tracking and

communication with suppliers

Portals for real time communication.

Automatic triggering of events

Strong internal compliance

Reduce Maverick spending Lack of purchase standards and manual errors

Automation of events to eliminate manual

errors.

Procurement Process

Best Practice Benefits Challenges E-procurement Solution Feature

Automation of possible

Procurement activities:

From Purchase requisition to

payment.

Dramatically cuts time and cost and increases

reliability

Lack of coordination of departments and segregated data and documents and Supplier

Behavior

Portals both for internal as well as

external communication

Integration of

applications

E-Procurement – Global Phenomena

E-Procurement is not a local phenomena but a global one, Enabled global sourcing of goods and services Reduction of Costs Breaking Trade Barriers Reduction in Agents

Benchmark Report –04 by Aberdeen Group indicates the following Reduced requisition-to-order cycles by 66% Cost Reduction : up to 25% or more

E-Procurement – Europe

Adoption from year 2000 E-procurement accounts

for 33% of E-business activities.

UK is the most prominent player in Europe.

Followed by Nordics, Switzerland, the Netherlands.

Germany and France less dominating role in B2B ecommerce,

E-Procurement Trends (Europe)

0

200

400

600

800

1000

1200

1400

1600

1800

1999 2000 2001 2002 2003 2004 2005

Year

Vol

ume

eDistribution eMarketPlaces eProcurement

E-Procurement Trends (Europe)

0

200

400

600

800

1000

1200

1400

1600

1800

1999 2000 2001 2002 2003 2004 2005

Year

Vol

ume

eDistribution eMarketPlaces eProcurement

E-Procurement – Asia

e-Sourcing's Potential Impact on National GDP

$151,000

$89,700

$74,859

$92,700

$122,130

$96,417

$79,202

$159,438

$128,494

$99,142

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

Indonesia Malaysia Philippines Singapore Thailand

GDP Before e-Sourcing GDP After e-Sourcing

in $US M illions

e-Sourcing's Potential Impact on National GDP

$151,000

$89,700

$74,859

$92,700

$122,130

$96,417

$79,202

$159,438

$128,494

$99,142

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

Indonesia Malaysia Philippines Singapore Thailand

GDP Before e-Sourcing GDP After e-Sourcing

in $US M illions Adoption from year 2002 E-procurement mostly in

private businesses. South Asians countries

(S’pore,Malaysia,Thailand) topmost users.

Followed by Japan & Korea. India – Increasing rapidly China – Its growing

Lumen AG

Company commercial lighting repair company 8 locations in Europe,

Problem streamline its purchasing process for both repair parts and ordinary office supplies and

materials. Wait Time > 1 week Central purchasing group spent time chasing paper No focus on locating new suppliers and securing better prices and terms.

Lumen AG Solution

An Internet-based e-procurement system Empowering staff Distributed Delivery Central purchasing group was relieved of overseeing

transactions below a set threshold. Direct real-time link to suppliers Increased flexibility Purchasing authority for dispersed employees, Simplified buying processes

FORD

Company Auto manufacturer Locations Worldwide

Problem High Purchase costs Lot of procedures & processes Tedious approval process

Solution – E-Procurement System New purchasing process, Empowerment of Employee to place orders online. Purchase approval in minutes Cost Cutting by 30%.

Labinal

Company an automotive and aeronautics group

Problem High Purchase costs Lot of procedures & processes Indirect purchases

Solution – E-Procurement System Web Based Tool, More efficient than manual process 25% reduction in non-production procurement cost Halved unit acquisition costs.

Compranet

Company A Mexican Government Initiative

Problem No consistent controls on purchases procurement processes were costly plagued by corruption; acquisitions were overpriced; suppliers were concentrated in the Mexico City area.

Solution – E-Procurement System Web-based on-line procurement system Variety of hardware and software. government suppliers can submit their proposals via the Web

site. Increased transparency

GlaxoSmithKline

Company Research-based pharmaceutical company 80 manufacturing sites in 37 countries 24 research and development centers globally. Annual revenues total $37.2 billion

Problem GSK relied on paper catalog and phone communication Waste valuable time scientists Archaic buying process

No benefit of negotiated deals with suppliers.

GlaxoSmithKline

Solution Solution contract compliance improved > 20% supplier content directly allowed GSK saving more than $500,000 a year. streamlined GSK’s procurement process Manual purchase orders have been eliminated,

Rolls-Royce

Company Leading producer of power systems Operates in 4 global markets civil aerospace, defense

aerospace, marine, and energy.

Problem Large quantity of non-value-added products Poor Visibility into annual spending on low value goods &

services No Consolidation based on Suppliers Humongous paperwork Manual Key Entries of records leading to inefficiencies

Rolls-Royce

Solution web-based catalog-ordering system Direct purchasing No pre-approvals No involvement of purchase department for non vale

added goods Supplier base rationalized (5000 reduced to 10) Development of strategic partnerships with suppliers Reduction in inventory stock value levels

E-Procurement - Challenges

Commitment of Top Management Change Management Issues Inability to Capture Required Benefits Cost & Time Overrun Computerized Auditing

E-Procurement - Risks

Confidentiality Proving to buyers that the personal information will

remain confidential

Integrity Proving to buyers that the sellers are who they say they

are

Authentication & Non-Repudiation Seller will not be able to refute the occurrence of a valid

transaction

Availability – 24 x 7

Enablers : Design Factors

• Technology• Security Mechanism• Procurement process knowledge

base• Integration with other Systems

(Payment Gateways, Supplier’s systems, MRP’s etc)

• Audit Trail Mechanisms• Notification Mechanisms

E-Procurement - Trends & Future

Finding Suppliers - Reverse auctions

Managing Suppliers - Supplier relationship management (SRM)

Inventory tracking (e.g. RFID..) integrated with procurement through software applications.

Conclusion

E-procurement system must be an integral part of any company’s

supply chain and corporate strategy to enable it to sustain its

competitive advantage.