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