Procurement & Contracts

Management
Lecture #1
01 February, 2014

Introduction
Education

BCS; 1997
MBA; 2001
PMP; PMI 2009
Six Sigma Black Belt; ASQ 2013

Work

Experience (16 years)

Jaffer Brothers (Pvt) Ltd

Ultimus Inc.
Enabling Technologies
Halliburton
BP
NTT DoCoMo
Schlumberger
Mobilink
Wateen Telecom
2

Class Introduction
Personal

Info

Name, Degree
Professional Experience (if any)
Why Procurement & Contracts
Management?
Four

facts about you

Course Structure
15

classes (course outline to be

shared)
3 Hourly Exams
Project
Marks distribution
Marks Head

Total Qty

Marks

Total Marks

Hourly Exams

30

30

Attendance

10

10

Class
participation

20

20

Final paper

40

40
4

CR Selection
Responsibility

Manage infrastructure i.e. board

markers, multimedia etc
Manage communication i.e. circulate
presentations, reading material
Manage feedback
Perks

5 special marks
Selection

criteria

Popular vote
5

Overview
All

organizations need inputs of goods and services from external

suppliers or providers.
Savings in material costs mean significant opportunities for
improving corporate profitability and return on investment.
Quality of input materials affects final product quality in a major
way.
In most concerns, large or small, purchasing is fast acquiring
wider recognition and a more strategic role, day by day, due to:

Advancing technologies
Limited resources
Increasing proportion of revenue spent on purchased goods and services.
Opportunities in outsourcing
Fewer and larger suppliers/conglomerates.
Increasing environmental concerns.
Successful adoption of world class ideas (TQM, JIT etc.,) and cutting edge
Technologies by leading concern

Overview (Contd)
For all the above reasons, buyers role is becoming more
strategic in nature. It includes, among others.
1.
2.
3.
4.
5.
6.
7.
8.
9.

Advising top management on market trends short term

and long term
Negotiating long term relationships with critical suppliers
Building strategic linkages with key supplier units
Vendor Development
Quality Trust
Supply Chain Management
Total Cost Reduction
Purchase Research
Value addition through creative purchasing route and
working more towards total cost concept and value
addition with continuous improvement perspective.
8

The Leverage
Strategic

Sourcing can have a

significant impact on the financial
performance and shareholder
value of a Company.

When

the goal is boosting

profits by dramatically lowering
costs, a business should look first
at what it buys.
Fortune, February 20, 1995
9

Illustrative Example
Percentage Cost Reduction in Direct Materials

Baseline

5 % 10 %

15 %

Revenue

COGS Material

60

57

54

51

Labour & Var OH

20

20

20

20

Gross Margin
20
Fixed OH Expenses
Net Income ( pretax )

% Improvement

100

100 100

23
10
10

100

26
10
13

29
10
16

10
19

30

60

90

10

Procurement Steps
Recognize and describe the need
2. Transmit the need
3. Select the vendor
4. Prepare and issue purchase order
5. Follow up the order
6. Receive and inspect the material
7. Audit the invoice
8. Settle the payment
9. Close the order
10.After sales/warranty obligations
1.

11

Procurement Objectives
Right

Quality

Right

Time

Right

Quantity

Right

Source

Right

Price
12

Quality
Quality-

fitness for use

Conformance to specs to be ensured at source
Rejection no solution
Minimal checking at receiver end
Reliability / repeatability
Creation of cost effective specifications;
Changes, if any, for consideration;
Both supplier and user have to contribute
Safety

and environment major trust areas

Quality to be created in a product, cannot be inspected into a product

Related issues
Standardization
TQM

/ ISO 9000 / 14000

Quality circles
Value engineering / value analysis
Supplier assessment / vendor development
13

Time
Lead

time analysis
Follow up system
Expediting
Network analysis/critical path analysis
Liquidated damages
Force majeure conditions
Logistics

Related issues
Effect

of time over-run for projects/critical spares

Bonus/penalty/cost

of expediting
14

Time: Lead Time Analysis

Effect

of long lead time on costs and profitability

Elements of administrative lead time
Making a flow chart showing time for different
activities
Analysis of flow chart to identify delays and
shortcomings of procedures
Improvement of procedures to shorten internal lead
time
Integrated approach
Suppliers lead time analysis
Negotiation with suppliers to reduce lead time and
rendering such help as may be necessary and feasible
Logistics

15

Time: Important Issues

Internal

lead time

Purchasing systems and procedures

Knowledge base
Incomplete specifications / over specifications
External

lead time

Incorrect choice of supplier

Over optimistic delivery promise
Change in buyers requirement / incomplete
order / buyers failure to keep his part of promise
Lack of efficiency in supplier organization
Delay genuinely beyond suppliers control
Logistics
16

Price
Concept

of price
Cost basis
Value / Quality
Concept of right price
Lowest price not necessarily right price
Total Cost concept
Price terms
Discounts
Commercial factors
Monopoly / Oligopoly / Perfect competition
Economic trends
Buyer & supplier partnerships - creating value together
Key success factors :
Knowledge
Product & its alternatives
Market trends
Competitive forces
Hedge / forward buying

17

Price (Contd)
Risk

Management
Forward Markets - Commodities
Business / Economic Factors
Price Analysis And Cost Analysis
Learning Curves
Relationship / Inter Dependence
Negotiation Skills

18

Quantity
Order

Quantity( EOQ / Batch Lot / Min Order Quantity )

Inventory Control
JIT Systems
Economic Lots
Discounts Etc
Staggered Delivery Terms

Related Issues
Working

Capital

Logistics
Warehousing
Distribution
Shelf

Life / Obsolescence
Availability / Shortages - ( Short Term / Long Term
19

Source: Determinants Of
Supplier Mix
Consistent

Quality
Supplier Facilities
Cost, Not Price (Total Cost Concept)
Stable And Competitive
Delivery Time (Normal, Sos)
Location
Service / Attitude / Reliability
Developmental Orientation / Innovation
Financial Strength
Technology / Quality Control / R&d
Market Standing / References

Key Success Factors

Knowledge

Of Suppliers/Market/Own Product
Understanding Of Environment
Long Term Planning
Developing Strategic Linkages With Key Suppliers
Supplier Development

20

Purchasing: Related Issues

Purchasing

Objectives And

Strategies
Purchasing Structure And
Organisation
Systems And Procedures
Measuring Performance,
Efficiency And Effectiveness
Bench Marking - Best Practices
21

Conclusion
Procurement

is acquiring a more strategic role in business

Integrate purchasing into your organization's strategic planning
Make or buy decision
Gain competitive advantage through excellence in purchasing
performance
Set and apply right criteria for selection of your vendors
Supplier development
Set right performance standards for your purchasing function
Re-engineer your procurement process for better user
satisfaction and achieve continuous improvements in inventory
and purchasing costs through improvement in purchasing
cycle.
Logistics and supply chain
Bench marking the purchasing function
Total quality in purchasing
Role of purchasing in the value chain
22

thanK yoU

23