Procurement & Contracts ManagementLecture #1 01 February, 2014

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Introduction Education

◦ BCS; 1997◦ MBA; 2001◦ PMP; PMI 2009◦ Six Sigma Black Belt; ASQ 2013

Work Experience (16 years)◦ Jaffer Brothers (Pvt) Ltd◦ Ultimus Inc.◦ Enabling Technologies◦ Halliburton◦ BP◦ NTT DoCoMo◦ Schlumberger◦ Mobilink◦ Wateen Telecom 2

Class IntroductionPersonal Info

◦Name, Degree◦Professional Experience (if any)◦Why Procurement & Contracts

Management?Four facts about you

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Course Structure 15 classes (course outline to be

shared)3 Hourly ExamsProject Marks distribution

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Marks Head Total Qty Marks Total Marks

Hourly Exams 1 30 30

Attendance 1 10 10

Class participation

1 20 20

Final paper 1 40 40

CR SelectionResponsibility

◦Manage infrastructure i.e. board markers, multimedia etc

◦Manage communication i.e. circulate presentations, reading material

◦Manage feedback Perks

◦5 special marksSelection criteria

◦Popular vote5

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Overview All organizations need inputs of goods and services from external

suppliers or providers. Savings in material costs mean significant opportunities for

improving corporate profitability and return on investment. Quality of input materials affects final product quality in a major

way. In most concerns, large or small, purchasing is fast acquiring wider

recognition and a more strategic role, day by day, due to:◦ Advancing technologies◦ Limited resources◦ Increasing proportion of revenue spent on purchased goods and services.◦ Opportunities in outsourcing◦ Fewer and larger suppliers/conglomerates.◦ Increasing environmental concerns.◦ Successful adoption of ‘world class’ ideas (TQM, JIT etc.,) and cutting edge◦ Technologies by leading concern

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Overview (Contd…)For all the above reasons, buyers role is becoming more

strategic in nature. It includes, among others.

1. Advising top management on market trends – short term and long term

2. Negotiating long term relationships with critical suppliers

3. Building strategic linkages with key supplier units4. Vendor Development5. Quality Trust6. Supply Chain Management7. Total Cost Reduction8. Purchase Research9. Value addition through creative purchasing route and

working more towards ‘ total cost concept and value addition’ with continuous improvement perspective. 8

The LeverageStrategic Sourcing can have a

significant impact on the financial performance and shareholder value of a Company.

“When the goal is boosting profits by dramatically lowering costs, a business should look first at what it buys.”

Fortune, February 20, 1995 9

Illustrative Example

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Percentage Cost Reduction in Direct Materials

Baseline 5 % 10 % 15 %

Revenue 100 100 100 100

COGS – Material 60 57 54 51

Labour & Var OH 20 20 20 20

Gross Margin 20 23 26 29

Fixed OH Expenses 10 10 10 10

Net Income ( pretax ) 10 13 16 19

% Improvement 30 60 90

Procurement Steps1. Recognize and describe the need2. Transmit the need3. Select the vendor4. Prepare and issue purchase order5. Follow up the order6. Receive and inspect the material7. Audit the invoice8. Settle the payment9. Close the order10.After sales/warranty obligations

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Procurement ObjectivesRight Quality

Right Time

Right Quantity

Right Source

Right Price12

Quality Quality- fitness for use Conformance to specs to be ensured at source Rejection – no solution Minimal checking at receiver end Reliability / repeatability Creation of cost effective specifications;

◦ Changes, if any, for consideration;◦ Both supplier and user have to contribute

Safety and environment – major trust areas Quality to be created in a product, cannot be inspected into a

product

Related issues Standardization TQM / ISO 9000 / 14000 Quality circles Value engineering / value analysis Supplier assessment / vendor development 13

Time Lead time analysis Follow up system Expediting Network analysis/critical path analysis Liquidated damages ‘Force majeure’ conditions Logistics

Related issues

Effect of time over-run for projects/critical spares

Bonus/penalty/cost of expediting

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Time: Lead Time AnalysisEffect of long lead time on costs and profitabilityElements of administrative lead timeMaking a flow chart showing time for different

activitiesAnalysis of flow chart to identify delays and

shortcomings of procedures Improvement of procedures to shorten internal lead

time Integrated approachSupplier’s lead time analysisNegotiation with suppliers to reduce lead time and

rendering such help as may be necessary and feasible

Logistics

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Time: Important IssuesInternal lead time

◦ Purchasing systems and procedures◦ Knowledge base◦ Incomplete specifications / over specifications

External lead time◦ Incorrect choice of supplier◦ Over optimistic delivery promise◦ Change in buyer’s requirement / incomplete

order / buyer’s failure to keep his part of promise◦ Lack of efficiency in supplier organization◦ Delay genuinely beyond supplier’s control◦ Logistics

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Price Concept of price Cost basis Value / Quality Concept of right price Lowest price not necessarily right price “Total Cost” concept Price terms Discounts Commercial factors Monopoly / Oligopoly / Perfect competition Economic trends Buyer & supplier partnerships - creating value togetherKey success factors : Knowledge Product & its alternatives Market trends Competitive forces Hedge / forward buying

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Price (Contd…)Risk ManagementForward Markets - CommoditiesBusiness / Economic FactorsPrice Analysis And Cost AnalysisLearning CurvesRelationship / Inter DependenceNegotiation Skills

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Quantity Order Quantity( EOQ / Batch Lot / Min Order Quantity ) Inventory Control JIT Systems Economic Lots Discounts Etc Staggered Delivery TermsRelated Issues Working Capital Logistics Warehousing Distribution Shelf Life / Obsolescence Availability / Shortages - ( Short Term / Long Term

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Source: Determinants Of Supplier – Mix

Consistent Quality Supplier Facilities Cost, Not Price (‘Total Cost’ Concept) Stable And Competitive Delivery Time (Normal, Sos) Location Service / Attitude / Reliability Developmental Orientation / Innovation Financial Strength Technology / Quality Control / R&d Market Standing / References

Key Success Factors Knowledge Of Suppliers/Market/Own Product Understanding Of Environment Long Term Planning Developing Strategic Linkages With Key Suppliers Supplier Development 20

Purchasing: Related IssuesPurchasing Objectives And

StrategiesPurchasing Structure And

OrganisationSystems And ProceduresMeasuring Performance,

Efficiency And EffectivenessBench Marking - Best Practices

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Conclusion Procurement is acquiring a more strategic role in business Integrate purchasing into your organization's strategic

planning ‘Make or buy’ decision Gain competitive advantage through excellence in

purchasing performance Set and apply right criteria for selection of your vendors Supplier development Set right performance standards for your purchasing function Re-engineer your procurement process for better user

satisfaction and achieve continuous improvements in inventory and purchasing costs through improvement in purchasing cycle.

Logistics and supply chain Bench marking the purchasing function Total quality in purchasing Role of purchasing in the value chain 22

thanK yoU

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