A view on procurement best practice

Dr Gordon Murray

Agenda

Agenda

Governance

Agenda

Strategy

Agenda

The day job

What do you mean when you refer to procurement?

7

Procurement Cycle

8. Closure / Review Need

1. Identify problem

2. Develop Business Case

3. Define Procurement Approach

4. Competitive procurement

5. Tender Evaluation

6. Award Contract

7. ManageImplementation

of Contract

8

8. Closure / Review Need

1. Identify Need

2. Develop Business Case

3. Define Procurement Approach

4. Supplier Appraisal5. Tender Evaluation

6. Award Contract

7. ManageImplementation

of Contract

Gateway Stages

Challenge

Challenge

Challenge

Challenge

Challenge

Challenge

Structural options

Which is best – centralised or decentralised procurement?

Centralised

The Market

Dept

Dept Dept

Dept

Procurement Unit

De-centralised

The Market

Dept Dept Dept Dept

Organizational structures within purchasing

Advantages Direct responsibility of operating

companies Stronger customer orientation

towards internal user Less bureaucratic purchasing

procedures/higher operational flexibility

Less friction costs due to coordination

Direct communication with suppliers

Disadvantages Dispersed purchasing power,

lack of economies of scale No uniform way of handling

towards suppliers Scattered supply market

research Limited possibilities for building

up specific expertise on purchasing, supply markets and components

Different commercial purchasing conditions among different operating companies

Advantages and disadvantages of decentralised purchasing

Devolved

The Market

Dept Dept Dept Dept

Procurement Unit

Procurement Collaboration

Procurement Collaboration

Why bother?

Why collaborate?

Collaborative procurement options

Consortia

The Market

Buyer Buyer Buyer Buyer

PBO

Collaboration strategy

Conversation (networking)

Coordination

Cooperation

Collaboration

(Derived from Huxham, 1996)

Procurement decision-making tools

Spend analysis

ABC Analysis: 75/20, 15/30, 10/50

The implications of ABC Analysis

Kraljic’s Procurement Positioning Model

Bottleneck Strategic

Routine Leverage

Supply Market

Complexity/Risk

Impact on profit

Who does what?

Procurement led

Coordinated

Decentralised

Potential benefit from

central management

Need for business involvement

Relative Power

Supplier Positioning Model of potential customers

Development Core

Nuisance Exploit

Attractiveness of account

Relative value of account

eProcurement

P2P & Strategic procurement interfaces

eProcurement Strategy

A potential Procurement Applications Portfolio

Category management

Marketing view of brand management

Approach to Category Management

Potential sourcing options

Make/buy/lease Internal/external Standardisation Domestic/overseas Single/multiple sourcing Stockless/JIT Annual Blanket Orders/Systems

contracting Partnership/Adversarial Distributors/Manufacturers Vertical integration/Arms length Vendor rationalisation

Consortia/Coordinated purchasing Forward/spot buying Quality/cost Short/long term contracts Earlier supplier involvement Supplier development Supplier councils Supplier certification Reverse marketing Supplier assistance Value analysis/value engineering Utilisation of IT/IS

Illustration of sourcing plan content

Supplier selection and contract award

View supplier selection and contract award as risk

management

Mandatory and desirable features

Supplier selection

Award criteria

The award approach

Contract Management

Contract Management

When does it start?

When does it end?

Who’s responsible?

The activities of a buyer during a contract period to ensure that all parties to the contract fulfil their

contractual obligations

Bailey, Farmer, Crocker, Jessop and Jones (2008) p. 419

Fundamentals

The contact is the agreement which is to be managed – it must be right

‘Battle of the Forms’The contract must be understood by all those managing

the contractA supplier can voluntarily add performance standards to

the tender document It is possible to include supplier improvement plans

within a contractContract management approach creates the

environment for determining whether or not the supplier will want to bid again

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What could go wrong with a contract?

49

Managing risk

Risk analysis Risk assessmentRisk mitigation

50

Risk threat responses

Reduction (treat)RemovalTransferRetentionShare

51

Risk assessment

Risk Probability Impact Proximity Mitigation

52

Relationship management

53

Relationship management

Adversarial contracting does not necessitate adversarial relationships

Effective relationship management requiresMutual respectMutual trustMutual understandingCreating an open and constructive environmentContributing to joint management of contract delivery

54

Service delivery management

55

Performance management

Shaped by the original customer definition of need

KPIs identified prior to contractingLikely to be directly linked to tender evaluation

criteriaKPIs should be

Proportionate, fit for purpose, easy to support by evidence, accepted by key stakeholders

56

Performance measures

Cost and value obtainedPerformance and customer satisfactionDelivery improvement and added valueDelivery capabilityBenefits realisedRelationship strengthResponsiveness

57

Change happens!

Contract variations

58

What circumstances could justify a change in the contract?

59

What steps are required when a change takes place?

60

Managing contract change

Acceptance that change happens Risk management predicts what might happen and potential

responses Changes require negotiation Change management control is essential

Due process Principles of transparency, fairness, accountability and stewardship Appropriate record keeping Due authorisation

Accepted changes require scheduling to minimise adverse impact Changes need to be communicated

Novation and assignment

CCR and CCN process

61

Change Control Form

1. Reason for change:

2. Description (giving full description of any specification):

3. Proposal for implementing the Change:

4. Timetable:

5. Likely impact on the Services, the Service Level and any Charges:

6. The Price (if any) (including itemised breakdown):

7. Further clarification of the Change/Charge/additional information:

8. Signed for and on behalf of XXX

9. Signed for and on behalf of XXX

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63

Closing the contract

64

Contract exit circumstances

Client contractual breach or changed circumstances

Provider defaultFrustration of contractEnd of the contract term

65

Contract management review

Aims to capture the lessons learnt for improving procurement

Should include key stakeholdersComplete a post-contract review report

What worked well?What didn’t work?What are the lessons for letting this type of contract in

the future?What are the lessons learnt for improving procurement

performance?Capture and communicate

Success factors

Thank you for your attention