Strategic Procurment of Capital Items and Works and Servicesma

8/13/2019 Strategic Procurment of Capital Items and Works and Servicesma

1/74

Strategic Procurement on Capital

items, Common items,

Constructions and Services

By Kazibila


2/74

Buying Capital investment purchase

Capital equipment is more likely to be bought

centrally than products of continuous

consumption such as materials and

components parts. Decisions are made by

decision centres with users, managers. The

greater the technical nature and complex of

the item the greater influencing technical staff


3/74

Capital items

Capital goods are in the form of fixed assets usedto produce goods, such as plant, equipments,rolling stock et.c

Capital assets are used to generate revenue oncost savings by providing production, distributionservices for more than one year

Capital expenditure: an expenditure on

acquisition of tangible productive assets whichyield continuous service beyond the accountingperiod.


4/74

Factors to consider when buying

capital equipments

Purpose: what is a prime purpose

Flexibility: How versatile is the equipment

Spares: cost and ease of availability Compatibility and existing equipment

Life

Reliability-breakdown means greter costs Durability etc


5/74

New or Used equipments

Used equipment may be either rebuilt or

reconditioned.


6/74

Financing the acquisition of capital

The acquisition of new or capital equipment

may be financed by

i. Straight purchase

ii. Hire purchase

iii. Leasing


7/74

Straight Purchase

Is buying the equipment on cash, this

increases fixed equipment and reduce current

assets (cash). The capital cost of acquisition

and the revenue cost of maintenance may

adversely affect the working capital of the

firm.


8/74

Hire purchase:

Provides a compromise between straight

purchase and leasing, hire purchase

agreements are easily negotiated and

available. To procure the temporary use of

something belonging to someone else in

exchange for payment


9/74

Lease

A contract by which the owner of asset agreesto let someone else use it for a stated periodof time in return for payment such as six

month lease. The leasing company buys and owns the asst

that the lessee require

The customer hire the asset from the leasingcompany and pays rental over apredetermined period for the use of asset.


10/74

Leasing or Buying

Decision to lease or buy depends on operating,legal and financial consideration

Operational factor: advantages to trial period

before purchase, cost saving equipment, thehedges provided against obsolescence andinflation.

Legal factor: leasing agreements are one side in

that most risks are transferred to the lessee.Terms and conditions should be examinedcarefully


11/74

Leasing or Buying

Financial factor : deciding whether to lease or

buy include

i. Opportunity cost-if purchase price of

equipment would be used for other purpose

and invest else where

ii. Discounted cost of meeting the periodical

rental payment over the period of the lease.


12/74

Production Materials

They are found under:

Raw Materials such as agricultural products andextractive industries such as mineral, ores,

timber, petroleum, fruits vegetables sold to aprocessor

Semi finished goods and processed materials-such as rods, sheets, tubing, wires, castings,

cloth, leather, sugar and paper Component parts and assemblies: used a part of

more complicated product to other


13/74

Raw Materials

Often sensitive commodity

Recognition of commodity markets

Safeguard in many organization by backwardintegration strategies


14/74

Commodities at the right price

Specialists use tow approaches to determine

the right price

i. Fundamental analysis: considers the market

trend of raising and falling determine

amount of stock to be purchased (bull and

bear market)

ii. Technical Analysis: past records of price

predicts the future price. Plot the data


15/74

Fundamental analysis

i. Fundamental analysis: where in bull or risingmarket, when prices rises stocks tend to beheld by producer or merchants thus forcing

consumers to bid higher for available stocksof the commodity. In case of falling or bearmarket, consumers hive off their stock andbuy less of the commodity than they are

using, which producers reduce prices to alevel at which they can turn unsold stock intocash


16/74

Construction and bills of Quantities

Construction supplies are purchased for use

on a site

They are found in highbulk relative to their

value, such as bricks, steel

Specification of construction supplies often be

the basis of

i. Instruction given by the client to an architect

or civil engineer


17/74


Specification of construction supplies often be

the basis of

i. Instruction given by the client to an architect

or civil engineer

ii. Architects speicification


18/74


Construction supplies are purchased anddelivered to the site

Subcontracting is done for construction project.

Example would be contracts for foundation,drainage, air condition, lift installation,ventilation, structural steelwork etc.

Some construction supplies involves intra

company purchasing. Such as stone, sand andgravel quarries that supply other companieswithin the group


19/74

Bill of quantities

BOQ are documents prepared by quantity

surveyors from drawings and specifications

prepared by architect or engineers, setting out

as priceable items the detailed requirementsof the work and the quantities involved.


20/74

Six Sections of Bill of Quantities

Section 1: Preliminary items and general

conditions: it sets out the terms and

conditions of the contract and responsibilities

of the contractor, architects and other partiesinvolved in the contract, provisions for the

settlement of disputes arising from the

contract


21/74

Six Sections of Bill of Quantities

Section II: Trade preambles: This sets out the

general requirements relating to such aspect

of a construction contract as:

i. Excavation and earthwork

ii. Concrete work

iii. Brickwork and block work

iv. Roofing

v. Woodwork


22/74

Section II (cont)BOQ

vi. Structural steelwork

vii. Metal work

viii.Plumbing installation

ix. Foul drainage above groundx. Holes/covers/supports for service

xi. Electrical and heating installation

xii. Floor, wall and ceiling finishes

xiii. Glazing

xiv. Painting and decorating


23/74

BOQ

Section III: Demolition and spot itemsFoundation Work. Set out the quantities of workto be done

Section IV: General alteration andrefurbishment work: Quantities of work to bedone

Section V: Provisional sums and contingencies:

Quantities of work to be done Section VI: Grand Summary: Quantities to be

done


24/74

Aims of BOQ

Enables tenderers to show against each item on

the unpriced bill of quantities a price pre unit

covering labour, materials, overheads and profit

and when totalled in the grand summary theitems will provide tender price for the contract

Enables the quantity surveyor, on receipt of the

successful tender, to ensure that the contractorhas made no serious errors that could cause

complication at a later date


25/74

Aims of BOQ

To avoid the inclusion by the tenderer of a

large amount for contingencies

Assist in verifying the valuation of variation

due to changes in design requested or

agreed by the client after the contract has

been placed


26/74

Procurement and Construction

contracts

Procurement will be involved at both thetendering and implementation stage ofconstruction contracts. At tendering the

procurement provides the estimates withprice for materials and subtracted work onwhich tender can be based. Procurement will :

i. Ensure that transport costs for materials arekept low by purchasing building items fromsources as close to the site.


27/74

Procurement and Construction

contracts

Procurement will :

i. Ensure that transport costs for materials arekept low by purchasing building items from

sources as close to the site.ii. Negotiate with subcontractors

iii. Obtain the best quality commensurate with

the life of the itemiv. Affect suitable delivery arrangement to

ensure that supplies are delivered to site


28/74

Procurement of Service

Services are intangibles such as economic

activities that are intangibles and imply an

interaction to be realized between service

provider and consumer

Intangibility the result of a service transaction

is not a transfer of ownership as with physical

goods. They can not to stocked, custody


29/74

Processing the procurement of

services-Six steps

Step I: Determine the appropriate process forprocuring the service: consider

i. Nature and strategic importance of the

service as to Kraljic matrix- routinised non-critical and leveraged are identified

ii. Purchasing such as insurance, advertising,

transport or energy is done by nonpurchasing personnel, provide training inspecialist


30/74


services-Six steps

Step II: prepare a statement of work: Astatement of work is outlining the specificservices a contractor is expected to perform,

generally indicating the type, level and qualityof service as well as the time schedule require.

Statement of work should clearly indicate:

i. The services requiredii. Where, when and to whom the services areto be provided


31/74


services-Six steps

Statement of work should clearly indicate:

i. The services required

ii. Where, when and to whom the services areto be provided

iii. Under what conditions

iv. Standard or level of performance requiredv. Period of initial provision and renewal

interval


32/74


services-Six steps

Step III: list the statement of work as the basisof request for proposal (RFP) or quotation(RFQ)

i. Request that potential suppliers suggesttheir solution(s)

ii. Provide scope for supplier innovation and

suggestionsiii. Such document are useful for locatingsolutions or resources


33/74


services-Six steps

Step IV: Obtain quotations or tenders from

potential suppliers.

Tender advertisement to all potential suppliers

Where RFP or RFQ used restricted to three orfour selected suppliers are considered.

StepV: Evaluate quotations or tenders.

Evaluation is a cross functional team.Individual evaluator should rank the offersreceived. The team should discuss the ranked.


34/74


services-Six steps

Step VI: Notification and issue of contract.

Notify the successful and unsuccessful

suppliers and issue the contract.


35/74

Service Level Agreement (SLAs)

An agreement between the provider of a

service and its use which quantifies the

minimum quality of service which meets

business needs. This is a part of theoutsourcing agreement and is regarded as a

schedule to the agreement.


36/74

Advantages gained from the Service

Level Agreement (SLAs)

The customers for and providers of specificservices are clearly indentified

Attention is focused on what a particular

service or services actually do Customer are more aware of what services

they receive and what additional servicesprovider can offer

Services and service levels adding values canbe distinguished from those that do not


37/74

Advantages gained from the Service

Level Agreement (SLAs)

Customer are aware of what a service or level

of service costs and can then evaluate the

service or level of a cost benefit basis

Monitoring of services and service levels is

facilitated

Understanding and trust is fostered between

customers and provider


38/74

Reasons for failing oc the Service Level

Agreement (SLAs)

Lack of commitment by customers and serviceproviders

Inadequate support structure, such as failure toimplement the SLA concept

Additions to workloads require an additionalreporting system

they are too detailed

They are not detailed enough Inadequate staff training relating to the purpose ,

advantage and implementation of SLA


39/74

Outsourcing

A management strategy by which major non corefunctions are transferred to specialist, efficient,external providers.

Outsourcing manufacturing: This is concerned

with make or buy decision. Strategic make or buydecisions determines the shape and capability ofthe organization's manufacturing operation byinfluencing : what product to make

What investment to make Ability to develop a new product

Selection of suppliers


40/74

Outsourcing-what not to outsource

Management of strategic planning

Management of finances

Management of management consultancy

Control of supplies

Quality and environmental management


41/74

Drivers of outsourcing

Quality: actual capacity is temporarily

insufficient to comply with demand

Cost: Outsourcing is a possible solution to

increasing costs and is compatible with a cost

leadership strategy.

Finance: A company has a limited investment

budget. The funds must be used forinvestment in core business activities.


42/74

Drivers of outsourcing

Core business: A core business is a primary

activity that enables an organization to

generate revenues

Cooperation: Cooperation between

companies can lead to conflict


43/74

Types of outsourcing

Body shop outsourcing- a means to meet ashort tem requirement such as short in houseskills

Project management outsourcing such as ITproject, training in new skills, managementconsultancy

Total outsourcing : where the outsourcingsupplier is given full responsibility for selectedarea such as catering, security


44/74

Benefits of outsourcing

Gain access to world class capabilities

Improve organizational focus

Make capital funds available


45/74

subcontracting

A secondary contract where the person or

company that is initially hired to do a job then

hires another to carry out the work.

It is a short tactical short term decision while

Outsourcing involves the total restructuring of an

enterprise around core competences and outside

relationships. What ever degree of outsourcing,enterprises must retain certain core capabilities.

Outsourcing is a strategic long term decision.


46/74

Reasons for subcontracting

Where the buyers organization is the employer

or client entrusting work to a main contractor

who , in turn subcontract part of the work

Where the buyers organization is the maincontractor and subcontracts work for a reason as

Overloading of machinery or labour

To ensure completion of work on time Lack of specialist machinery or specialist know ho


47/74

Reasons for subcontracting

Reasons to subcontract

i. Overloading of machinery or labour

ii. To ensure completion of work on time

iii. Lack of specialist machinery or specialist knowhow

iv. To avoid acquiring long term capacity whenfuture demand is uncertain

v. Subcontracting is cheaper than manufacturinginternally


48/74

Partnering

Is a commitment to both customers andsuppliers, regardless of size to a long termrelationship based on clear, mutually agreed

objectives to strive for world class capability The term partnership sourcing refers to all

forms of non adversarial collaborativerelationships.

The concept of partnering is generic and refersto range of collaborative relationships


49/74

Degree of partnerships

Type I: Partnership involving organizations thatrecognize each other as partners and on limitedbasis, coordinate activities and planning whichhas short term focus which involves few areaswithin each organization.

Type II: Partnership involving organizations thathave progressed beyond coordination to

integration of activities such partnerships have along term view of partnership and involvemultiple areas within both firms


50/74

Degree of partnerships

Type III Partnership: involve organizations

sharing a significant level of operational an

strategic integration. In particular each

partner can make changes to the otherssystems without getting approval and such

partnerships are of long term duration.


51/74

Pricing Agreement

Negotiation results to the price to be paid to

the supplier.

Pricing models: Suppliers aims to cover their

costs and achieve a margin of profit that will

provide for future growth, meet long term

borrowing ,update plants and equipment built

up, reserves and reward shareholders.


52/74

Pricing Models

1. Price cost models:

2. Market driven models


53/74

Price cost model

i. Cost mark up pricing model (cost pluspricing). Usually supplier adds a mark uppercentage to the estimated cost. Estimated

cost may be product cost such as directmaterials,+ labor , +production overheads orTotal cost (product cost +general ,administrative and marketing overheads)

ii. Marginal pricing model: The supplier fixes aprice (based on product or total cost)


54/74

Price cost model

ii. Marginal pricing model: The supplier fixes aprice (based on product or total cost) thatwill yield a predetermined percentage of the

quoted price.iii. Rate of return pricing models (known as

target return pricing). The supplier places theprofit on the desired return on the

investment rather than the estimated costper product.


55/74

Market driven models

Prices volume model-involves break even

analysis

Make share model: depends on the market

share or penetration achieved by the supplier.

Market skimming price model- set during

introduction stage to attract buyers

Current revenue pricing model : covers

operating cost rather than achieve profit. etc

P t id ti i i i


56/74

Procurement considerations in pricing

agreement

The risk attached to the purchase

The purchasers position in the market

Type of purchase whether is leverage, strategic,

non critical or bottleneck product Where rebuy, modified rebuy or new buy

Number of suppliers in the market

Price paid by competitors Period for which the price is to be agreed

Price analysis etc.

P t id ti i i i


57/74

Procurement considerations in pricing

agreement

The risk attached to the purchase

The purchasers position in the market

Type of purchase whether is leverage, strategic,

non critical or bottleneck product Where rebuy, modified rebuy or new buy

Number of suppliers in the market

Price paid by competitors Period for which the price is to be agreed

Price analysis etc.

Risks of different pricing arrangements


58/74

Risks of different pricing arrangements

to the purchaser

Product or service

Performance risks

High

Low Low HighFinancial risks

Firm price

Fixedprice

Predetermined fixed priceTarget cost incentive with maximumprice

Target cost incentive with no

maximum priceCost price + Fixed%


59/74

Price analysis

A. Price analysis as comparison; The process ofexamining and evaluating a proposed pricewithout evaluating its separate elements of costand profit. It is done by comparing with

i. Competitor offer on the immediate purchase

ii. Established catalogue prices

iii. Market price indexes

iv. Prices set by law or regulations (Std prices)

v. In house estimate


60/74

Price analysis

B. Price analysis as price breakdown: Broken-

down of quoted price into its constituent

elements for the purpose to determine the

reasonableness of proposed charge. Analysisof price is based on

i. Cost experience of the buyers company

ii. Cost estimates prepared by costing staffiii. Cost information by vendor


61/74

Negotiation

Negotiation is a bargaining process for terms

and conditions in arriving to the agreements

Is the finest opportunity for the buyer to

improve his/her companys profits and obtainrecognition

Is the process whereby two or more parties

decide what each will give and take in anexchange between them


62/74

Two approaches to negotiation

i. Adversarial negotiation: termed as distributive

or win to lose negotiation. It focus on positions

staked out by the participants and the

assumption is that every time one party wins,the other loses

ii. Collaborative negotiation-also called integrative

or win to win negotiation. Creative problem

solving, one or both parties can gain without

the other having to lose rather than adversary


63/74

Factors in negotiation

i. The negotiator: buyer and supplies are

individuals who are acting as representatives

A. Personality in-

external appearance such as facial features,

colour, physical aspects together with their

personal behavior such as vulgar,

aggressive, friendly courteous


64/74

Factors in negotiation

i. The negotiator: buyer and supplies are

individuals who are acting as representatives

A. Negotiator as representatives

The level of authority is consider in

representatives in negotiation, the

responsible person

Negotiating situation related to


65/74

Negotiating situation related to

strength and weakness of negotiators

The buyers negotiating position: The buyer

becomes strong when

i. Demand is not urgent and can be postponed

ii. Suppliers are anxious to obtain the business

iii. There are many potential suppliers

iv. The buyer is in a monopolistic or semi

monopolistic position

v. Demand can be mate by substitute products


66/74

Buyers strength (cont)in Negotiation

i. Demand is not urgent and can be postponedii. Suppliers are anxious to obtain the business

iii. There are many potential suppliers

iv. The buyer is in a monopolistic or semimonopolistic position

v. Demand can be mate by substitute products

vi. Make or buy alternatives are available

vii. Buyer has a reputation for fair dealing andprompt payment

viii.Buyer well briefed about supplier business

The suppliers strength negotiation


67/74

The supplier s strength-negotiation

position

i. Demand is urgentii. Suppliers are indifferent about accepting the

business

iii. Supplier is a monopolistic or semi monopolisticposition

iv. Buyers wish to deal with the supplier due totheir reputation for quality, technology,reliability etc.

v. The supplier own a necessary machine, tech

vi. Supplier well briefed about the buyer


68/74

Negotiation process-Prenegotiation

Matters to consider during prenegotiation arei. Who is to negotiate-individual or team player

approach.

ii. The venue to negotiate-prepare a conducivemeeting room for negotiation

iii. Intelligence gathering: collecting necessary data

iv. Negotiation objectives: determine objective tobe achieved

v. Strategy and tactics: plan the order of issues tobe dealt


69/74

Team approach in negotiation

Allocate roles typical player: the spokespersonthe presenter of the case as a captain, therecorder, who takes notes of the negotiation,

the expert, such as management accounting,engineers for technical matters

Avoid disagreement between team memberswhile negotiation are in progress

Avoid goup-think for team members to holdillusion of group


70/74

Gathering intelligence

Ascertaining the strengths and weakness of

the respective negotiating position

Assemble relevant data relating to costs,

production, sales etc

Prepare data to be presented at the

negotiation in the form of graphs , charts,

tables etc.


71/74

Gathering intelligence

Use negotiation tools such as

i. Cost and price analysis

ii. Situational analysis

iii. Value analysis


72/74

Actual negotiation

Use philosophy of collaborative negotiation, in

all stages

Use the techniques of

Framing an agenda to ensure more difficult

issues to appear later

Questions to mean both eliciting and keeping

pressure on the opponents to control the

pattern and process


73/74

Negotiation behavior

All negotiation are interpersonal skills. Avoid

shouting, because it will cause shouting back

of the other part

Ploy manoeuvre in negotiation aimed atachieving a particular result.


74/74

Post negotiation

Drafting a statement detailing as clearly aspossible the agreements reached and circulatingit to all parties for comment and signature

Selling the agreement to the constituent of both

parties-what has been agreed, why it is the bestpossible agreement and what benefits willaccrue.

Implement the agreement, such as planning

contracts, setting up joint implementation team Establish procedure for monitoring

implementation of the agreement.

Strategic Procurment of Capital Items and Works and Servicesma

Documents

Transcript of Strategic Procurment of Capital Items and Works and Servicesma