1. Lecture 9: Project Procurement Management
CISB243 – Lecture 12
Pn. Hidayah Sulaiman
Lecture 9: Project Procurement Management

2. Meaning of Procurement
Procurement means acquiring goods and/or services from an outside source
Other terms include purchasing and outsourcing

3. 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
IT Project Management, Third Edition Chapter 12

4. Project Procurement Management Processes and Key Outputs
IT Project Management, Third Edition Chapter 12

5. 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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6. 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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7. 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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8. 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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9. 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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10. Figure 12-2. Contract Types Versus Risk
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11. 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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12. Figure 12-3. Statement of Work (SOW) Template
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13. 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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14. Outline for a Request for Proposal (RFP)
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15. 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
IT Project Management, Third Edition Chapter 12

16. 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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17. Sample Proposal Evaluation Sheet
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18. Detailed Criteria for Selecting Suppliers
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19. 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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20. 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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21. 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
IT Project Management, Third Edition Chapter 12

22. 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
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23. E-Procurement
Issues & Perspectives

24. Procurement Process Tech bid Evaluation Planning Tender Notice
Receipt of bids
Tech bid
Evaluation
Fin. bid
Award
Receipt of Goods
Payment

25. Web Based Application Software
What is E-Procurement?
Suppliers
Buyer
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.

26. BENEFITS

27. Benefits of e-Procurement
Supports Online
Reverse Auction
Core Objectives
Of e-procurement
Real Time
Monitoring
Process
Efficiency
New supplier
discovery
Cost
Reduction
Paper less
environment
Transparency
Streamlining
Procurement
processes

28. 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

29. 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

30. Best Practice Approach

31. E-procurement Solution Feature
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

32. E-procurement Solution Feature
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.

33. 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

34. GLOBAL PERSPECTIVE

35. 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

36. 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,

37. E-Procurement – Asia 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

38. Lumen AG Company Problem 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.

39. 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

40. FORD Company Problem Solution – E-Procurement System 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%.

41. Labinal Company Problem Solution – E-Procurement System
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.

42. Compranet Company Problem Solution – E-Procurement System
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

43. GlaxoSmithKline Company Problem 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.

44. 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,

45. Rolls-Royce Company Problem Large quantity of non-value-added products
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

46. 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

47. E-Procurement - Challenges
Commitment of Top Management
Change Management Issues
Inability to Capture Required Benefits
Cost & Time Overrun
Computerized Auditing

48. E-Procurement - Risks Confidentiality Integrity
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

49. 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

50. 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.

51. 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.