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Submitted in partial fulfillment of the requirement for the award of eMBA for the year 2010-12
Under the guidance of: Prof. L.N. Chopde
By: Saylee Gandhi Sneha Shriyan Rasika Chavan Harshada Dage
MET Institute of Management Mumbai
This is to certify that, Ms Saylee .M. Gandhi Ms Sneha Shriyan Ms Rasika Chavan Ms Harshada Dage of eMBA Div C Semester I of MET Institute of Management for academic year 2010-12 has successfully completed the project on “Procedure for Procurement of Materials” under the guidance of Prof. L.N. Chopde.
(Certificate from the Company)
Preface 4 .
His continuous interaction and support made it possible for the successful completion of the project. be it regarding any concept related of accounts. It would not have been possible for us to reach this stage without his support & guidance. for his valuable assistance. 5 . L. Chopde (faculty member MET) our project guide. N. He always had the answers to our queries. We would also take the opportunity to thank the institute for the encouragement and facilities provided to us for the successful completion of this project.ACKNOWLEDGEMENT Our deepest sense of gratitude. keen interest at each step of the project. profound respect and sincere thanks to Prof.
Executive Summary 6 .
Introduction………………………….………………………………... b. b. Fixed Price Contracts………………………………….. e.12 Cost Contracts…….. Procedures of Procurement a. c. b.15 Shared Services……………………………………….TABLE OF CONTENTS 1. Procurement a.13 Leasing Contracts………………………………………14 Regular Purchase Contracts..14 4.11 Indirect Procurement………………………………….14 Installment Purchase Contracts………………………..…………………………. Types of Procurement Contracts a...…09 Common Terminologies in Procurement……………….. Direct Procurement…………………………………….. Procurement .. d.09 2.15 7 . Types of Procurement a... b..………………………………….11 3. Tendering…………….
……………………………….21 Types of Risks in Procurement……………………….22 7.16 5. Risk Management in Procurement a. Steps in Procurement of Materials……………………………18 6.…29 8 . Green Procurement…. What is Risk Management…………………………... Concepts a. d.…28 8. b...c.26 Public/Government Procurement…………………..24 E-Procurement……………………………………. Selection in Planning (SIP)……………………………16 Just in Time Approach (JIT)………………………….…. Bibliography………………………….. b....………………….. c.
Procurement is the acquisition of appropriate goods and/or services at the best possible price to meet the needs of the purchaser in terms of quality and 9 ." The procurement department within an organization manages all the major purchases.Procurement Introduction Procurement is the fancy word for "purchasing.
Almost all purchasing decisions include factors such as delivery and handling. Common Terminologies in Procurement: 1) Procurement plan: The document that describes how procurement processes from developing procurement documentation through contract closure will be managed. managing contract related changes and. If good data is available. marginal benefit. 10 . when appropriate managing the contractual relationship with the outside buyer of the project. time and location. it is good practice to make use of economic analysis methods such as cost-benefit analysis or cost-utility analysis. 2) Make or Buy Decision: A business decision that compares the costs and benefits of manufacturing a product or product component against purchasing it. 3) Contract Administration: The process of managing the contract and the relationship between the buyer and the seller. and price fluctuations. Procurement generally involves making buying decisions under conditions of scarcity.quantity. Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing exposure to fraud and collusion.
there is more accountability. Bids are typically read aloud in public at the time and place specified in the solicitation.obligating the buyer to pay for them.4) Invitation for Bid: Refers to the method of soliciting offers and are used when negotiations are not anticipated. 5) Request for Proposal (RFP): A type of solicitation that is used typically for large amount of contracts when negotiations are anticipated. Offers in response to RFPs can be accepted without negotiations and become legally binding. Direct procurement and indirect procurement TYPES 11 . services to be supplied. 7) Statement of Work (SOW): A narrative description of products. Contracts are used because they are legally binding. 6) Contract: A contract is a mutually binding agreement that obligates the seller to provide the specified products or services . Types of Procurement Procurement is broadly categorized in two types as follows.
It encompasses all items that are part of finished products. spare parts Based on the consumption purposes of the acquired goods and services. The first category being direct. such as raw material.related procurement and the second being indirect. It comprises a wide variety of goods and services. Direct procurement occurs in manufacturing settings only. procurement activities are often split into two distinct categories. components and parts.related procurement. In contrast. production. indirect procurement activities concern “operating resources” that a company purchases to enable its operations. from standardized low value items like office supplies and machine lubricants to complex and costly products and services like heavy equipment and consulting services. Direct procurement.Direct procurement Indirect procurement Capital goods and services Low Low High Strategic Machinery. computers Raw material and Maintenance. which is the focus in supply chain management. non-production. directly affects the production process of manufacturing firms. repair. production goods and operating supplies F Quantity Large E Frequency High A T Value Industry specific U Nature Operational R E Crude oil in Examples S petroleum industry Low Relatively high Low Tactical Lubricants. 12 .
will be paid more and also Fixed Price plus Award fee (FPAF) – 10000/. Leasing Contracts 4. Fixed-Price Contracts 2. Installment-Purchase Contracts 1) Fixed price contracts: Under fixed price contracts there are following subcategories: a) Firm-fixed price contract: It is used when a fair and reasonable price can be established at the outset. The firm pays the negotiated amount regardless of the contractor’s real cost. Costs Contracts 3. Purchase Contracts 5.Types of Procurement Contracts Procurement contracts can be categorized into 5 main areas such as: 1.is paid plus for every month the work finished earlier than schedule 1000/.plus every 13 . b) Fixed-price incentive contract: It is used when the parties can negotiate a target cost.g. target profit and a ceiling price that provides for the contractor to assume an appropriate share of the risk. E. Fixed Price Plus Incentive Fee (FPIF) – 10000/.
The seller gets percentage of saving if actual cost is less than target cost.is awarded with the max award of 10000/c) Fixed price with economic price adjustment contract: It is used to protect the parties against significant economic fluctuations material costs during the period of contract performance (rise since last financial recession) recommended for all food commodities buyers.categories: a) Cost Contract: Seller receives no profit. e) Cost plus Award Fee (CPAF): Cost plus fee plus award based on performance. d) Cost plus Incentive Fee (CPIF): Cost plus variable fee.in fees. Used by non profit organizations. Cost plus 10000/. 14 . Under costs contract there are following sub.year plus a price will increase based on Consumer Price Index. E. Fixed Price Economic Price Adjustment – 10000/. c) Cost plus Fixed fee (CPFF): E. Original estimate is done (target cost) and target fee is determined. 2) Costs Contract: It is used when there are enough uncertainties involved in contract performance to use a fixed price contract taking into consideration limitation of costs.month performance exceeds planned value 1000/. b) Cost Plus Fees (CPF) or Cost plus Percentage of Cost (CPPC): Cost plus 10% as fees.g.g.
g. 4) Regular Purchase Contracts: Such contracts are ordinary contracts and are generally used for procuring commodities.f) Time and Material: Contract is based on the time consumed and materials used. Rs. Procedures of Procurement a. 5) Installments Purchase Contracts: Such contracts are ordinary contracts and are generally used for procuring commodities on installment basis. Such types of contracts are usually used in construction industry for procurement of materials. 3) Leasing Contracts: Contracts are leased as per the requirements of both the parties for specific period of time.100 /hr plus cost. Terms and conditions of installments are decided by the buyer and the seller parties. E. Tendering: 15 .
resulting in fragmented. This combines several small procurement agents into one centralized procurement system. presenting control and compliance issues. Company X is required to state the product/service desired and make the contract open to the bidding process. If the lowest bidder is deemed incompetent to provide the desired product/service.10. Each organization executes transactions differently. an organization’s procurement functions may be joined into shared services.: Company X policy: "any product/service desired that is over Rs. Then. 2) Shared Services: In order to achieve greater economies of scale. Tendering.000 requires a bidding process") depending on policy or legal requirements. inconsistent processes with no internal control over the information. Company X will then select the submitter who has the next best price. Company X will usually select the lowest bidder. Most global companies have multiple purchasing departments resulting in disconnected processes and individuals all trying to accomplish the same function.e. 16 . Shared Services is an organizational best practice for procurement. If the cost for that product/service is over the threshold that has been established (e.. A company may want to purchase a given product or service. For Procurement to scale operations in a central Shared Service Center. Company X may have ten submitters that state the cost of the product/service they are willing to provide. organizations can consolidate suppliers.00.Procurement may also involve a bidding process i. and is competent to provide the product/service.g.
These means the material has to supplied only when it is needed. The philosophy of JIT approach is not to waste money on keeping the inventory. strengthen internal service for customers. Just-in-time is a system of timing the purchases of consumables so as to keep inventory costs low. The SIP process also enables vendors and contractors to respond with greater accuracy and competitiveness as a result of the generally longer lead times they are afforded. Just in time approach says to keep no or zero inventory. This not only applies to the raw materials but also to finished goods. One system which has gained increasing momentum in the construction industry and among developing economies in the Selection in planning process which enables project developers and equipment purchasers to make significant changes to their requirements with relative ease. 3) Selection in Planning (SIP): There are several alternatives to tendering which are available in formal procurement. This approach leads to minimizing storage costs and any taxes that may be applicable. 4) Just-in-Time Approach (JIT): Another common procurement issue is the timing of purchases. However 17 .improve operational efficiencies. Just-in-time is commonly used by Japanese companies but widely adopted by many global manufacturers from the 1990s onwards. strengthen internal controls and facilitate the compliance process.
The system is said to be developed by Toyota to decrease their cost of inventory. proper correspondence between customer and supplier has to be maintained. But when once JIT is successfully installed it helps companies to substantially reduce the cost of the product. In other words it is reverse chain of production. For implementation of JIT. maintenance and other factors. where customer places the order and accordingly the product is manufactured. system installations.having a JIT approach being followed is very difficult and companies need lot of investment to be made. This investment is not only monetary but also includes employee training. The largest chain of the world. This is also popularly known as "Pull system" in production. Steps in Procurement of Materials 18 . Wal-Mart is successfully following this approach and thus they are in the position to offer the product at lower cost as compared to other retail chains.
Additional information and clarifications are often required by vendors. they are evaluated on the basis of a predetermined scoring system referred to as ‘source selection criteria’. 6. Prepare bid documents: These documents include a SOW statement (Statement of Work). Anything the organization cannot provide must be procured. general terms and conditions. Receive responses from bidders: A suitable time-frame must be given for vendors to prepare bids. or through an organization’s qualified vendors list. 5. 19 . 3. 4.1. and an explanation of how proposals will be evaluated (source selection criteria). 2. bid response instructions. Project needs are analyzed and compared with available resources and skills. the internet. The events offer an opportunity for vendors to ask questions and to hear questions posed by other potential vendors. Distribute bid packages to potential vendors: Potential vendors can be identified through advertising. Make purchase decisions – Planning: Purchase decisions follow from project planning and analysis. Evaluate proposals: After all bids have been received. Bidder’s conferences: Bidder or vendor conferences are used to efficiently deliver detailed information to potential vendors.
and support. Interview bidders: Short-listed bidders are interviewed to discuss details of their offers and to ensure a good fit with the purchasing organization. 10. Conduct negotiations: The leading candidate is invited to discuss (negotiate) contract details. The issues that generally require clarification include such things as delivery date. Determine work start date: Work cannot begin until after the final contract has been signed by senior management of both the buying and selling organizations. 7. 11. 20 . Delays in obtaining final signatures can result in delays to the start of work. 8. Responsibility for ensuring that the right work gets done at the right time is typically left to the project team. The contract is a legal document that clarifies the responsibilities and relationships between the buyer and seller.The comparisons are typically performed by experts from various disciplines related to the type of procurement. Award contract: A contract is awarded for each procurement. shipping costs. 9. Administrative responsibility remains with the procurement department. warranty. Manage contracts: ‘Managing contracts’ is the supervision of actual procurement activities from both an administrative and a practical perspective.
12. Records are kept of all correspondence generated during the life of the contract. 14. a contract archive is created that documents exactly what work was completed and what payments made. (Of course every effort should be made to correct the situation through negotiations and discussions before considering termination. How claims are administered is determined by the procedures set out in the contract.’ Contract closure involves the formal notification of all parties regarding the status of the contract. When the remedies specified in the contract are insufficient to resolve conflicts. the issue may ultimately end up being settled in court. 21 . End contracts: After all work is complete. In addition. A detailed SOW is a critical component of effective performance analysis. (such as schedule or quality) then the contract may be terminated according to terms established in the contract. Claims administration: Claims administration involves the management of conflicts between the buyer and seller. or if the contract is terminated.) 13. Review performance (extend or terminate): Throughout the life of the ‘delivery’ of goods and services. the performance of the delivering organization (vendor) must be constantly reviewed and compared with contract terms. If vendor performance falls below a specified standard. the contract is formally ‘closed.
Ongoing claim administration – litigation: Conflicts between the buying and selling organizations can continue long after a project is formally completed. which can take years to be resolved. It is important to recognize that risk management covers all aspects of procurement. processes and structures that are directed towards effective management of potential opportunities and threats to the organization achieving its objectives. What is Risk Management? Risk management can be defined as the culture.’ This includes an analysis of what went according to plan. Risk management in Procurement 1. An organization’s legal and procurement departments take responsibility for ongoing claims administration. 16. Risk management is an essential part of good procurement. what went wrong. An officer who manages procurement risk well is more likely to achieve the objectives set in the business case. 22 . The following diagram illustrates the hierarchy of risk.15. and what should have been done differently. Lessons learned: An important part of helping an organization to avoid repeating mistakes is the gathering of ‘lessons learned.
increased government inspection. or inability to enforce contracts.e. judicial review. 23 . a clear audit). or internal procedures (the procurement code of practice or contract procedure rules) or the lack of documentation to prove compliance (i. and in extreme cases may result in external intervention. Programme risks can exposure the Company to challenge. Strategic risks threaten to damage the reputation of the Company.2. Programme Risk – Failure to comply with procurement legislation. employment tribunals. result in loss of public confidence. What are the types of risk associated with procurement? There are three main risk areas: Strategic Risk – Long-term adverse impacts from poor decision-making or poor implementation.
or is unavoidable. hazards to service users. a programme risk could be the awarding a contract without appropriate terms and conditions and lack of contract management. the general public or staff. resulting in confusion as to contract requirements and outcomes. inadequate terms and conditions. or damage to property. 2) Reduction – Control measures are implemented to reduce the impact and/or likelihood of the risk occurring. malfunctioning equipment. Procurement risk can be minimized by the following means: 1) Elimination – The circumstances from which the risk arises are identified and removed so that the risk no longer exists. failure to deliver services effectively & on time. 24 . 3) Transfer – The financial or delivery impact of a risk is passed to others. Such risks are often the result of inadequate contract management processes.Project or Operational Risk – Poor contract management. and ultimately. litigation. and can result in insurance claims. poor user satisfaction. 4) Acceptance – Documenting a conscious decision after assessment of areas where the risk can be accepted as having little or no material impact. disputes. For example.
Definition Green procurement is the purchase of environmentally friendly products and services. technology. are designed to last longer and minimize their impact on the environment from cradle to grave. regardless of size. Also known as green or environmental purchasing. service or contract. Green procurement programs may be as simple as purchasing renewable energy or recycled office paper or more involved such as setting environmental requirements for suppliers and contractors. quality and the environmental impact of the product. 25 . "Green" products or services utilize fewer resources.Concepts Green Procurement: A. they save money over the life of the product or service. "green" products and services have less of an impact on human health and may have higher safety standards. green procurement compares price. Whilst some "green" products or services may have a greater upfront expense. Green procurement policies are applicable to all organizations. the selection of contractors and the setting of environmental requirements in a contract. Main Features Green procurement steams from pollution prevention principles and activities. In addition. B.
2. expensive or zero environmental alternatives. increase resource efficiency. They can also assist countries in meeting multi-lateral requirements such as the Kyoto Protocol. prices. inaccurate studies. 26 .Before a green procurement program can be implemented. markets. lack of readily available environmental friendly products. 5. available services and organizational behavior. programs and policies. The outcome is a regularly reviewed green purchasing policy that is integrated into other organizational plans. lack of organizational support. 3. 4. Green procurement policies and programs can reduce expenditure and waste. Inaccurate or unsupported environmental claims by manufacturers and suppliers. International Standards Organisation and other bodies have established guidelines for green procurement programs. A life cycle assessment of the environmental impacts of products or services is required and a set of environmental criteria against which purchase and contract decisions are made has to be developed. and influence production. current purchasing practices and policies must be reviewed and assessed. Obstacles to implementing a green procurement program include: 1.
E. 27 . Examples 1. products. Environmental considerations include: avoidance of toxic substance during production and disposal. quality.C. and production equipment based on price. Ongoing purchases may qualify customers for volume discounts or special offers. e-procurement is also sometimes referred to by other terms. Depending on the approach. Typically.Procurement: E-procurement is the business-to-business purchase and sale of supplies and services over the Internet. recyclibility. and ease of disassembly for processing and disposal. such as supplier exchange. buyers or sellers may specify prices or invite bids. resource and energy conservation. Transactions can be initiated and completed. e-procurement Web sites allow qualified and registered users to look for buyers or sellers of goods and services. parts. environmental impact. Fujitsu Fujitsu Japan has a green procurement policy that selects materials. and delivery. An important part of many B2B sites.
negotiating prices and settling contract terms.E-procurement software may make it possible to automate some buying and selling. enabling a Shared Service Center to create further efficiencies by managing a company’s total procurement budget and process. Improved Purchasing Decisions – With more information readily available. Benefits of E-procurement: • Lower Costs – Automation enables buyers to process more bids and speeds purchasing. Companies participating expect to be able to control parts inventories more effectively. E-Procurement delivers significant decreases in purchasing cycle times. E-procurement is expected to be integrated with the trend toward computerized supply chain management. spending analysis and finding better suppliers. reduce purchasing agent overhead. increased compliance with corporate purchasing policies and better purchasing decisions. and improve manufacturing cycles. New Savings and Improvement Opportunities – Finance managers can monitor performance quickly with analytical reports and realize buying power by consolidating purchasing volumes. • • 28 . buyers can make better decisions on selecting suppliers. These efficiencies optimize operations. freeing time for more important activities such as price negotiation.
reducing calls to Purchasing. • • • • Public/Government Procurement: 29 . identify inefficiencies and eliminate unnecessary spending. Faster Communication – The real-time exchange of documents and monitored workflow speeds communications with business managers and suppliers. making it easier to detect bottlenecks. Improved Visibility into Purchasing Processes – Finance has a “clear line of sight” into the end-to-end procure-to-pay process. Improved Supplier Relationships – Self service capabilities enable suppliers to access information online. Easier Auditing – Complete capture of all purchasing content and workflow steps combined with instant online access makes integrated auditing easier for both internal and external auditors.• Faster Purchasing Cycles – The elimination of document rerouting and paper chasing speeds the purchasing process. no searching for lost or misfiled documents.
Bibliography: 30 .
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