procurement management

Università degli Studi di Trento

Relationship ManagementA focus on Procurement Management

Nicola Mezzetti, Ph.D.

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Introducing Relationship Management (ISO 9000:2015)

For sustained success, an organization manages its

relationships with interested parties, such as suppliers.

Interested parties influence the performance of an organization. Sustained success is

more likely to be achieved when an organization manages relationships with all of

interested parties to optimize the impact on its performance; relationship

management with its supplier and partner networks is of particular importance.

Key Benefits

Enhanced performance of the organization and its interested parties through

responding to the opportunities and constraints related to each interested party

Common understanding of goals and values among interested parties

Increased capability to create value for interested parties by sharing resources

and competence and managing quality related risks

A well-managed supply chain that provides a stable flow of goods and services

Relationship Management

Nicola Mezzetti – Università degli Studi di Trento

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Introducing Relationship Management (ISO 9000:2015)

Actions you can take

Determine relevant interested parties and their relationship within the

organization.

Determine and prioritize interested parties relationships that need to be

managed.

Establish relationships that balance short-term gains with long-term

considerations.

Pool and share information, expertise, and resources with relevant interested

parties.

Measure performance and provide performance feedback to interested

parties, as appropriate, to enhance improvement initiatives.

Establish collaborative development and improvement activities with

suppliers, partners and other interested parties.

Encourage and recognize improvements and achievements by supplier and

partners.



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Why Procurement Management?

Procurement of goods and services, essential to the operation of a

company or an organization, often involves substantial expenditure.

This is an area most vulnerable to improper manipulation and

malpractice

Any impropriety in procurement may

Bring financial losses upon a company or an organization

Adversely affect its reputation and trustworthy partners for businesses

The purpose of procurement management is that of ensuring ‘’value

for money’’ by fostering the adoption of best practices and preventing

improprieties in the process.



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What is Procurement Management?

Procurement management is a set of processes to buy needed

products, services, or results from the market. It includes

The contract management and change control processes required to

develop and administer contracts or purchase orders issued by authorized

team members

Controlling any contract issued by an outside organization that is

buying deliverables or services from the team, and administering

contractual obligations placed on the team by the contract



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The Beginning: Make or Buy?

Make-or-buy decision is a judgment made by management whether

to realize a component, or a service, internally or buy it from the

market.

Examples of decision criteria

Resources: Does the firm own all the required capabilities (e.g.,

competences, processes, certifications)?

Strategy: Is the component/service closely linked to the firm’s core

competencies or are critical to the customer strategy?

Costs: Will it be cheaper to realize the component/service or to outsource it to

a supplier (including internal costs for management and quality assessment)?

Time: Will the component/service will be available sooner than internally

developed?

Risk: Can we accept/mitigate the risks of making or do we need to

share/transfer risks?



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The Buy Decision

When an organization decides to buy, the question then becomes to

whom to delegate the responsibility. The organization must select

a supplier for the component/service in question.

The buying organization must be highly skilled at

Specifying product attributes

Forecasting expected requirements

Ensuring the right quality at a reasonable cost



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The Procurement Cycle



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Requirement Definition: The Statement of Work

The procurement Statement of Work (SOW) describes the

procurement item in sufficient detail to allow prospective sellers to

determine if they are capable of providing the item. Each individual

procurement item requires a SOW.

The procurement SOW is written to be clear, complete and concise.

It includes a description of any collateral services required, such as

performance reporting or post-project operational support for the procured

item.

The procurement SOW can be revised and refined as required as it

moves through the procurement process until incorporated into a

signed agreement.



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Tendering or Sourcing

Once the Statement of Work is ready, procurement requests are

issued to potential sellers. Based on the selection criteria, the buyer

can issue different types of documents:

Request for Information (RFI)

Invitation for Bid (IFB)

Request for Proposals (RFP)

Request for Quotation (RFQ)

The level of detail of procurement documents should be consistent

with the value of, and risks associated with, the planned procurement.

sufficient to ensure consistent and appropriate responses

flexible enough to allow consideration of any seller suggestions



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Tendering or Sourcing: Seller’s Responsibilities

A seller answers the procurement document with a quotation covering

the provisioning of all the requirements specified in the statement of

work. In a quotation, the seller should at least include:

A high-level description of how the item/service will be realized and

delivered

Specification of the target quality levels

The professional roles that will be involved with the associated hourly rate

The activities that will be performed, with the effort required to each

professional role

The warranty conditions

The level of detail of the quotation should anyway depend on the

amount of effort that is required to deliver the results at the desired

level of quality.



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Evaluation & Selection

During this phase:

Seller responses are collected

A seller is selected by adopting one or more selection criteria, i.e.,

Understanding of the need

Overall or life-cycle cost

Technical capability

Risk

Warranty

Management or technical approach

Past performance of seller

Financial resources

The contract terms and conditions are negotiated.



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The Contract

A contract is a legally binding or valid agreement between two

parties. The law will consider a contract to be valid if the agreement

contains all of the following elements:

offer and acceptance;

an intention between the parties to create binding relations;

consideration to be paid for the promise made;

legal capacity of the parties to act;

genuine consent of the parties; and

legality of the agreement.

An agreement that lacks one or more of the elements listed above is

not a valid contract.



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The Contract: Terms and Conditions

Terms and conditions are the words in the contract, describing rights

and responsibilities of the parties

Term: a specific promise

Condition: a modification of a term

Writing a contract,

Plain, ordinary, and popular meanings overrule technical jargon – when

in doubt, define the term within the contract.

With two different but equally probable meanings, a contract will be

interpreted against the author.

The same word means the same thing throughout the whole

contract.



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The Contract: Terms and Conditions

Terms and conditions are the words in the contract, describing rights

and responsibilities of the parties

Term: a specific promise

Condition: a modification of a term

Writing a contract,

Plain, ordinary, and popular meanings overrule technical jargon – when

in doubt, define the term within the contract.

With two different but equally probable meanings, a contract will be

interpreted against the author.

The same word means the same thing throughout the whole

contract.



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The Contract: Example of Conditions

Within a procurement’s agreement, conditions can be defined to set:

How the parties will communicate and manage change requests

How the parties will monitor and control advancements

How quality assessment will be performed

How changes and other issues will be communicated

How, and under which conditions, audits can be performed at the supplier

side

How deliveries will be performed

How payments will be managed, according with the advancements

Service Level Agreements, when needed

Warranty conditions

What allow each of the parties to early terminate the agreement



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Contract Types: Lump Sum Contract

The lump sum contract (or stipulated sum contract) requires that the

supplier agree to provide specified services for a stipulated or fixed

price.

The owner transfers all the risks to the contractor, who in turn can be

expected to ask for a higher markup in order to take care of unforeseen

contingencies.

The supplier is responsible for the proper job execution and will

provide its own means and methods to complete the work.

Developed by estimating the labor costs, material costs, and adding a

specific amount that will cover contractor’s overhead and profit margin.

This contract is usually employed if the requested work is well

defined and the technical design is completed.



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Contract Types: Variations of Lump Sum Contract

Firm Fixed Price contract: the price is set at the outset and not subject to

change unless the scope of work changes. Any cost increase due to

adverse performance is the responsibility of the seller, any changes can

increase the costs to the buyer.

Fixed Price Incentive Fee: this contract allows for deviation from

performance, with financial incentives tied to achieving agreed upon

metrics. Performance targets are established at the outset, and the final

contract price is determined after completion of the work. A price ceiling is

set, and all the costs above the price ceiling are responsibility of the seller.

Fixed Price with Economic Price Adjustment: fixed-price contract with

a special provision allowing for pre defined final adjustments to the

contract price due to changed conditions (e.g., change of requirements,

inflation changes).



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Contract Types: Cost-Based Contracts

With cost-based contracts the amount that the buyer pays is driven

by the actual costs incurred by the seller.

Direct costs: costs that can be tied to a specific deliverable

Indirect cotst: costs which cannot be tied to a specific deliverable (e.g.,

fringe benefits, costs of running the business). They are calculated as a

percentage of historical, allowable costs.

Provides the project flexibility to redirect a seller whenever the scope

of work cannot be precisely defined at the start and needs to be

altered, or when high risks may exist in the effort.



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Contract Types: Variations of Cost-Based Contracts

Cost Plus Fixed Fee Contracts: fixed-fee payment calculated as a

percentage of the initial estimated project costs. The fee is paid only for

completed work. Fee amounts change if project scope changes.

Cost Plus Incentive Fee Contracts: seller is reimbursed for all allowable

costs and receives a predetermined incentive fee based upon achieving

certain performance objectives as set in the contract: if final costs are less

or greater than the original estimated costs, then the parties share costs

based upon a pre-negotiated cost-sharing formula (e.g., 60/40).

Cost Plus Award Fee Contracts: seller is reimbursed for all legitimate

costs. The majority of the fee is earned based on the satisfaction of certain

broad subjective performance criteria defined and incorporated into the

contract. The determination of fee is based solely on the subjective

determination of seller performance by the buyer.



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Contract Types: Time & Material

Hybrid type of contractual arrangement that contains aspects of both

cost-based contracts and fixed price ones

Often used for staff augmentation, acquisition of experts, and any outside

support when a precise statement of work cannot be quickly prescribed.

This kind of contract resemble cost-based contracts in that they can be left

open ended and may be subject to a cost increase for the buyer.

The full value of the agreement and the exact quantity of items to be

delivered may not be defined by the buyer at the time of the contract

award.

T&M contracts can specify not-to-exceed values and time limits.

Contracts can also preset unit labor or material rates, when both parties

agree on the values for specific resource categories.



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Contract Management

In this phase, when the contract is being executed, the activities to be

performed are:

Managing procurement relationships.

Monitoring contract performance.

Making changes and correction to the contract as appropriate.

Both the buyer and the seller will administer the procurement contract

in order to ensure that their performance meets procurement

requirements according to the terms of the legal agreement.

Each are required to ensure that both parties meet their contractual

obligations and that their own legal rights are protected.



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Contract Management: Buyer Responsibilities

The buyer reviews and documents how well a seller is performing or

has performed based on the contract and establishes corrective

actions when needed.

Direct and manage project’s work, to authorize the seller’s work at the

appropriate time.

Control quality, to inspect and verify the adequacy of the seller’s product.

Perform integrated change control, to assure that changes are properly

approved and that all the stakeholders are aware of such changes.

Control risks, to ensure that risks are mitigated.

Financial management, to ensure that payment terms defined within the

contract are met and that seller’s compensation is linked to the work

accomplished

Managing early termination (for cause, convenience, or default) in

accordance with the termination clause of the agreement.



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Closing the Procurement

The contract terminates with success by passing an acceptance test:

the buyer assesses the results produced by the seller against the

agreement’s terms ad conditions.

Records are produced in order to reflect the test result, that can be either

positive or negative

A positive result concludes the contract

Major non-conformities will require the seller to fix the procurement’s

results and to repeat the acceptance test

Even in case of early termination, records have to be produced in

order to collect and maintain relevant evidences on the causes that

led to the contract’s closure.



Grazie

Thank you!

procurement management

Leadership & Management