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Q.2 Compare Operation and project procurement. Also list and explain the project procurement process.


Answer:
Operations procurement and Project procurement:
Although there are several commonalities in the procurement carried out for the regular manufacture of a product by an operating company, and the procurement carried out for a specific project, we briefly review the differences between the two in the table hereunder;


TABLE
Operation procurement
Project procurement

1. Caters to ongoing production        
1. Caters to a non-repetitive project
2. Amenable to long term cooperation             
2. Only in exceptional cases, it is amenable to long term co-operation
3. Bulk orders are common                
3. Order quantity is mostly low volume
4. Product is usually a standardized Product
4. Very often, the product or service is customized to the specific project need. In addition, project may also need standard products.

Project procurement management process:
Project procurement method will vary depending on the category of the product / service being contracted. The broad categories are:
– Materials or products
– Equipment or tools
– Labors
– Professional services
– Totally engineered systems
– Total project

Project procurement management generally involves the following:
  • Decide on „Make or Buy
  • Getting work done by people outside the project team for a „Buy decision.
  • Risk management is an essential part of procurement management. Although risk management is often addressed separately, it is note worthy that contracts are, at their core, risk management tools.

All procurement requires some level of planning. The intensity of, and the efforts required in the planning will depend on the complexity of the scope of work (resulting in a SOW document) in the procurement package.
For a manufacturing company deciding to go ahead with a project, the „Make or buy decision forms the first step in the procurement planning. This decision will be evidently based on a cost comparison between „make and „buy, timely availability of the manufacturing equipment / shop personnel for meeting deliveries without adversely affecting their other job orders. Several examples of companies in India exist, where the company or a division of the company manufactures a product, and the company is also executing projects for clients which require the same product as part of the project scope. Larsen & Toubro manufacture switchgear, pressure vessels, heat exchangers etc., which are also required in several electrical projects / petrochemical projects they execute for clients; Kamani Engineering manufacture transmission towers, and also executes large power transmission projects for Power Grid Corporation of India, where the bulk of the transmission towers are their in-house supply. A „Make or Buy decision is also relevant for a company which wants to implement new software for their operations and is capable of developing the software internally. Table shows the comparison of costs for in-house development and outsourcing.
The market scenario for the product / service to be procured can give rise to any of the following three conditions:
  • Sole source: Here, there is only one qualified seller in the market e.g. for a long time, the Reverse Osmosis (RO) membranes utilized for desalinating saline water was being manufactured only by Dow Chemicals under their patent, and all water treatment package vendors had to buy RO membranes only from them or their licensee in a country (this is of course not true today since there are other manufacturers in the market). Another example can be that if you are looking for a consultant (in a specific high expertise area), and you also want him to speak the language your employees understand (say, Italian), and you also want him to be a local person for your employees frequent and face-to-face interaction with him, you will (if you are lucky) find only one person, who will dictate his price. This condition therefore is likely to result in a high contract price.
  • Single source: This is a case when your organization prefers to work with an identified seller, even though other sellers may offer a lower price. This of course poses a potential risk of the seller taking advantage of the situation and not meeting the delivery or quality commitment. Although such a condition is rare, sometimes companies show a preference for a supplier with a view to forge a long term relationship for a niche product which the company may require to procure often.
  • Oligopoly: This is a scenario condition where the providers of the product or service are so few in number that the actions and pricing of one seller affect the actions and pricing of the other sellers. Examples of airline fares, oil prices, hardware prices can fall in this category.
The procurement management process forms an important part of each of the process groups described in PMBoK, which were discussed in Unit 3. The table hereunder summarizes the actual procurement processes involved in each of the process groups (mentioned as project phase) in the table.

 Process
Project phase
Key deliverables
Plan purchases and acquisitions
Planning
Procurement management plan
Plan contracting
Planning
Contract Statement of Work (SOW), Evaluation criteria
Request seller responses
Execution
Sellers list, Proposals
Select sellers
Execution
Selected sellers, Contract
Contract administration
Execution
Contract changes
Contract closure
Closure
Closed contracts




Plan purchases and acquisitions. This includes
      deciding what to buy and when and how to buy it.
      review of risks involved in each make or buy decision
      review type of contract with regard to mitigating the risk by determining what risks can be transferred to seller

The outputs of this process are:
– Project management plan describing how procurement process will be managed starting with development of procurement documentation and culminating in contract closure.
      Contract SOW (Statement of Work which describes the portion of the project scope which is included in the particular contract).
Plan contracting. This includes
– Preparation of a procurement document for each contract planned. This document is issued to prospective sellers who are invited to bid. This invitation is termed ITB (Invitation to bid), RFQ (Request for quotation), Tender Notice, RFP (Request for proposal), Invitation for negotiation or Contractor initial response.
ITB and RFQ (both imply the same type of invitation) are focused on getting the Sellers price, not his ideas. RFP asks for a price – in addition, it necessarily asks for sellers and ideas and ideas on how the project work should be done, which implies that there is a bit of consultancy service demanded from the sellers in their response.
– Evaluation criteria: The first category of evaluation relates to prequalification of a firm for receiving the ITB. Here, a prior assessment is made of the in-principle capability of a firm to perform the intended scope of work. For large value contracts, the ITB is preceded by an invitation to submit a prequalification offer, in which the seller is asked to submit his experience list for similar works carried out by enumerating the following:
i) List of projects completed with contract value, completion period, scope of work.
ii) Audited Financial statements like Balance sheet, P & L account for the last 3 to 5 years
iii) Contract completion certificates from his clients
iv) Firms organization structure
v) List of key personnel of the firm
vi) List of construction equipment/production machinery owned
vii) Any other technical/financial/organizational data considered relevant by the owner
This data submitted by all prospective bidders is analyzed to arrive at a list of pre-qualified bidders, who are seen to be eligible to receive the ITB/RFP.
The second category of evaluation criteria relates to evaluating the bids received in response to the ITB/RFP. These may involve price loading criteria for technical and commercial deviations stipulated by the bidders in their bids, as well as specific criteria for price loading on utilities consumption (electricity, water etc.) where system performance is evaluated based on system life-cycle costs.
Request seller responses
While the prospective sellers are expected to submit their bids in response to the ITB/RFP as issued to them, it is common practice in large value contracts to host a bidders conference, where all bidders are present and are permitted to ask questions concerning the SOW. This method is followed to ensure that all bidders possess the same information on which to base their prices and proposals. After satisfactory completion of this step, a due date for submission of the bid/proposal is communicated to all bidders. This process is called solicitation.
The output of this process is the bunch of bids proposals from the bidders. The bids/proposals are seller-prepared documents that describe the seller’s ability to provide the requested products/services at his quoted price.
Select sellers
This process involves complete evaluation (techno-commercial evaluation and price evaluation) of the bids received followed by negotiations with the bidders. Where the bidders have been pre-qualified following a fairly extensive evaluation, the final selection of the seller is usually based on the lowest evaluated price.

The outputs of this process are:
– The contract; this can be a simple purchase order or a complex document. A contract is a legal document backed by the countrys legal system (as long as it does not include illegal activities). In the USA, Uniform Commercial Code is the basis of commercial contracting.
– Contract Management Plan; this covers contract administration activities through the life of the contract

Contract administration: This includes
– managing the contract and the relationship between buyer and seller
– regular review of sellers performance in executing the SOW, as well as documentation of this performance
– continuously manage contract related changes
– provide a basis for future relationship with seller

Contract closure: This includes
– completion and settlement of the contract, resolving all open items in order to close the contract
– sometimes, a contract may be foreclosed or terminated by mutual agreement between buyer and seller or from the default of one of the parties (claims which remain unresolved may be subject to litigation after contract closure)


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