Procurement Strategy: Practice Question

Within a procurement strategy, explain: build/buy decision, single/integrated/multiple suppliers, selection, conditions and form of contract, pricing and reimbursement.

1) build/buy decision often referred to as make or buy is the decision as to which parts of the project should be done in house and which parts should be procured from an external supplier. In reaching this decision an organisation will consider its internal resources, competencies and the most appropriate place for risk management. Some areas such as operations planning are often better done in house, whereas other such as construction are better don externally. Each project will be different depending on the organisational capability.

2) Clients face a choice of how they breakdown the contract work package. They could go for a single supplier which has ll the capabilities to deliver the contract, although in practice this single supplier may in effect sub-contract parts of the work. The may go doe an integrated project team that is often made up of different suppliers forming a partnership or joint venture. Or they can split the work into multiple suppliers often called a hub and spike model. In this case different suppliers do different parts. Each has significant advantages and disadvantages and careful consideration is needed to select the right approach.

3) When selecting suppliers most organisations go through a formal supplier selection process. In fact, for many sectors, this process is mandated by European procurement regulations. The aim is to provide a fair and level playing field for all bidders. It involves many stages but typical issuing an invitation to tender, receiving responses, selecting a supplier based on published criteria and then awarding the contract to the supplier who provided the best value for money.

4) A number of forms of contract are available when placing a contract. These set out the terms and conditions for the contract, including the responsibility of each party, scope, processes for invoicing and how disputes are resolved. Often these forms of contract are standardised within a sector. For example, civil engineers might use NEC whilst builders would use JTC. It is important that project managers understand the form of contract that is being used.

5) Within a contract there may be a number of different payment mechanisms, these can include a combination of fixed price and time and materials elements. So, for example, a contract may include fixed price element for the main construction work but the design work may be a day rate. Getting the right payment mechanism is important because it needs to reflect the risk in the contract. It is important that the project manager understand how the payment.