A CSC Company UNCLASSIFIED Fundamentals in Mastering Purchasing Presenter: Jennifer Kupec - CPCM, PMP ®

A CSC Company UNCLASSIFIED 2 Purchasing  Purchasing refers to a function in business whereby the enterprise obtains the inputs for what it produces, as well as other goods and services it requires. In larger businesses, the function is frequently carried out in a purchasing department, headed by a purchasing manager.inputspurchasing departmentpurchasing manager  Purchasing is the informal name of the department in Procurement responsible for issuing Purchase Orders for goods, including material and equipment. In most US Corporations, Purchasing Agents are typically referred to as “Purchasing Specialists” or simply as “Buyers”.

A CSC Company UNCLASSIFIED 3 Basic Work Process  BASIC WORK PROCESS:  Purchasing Agent receives a requisition.  The Purchaser then evaluates the requisition to determine which suppliers would best supply the material and includes those suppliers on the List of Bidders, or those who will be solicited to submit quotation.  The formal request for a quotation is known as an Request for Quotation (RFQ) or Request for Proposal (RFP), depending on the complexity of the material or service.  The RFQ/RFP can be as simple as text written in an , to a complex document requesting engineered drawings, manufacturing locations, multiple points of contact at each branch location, and financial statements.  The Purchaser will also determine the validity period of the Solicitation of Bids known as the "Bid due Date", the date when the window to submit proposals ends.  After the bids are received the Buyer will evaluate the proposals and tabulate the bids, usually on a spreadsheet. A bid tabulation is essentially a spreadsheet with catorgies used to informally compare each supplier's proposals to determine which proposal best meets the Buyer's needs.  After the bids are tabulated, the Buyer will make a decision in regards to which supplier will be recommended and will award the order and the Seller will proceed in supplying the material in accordance with the agreed upon terms.

A CSC Company UNCLASSIFIED 4 Fundamentals  Understand the Requirement  Perform Analysis  Prepare for Negotiations  Execute  Always Document!

A CSC Company UNCLASSIFIED 5 Requirements  Understand the requirements!  Ask yourself? Does the requirement make sense? Is it reasonable to ask the contractor to provide the requirement? Do you understand the deliverables? Do you know a better alternative to the requirement that is being asked for?

A CSC Company UNCLASSIFIED 6 Evaluate Overall Price Reasonableness With Price Analysis Price analysis - process of examining and evaluating a proposed price to determine if it is fair and reasonable  Cost analysis - not a substitute for price analysis  Perform a price analysis whenever there is a valid base for analysis  Cost analysis - insight into what it will cost the firm  Cost analysis does not necessarily provide a picture of what the market is willing to pay

A CSC Company UNCLASSIFIED 7 Basis for Price Analysis Select the basis for comparison in determining if a price is fair and reasonable, such as:  Proposed prices received in response to the solicitation  Commercial prices  Previously proposed prices and contract prices for the same or similar end items  Parametric estimates or estimates developed using rough yardsticks  Independent public body estimates  Prices obtained through market research

A CSC Company UNCLASSIFIED 8 Price Reasonableness Decision  Price analysis is a subjective evaluation  Resolving differences between cost and price analysis: If price analysis does not support the cost analysis, reexamine the cost analysis result Consider alternative methods of contract completion If the results of cost analysis and price analysis cannot be reconciled, refer the contract action to the next level

A CSC Company UNCLASSIFIED 9 Identifying Cost Drivers Cost drivers - aspects of proposal or contract requirements that if changed would have a major impact on contract price  What are some possible cost drivers? Contract terms and conditions Delivery requirements Technical requirements

A CSC Company UNCLASSIFIED 10 Considering the Cost Driver Effect on Contract Price  Example 1 - Normal delivery time for Candy Bar A is six months after receipt of an order at a unit price of $1.00. The requiring activity wants the candy bar in three months at the same price. The bidder can get the candy bar in three months, but only at a premium price of $1.25.  What is the cost drivers in Example 1? Example 1 - Schedule is a cost driver with a shorter delivery schedule resulting in a cost increase.

A CSC Company UNCLASSIFIED 11 Identify Sources of Cost Risk  Most cost estimates include a "point estimate"  In most cases, the point estimate is one of a range of possible costs  There are usually variances between projected and actual costs

A CSC Company UNCLASSIFIED 12 Cost Risk  Increases when market prices are volatile or cost information is lacking  There are a variety of methods for reducing and controlling contract cost, among the most important are the appropriate use of: An appropriate contract type Clear technical requirements Public body furnished property Other contract terms and conditions

A CSC Company UNCLASSIFIED 13 Contract Type Decision  Remember contract type decisions are subject to negotiation  Contract Type and contract price are closely related and should be negotiated together  The objective is to negotiate a contract type and price that will result in reasonable contractor risk and provide the contractor with the greatest incentive for efficient and economical contract performance

A CSC Company UNCLASSIFIED 14 Elements by Contract Type  Establish a position on key elements that will define the contract pricing arrangement  You may be able to: Restrict negotiations to total price Negotiate agreement on several elements needed to define the pricing arrangement

A CSC Company UNCLASSIFIED 15 Contract Elements by Contract Type Contract TypePricing Elements Requiring Negotiation Firm fixed- price and firm fixed-price level of effort Total price Fixed-price award fee  Award fee pool  Fixed price (including normal profit)  Plan for periodic evaluation Cost-plus- incentive-fee  Target fee  Cost sharing arrangement under target cost  Cost sharing arrangement over target cost  Minimum fee  Maximum fee  Target cost Cost-plus- award-fee  Estimated cost  Base fee  Award fee

A CSC Company UNCLASSIFIED 16 Contract Elements by Contract Type (cont.) Contract Type Pricing Elements Requiring Negotiation Cost-plus- fixed-fee  Fixed Estimated cost  fee Time-and- materials  Labor-hour rate(s)  Material handling costs (indirect costs) or provision to charge material on a basis other than cost  Ceiling price Labor-hour  Labor-hour rate(s)  Ceiling price $$$

A CSC Company UNCLASSIFIED 17 Added Value  Add value to your team Understand the contractors available to perform different kinds of work Understand the market and what is fair market value for a product or service Support you analysis with facts and not fiction Document decision and execute timely Question things that do not make sense

A CSC Company UNCLASSIFIED 18 Consider Contracting Alternatives  Consider alternatives offered by your contractors  But ensure support from technical personnel is available to help you review complex proposals  Analysis support may also be needed from: Requiring activity personnel Technical personnel The cognizant auditor

A CSC Company UNCLASSIFIED 19 Caution About Alternatives Before bringing a potential alternative, consider:  Costs  Terms and conditions affected by the proposed alternative  The nature of the discussions In a non-competitive environment, changes in terms and conditions may be directly negotiated In competitive procurements, it may be necessary to amend the RFP and notify other bidders

A CSC Company UNCLASSIFIED 20 Pre-negotiation Documentation  Draft elements of a Price Negotiation Memorandum (PNM) before negotiations: Purpose of the negotiation Description of the acquisition Exception(s) used and its basis  The extent to which the purchasing agent: Relied on the data submitted Recognized any submitted data as inaccurate, incomplete, or non-current Determined that an exception applies and will not require certification

A CSC Company UNCLASSIFIED 21 Additional Documentation Document important aspects of the procurement situation that affected pre-negotiation objectives, such as:  The items or services and quantities being purchased  The place of contract performance  The delivery schedule or period of performance  Differences between the proposed delivery schedule and the objective schedule

A CSC Company UNCLASSIFIED 22  Any previous buys of similar products and related information  Any public body-furnished material  Any unique aspects of the procurement action  Any outside influences or time pressures associated with the procurement Additional Documentation (Cont.)

A CSC Company UNCLASSIFIED 23 Summarizing Pre-negotiation Positions  Outline the bidder's estimating rationale, the public body's pre-negotiation objective, and key differences between the two positions  Generally, this summary begins with a tabular presentation similar to the following: Cost ElementProposedObjectiveDifferenceReference Engineering Direct Labor $1,000,000$900,000$100,000See Para A Engineering Overhead $2,500,000$2,025,000$475,000See Para B Subtotal$3,500,000$2,925,000$575,000 G&A Expense$350,000$292,500$57,500See Para C Total Cost$3,850,000$3,217,500$632,500

A CSC Company UNCLASSIFIED 24 Consider Risk by Developing a Range of Positions The classic approach to developing a negotiation range calls for three positions – minimum, objective, and maximum  The cost objective should be the best estimate of what the effort should cost  The minimum, sometimes called the "going in position," should be at the low end of the reasonable range  The maximum is at the high end of the reasonable range

A CSC Company UNCLASSIFIED 25 Document the References Used in Position Development  Be able to find key references during management review of contract negotiation objectives, during negotiations, and during preparation of the price negotiation memorandum  Why is this important? If a question arises later concerning defective pricing, it is vital that you have a detailed record of the information that you relied on during negotiations

A CSC Company UNCLASSIFIED 26 Thank You for Coming! Presenter Jennifer Kupec CPCM, PMP® (703)