Procurement

Question 1

Part (a) Explain two elements of a procurement strategy and why these are important.

Part (b) Explain three steps in the supplier selection process for a project.

Answer 1

Answer (a)
1)Make or Buy. Organisations often have “in house” capability for all or part of a project so there needs to be a decision on make or buy. When calculating the cost of each option care must be taken to ensure that all cost both direct and indirect are taken into account and also the overall effect of the decision on the organisation e.g. would a decision to make have a knock on effect on other projects which may require the same resources. Would a decision to buy put in house facilities at risk?

2)Contract Type. Often in Procurement there is a choice between agreeing a fixed price for a contract or paying for time and materials consumed. A fixed price gives certainty and hence has less risk for the buyer, but T&M could turn out to be cheaper. However if the contract proved more difficult than first thought there is no limit to the cost thus T&M is riskier for the buyer.

Answer(b)
1)Define the requirements. The requirements are documented in the “Invitation to Tender” (ITT). This will detail the requirements in enough detail for a potential supplier to plan and cost the requirement. The format of the response will be specified by the buyer so as to facilitate easier comparison of rival bids

2) Issue Invitation to Tender. The ITT is made available to anyone and there is a response deadline. It is a mandatory requirement that the tendering process must be seen to be open and fair to all potential bidders. This requires that all bidders must be given exactly the same information on which to base their bid. Information given to one must be given to all. Even with well-prepared bid documents there will be ambiguities and differences in interpretation. Any such problems can be addressed at a Bidders Conference where all potential suppliers can attend and ask questions. If this is impractical the conference could be web based.
3) Evaluate responses. Buyers must have a selection process which is objective and not subject to personal prejudice. Such a method will also help to demonstrate that the selection process has been fair and transparent. A common way of doing this is by using a weighting system. The buyer develops a list of factors such as cost, financial status and track record. Each factor is then given a weighting based on its importance then each bidder is scored, and a total score obtained. The top scorers will constitute the short list.

Question 2

Within a typical procurement strategy, explain each of the following five factors:

1. Make or buy decision
2. Use of single, integrated or multiple providers/suppliers
3. Provider/supplier selection
4. Conditions and forms of contract
5. Types of pricing and reimbursement methods

Answer 2

1. Make or buy decision
   Organisations often have “in house” capability for all or part of a project so there needs to be a decision on make or buy. It may be cheaper, more efficient or easier to purchase rather than make in house
2. Use of single, integrated or multiple providers/suppliers.
   Using a single supplier is easier and cheaper to manage but can be a source of risk because everything is reliant upon that supplier. The extra effort of contracting with multiple suppliers for key components or even integrating supplies from individual vendors can considerably reduce project risk
3. Provider/supplier selection
   A poor supplier or sub-contractor can do immense harm to your project. To become an approved supplier should involve a qualification process which would cover such things as financial stability, capability and reputation. There should be a transparent process for evaluating and comparing potential suppliers.
4. Conditions and forms of contract
   A supplier must be willing to accept a form of contract acceptable to the client. Possible forms of contract are :-
   Cost reimbursable, Cost plus fixed fee, Cost plus incentive fee and Firm fixed price
5. Types of pricing and methods of reimbursement
   The difference between price and cost determines the profit margin. Three common ways of establishing price are:-
6. Cost based pricing. Here the supplier decides on the profit margin that is required and adds that to the cost.
7. Demand based pricing. If demand for the product is high then the supplier can increase the profit margin.
8. Competition based pricing. In this case where there is competition for supply then it may be necessary to reduce the profit margin to win the business.