Procurement & Contract Management – Discussion notes

Procurement/Contract Cycle upstream starts Identification of Need Vendor rating/review of performance Approval of the business case Payment Defining the specification Monitor Performance Analyzing the market upstream ends Contract award Defining the Contractual terms Negotiating value for money Supplier Appraisal Analyzing quotes/tenders Select bidders Inviting quotes/tenders

Supply Planning Framework To ensure existence of a supply Market to which the buying organization has ready access & which enables it to succeed as a business; now & in the future Supply positioning Market Management matrix Supplier preferences Vulnerability management Current market position Vendor Improvement program Procurement marketing Reverse marketing Ideal market position

Contract Strategy Model Make or buy Cost analysis Power/dependence Strategic resource Buy Make Market analysis Competitive market Monopoly Market & Managing them Cartel market & Circumventing cartels Dependency evaluation Multiple source Single source Relationship decision Cooperative Mutual deterrent Collaborative Contractual alliance Arm’s length Partnership, vision & synergy

Procurement Targeting BOTTLENECK (Strategic security) Guarantee supply LEVERAGE (Tactical Profit) Drive for profit CRITICAL (Strategic Critical) Close supplier management ROUTINE (Tactical Acquisition) Minimize time High Business Risk Low Value

Activity Spend Bottleneck 10% Critical 8% Routine 70% Bottleneck 15% Leverage 12% Bottleneck 15% Leverage 35% Routine 5%

Supply Positioning: Relationships Long Term Responsive to Suppliers Prepaid to Give EASY to work with Regular Reviews Cool / Flexible / tolerant Short Term Competitive How Do They See You? Versatile Highly Specific Clear Measures (2 way) Mutual & Participative Open Innovative Attentive Warm Persistent- High Levels of Achievement Minimal Day to Day But Lots of Initial Contacts High Levels of Trust Mutual Goals Distant But Close

Supply Positioning: PURCHASING ACTION Long Term Contracts Indexation Stockholding Alternative Products Volume Conscious Cost Insensitive Flexibility Active Sourcing Market Exploitation High Market Knowledge Short Term Contracts Take Risks Medium/Long Term Contracts Detailed Contract Conditions Supplier Analysis/Forecasts Close control/Devt. of Supplier Close Price MGMT/PPCA Audits Contingency Systems Contracting Cash Order Stockless Purchase Paperless Purchase Consignment Stocks Simple Procurement procedures BOTTLENECK CRITICAL ROUTINE LEVERAGE

Supplier Preference CORE DEVELOP NUISANCE EXPLOITABLE High Low Nurture customer Grow business EXPLOITABLE Maintain high prices Accept risk of lost business CORE Maximum attention Actively defend Increase share Of supply NUISANCE Minimum attention Lose without concern High Account Attractiveness Low Relative Value

Relative value of Customer Business High ATTRACTIVENESS Payment on time Payment secure Profitability Relationships Loyalty Positioning on supply positioning grid Product Knowledge/Technology Cost of servicing the Account ‘Leading Edge’ Customer Customer Market Share/Image ATTRACTIVENESS OF ACCOUNT Low High Relative value of Customer Business RELATIVE VALUE OF BUSINESS Values Sales v average % Availability Business achieved Ability to ‘sell through’ other products/services Ability to ‘sell through’ to other customers

Supplier Preferencing Nuisance Supplier’s view: Little profit made Customer difficult and/or expensive to service Probably poor at paying bills Customer generally unattractive in other ways Poor service, supplier shows little interest in putting it right Supplier’s overall objective: “Give low attention” Withdraw from the business

Supplier Preferencing Exploitable Supplier’s view: Suppler in unique position of strength Prices may rise or service costs reduce Seek short-term advantage Suppler prepared to risk losing customer Supplier’s overall objective: “Drive for best price” Maximise profit in the short-term

Supplier Preferencing Supplier’s view: Customer has potential Customer highly sought after Supplier works hard to exceed customer expectations Pricing based on “special deals", marginal cost principles Pro-active service levels Supplier’s overall objective: “Nurture the customer” To get further business Development

Supplier Preferencing Supplier’s view: Supplier’s core business High level of service and response Increase profitability in low key manner Receptive to strategic alliances Seeks to lock in customers Supplier’s overall objective: “Look after the customer” To retain and expand business To ensure profitability Core

Market Management Matrix L C R B Development Nuisance Exploitable Core × √

Post Contract Process 1 2 3 4 5 6 7 Develop & Implement Action Plan Manage Performance & Relationships Execute Close-out & feedback Initiate Start-up Deliver Opportunities Manage Change Share the learning Orderly Transition Close-out existing contract Timeline Roles & Resp. Communication HSSE KPI’s Checklist Signed contract Risk Management Evaluate the impact Engage stakeholder Change response & manage transition Full documentation Supply chain & cost structure Strategy trigger/renewal points Identify, document & share Analyse & evaluate impact Feedback learnings Continuous improvement Conduct overall reviews Data/learning from other sources Develop Contract Mgt. Plan Kick-off mtg. Verify Supplier Plans HSSE prior to mobilisation KPI’s Opportunity & learning logs Manage risks Measure performance Manage change & variations Manage claims & disputes Track spend Confirm roles & responsibilities Monitor review & revise opportunities Evaluate & prioritise Ensure proper stakeholder engagement Pursue & deliver realisable opportunities Capture & report value improvement Verify completion Prepare & agree Final Account Resolve ops/part/legal/HSSE/ & commercial Issues Release securities Appraise supplier perf. Close-out report Enhance Value Deliver Opportunities Manage Change Share Learning

Contractor’s incentive to price accurately Different Contract Strategies F L E X I B T Y Min Cost Reimbursable Partnership Call-off Trading House Spot Max Goods Services Day Rate Unit Rate Bills of Quantities Lump sum Time and Materials Contractor’s incentive to price accurately Buyer’s Risk

Different Contract Strategies Min Max R E L A T I O N S H P Time to develop scope Cost + Fixed Fee Bills of Quantity Call off order Target Cost Trading House Lump sum + variations ADHOC MEASURE COST REIMBURSABLE Lump sum – EPIC – Conventional/Traditional Employers risk (if accurate scope) Employers Flexibility Contractors Incentive to Price Accurately Schedule of Rates Management Cost + %Fixed Fee

The Contract Interface Matrix { Several combinations can be considered (EPC) Transport Install on Site Design Procure/Lease Consolidate Existing Containers ‘New’ Containers Close out/Dispose Pack up current office Sch. Of rates Lumpsum Sch. Of rates Load/Unload Day rates Lumpsum B.O.Q Un-pack at new office Lumps Lumpsum Make minor alterations Lumps Lumps Lumps Sch Rates Please note that this is just an example illustrating the contract matrix and does include any recommended strategy!

defined Usage uncertain Tendered Contract Negotiated Contract (1) Lump Sum (2) Unit Rate (3) Reimbursable Cost Type: Equipment/Services defined Usage uncertain Uncertain, not defined Scope: Fully Defined Conceptual design Construction Manpower Equipment hire Drilling Transport Consultancy Maintenance civil wells process Seismic acquisition and processing Construction EPC Detailed design Total Procurement Conceptual design (eg EPC) Consultancy Applicability: Measured work Day rate Actual cost Incentive Actual cost + profit Fixed fee Milestone Incentive Day rate/time rate Measured work Milestone Incentive Remuneration: Turnkey (1), (2), (3) Bills of Quantities (1), (2) Time and Materials (2), (3) Consultancy agreement (2), (3) Combinations of Types:

Example Contractor Motivation High Easy Hard Low Introduce competitor Delete contractor from future tenders Other group contracts Liquidated damages Incentive Payments Withhold Payments Extend contract Retention Monies Ease of Implementation Easy Hard Terminate The Law Performance Bonds Low

Introduction to Performance Management Incentives - Additional business - Incentive scheme - Milestone payments Contract extension Public sector networking New business opportunities “Preferred” status paying more for earlier completion Sanctions Retention Litigation Termination Performance bond Withhold payment Suspend future bids Liquidated damages Introduce competition

Successful incentives Require trust to work - Win win, not win lose Size of incentive must be reasonble & realistic The concept is motivation It must be clear they are not “entitlements” Consider risk sharing They have to be negotiated into the contract

Relationship Development Stable phase - Uncertainty reduced - Adaptations implemented - Normalisation of operating processes Supplier development processes Base level commitment Harmonisation of planning cycles Termination - May occur at any time - Perhaps due to Change in market perception Change in need perception Change in supplier performance