A Term Report on;

Procurement Management in High Tech.

Industries

Submitted to : Sir Kanwar Saleem Akhtar

Project Management

Group Members

S. M. Sibtain Jafri
(2k8-ChE-108)
Badar Rasheed
(2k8-ChE-113)
Waqas Siddique
(2k8-ChE-120)
Zafar Afzal
(2k8-ChE-127)

Section B , 8th Semester

September 7 , 2012
ACKNOWLEDGEMENT

First of all, I would like to say Alhamdulillah, for giving me

the strength and health to do this work until it done.
Not forgotten to my Family for providing everything.
Internet, books, computers and all that as my source to
complete this report. They also supported me and encouraged
me to complete this task.
Then I would like to thank my teacher, Sir Kanwar Saleem
Akhtar for guiding me. We had some difficulties in doing this
task, but he taught us patiently until we knew what to do. He(Sir
Kanwar Saleem Akhtar) tried and tried to teach us until we
understand what we supposed to do in completing this report.
And Thanks to my Friends who encouraged throughout this
project. Last but not least, my friends who were my Group
Members and doing this job with me and sharing our ideas.
They were helpful that when we combined and discussed
together, we had this task done.

Content

Topic

Page No.

Acknowledgement

What is Project Procurement Management

The Procurement Process

Procurement Management in High Tech. Industries

An Overview of the Procurement Management Process

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The Project Manager's Role in Procurement

16

Ten Top Tips for a Successful Procurement Process

References

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What is Project Procurement Management ?

Procurement

Procurement includes the processes required to acquire goods and

services, to attain project scope, from outside the performing organization. Projects
usually require procurements. Projects need Materials, Equipments, Consultants,
Training, and Many Other Goods & Services.
Projects Procurement Management is the process of Purchasing
Products necessary for meeting the needs of the Project Scope from outside the
Performing Organization (The Enterprise whose Employees are most directly
involved in doing the Work of the Project).

The Procurement Process

1. Procurement Planning
Procurement Planning is the process of identifying which part of the
Project should be procured from resources outside the Performing Organization.
Procurement Planning centers on 4 elements:
1. Whether or not Procurement is needed
2. What to procure
3. How much to procure
4. When to procure.
2. Solicitation Planning
Solicitation Planning is the process of preparing to solicit (ask for)
Sellers to provide Products needed for the Project.
3. Actual Solicitation Process
(Obtaining Quotations, Bids, Offers, or Proposals )

Once the Solicitation Planning has been completed, the actual

process of Solicitation can begin. The Seller (not the Buyer) performs most of
the activities in Solicitation --- usually at no additional cost to the Project. The
Sellers are busy trying to win the business by providing Quotations, Bids,
Offers, or Proposals. Source Selection involves the receiving of Bids or
Proposals and application of the Evaluation Criteria to select a Provider. Many
factors (aside from cost or price) may need to be evaluated in the source
selection decision process.
4. Determining Source Selection
Source selection involves:
evaluating bidders proposals
choosing the best one
negotiating the contract
awarding the contract
It is helpful to prepare formal evaluation procedures for selecting
vendors.
5. Contracts Administration
It is the process of managing the relationship between Sellers (Contractors,
Subcontractors, Vendors, Suppliers. . .) and Buyers. It is the process of
ensuring that the Buyer and the Seller both perform to the specification with
the Contract.
6. Contracts Closeout
Completion and Settlement of the Contract, including resolution of any open
items.

Procurement Management in High Tech. Industries

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It is not always economical for the companies to make all the materials
used in manufacturing. Some items are procured from others, and some are
produced in the company.
Some reasons for making are

Lower Production Cost

Unreliable Or Unsuitable Suppliers
Assure Adequate Supply (Quantity)
Utilize Surplus Labor Capacity
Obtain Desired Quality
Protect Special Design Or Quality

Some reasons for buying are

Lower Acquisition Cost

Inadequate Capacity
Reduce Inventory Costs
Ensure Alternative Sources Of Supply
Item Is Protected By A Patent Or Trade License

One of the major issues that a company might encounter is the method of
Procurement.
Procurement method is the way of ordering material. Some of the new
developments in this area include:

Electronic Ordering
Stockless Purchasing
Standardization, and
Just in Time Purchasing.

Electronic Ordering
Electronic ordering reduce paper transactions. Paper transactions
include purchase order, receiving document, authorization to pay, etc. Transactions
between firms are increasingly done via electronic data interchange (EDI). EDI is a
standardized data transmittal format for computerized communications between
organizations. It provides data transfer for any business application, including
purchasing. for example, data for a purchase order (such as order date, due date,
quantity, part number, order number, address, etc.) are fitted into standard EDI
format.

The data are then sent from one computer to another by phone line
(Internet). A computer program is used to read those data into the receiving
companys files. Electronic ordering also speeds up the traditionally long
procurement time.
Stockless Purchasing
This means that the supplier maintains the inventory for the
purchaser. Here, the cost of stocking inventory has been temporarily transferred from
the purchaser to the supplier. If the supplier can maintain the stocks for a variety of
customers who use same products, then there may be net savings in this option.
Otherwise purchasing costs may go up.
Standardization
Rather than obtaining a vriety of components similar in labeling,
coloring, packaging etc. the purchasing agent should try to have those Components
standardized. For every component that is standardized, there is one less invoice,
one less item to be inventoried etc.
Just In Time Purchasing
Just in time (JIT) purchasing is directed toward the reduction of
Waste (That is present at incoming inspection, excess inventory and poor quality)
and delay. This waste and delay is present in all production processes. (Not only in
purchasing). Therefore, JIT approach can be applied to all areas of production. The
basic JIT approach: Every Moment Material Should Add Value.
Goals Of Just In Time Purchasing
1. JIT tries to reduce all non-value-added activities.
(If Purchasing Personnel Can Select More Reliable Vendors,
Purchased Items Can Be Received Without Counting, Inspection.)
2. Elimination of In-plant inventory.
No Raw Material Inventory Is Necessary If Materials Are Perfectly
Delivered to Where They Are Needed.
Parts Should Be Delivered In Small Lots Directly To The Using
Department As Needed.

 Elimination Of Inventory Allows Managers To See Production Problems

That Are Hidden Behind Those Inventories.
3. Quality and reliability improvement
To Obtain Improved Quality And Reliability,
a) Vendors And Purchasers Must Have Mutual Understanding And
Trust.
b) Suppliers Long Term Commitment To The Relationship Should Be
Increased.
Physical Distribution Management
Products need to be distributed to the customers. Today, many
manufacturer companies utilize Multi-Echelon inventory systems. In multi-echelon
inventory systems, Products are stored at different points, before reaching to the
customer. After manufacturing the Products, the Manufacturer stores them in its own
warehouse. From there, they are transported to regional warehouses. These
regional warehouses serve as a distribution point for retail stores. When the retail
stores require products, They will request them from their local warehouse. The
function of the Regional Warehouse is to provide an Intermediate Stage in the
distribution system so that manufacturer Does Not has to deal with every single
customer. This also means that, Customers DO NOT have to reach to the
manufacturers plant.
Transportation
Physical distribution managers must ALSO decide on which mode
of transport is Best to distribute Products to the Customers.
Available modes of transport are:

Road transport (cars, trucks),

Railway transport,
Water transport (ships),
Air transport
Pipelines (oil, natural gas).
Air transport is very expensive and limited in Space availability.

Therefore, It is usually preferred for small-quantity, high-value products, which

require fast delivery (e.g., highly fragile electronic parts). On the contrary, Water or

Railway transportation is slower BUT cheaper. Therefore, they are used for carrying
Large Quantities of raw materials (e.g., coal and iron).

There may be some limitations on these modes of transport, as well. For

example, only Gas and Liquids can be conveniently transported by Pipelines.
Similarly, very large products (such as building sections) would not fit in most
Aircrafts. However, the mode of transport is usually Chosen with reference to the
Relative Importance of the following factors:

Delivery speed
Delivery dependability (reliability)
Quality deterioration
Transportation cost, and
Route flexibility.

The selection of the transportation mode will also affect other decisions related to the
management of operations. For example, firms may choose to locate their facilities
near to ports or airports, or railway sidings, or close to motorways depending on the
selected mode of transport.
Contract Terms
In any exchange between buyers and suppliers, both sides have to
agree on Who will Pay for the transportation. This becomes a particular issue in
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international trade where knowledge of international trade agreements and

legislation are critical to purchasing successfully from other Countries.
Internationally recognized shipping terms are now in operation which
are applied to international transportation by sea or air. The main definitions of these
terms are as follows:
1. Ex-works: In an ex-works contract, the purchaser accepts full responsibility
for arranging transportation from the suppliers location.
This involves:
1. Arranging transportation, insurance, and documentation to move the
goods to the required source port (air or sea).
2. Have them loaded on to the mode of transport.
3. Transported to, and unloaded at the destination port.
4. Cleared through customs and transported to the purchasers location.

2. Free alongside (FAS): In this arrangement, the supplier agrees to deliver

to the (source) port specified by the purchaser and is responsible for the
transportation and insurance of the goods Until that point. However, the
purchaser has to arrange and pay for loading on to the vessel and all
onward transportation, insurance, and documentation.

3. Free on board (FOB): Here the supplier pays for and arranges loading on
to the outward-bound transportation and thereafter the purchaser becomes
responsible.

4. Cost and Freight (C&F): This is a split responsibility arrangement in that

the supplier arranges and pays for transportation to an agreed point, but
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the purchaser has to pay insurance from when the goods are loaded on
board. The purchaser has to acquire any documentation required by the
country of origin. Once the goods have been unloaded at the port of entry,
the purchaser is responsible for all ongoing transportation and insurance.

5. Cost, Insurance, and freight (CIF): This is similar to C&F But here the
insurance during transportation is responsibility of the supplier.
6.

Delivered: This is the opposite of ex-works in that the supplier has total
responsibility for the goods, their transportation, insurance, and all
documentation until they are delivered to the purchaser.

Logistics
Logistics originated during the Second World War when it related to the
movement and co-ordination of troops to the required location.

When adopted by

the business world as a concept It referred to the movement and coordination of

finished products. Logistics function manages the total flow of products from the
plant to the customers. As contrary to the materials management, Logistics provides
an emphasis on physical distribution management. However, These minor
differences are present because of the backgrounds of the two groups who have
originated the concepts. Generally, the logisticians tend to come from marketing
discipline.
Supply Chain Management
Logisticians have devoted little attention to managing the chain of
supply up to the purchasing function. And similarly, materials managers have ignored
the management of the flow of products down to the customers through distribution
channels. On the contrary Supply Chain Management views the entire chain as a
system to be managed. It can be defined as
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managing the entire chain of raw material supply, manufacture,

assembly and distribution to the end customer.
In long supply chains, it is not easy to co-ordinate the
whole chain. This is especially true when part of the supply chain serves two sets of
end customers.
For example, many manufacturers of automobile components serve two different
groups of end customers:
One group buys new cars (vehicle market)
The other group buys spare parts for repair of their cars (spares
market)
The spares market is also known as aftermarket for the car components.

The Role of Inventory, The planning and control priorities, and

price negotiations will all be different for each chain. Since the components for both
chains are produced by the same Component Manufacturer, Operations should be
split between the two chains, AND they should be well managed.

An Overview of the Procurement Management Process

Procurement is a formal process by which many organizations obtain
goods and services. In addition to contracts, outputs of the procurement
management process include the procurement management

plan, procurement

statement of work (SOW), procurement documents, change requests, additional

procurement documentation, and lessons learned. Private companies have a lot of
flexibility in their procurement practices. Because government entities are spending
public funds, however, they normally have to comply with laws, rules, and regulations
that specifically govern each step of the procurement process. Private companies
that use public funds from the government may also be required to comply with
some or all of these regulations.

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In most companies, there is a department that handles and controls

procurements. This department is often called the procurement, contracting,
purchasing, or legal department (for simplicity, we'll call it the "procurement
department"). Managing procurement requires legal knowledge, negotiation, and an
understanding of the procurement process. Though project managers are often not
expected to take the lead in legal matters, negotiations, or managing the
procurement process, they must be familiar with all of these aspects.
When a project is planned, the work is analyzed to determine if internal
resources can do everything or if any of the work will be outsourced (a make-or-buy
decision). If one or more procurements are needed, the procurement department
gets involved in the project to manage the procurement process. A project manager
must understand what these procurement experts will need from them, provide the
experts with that information, and then work with the procurement department
throughout the life of the procurement.
Once the decision has been made to procure goods or services from
an outside source, the project manager will facilitate creating a plan for how the
procurement process will proceed (a procurement management plan) and will create
a description of the work to be done by a seller (a procurement statement of work).
In addition, the procurement manager determines what type of
contract and procurement document should be used. The most common
procurement documents are Request for Proposal (RFP), Invitation for Bid (IFB), and
Request for Quotation (RFQ). The type of procurement document used is connected
to the contract type selected and the form of the procurement statement of work. As
you will see later in this chapter, the different types of contracts require project
managers to focus their management activities in different areas.
At this point, the seller needs to take action and the buyer just
waits. The prospective sellers will review the procurement documents and determine
whether they are interested in submitting a bid or proposal to try to win the work.
They may have the opportunity to participate in a bidder conference or a pre
proposal meeting. As part of the procurement process, prospective sellers may also
have the opportunity to submit questions relating to the procurement documents in
writing. They need to submit these questions to the buyer before the submission
deadline for bids or proposals.

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The prospective sellers will carefully review the buyer's

statement of work and all the terms of the proposed contract contained in the
procurement documents. This review helps the seller get a full understanding of what
the buyer wants. It also helps the seller assess the risks involved in the project. If the
scope is incomplete or unclear, if the prospective seller is aware of the buyer having
a history of poorly managing projects, or if any other risks are identified, the
prospective seller may decide not to submit a bid or will adjust the price, time, or
both submitted to the buyer to account for these risks. When a fixed price is required,
the seller should include these risks in the total detailed cost estimate, as well as
other costs such as overhead, and then add profit to come up with a total cost
estimate. In any case, the risk of the project is formally or informally asse sed before
sending the bid or proposal to the buyer.
In most cases, procurement is competitive; there will be multiple
sellers who can do the work and who are invited to submit a response to the
procurement documents. On occasion, work might be so specialized that there is
only one seller (a noncompetitive bidding situation). Public organizations may be
required by law to follow certain procurement practices and make a selection from
the perspective seller in a certain way. Because private companies may buy from
anyone they want, competitive bidding is not required by law, though they might have
internal policies regarding procurement practices that must be followed. A private
company need not even obtain a bid; it can simply issue a purchase order to obtain
goods or services.
Organizations may use several different methods to select a seller.
As noted in the previous paragraph, these methods may be dictated by law or
internal policies. If a buyer receives competing submissions from many prospective
sellers, the buyer might ask for presentations from all of the sellers to help select a
seller. Another option is to shorten the list of prospective sellers first and then request
presentations. If presentations will not add value for the buyer, the buyer may just
move into negotiations with the preferred seller or with more than one seller. All
terms and conditions in the proposed contract, the entire procurement statement of
work, and any other components of the procurement documents can be negotiated.
Negotiations can take a lot of time, and they require the involvement of the project
manager.

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At the end of negotiations, one or more sellers are selected, and a

contract is signed. The procurement management plan created earlier may also be
updated.
Notice that the procurement process doesn't end when the contract
is entered into. Once the contract is signed, the procurement must be administered.
This involves making sure all the requirements of the contract, even ones that seem
unimportant, are met. It also means keeping control of the contract and making
approved changes.
Once the procurement work is complete, the procurement will be
closed. This includes the completion of a procurement audit to determine lessons
learned. Since there can be many different procurements involved with anyone
project, the process of closing a procurement can occur many times on a project. For
example, in a project to renovate a house, a seller may be contracted to paint the
house, another may be contracted to install new landscaping, and still another may
be contracted to install a new bathroom. Each of these procurements is closed as it
is completed. Because there is only one project, the overall project is closed just
once, upon completion of all the project work, unless the project is managed in
phases. In that case, the Close Project or Phase process occurs at the end of each
phase, after procurements completed in that phase have been closed out. Make sure
you understand the difference between closing individual procurements and closing
the project or project phase. During procurement closure, final reports are submitted,
lessons learned are documented, and final payment is made.
Buyers and Sellers
In the real world, the company or person who provides services and
goods can be called a "contractor;' "subcontractor:' "designer:' etc. The PMBOKo
Guide uses only one term, "seller;' but the exam may use any of these terms to
describe the seller. The company or person who purchases the services is called the
"buyer." Many companies are a buyer in one procurement and a seller in another.
Negotiation
Negotiation is an interactive process between two or more parties
seeking to find common ground on an issue or issues of mutual interest or dispute

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where the involved parties seek to make or find a mutually acceptable agreement
that will be honored by all the parties concerned.

The Project Manager's Role in Procurement

Know the procurement process so you know what will happen when.
Understand what contract terms and conditions mean so you can read
and understand contracts.
Make sure the contract contains all the scope of work and all the project
management requirements, such as attendance at meetings, reports,
actions, and communications deemed necessary to minimize problems
and miscommunications with the seller(s).
Identify risks, and incorporate mitigation and allocation of risks into the
contract to decrease project risk.
Help tailor the contract to the unique needs of the project while it is
being written.
Fit the schedule for completion of the procurement process into the
schedule for the project so the project schedule is realistic.
Be involved during contract negotiations to protect the relationship with
the seller.
Protect the integrity of the project and the ability to get the work done by
making sure the procurement process goes as smoothly as possible.
Help make sure all the work in the contract is done, such as reporting,
inspections, and legal deliverables, including the release of liens and
ownership of materials, not just the technical scope.
Do not ask for something that is not in the contract without making a
corresponding change to the contract.
Work with the procurement manager to manage changes to the
contract.
Second, the project manager must be assigned before a
contract is signed! Many companies that sell their services make a huge but
common mistake by not having the project manager involved in the bidding
and proposal process. Instead, only marketing and sales are involved until
after the contract is Signed. The project manager is then handed a project with
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a contract that may include unrealistic time or cost constraints. The project
starts out in trouble.
Ten Top Tips for a Successful Procurement Process
1. Spend plenty of time planning
2. Establish roles and responsibilities
3. Ensure transparency of proceedings
4. Observe legalities
5. Accommodate innovation and secure best value
6. Prepare sound and complete documents
7. Considering monitoring and payment arrangements at the outset
8. Ensure procedures provide for probity and accountability
9. Think before you act
10.
Learn from the Process

References
Project

Procurement

Management

Contracting,

Subcontracting,

Teaming, Quentin W. Fleming

Projects Procurement Management & Contracts Administration using
Primavera Expedition Software by Dr. Abdalla El Daoushy
2009 RMC Publications, Inc
Slideshare.com
Local Government Task Force Guide

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