Learning Outcome 9: Understand project procurement Flashcards
What is the purpose, of a procurement strategy
The procurement strategy is a detailed plan of how a business will acquire goods or services that it needs to operate efficiently from the right suppliers at the right price and at the right time.
Six things you find in a procurement strategy
- Procurement Objectives - Defined goals of the procurement.
- Procurement Method - Outlines the approach that the business will take to procure goods or services including the use of competitive bidding, negotiation or strategic sourcing.
- Supplier Management - How the project will manage suppliers including performance metrics, market volatility or supply chain disruptions.
- Risk Management - How the project will identify assess and mitigate procurement risks related to supplier performance, market volatility or supply chain disruption.
- Procurement Policies & Procedures - The governance for the procurement including procurement standards, ethical guidelines and procurement reporting requirements
- Procurement Performance Metrics - How the project will measure the success of its procurement process including cost savings, performance and cycle time.
Benefits of a Procurement Strategy
- Cost Reduction
- Improved Supplier Relationships
- Risk Management
- Compliance
- Enhanced Transparency
- Strategic Advantage
Features of Fixed Price Reimbursement
Characteristics -
Price pre-agreed for contract duration.
Used where the product has a stable cost structure.
Advantages -
Simple & straightforward.
Easy to administer.
Disadvantages
Not suitable for where variable costs.
Supplier bears the risk
Features of Cost Plus Reimbursement
Buyer reimburses cost of the goods and services, with a pre agreed fee to cover margin and costs.
Advantages - Transparent.
Supplier compensated for efforts.
Suitable for long term contracts.
Disadvantages -
Supplier may overestimate their overheads.
Not suitable for short term contracts or where suppliers unable to forecast.
Characteristics of Unit Quantity reimbursemen
Buyer reimburses for each unit of product/service at pre-determined cost.
Advantages - Provides control over costs.
Suitable for short term contracts.
Best where there is a predictable cost.
Disadvantages - May not be suitable for suppliers with a variable cost structure, incentivises quantity over quality, may not be suitable for products or services with a high level of uncertainty with them.
Characteristics of Target Cost reimbursement
The buyer and supplier agree on a target cost for the product or service being purchased, this includes the suppliers estimated cost of production, as well as their desired profit margin. The buyer then reimburses the supplier for the actual costs of production up to the agreed target cost, if the actual cost of production exceeds the target costs, the supplier bears the additional cost.
Advantages - Incentivises supplier to work efficiently and manage cost effectively.
Suitable for long term relationships.
Requires a high level of communication and collaboration between buyer and supplier.
Disadvantages -
Supplier may underestimate their overhead costs leading to lower profits.
Difficult to administer.
Requires a high level of communication and trust between buyer and supplier.
Differentiate between different contractual relationships
What are the six stages of the supplier selection process?
Research - identifying the providers that have the required capability, this may be unnecessary where there is already a regularly reviewed and up-to-date approved supplier list. Research may result in a long list of potential suppliers; pre-qualification seeks to reduce this list.
Pre-Qualification - to gather information from potential suppliers this may clarify the production capacity of provider, its willingness to tender, its financial stability, its technical expertise and it may also ask for references for similar work. The pre-qualification results in a short list of providers that will be asked to provide a full bid against a defined set of requirements. Tender - may seek specialist help, it is important that the requirements are clear and all providers are given an equal chance of success. Records associated with selection should be maintained and archive to contain risks associated with potential challenges by unsuccessful providers, inputs to the selection process should be an appropriate risk analysis, in addition to time cost and quality considerations as defined in the resource management plan. Where possible reserve providers should be identified, for critical goods and services the contract may be split among several providers as a form of risk containment. Award - will involve the negotiation and agreement of the contract supply goods and services, attention needs to be paid throughout the whole selection process to ensure that the contract is not casually entered into and it should be made clear in all meetings and in associated documents that the proceedings are subject to a contract. Manage - once a contract is awarded it is important that the relationship between the project and the provider is actively managed, although much effort may have been invested in the binding contract, resorting to the contract to r resolve disputes should be seen as a last resort. Contract managers must regard providers as members of the team and communicate effectively.
Close - once the goods and services to be supplied by the provider have been delivered and accepted the contract will be closed. This will involve ensuring that all financial arrangements have been honoured, and all changes to the contract have been accounted for, it may involve setting up a maintenance contract support, repair or update goods provided.
What happens in the research stage of supplier selection?
Research - identifying the providers that have the required capability, this may be unnecessary where there is already a regularly reviewed and up-to-date approved supplier list. Research may result in a long list of potential suppliers; pre-qualification seeks to reduce this list.
What happens in the pre-qualification stage of supplier selection?
Pre-Qualification - to gather information from potential suppliers this may clarify the production capacity of provider, its willingness to tender, its financial stability, its technical expertise and it may also ask for references for similar work.
The pre-qualification results in a short list of providers that will be asked to provide a full bid against a defined set of requirements.
What happens in the Tender stage of supplier selection?
Tender - may seek specialist help, it is important that the requirements are clear and all providers are given an equal chance of success. Records associated with selection should be maintained and archive to contain risks associated with potential challenges by unsuccessful providers, inputs to the selection process should be an appropriate risk analysis, in addition to time cost and quality considerations as defined in the resource management plan.
Where possible reserve providers should be identified, for critical goods and services the contract may be split among several providers as a form of risk containment.
What happens in the Award stage of supplier selection?
Award - will involve the negotiation and agreement of the contract supply goods and services, attention needs to be paid throughout the whole selection process to ensure that the contract is not casually entered into and it should be made clear in all meetings and in associated documents that the proceedings are subject to a contract.
What happens in the Manage stage of supplier selection?
Manage - once a contract is awarded it is important that the relationship between the project and the provider is actively managed, although much effort may have been invested in the binding contract, resorting to the contract to r resolve disputes should be seen as a last resort. Contract managers must regard providers as members of the team and communicate effectively.
What happens in the Close stage of supplier selection?
Close - once the goods and services to be supplied by the provider have been delivered and accepted the contract will be closed. This will involve ensuring that all financial arrangements have been honoured, and all changes to the contract have been accounted for, it may involve setting up a maintenance contract support, repair or update goods provided.
