1. 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

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

3. 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

4. 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)

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

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

7. 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

8. (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

9. 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

10. 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

11. 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

12. 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

13. 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?

14. 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