Contracting and procurement

Abstract

This article will present a review of the tendering phase and contract management of project procurement management. Decision factors and methods for a company's procurement division when selecting a supplier and negotiating a contract will be presented. Multiple factors should be considered when selecting a supplier and when the supplier has been chosen, a contract must be designed with some main objectives. The company must decide between a pool of sellers, which they seek offers from, or choose to negotiate with a given seller. When negotiating a contract, the main things to consider are to ensure that buyers are able to meet their customers' demand and propose a system where the supplier and the buyer share risks and cost. The article will first introduce briefly the definition of procurement and contracting separately, and then explain the relationship between the two. The article will then be divided into five main parts; defining the problem, defining the buyers' needs, determining the qualification of a supplier, choosing a supplier, and finally the negotiation factors. .

Contracting and Procurement

Procurement

"Procurement is the acquisition of goods, services or works from external sources." The goal of procurement management is to identify a supplier to procure goods and services for a specific company. Suppliers can provide all from raw materials to finished products. Project Procurement Management spans a wide range and is present throughout the whole project process. Furthermore, this article will cover the tendering phase and contract management.

Contracting

"An agreement between two or more parties, especially one that is written and enforceable by law." Contract management involves creating a contract, negotiating terms and conditions, compliance, execution and analyzation. In Project Procurement Management legal documents, or contracts, are made between the buyer and the seller. It is a document stating that the seller will provide some value in return for compensation from the buyer.

Contracting in Procurement

All companies have to make a decision to produce in house, or outsource the production. If the benefits for outsourcing exceed the benefits of producing in house, companies must find a supplier that is reliable and maintains a certain standard. Project Procurement Management includes all processes needed to deliver goods or services from outside the project team as well as the development of contracts issued with the supplier. In this article the scope of the buyer will be explored.

Defining the Problem

How much should the company itself produce, what is cheaper and/or justifiable to outsource? The first step is to define whether a problem is present. If companies lack capacity, if production is expensive, if they do not have the people, skills, or knowledge to execute, other solutions should be investigated. One of the solutions is outsourcing. Outsourcing is when a company requests goods or services from an outside party. Advantages and risks of outsourcing need to be evaluated, and an optimized plan developed for make/buy decisions. Justifications should be presented for outsourcing, and a production plan for in house production. A meaningful procurement strategy should be developed, with the following factors considered: products services technologies financial plan global presence geopolitical and economic risks growth plans competition customer satisfaction corporate social responsibility regulatory and political environment employee growth and satisfaction All available information about these factors should be gathered through company strategic and operational plans, annual reports and executive management input.

Benefits

The benefits of outsourcing are:

• Economies of scale
• Risk Pooling
• Reduce capital investment
• Focus on core competency
• Increased flexibility

Risks

The risks of outsourcing are:

• Loss of Competitive Knowledge
• Conflicting Objectives

When the procurement strategy has been defined and all outsourcing decisions been determined the next step is to define the buyer's need.

Defining the Buyer's Needs

After deciding which goods and/or services to outsource, the amount must be decided as well. After setting up a clear plan for all goods and services needed from the supplier, all possible suppliers should be specified and explored further. Suppliers with the people, skills, knowledge and capacity to meet the buyers demand should be explored.

Determining the Qualification of a Supplier

The third step is to examine the supplier's qualification and availability. The selection criteria is stated in the procurement documents, and often depends on many factors. It might only have one factor, cost, but in various businesses the requirements are more. Various factors to consider are:

• understanding of need
• overall or life-cycle cost
• technical capability, risk
• management approach
• technical approach
• warranty
• financial capacity production capacity and interest
• business size and type
• past performance of sellers
• references
• intellectual property rights and proprietary rights

Each business must identify their own selection criteria, depending on complexity of the product or service. Pharmaceutical companies selling on the US market for example, must select a supplier approved by the FDA (Food and Drug Authority) and the supplier must be audited to confirm they fulfill certain rules and regulations.

To verify a supplier's qualification buyers can take proactive steps. The buyer may ask previous customers for reference, and have them confirm a delivery performance and inform about any problems that arose. They may as well do financial status checks, and check if the supplier has access to more workforce or unused capacity of facilities in case of unexpected increase in demand. The buyer might have requirements of specific quality standards that need to be verified with the supplier, as well as request samples of supplier products and test them to see if they meet requirements.

Choosing a Supplier

Choose between suppliers that maintain the certain qualification standard, and now consider other factors, such as cost.