1. Procurement & Contract Management – Discussion notes

2. 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

3. 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

4. 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

5. 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

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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. Market Management MatrixL C R B
Development
Nuisance
Exploitable
Core × √

16. 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

17. 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

18. 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

19. 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!

20. 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:

21. 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

22. 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

23. 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

24. 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