HEPTech and ESS Innovation Procurement Workshop

LundProcurement at CERN and innovative

procurement:

The CERN experience

7 May 2013

Dante Gregorio

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Definition of Supplies and Services Procurement expenditure Legal framework and procurement rules and procedures LHC procurement summarised Prototyping and procurement contract strategies LHC - Some examples Conclusions and lessons learned

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Supplies and ServicesSupply contracts: Contracts for supplies of equipment including R&D contracts, electricity, telecommunications and insurance contracts as well as maintenance and leasing contracts covering data processing, printing and telecommunication equipment.

Country of origin: The country(ies) where the supplies (including their components and sub-assemblies) are manufactured or undergo the last major transformation by the contactor or his sub-contractor.

Service contracts: Contracts for the provision of services to be executed on the CERN domain.

Country of origin: The country in which the bidder is established.

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Procurement Expenditures 2000-2012

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What do we buy ? Supplies for 352 MCHF (2012)

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Civil engineeringBuildings, roadworks, UtilitiesCooling & ventilationPower distribution, cablesInfrastructure & servicesMetal structuresMechanical engineeringRadiation shieldingTransport & handlingSafety & access controlInstallation, operation & maintenanceData acquisition, computing & networkingVarious supplies

Furniture, tooling, gases, stationary, etc..

What do we buy?Recurrent supplies and services

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Industrial controls & field busesTiming & “fast” real-time controlsBeam collimationBeam injection, ejection & dumpRadio-frequencyPower convertersBeam instrumentation & diagnosticsSuperconducting, permanent and electromagnetsCryogenicsVacuum and UH Vacuum

What do we buy?Accelerator technologies required for

consolidation projects and new developments

New Projects• LHC Injectors Upgrade (LIU)• Accelerators Consolidation

(CONS)• High Luminosity LHC (HL-

LHC)• Linear Collider Studies (LC)

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Legal framework• CERN, an Intergovernmental Organization, was established

in July 1953, by the “Convention for the establishment of a European Organization for Nuclear Research”.

• As an Intergovernmental Organization, CERN is not a legal entity under national law but governed by public international law.

• CERN benefits from immunity from national jurisdiction and execution. Thus, legal disputes between CERN and its suppliers and contractors are not submitted to national courts but solved via international arbitration.

• CERN is thus entitled to establish its own internal rules necessary for its proper functioning, such as the rules under which it purchases equipment and services.

• CERN, an Intergovernmental Organization, was established in July 1953, by the “Convention for the establishment of a European Organization for Nuclear Research”.

• As an Intergovernmental Organization, CERN is not a legal entity under national law but governed by public international law.

• CERN benefits from immunity from national jurisdiction and execution. Thus, legal disputes between CERN and its suppliers and contractors are not submitted to national courts but solved via international arbitration.

• CERN is thus entitled to establish its own internal rules necessary for its proper functioning, such as the rules under which it purchases equipment and services.

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• CERN procures supplies and services and awards orders and contracts in compliance with the principles of transparency and impartiality;

• CERN’s tendering procedures are selective and do not take the form of open invitations to tender. They shall, in principle, be limited to firms established in the Member States;

• Invitation to tender and price enquiry documents shall be drafted in an objective way so as to guarantee fair competition.

• CERN procures supplies and services and awards orders and contracts in compliance with the principles of transparency and impartiality.

• CERN’s tendering procedures are selective and do not take the form of open invitations to tender. They shall, in principle, be limited to firms established in the Member States.

• Invitation to tender and price enquiry documents shall be drafted in

Procurement Principles

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• ensure that bids fulfill all the necessary technical, financial and delivery requirements;

• keep overall costs for CERN as low as possible;

• achieve well balanced industrial return coefficients for all the Member States.

Procurement rules

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Procedures for obtaining offers

• Requirements not exceeding 10’000 CHF; Users may issue enquiries directly provided CERN procurement

rules are followed (i.e at least three suppliers contacted);• Purchases between 10’000 CHF and 200’000 CHF

Price Enquiries issued by Procurement Service;• Purchases exceeding 200’000 CHF

Market Surveys & Calls for Tenders issued by Procurement Service.

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Requirements from 10k to 200k CHFPrice enquiries:• Deadline for bidders to submit bid is at least 4 weeks from mailing

date; • Number of firms to contact should be at least three and as a general

guideline should not exceed five; • Market survey is not needed;• Price enquiries are not published

Adjudication < 200 000 CHF• Lowest offer - Free Carrier (FCA) price which complies with the

technical, financial and delivery requirements.

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Requirements exceeding 200k CHF

Market Surveys followed by Invitations to Tender:

• Announcement in the document “Forthcoming Market Surveys and Calls for Tenders” available on-line.

• Market Survey: used to select the firms to be invited for tender;

• Issue of invitation to tender.

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Market surveys -1Purpose:• Pass information to industry on future requirements;

• Allow delegates, ILOs to propose potential bidders;

• Update and improve CERN’s supplier database;

• Encourage firms to seek early exchange of technical information with CERN and vice-versa;

• Allow CERN to draw up a final list of qualified bidders;

• Allow CERN to draw up a final Technical specification for the Invitation to Tender.

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Market surveys -2

Documents (in English) include:• cover letter (including on which basis the Invitation to Tender will be

adjudicated);• brief technical description (1-2 pages);• qualification criteria (financial and technical);• qualifying questionnaire

Suppliers have a minimum of 4 weeks to reply.A market survey is valid up to 12 months from the date of issue (or up to 18 months for prototypes).

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Final selection of firmsOnly firms which have fulfilled the qualification criteria of the market survey concerned shall be considered.

As a general guideline, the final list of firms to be invited to tender shall not exceed:

- 10 firms for contracts between 200 000 and 750 000 CHF;- 15 firms for contracts exceeding 750 000 CHF.

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Invitations to tenderContains (in English) :• Cover letter - including enclosures; • Technical specification - including technical annexes and technical

drawings;• Tender form.

• Deadline for bidders to submit a bid is at least 4 weeks from mailing date (with a longer period for more complex requirements).

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Adjudication > 200k CHFContracts to be awarded on the basis of one of the following:

Supply contracts:

Lowest compliant bid: i.e. to the firm whose bid complies with the technical, financial and delivery requirements and is the lowest, subject to the rules aimed at achieving well balanced industrial return coefficients for the Member States;

Service contracts:

Best Value for Money (BVFM): to the firm whose bid is the most economically advantageous.

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Intellectual PropertyAny supplies and services provided shall include a license to all intellectual property necessary for the free and unlimited use of such supplies and services, including for their repair, modification and replacement by CERN or by any third party designated by CERN, within the scope of CERN’s activities.    Any intellectual property generated in the performance of the contract shall be vested exclusively in CERN.

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The total LHC procurement summarised• 1’170 price enquiries and invitations to tender

(> 50’000 CHF each);

• 115’700 purchase orders (for amounts up to 750 kCHF each) and 1’040 contracts of various types and amounts;

• 6’364 different suppliers and contractors (sub-contractors not included).

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Amounts in MCHF

MaterialLHC machine & experimental areas,Incl. R&D, injectors, tests and pre-operation

3’755

Contribution of external institutes to LHC detectors

1’970

CERN contribution to LHC detectors, incl. R&D, Tests and pre-operation

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CERN contribution to LHC computing 82

Total costs 6’300

Total LHC procurement

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CERN conducts direct procurement based on CERN’s intrinsic needs deriving from curiosity driven research.

CERN’s requirements can be sub-divided into three categories:

1) Standard industrial products (off-the-shelf);

2) Non-standard products which can be produced with existing manufacturing techniques and/or technologies, but industry

has no experience of manufacturing the products;

3) New high-tech products requiring a conceptual design phase. The manufacturing methodology has to be developed.

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Each category of products requires a different procurement strategy. The level of investment by CERN, the risk and risk-sharing, the responsibilities, the commercial strategy, as well as the expected benefits and spin-offs are entirely different in each case.

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• key technologies and production methods did not yet exist at the start of the project;

• spending had to take national interests into account and ensure a fair industrial return to the Member States;

• the procurement service had to navigate through risks of lowest-bidder economics and needed to identify ways of balancing innovation and creativity with strict procurement and quality control procedures;

• a tight budget and project schedule required that the impact due to long lead times of essential components and tooling, business failures, cost overruns, disputes, etc. had to be minimized.

LHC Procurement challenges

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LHC Prototyping and procurement contract strategies - some examples:

Dipole magnets (2*)

Cryogenics (2*)

* Non-standard products which can be produced with existing manufacturing techniques and/or technologies, but industry

has no experience of manufacturing the products.

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Dipole magnets

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Total value of all dipole magnets >1’300 million CHF

The dipole magnets were designed and developed at CERN, although several firms were involved in early prototyping work throughout the development process. The purpose was to get industry involved as early as possible in the manufacturing techniques.

It was decided at an early stage that the main components and tooling required for the assembly of the dipole cold masses would be purchased by CERN and delivered to the cold mass assemblers, e.g. presses, superconducting cable, steel, etc.

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Although several firms had been involved and interested in the early development phase, at the time of tendering for the dipole cold masses, only three bidders remained committed to the project and had the necessary expertise and experience from prototype manufacturing.

However, the production of single units had taken >1 year during the prototyping phase; for the series production, the assemblers would each have to produce 3-4 units per week!

This manufacturing time factor could lead to budget overruns; Significant risks perceived by the bidders to quote for the assembly of the cold masses could lead to significant risk margins in their tender prices.

The fact that probably all three bidders would be needed for the production of the series only aggravated the problem of potentially high prices, since the competition would be reduced.

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An invitation to tender was made for the assembly of 90 dipole cold masses. A contract was negotiated with firm prices with all three assemblers for the assembly of 30 dipole cold masses each, allowing the assemblers to approach the foot of the learning curve and be in a position to make a reliable estimate of the assembly costs. At the same time, the number was sufficiently low (90 out of 1250) as to reduce the perceived risk for the assemblers, should they have underestimated the costs for assembly.

Towards the end of that production, CERN issued a new invitation to tender for the production of the remaining dipole cold masses, requesting the three assemblers to quote firm prices (subject to revision using a price revision formula).

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The initially quoted prices were again higher than the budget for the LHC allowed, but after numerous rounds of lengthy negotiations with all three assemblers, during which CERN succeeded in convincing the assemblers that they had overestimated the time required for several assembly operations, all three assemblers agreed to prices for the assembly of cold masses that were compatible with the LHC budget.

A contract was subsequently placed with each of the three assemblers for a third of the remaining quantities required for the LHC.

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In the end, the strategy of CERN proved to be sound. The assembly of the dipole cold masses, with their tooling, materials and components provided by CERN, was considered to be the most challenging aspect of the LHC project.

CERN’s contractual strategy worked on all levels – technical, financial, contractual and logistical – and neither delayed the LHC project, nor resulted in significant cost overruns.

Conclusion

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CryogenicsThe superconducting magnets operate in superfluid helium at a temperature of 1.9K and require cryogenic installations on an unprecedented scale, to be constructed around the whole circumference of the LHC machine.

To distribute the cryogenic refrigeration power, helium is transported over long distances and distributed via a 27 km long cryogenic distribution line (referred to as the QRL).

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QRL

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Total value of QRL > 130 million CHF.

Since there were several firms in the CERN Member States competent in design, production and installation of cryogenic transfer lines, CERN did not design the QRL itself.

However, it was clear that, asking bidders to quote competitive prices for the complete QRL before any design or prototyping work, would result in prices that would include significant risk margins.

It was necessary to reduce the perceived risk and keep the production on time and on cost.

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Stage 1 (Qualifying pre-series test cell) – Based on a functional specification, bidders were invited to submit bids for the QRL design, manufacturing, installation, and commissioning of a 110-m-long pre-series test cell, and also to quote net ceiling prices for the final QRL.

The adjudication of the pre-series contracts was based on the sum of the price of the pre-series test cell and that of half the price for all eight sectors (with the idea of working with at least two suppliers).

As a result, CERN placed contracts with three contractors, each for the design, manufacturing, installation at CERN and commissioning of a 110-m-long pre-series test cell.

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Stage 2 (Series QRL) - After delivery and successful testing of the pre-series test cells, the suppliers were invited to re-tender for the series QRL, with the stipulation that tenders must not exceed the net ceiling prices quoted for the series QRL in the first tendering round (Stage 1).

Initially, it was CERN’s intention to split the total requirement between two suppliers, with a part of the eight sectors from each, thus following a dual-sourcing policy.

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To CERN’s surprise, one of the bidders, who successfully passed the pre-series test, quoted a very advantageous price for the entire set.

CERN thus decided not to split the supply, but to place a contract for the complete QRL with this firm only.

The contract was based on fixed prices per sector of QRL (the eight sectors were not identical) and included a price revision formula.

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Work began quickly, but soon a number of problems came to light:

the delivery of non-conforming components by a sub-contractor; a change in sub-contractor for the installation of the QRL in the

LHC tunnel, who subsequently became insolvent; and corrosion caused by the flux employed for brazing operations.

This situation delayed work enough to have a knock-on effect on the rest of the LHC project schedule. E.g. magnet installation in the tunnel could not start before the QRL had been installed and tested in the sectors concerned.

QRL - Problems

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CERN was forced to take decisive action in order to gain lost time in the production and installation of the QRL.

Firstly, CERN agreed to pay the contractor certain costs related to the speeding up of component production and for additional tooling and additional supervisory manpower required for accelerated installation.

Secondly, CERN agreed to assume a number of tasks that had initially been assigned to the contractor, thus “freeing” the contractor to focus on its critical work.

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As a result of these exceptional efforts, the installation accelerated considerably and, despite the short installation time of the final sectors, the quality of these sectors was high.

The implemented changes resulted in lengthy discussions and negotiations between the parties as regards extra costs incurred by both parties but an overall settlement was reached which was still cheaper than splitting the contract between two suppliers.

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The few examples detailed in this chapter show the innovative style of interacting with suppliers and contractors that allowed the LHC to be built only very slightly over budget.

Finally, CERN’s procurement strategies were all based on the fact the technical expertise and competence existed in-house in all relevant fields; cryogenics, superconductivity, ultra-high-vacuum applications, electronics, computing , civil engineering etc.

Conclusions

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1. Different contracts require different tendering and contracting strategies. In the examples there are two distinct approaches:

a) the dipole cold masses were developed at CERN and the contracts based on build-to-print drawings. CERN even supplied the main tooling and all major components for the assembly, and

b) the QRL contract was based on a functional performance specification where the design and development was performed by the supplier.

Lessons learned

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2. Flexibility and innovation in the procurement process is of utmost importance. If a strategy does not work as planned because of unforeseeable conditions, you have to be prepared to change strategy.

3. Carefully evaluate the benefits versus costs related to dual sourcing.

4. Be aware of possible “grab and run” attitude by suppliers.

5. No change, no pain.

6. Ensure competition throughout the entire bidding process.

7. Follow-up contracts carefully.

Lessons learned

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