Running head: FINAL PAPER 1

Final Paper

First M Last

University

Project Planning and Management

BUS 612

Dr. First Last

April 1, 2011
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Final Paper

Introduction

Purchasing and supply chain management goes hand-in-hand as one complete process in

an effective and competitive firm. Commerce, industry and government agencies use the term

“purchasing” in identifying the act and financial responsibility in the procurement of services

materials and supplies. Along with the procurement process, supply chain management (SCM)

is used to ensure the procurement process has a cost-effective and efficient supply chain.

Throughout this paper, we will review the process involved. We will review definitions of terms

used through-out the procurement and supply chain management process, discuss tools and

improvements, review procurement planning and how to select qualified vendors. Lastly, we

will touch on what the basic elements of the evolution of a contract and basic legal aspects of

procurement in a

project - concluding

with critical elements

of a contract.

For a visual aid

in the entire process, I

have included from the

Project Management

Book of knowledge an

excellent visual

description of the (PMBOK, 2008, p. 314)

project procurement
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management overview. The PMBOK breaks down the entire process into planning, conducting,

administering and closing. Keeping these basic steps in mind throughout the process helps to

simplify the entire procurement process.

Definitions and Importance

The process of acquiring services and/or goods from the preparation stages, then through

the processing stage of the requisition then through the receiving and authorization of the

payment invoice is commonly known in the business world as the “procurement” process. Many

laymen will define procurement with the word purchase - which is not the case. In contrast to

procurement, purchasing is the control point where management monitors for the right approval

of the right article at the right value, quantity and quality from the appropriate supplier at the

right terms and time. (Definitions) In the business world, procurement generally involves eleven

items:

1. Purchase planning

2. Standards determination

3. Specifications development

4. Supplier research and selection

5. Analysis value

6. Financing

7. Negotiation of prices

8. Making purchases

9. Supply contract administration

10. Inventory control

11. Disposals.
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Our text, Purchasing and Supply Chain Management, links procurement with contract

management. Contract management includes the monitoring of relationships with those under

contract along with addressing any problems that may arise and incorporating any changes that

may be required to keep the contract going smoothly. In other words, contract management is

the administrative work that is connected with the handling of contracts to ensure all parties

meets each other’s expectations; this relationship includes these activities:

1. Bidding invitations

2. Evaluation of bids

3. Awarding of contracts

4. Implementation of contracts

5. Quantitative measurement of completed work

6. Payment computations.

By combining contract management into the procurement process, project managers can

assure they are working effectively to accomplish the best outcome through their procurement

process while maintaining positive relationships with suppliers.

RFP Tools and Improvements

The request for proposals (RFP) is, “A type of procurement document used to request

proposals from prospective sellers of products or services. In some application areas, it may have

a narrower or more specific meaning.” (PMBOK, 2008, p. 445) According to our text they are

used in the bid procurement procedures through which purchasers advise their possible suppliers

of needed information that the supplier can use to aid in making their proposals. The RFP should

provide:

1. Scope of work (SOW)

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2. Product specifications

3. Timelines

4. Type of contract

5. Requirements

6. Conditions

7. Explanation of goods and/or services to be contracted

8. Criteria used for evaluation

9. Contractual requirements

10. Technical goals

Suppliers respond to the RFP with detailed proposals to include a quotation of a proposed

price. They provide for negotiations after sealed proposals are opened, and the award of contract

may not necessarily go to the lowest bidder. Managers must review all proposals and make a

selection based on all criteria – not just the lowest bidder. Case 8 of our text, “The Capital State

Arena,” provides an example of a university seeking proposals for a new lighting system. In this

illustration the university had a requirement for replacement parts to be available within 24

hours. Although some of the proposals have had a lower bid, if they could not guarantee the new

lighting system could be repaired with replacement parts in a timely fashion, their low bid may

not be the best choice for the project. Potential down time of the lighting system could cost the

university more than the money they may save on a low bid. (Benton, 2010, p. 461)

Lastly, according to our text, page 346, “The buyer should never reveal its objectives to

the seller. The ultimate objective of the buyer should be to develop a reasonable con- tract price.

The buyer also must be flexible in selecting the type of contract (fixed cost or cost-plus) that will

be appropriate for a specific spend. The negotiations’ objectives also should use a data-driven
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approach to determine minimum and maximum pricing strategies. Of course, the buyer’s

minimum and maximum strategies should be listed.” (Benton, 2010, p. 346)

Procurement Planning and Selecting Vendors

The principal portion in the procurement decision process is the price of the item. To keep a

competitive edge in increasingly competitive markets, purchasing agents must include in their

decision process five basic pricing strategy components in their procurement planning; these

components are:

1. Selecting the appropriate supplier

2. Choosing right materials

3. Selecting the correct quantity

4. Choosing the best timing

5. Selecting the right price (Benton, 2010, p. 291)

How many people can remember Kathie Lee Gifford clothing line? A good reason

people today may not remember her clothing line is because of the 1996 Kathie Lee Gifford

clothing line scandal that rocked this countries clothing industry. This incident is an excellent

example of a poor choice in selecting the right supplier. According to an excerpt of a report

from a National Labor Committee report, posted on the Harvard Law website entitled Children

Found Sewing Clothing For Wal-Mart, Hanes & Other U.S. & European Companies, “Charles

Kernaghan and the National Labor Committee revealed that Kathie Lee Gifford’s clothing line

for Wal-Mart was being made by 12 and 13-year-olds in Honduras, the resulting scandal and

publicity was enough to virtually wipe out child labor in garment factories around the world

producing for export to the U.S.” (Children found sewing) Besides wiping out the child labor

thirteen or so years ago, the Gifford clothing line quickly disappeared off the shelves throughout
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the United States. Consumers found it unacceptable to purchase products manufactured by child

labor. Ten years after the scandal, child labor has been on the increase again. Consumers have

forgotten what happened years ago. Manufactures’ must be conscious not to make the same

decision as Ms. Gifford.

Purchasing professionals must not only look at the price when determining the item to

purchase; they need to ensure the means they select to get to a price is appropriate. Standard

Pricing List, Competitive Bidding and negotiations are the three most common pricing methods

used to get when accruing prices from suppliers (Benton, 2010, p. 291). “Standard price lists

are usually prices generated based on the seller’s total cost structure. The selling firm usually

offers quantity discount schedules in order to influence the behavior of the buying firm.”

(Benton, 2010, p. 291) This is by far appears to be the most common. Competitive bidding is

what I see in the government. The government puts out a request for bids and suppliers create

bids that meet the government’s criteria. “The supplier’s competitive advantage is critical when

the formal competitive bidding process is used. In most government competitively bid contracts

(sealed bids), the lowest bid is the winning bid.” (Benton, 2010, pg. 291) Lastly, the 5

purchasing objectives should be included in the negotiation process. We find this process used

in home construction all the time. Our text says, “…when there are time constraints, the

specifications are not clearly stated, there are not enough sellers, and the dollar value is too low

to consider using the competitive bidding process.” (Benton, 2010, p. 292)

Depending on the situation will dictate as to how the purchasing professional will

proceed with their pricing strategy; once the determination is made as to the best pricing strategy,

the purchasing agent will be well equipped to make the proper decision that will provide a

positive financial impact to the firm they represent.

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Contract Evaluation

Contract Evaluations is also critical in the procurement process. An excellent example of

this point is case 8 in the course textbook; Capital State University (CSU) had to evaluate

multiple contracts in the procurement process of a costly lighting system. CSU recognized a

need and provided a list of projected uses for the lighting control system. By evaluating them in

order of most usage (one being the highest and four being the lowest) as interpreted by the

scenario, the university would be able to establish whether the contracts meet their criteria in

order of importance. Assigning a value to the uses creates a visual representation the criteria

importance.

1. Control lighting for their men’s basket ball team and future sporting events

2. Control lighting for future commencement ceremonies

3. Accommodate different lighting moods for off season facility rentals

4. Use as a teaching tool for the university theater department

Along with the purchases use, CSU has provided a list of “required” features with

justifications for each. When evaluating contracts, it is essential managers to ensure required

items are included in the contracts and are weighted in value accordingly. According to Benton,

“In the new fast-paced and volatile buying environment, the purchasing firm must know where

to look for each item. Buyers should be experts on the industry and on specific raw materials or

component parts. There are many sources available for the buyer to consider when seeking out

potential suppliers.” (Benton, 2010, p. 159) When evaluating contracts, buyers need to make

sure thy locate suppliers that can provide the best contract for the project at hand.

Critical Elements of a Contract

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Lastly in the relationship between project management and the procurement and supply

management process is the necessity to monitor payments from the buyer to the seller. This

process requires a working relationship between the buyer and seller and will ensure that the

terms of the contract are met and payments are also met. Payment should be in direct proportion

to the required compensation linked to the seller’s progress as outlined and defined in the

contract. “Terms and conditions of the contract become key inputs to many of the seller's

management processes. The contract can actually contain the inputs (e.g., major , key milestones,

cost objectives), or it can limit the project team's options (e.g., buyer approval of staffing

decisions is often required on design projects).” (PMBOK, 2008, p 316)

It is important for the project manager keep a healthy relationship with the seller to aid in

the process of ensuring payments are made in direct proportions to work completed. An example

of this that I am familiar with is in the realm of software development; as contracted developers

produce software as outlined in the requirements documentation and the contract, payments are

made accordingly.

In support of this point, the PMBOK says there should be a performance review based on the

contract agreed upon by both parties. The review will help measure competency for any future

projects as well as aiding in the evaluation of the current project. “The Administer Procurements

process reviews and documents how well a seller is performing or has performed based on the

contract and establishes corrective actions when needed. This performance review may be used

as a measure of the seller's competency for performing similar work on future projects. Similar

evaluations are also carried out when it is necessary to confirm that a seller is not meeting the

seller's contractual obligations and when the buyer contemplates corrective actions.” (PMBOK,

2008, p. 337)
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Conclusion

In conclusion, this paper identified that purchasing and supply chain management must

go hand-in-hand as one process for a firm to be effective and competitive. Commerce, industry

and government agencies have used the term “purchasing” in identifying the act and financial

responsibility in the procurement of services materials and supplies. Along with the procurement

process, we identified supply chain management (SCM) was used to ensure the procurement

process was cost-effective and efficient. We reviewed the process involved, definitions of terms,

discussed tools and improvements and reviewed procurement planning and how to select

qualified vendors. Lastly, we touched on what were the basic elements of the evolution of a

contract and the legal aspects of procurement in a project and concluded with critical elements of

a contract. With the information provided in this research paper, you are now on your way to

successfully procuring materials or services and effectively understand the supply chain process.
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Reference

Benton, W. C., Jr. (2010). Purchasing and supply chain management (2nd ed.). New

York, NY: McGraw-Hill Irwin.

Clothing for wal-mart, hanes & other u.s. & european companies. (n.d.).

Retrieved April 8, 2011,from

http://www.law.harvard.edu/programs/lwp/NLC_childlabor.html

Definitions. (n.d.). Retrieved April 8, 2011, from

http://www.businessdictionary.com/definition/procurement.html Children found sewing

Project Management Institute (2008), A Guide to the Project Management Body of Knowledge

(PMBOK Guide) – Fourth Edition. Newtown Square, PA: Project Management Institute,

Inc.