The What do I want? Lecture Procurement The Make-or-Buy Decision What the buyer wants What the seller wants The What do I want? Lecture

Learning Objectives Discuss the causes of buy or procurement decisions Identify some of the motivations of buyer and seller in the tendering process

What is procurement? “Originally Mil.: the action or process of obtaining equipment and supplies. Subsequently (esp. in Business): the acquisition of goods or services at the best possible price, in appropriate quantity, at the right time and place, etc.; this as a practice.” Oxford English Dictionary Sounds a bit similar to Project Management, doesn’t it? “Procurement is the process by which the resources (goods and services) required by a project are acquired. It includes development of the procurement strategy, preparation of contracts, selection and acquisition of suppliers, and management of the contracts.” APM BoK

Procurement as a Project Lowe (2013) Commercial Management Framework: Requirement identification Requirement specification Solution selection Asset/service procurement Award Asset receipt Asset usage Asset disposal/Service termination APM PLC Project lifecycle (Concept, definition, development, handover, closeout) Extended project lifecycle (benefits realisation) Product lifecycle (operation, termination)

Project Procurement Procurement FOR a project Procurement OF a project Procurement AS a project Procurement as a ‘spot market’

What is the difference between a ‘sale’ and a ‘contract’? Presentation

Different ‘buy sides’ Subcontractor Value Chain Prime Contractor Value Chain Client Value Chain User Value Chain Supplier Value Chain Project Vendor Value Chain Purchaser Value Chain A straightforward ‘buy’ at market, or a contracted relationship? Relationships could be one-off or continual Buy-side tactics often get pushed down the supply chain

(are we making or buying cluster?) Make or Buy (are we making or buying cluster?) Make if… The asset is going to be heavily used and will give strategic advantage The capability to make will have synergy across the business Few alternatives suppliers/supply market is controlled by competitors Need innovation in some area, sensitive IP Supply and usage need to be close together Have an internal cost advantage Strong, defensible skill base Buy (Hire or Own) if… Business is unattractive Materials or processes are not critical to business or marketing Supply market will allow close relationships other advantage in supplier relations Relations can be sufficiently managed through contracts Low supplier switching costs, uncoupling is low risk No sensitive IP Suppliers have lower cost base Skills are hard to acquire

Why procure? Procurement is Problem Solving To utilise skills or resources for a limited time, which are not economical to own To have the benefit of ‘best in breed’ solutions from such providers To get work started more quickly than would be possible by recruiting, training and resources employees and owned resources To spread the performance or cost risk of a particular project To be able to focus on core competencies and leave the rest to the suppliers - outsourcing

Corporate objectives for Procurement Department “Feed the operation” – Joseph Carlioz Provide value which the firm is unable to or is uneconomical to produce in-house Ensure continuity of supply Develop relationships with and monitor performance of existing sources Open up new sources of supply either as alternatives or for future strategies To buy efficiently, economically and ethically – best value at lowest cost To maintain relationships with other departments, requesting and providing information and advice Perhaps to dominate access to supply in a given industry

Who does it? Commercial Manager Buy-side Commercial Manager or Officer Project Manager Supply Chain Manager Procurement Manager Procurement Contracts Manager Contracts Manager (procurement) A shared role between procurement and contracts Industrial Buyer

What does the buyer want from the supplier? To get what they (think they) have paid for ‘Fitness for purpose’, which is only in the eye of the customer, despite what the supplier might believe about their product/service Accurate cost/time estimates Competitive prices (sometimes) Delivery on time, cost, quality – avoiding overruns Delivery to the correct location Integration with project plans and works of other suppliers Minimal Scope Creep but flexibility to change design during production Minimal claims for additional time and cost from contractors Advice and aftercare, meaningful guarantees and after sale service Is defect free on delivery/completion/rapid fixing of defects Early commencement of work (how early?) To be actively involved and informed during the life of a project A clear allocation of responsibilities/single-point responsibility

What does a seller or supplier want? A full order book Make the intended margin on the contract Maximise profits through via tactical change control, contractual claims or cost reductions Minimise changes unless as above… Provide contracted deliverables on time to avoid exposure to liquidated damages or other penalties Maximise cashflow Be paid the correct amount Be paid on time Repeat business Enhanced credibility from serving you Access to better customers than you Competitive Advantage Is there a conflict here? As buyer, how do we align our interests?

How does the buyer get it? Project Management processes - to determine the requirement and the conditions Tendering process – to select the suppliers Contract & Payment terms – to get the behaviour, which should lead to the required thing What does the seller want? Aligned interests can help overcome moral hazard and adverse selection