Procurement Management (Lim Keng Liang TP028092) Issues covered in Procurement Management
#9 No proper tendering process even though acquisition and spending went through
PROC manager #10 No proper tendering process for purchasing of IT assets, leading to budget overrun #16 No monitoring reports to review as none were properly documented #18 Hardware and software delivery were still being negotiated with potential vendors
while there are only four months left to complete the project 1.1 Introduction Project procurement management, defined by PMBOK is “the process necessary to purchase or acquire the products, services or results needed from outside the project team” (Carr, 2011). There are four main process groups in project procurement management, which will be mentioned below. The processes are: i.
Plan Procurements (Planning): the first major process, which involves the creation of the procurement plan for a project. The project manager is pivotal here as to making decisions, such as which items are to be outsourced and which are to be self-made by the project team. Procurement documents are preempted in this phase, in which a selection of vendors are chosen. Documents include risk register, scope baseline and
ii.
project schedules. Conducting Procurements (Executing): the second process in procurement management. In this phase, vendors are shortlisted and given a procurement contract. There are many types of tools and techniques used for conducting procurements, such as a bidder’s conference, a make-or-buy-analysis and expert judgement to obtain the best vendor for the project outsourcing. One vendor will be chosen and a contract will
iii.
be awarded. Administering Procurement (Monitor and Control): the third process in procurement management. This is the phase where the project team has to manage relationships with the chosen vendor, ensure seller performance meets the procurement requirements, corrective actions and controlling the changes if any exists within the procurement stage.
iv.
Closing Procurements (Closing): the final process in procurement management. In this phase, processes are needed to end procurement contracts are administrated. All planned work as per contract is verified and completed, with information archived for future needs.
1.2 Procurement Planning In procurement planning, the project team should identify which part of the project’s needs can best be fulfilled by using a third party product or service. This is called as outsourcing. Outsourcing can be evaluated by how a procurement could be done, how much money needs to be spent and also the time that needs to be allocated to perform the procurement. A make-or-buy analysis can be done in this stage. A make-or-buy analysis is a technique used to determine whether a product or service should suitably be bought externally or to be done internally by the project team. There are many elements to be taken into consideration during this analysis, such as in the table shown below. MAKE -May cost less -Easily integrated into project operations -Project manager has direct control over work -Maintain organizational talents and able to
BUY -Usually costs more, less in rarest of cases -Depends on skill level of supplier -Indirect control -Project management able to spend time on
protect company personnel from layoff -Able to avoid unreliable suppliers
primary business -Less time consumed as no extra work for related departments
1.3 Tools and Techniques (Planning) Once determined, a contract is created and sent to the vendor’s office to help set up the procurement’s next phase. The contract that is awarded here is a fixed price/lump sum contract,
because it matches the requirements of the project. Furthermore, an example spreadsheet for prices can be obtained from China or Thailand, who have their services already up and running. Thus, an estimation of costs and necessary equipment can be easily obtained. The project manager and his procurement team will identify all items that are required for the project to commence. The list of items are then compiled and reviewed by the Project Management Office (PMO). Below is an example of items that are required for GSCMP.
Number 1 2 3 4
Category Hardware
7 8
Specifications
(Firewalls) Telecommunication
5 6
Product Servers Backup Servers Internet Routers Security Measures
Software
Wires Supply Chain System Database Helpdesk System
The project management team will have to work cohesively with the procurement management department in order to obtain said products. The procurement department will then request for a Request for Proposal (RFP) or a Request for Quote (RFQ). In this situation, a Request for Quote should be more appropriate, as a spreadsheet of the equipment needed can be obtained from China or Thailand, complete with pricing for all the items defined by the project team. This tool can be used to solve problem #9 and #10. A sample RFQ is shown below.
Dear [COMPANY NAME] We are pleased to inform you that we are interested in purchasing
[DESCRIBE PRODUCTS/SERVICES HERE, INCLUDE ALL DETAILS]
We would like you to quote your price for supplying products as aforementioned together with a possible discount of said products are bought in larger volumes. Please also indicate in the quotation:
a) Whether quotes are inclusive or exclusive from sales taxes b) An estimated delivery time for products, a shorter timeframe will be key to any purchases made c) Any extra costs such as delivery costs (if any) d) Any technical support provided, together with duration e) Type of payment preferred
Yours Truly,
_____________________ Lim Keng Liang Procurement Manager 016-9286362
In the Request for Quotation shown above, a company name (let’s say Company A) is selected for the procurement process. The quotation is then generated as of the above and sent either via email or presented formally face-to-face. Depending on the items required from the supplier, all of items that are required from them are to be stated down in the quotation, including all details and versions of the items. This is because there might be different variations of a single item, such as hardware for a computer, which can vary depending on brand, model and performance. All items quoted should also be cross-checked by the supplier, with the possibility of the supplier offering a better product or package to the buyer. As pricing is extremely important with a given budget, the supplier should also note that any other offers that may be recommended by the supplier should be no higher than said budget, as suggested by the spreadsheets obtained from China and Thailand. Lastly, the quotation should also include details such as tax-inclusive products or not, delivery times and duration and the possibility of technical support as an aftersales service.
1.4 Conducting Procurements (Execution) In the second phase of procurement management, the project team will have to collect responses from the shortlisted suppliers, evaluate them and then select a suitable one that is deemed fit to outsource for the equipment for the company. Quotations are to be received from multiple suppliers at this stage, all of them to be evaluated using the project’s evaluation criteria as a baseline. Once the suppliers have been shortlisted again, the project team will invite the suppliers for a bidder’s conference. 1.5 Tools and Techniques (Execution) A bidder’s conference is a meeting held by a buyer and his/her potential suppliers. The suppliers are informed beforehand about the bidder’s conference, thus are expected to present their products and services to the buyer, in a form of a proposal, regarding their advantages or any other perks if the buyer is to select them as their supplier. Before the proposal is submitted by the supplier, it is of utmost importance that the supplier understands the needs and wants of the buyer. A bidder’s conference is suitable for this project as any enquiries can be answered immediately by the suppliers present at the conference, with the added advantage of clarity on contract agreements and price or quality comparison. After careful evaluation of proposals or bids from the sellers, the project management team will select the best seller to initiation a negotiation of said contract. Elements such as pricing, after sales services and more will be discussed here. Once both parties have reached an agreement, the project management team will award the supplier with a contract. This is known as contract signing, which means both parties are bound together by the laws of the contract. Different types of contracts are awarded over different types of functionalities of the project. In example, for software purchasing, a fixed price contract would be suitable as the software is a one-off copy. It also has the least risk and its risk is easily transferrable back to the vendor. For employee training, a cost plus incentive fee (CPIF) contract can be negotiated, as the timeframe left for the project is only 4 months. In this case, whichever vendor that can complete the training program in the shortest amount of time can be awarded with an incentive bonus, as time is an extremely important factor to be taken into consideration for the project.
Supplier Evaluation Matrix A Supplier Evaluation Matrix can be created for evaluating which supplier is more suitable for GSCMP. The project team should be able to create one, filled with important criteria that can be used to filter out the better suppliers from the less outstanding ones. The supplier which matches all the given criteria and has the highest score will be chosen for negotiations. An example of a Supplier Evaluation Matrix is shown below:
Criteria
Weightage Vendor A
Vendor B
Vendor C
Satisfying project’s
(%) 20%
18
15
20
needs Price Ability to meet
20% 10%
17 10
15 8
10 5
levels Product quality Delivery services on
20% 10%
19 9
19 8
20 6
time Abiding to quality
20%
20
18
18
customer service
program guidelines By calculating the total scores of each vendor from the Supplier Evaluation Matrix, a buyer can determine which vendor is more suitable and is able to cater to his or her needs for the procurement process. The total weightages for all vendors are 93(A), 83(B), and 79 (C) respectively. Based on the weightages stated above, there are a few conclusions that can be drawn. First, Vendor A and C understands the requirements of the project to a higher extent compared to Vendor B. Vendor C has the highest understanding, thus the price of Vendor C is also higher, suggesting that Vendor C might be a company that caters to other high-end companies. It also reflects on the product quality, which shows that Vendor C has the highest product quality among the three vendors. Due to Vendor C being a larger company, it may have other delivery services, thus the lower points in delivery services time. This is an important
factor as time isn’t a luxury that the current project procurement team have. Thus, the suggested vendor that can be chosen is Vendor A, since it has a higher total weightage and most importantly has better after sales services and delivery time compared to the other two vendors.
One of the inputs of project procurement is a Statement of Work Contract, which highlights the scope of work for the supplier so that they know what they have to come up with and also the accompanying details, such as work requirements, location and duration of work and so on. Below is an example of a Statement of Work Contract.
Statement of Work Contract Introduction: The goal of the project is to help GSCMP increase efficiency by managing a supply chain management across its branches. A software is required in order to help accomplish this, accompanied with tools that can help boost performance Scope of Work: The scope of work for GSCMP includes item management, warehouse management, data storage and supplier management, all of the above which are updated constantly. Location of Work: Location of work is to be at GITS main office, where GSCMP will deliver the products to them. Period of Performance: The time period allocated for project is 6 months. Work Requirements: The supplier is expected to complete delivery of items or services within the time limit as promised in the proposal. The supplier will be expected to come out with their proposal during
the bidder’s conference and only the best supplier will be chosen. Software is also expected to be delivered by the supplier within the time limit. Suppliers are also expected to provide and complete training for staff for the new software within the time frame. Acceptance Criteria: The project team will monitor performance of hardware and software purchased from the supplier. If there are any changes or dissatisfactions, buyer can renegotiate terms with the seller. Other requirement : All hardware and software should be acquired legally. A certificate for products purchased must be present, proving that the product is genuine and warranted by the product’s manufacturer Approval Approved by ________________________ (Name) (Position) (Date)
Company Name Contract/Service Agreement Date Title of Work: This is an Agreement made as of __________ by _______________________________ (the “Seller”), and __________________________________ (the “Buyer”).
THE SELLER AND THE BUYER AGREE THAT: 1. The Work: The Seller will create the Work as set forth in Exhibit A hereto. The Buyer will provide the Seller with the format and specifications in which each element of the Work is to be submitted. The Seller agrees to conform to such format and specifications.
2. Delivery of the Work: The Seller agrees to deliver to the Buyer the Work in form and content acceptable to the Buyer on or before the dates outlined in Exhibit B of this Agreement, time being of the essence to the Buyer.
3. Right to Terminate: If the Seller materially departs from the agreed-upon schedule or if the Work is not satisfactory to the Buyer (based on reviews of drafts, market conditions, and/or other criteria as determined by the Buyer), the Buyer may at its option: A. Allow the Seller to finish, correct, or improve the Work by a date specified by the Buyer; B. Terminate this Agreement by giving written notice to the Seller.
4. Payments: The Buyer will pay the Seller _________________ upon accepted completion of the Work.
5. Exhibit: The following Exhibit is hereby incorporated by reference into this Agreement:
Exhibit A: Statement of Work Exhibit B: Schedule
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE EXECUTED THIS Agreement as a sealed instrument as of the date first above written.
Buyer By:
Seller
________________________
____________________________
Date: ________________________
____________________________
1.6 Administering Procurements (Monitoring and Control) The third phase of project procurement management is to administer procurements, where the key activities in this phase are monitoring and controlling what happens to the project development. This is to ensure seller performance; they should be able to fulfill all requirements as stated in their proposed contract. This step solves problem #16 and #18. 1.7 Tools and Techniques (Monitoring and Control) A contract change control system can be used to help monitor and control processes within the procurement. It can be done orally or using written documents. The change control system should include a description of processes and information within the project, also if any changes that are made that should be recorded. It should be done by someone with authority, namely department managers so that it can take effect throughout the entire work force. The second tool that can be used is a procurement performance review. Usually a table to measure work done by the supplier, to weigh the performance and amount of work accomplished by the supplier. The data collected can be used by the project manager to make further decisions in the future. Below is an example of a simple procurement performance review.
Product Quality Product Delivery Cost for Products Setup Time for System After Sales Services Business
Satisfactory x
Acceptable
Unsatisfactory
x x x x x
transparency and efficiency
In the procurement performance review above, it is shown that the supplier has done an overall satisfactory job with his overall performance in administering the procurement. Good product
quality suggests that all products are of graded quality and presumably has undergone quality checking after manufacture and delivered to wholesale sellers. The product delivery is also acceptable, which can be assumed as on time, but not ahead of schedule. This is because of a limited time frame for the project to be completed, thus anything that can be completed quickly enough is considered as a boost in morale and efficiency. The cost for products are also satisfactory, meaning that it can be well under the allocated budget, thus saving resources for the company and potentially investing the money in somewhere more pivotal and can stem the growth of the project. The setup time is acceptable, which concurs with the product delivery time. As time is extremely limited in the project, all procurement steps should be completed as soon as possible to make way for project cutover and contract completion. This includes the setup time for the system, which can take a while. After sales services is also acceptable, which can be caused by less interactions by supplier’s staff with the buyer’s staff. The supplier’s staff should interact more and educate the buyer’s staff on how to setup and use the current system so that there will not be any hiccups in using the system in the future. Business transparency and efficiency is at its highest, so it is safe to presume that both parties have agreed upon the contract and its clauses; thus are well aware of their roles in the procurement activity.
1.8 Closing Procurements (Closing)
The last process of project procurement. It involves resolving any open issues or problems existing in the project. Once the issues are solved, the contract between the supplier and buyer is said to be completed. The project team should take necessary actions in this phase, such as determine if all work as promised by the supplier is completed accurately and satisfactorily, updating records so that it matches all final results of the project and finally to archive all information for future references. The contract itself that was created and agreed upon by the supplier and buyer should include all requirements for the formal acceptance and closure procedure. 1.9 Tools and Techniques (Closing) Procurement Audit A procurement audit is a systematic analysis whether an activity and its results correspond with the demanded requirements and whether the demands are effective and suitable to aid in achieving the activity’s primary objectives. Audits can be done by external professionals so that it can help decision makers within a project to get a clear idea of the performance status of its procurement department. Completing a procurement audit will enable an organization to identify and manage risks related to procurement processes and purchasing to help uncover potential savings in terms of money spent.
References
BusinessDictionary.com, (2015). What is bidder's conference? definition and meaning. [online] Available at: http://www.businessdictionary.com/definition/bidder-s-conference.html [Accessed 7 Aug. 2015]. Carr, P. (2011). Week 8: Project Procurement Management. [online] Project Leadership. Available at: https://projectleadershipwaterloo.wordpress.com/2011/12/05/week-8-projectprocurement-management/ [Accessed 6 Aug. 2015]. Certification, E. (2015). PreparePM | Project Procurement Management. [online] Preparepm.com. Available at: http://preparepm.com/notes/procurement.html [Accessed 6 Aug. 2015]. Nxtasia.com, (2015). NxtAsia Consulting - Procurement Audit. [online] Available at: http://www.nxtasia.com/what-we-do/procurement-audit/ [Accessed 8 Aug. 2015].
