Lecture 9: Project Procurement Management

1. CISB243 – Lecture 12 Pn. Hidayah Sulaiman Lecture 9:Project Procurement Management

2. Meaning of Procurement • Procurement means acquiring goods and/or services from an outside source • Other terms include purchasing and outsourcing

3. 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 IT Project Management, Third Edition Chapter 12

4. Project Procurement Management Processes and Key Outputs IT Project Management, Third Edition Chapter 12

5. 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 IT Project Management, Third Edition Chapter 12

6. 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 IT Project Management, Third Edition Chapter 12

7. 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 IT Project Management, Third Edition Chapter 12

8. 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 IT Project Management, Third Edition Chapter 12

9. 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 IT Project Management, Third Edition Chapter 12

10. Figure 12-2. Contract Types Versus Risk IT Project Management, Third Edition Chapter 12

11. 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 IT Project Management, Third Edition Chapter 12

12. Figure 12-3. Statement of Work (SOW) Template IT Project Management, Third Edition Chapter 12

13. 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 IT Project Management, Third Edition Chapter 12

14. Outline for a Request for Proposal (RFP) IT Project Management, Third Edition Chapter 12

15. 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 IT Project Management, Third Edition Chapter 12

16. 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” IT Project Management, Third Edition Chapter 12

17. Sample Proposal Evaluation Sheet IT Project Management, Third Edition Chapter 12

18. Detailed Criteria for Selecting Suppliers IT Project Management, Third Edition Chapter 12

19. 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 IT Project Management, Third Edition Chapter 12

20. 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 IT Project Management, Third Edition Chapter 12

21. 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 IT Project Management, Third Edition Chapter 12

22. 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 IT Project Management, Third Edition Chapter 12

23. E-Procurement Issues & Perspectives

24. Tech bid Evaluation Planning Receipt of bids Tender Notice Fin. bid Evaluation Award Receipt of Goods Payment Procurement Process

25. Web Based Application Software Buyer Suppliers What is E-Procurement? 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.

26. BENEFITS

27. Cost Reduction Transparency Process Efficiency Core Objectives Of e-procurement Paper less environment Supports Online Reverse Auction New supplier discovery Real Time Monitoring Benefits of e-Procurement Streamlining Procurement processes

28. 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

29. 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

30. Best Practice Approach

31. Supplier Selection

32. Contract Management

33. Procurement Process

34. GLOBAL PERSPECTIVE

35. 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

36. 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,

37. E-Procurement – Asia • 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

38. 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.

39. 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

40. 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%.

41. 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.

42. 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

43. 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.

44. 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,

45. 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

46. 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

47. E-Procurement - Challenges • Commitment of Top Management • Change Management Issues • Inability to Capture Required Benefits • Cost & Time Overrun • Computerized Auditing

48. 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

49. 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

50. 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.