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Procurement management may be defined as the combined functions of purchasing planning, vendors qualification, purchasing, inventory control, traffic control, quality control, and salvage operations.
Procurement management is a concept originally introduce by governments whereby the purchasing function is expanded from merely exchanging money for goods to one of total responsibility for acquiring goods.
From the project management point of view, procurement functions vary according to the job progress within the project life cycle. Since material supply for projects is usually one of the main components of the total construction effort, special attention should be given to the functional organization that will be handling the procurement operation.
Procurement during conceptual estimate paper and design basis paper, is limited to consulting services from the engineering department about:
.Vendor availability;
.Market conditions;
.Order of magnitude estimates; and
.Delivery time estimates.
This consulting service is a simple but vital function considering that project procurement cost is usually found to be 40 to 60 percent of the total cost of the project.
During Project Proposal (PP) development the main function of the procurement organization should be the creation of an acquisition schedule for long lead time materials according to the project milestone schedule implemented within the project execution plan.
The acquisition schedule is usually called the Long Lead Time Material (LLTM) and equipment schedule and it is always a commanding element for the total project duration.
Additionally, during the project proposal phase preliminary materials take-off (TO) is carried out and a program for procurement of items other than LLTM is established.
Materials 'take-off' (TO) is an engineering function that consist of reading design drawings and producing material and equipment schedules required for supporting construction of the project.
Once the material/equipment TO's are completed, purchase requisitions are generated.
Purchase requisitions usually contain the following:
.Engineering drawings;
.Engineering specifications;
.Inspection requirements;
.Contracting terms and conditions;
.Shipping requirements; and
.Required explant date.
Once the project is funded, definitive design generates more detail information and purchasing functions become more involved in the project development.
The already started vendor consultation and qualification will be complemented with new information resulting from the design team and purchase requisitions will be consolidated.
Long lead time material and equipment purchasing orders will be generated immediately after funding if prior provisions for this issue have not been made.
This phase of procurement development requires a great deal of bidding and contracting before the total project requirements are committed.
When all purchase orders have been placed and the contract awarded, the procurement organization has some of the most important tasks within the project life cycle, they are:
.Expediting;
.Quality assurance;
.Quality control;
.Shipping; and
.Delivering to site.
Expediting:
Vendors and subvendors have to be closely supervised to avoid unnecessary delays and ascertain delivery according to technical specifications.
Expediting requires:
.Original vendor production schedule;
.Original buyer milestone schedule;
.Establishing a progress measurement system;
.Reporting progress according to the above; and
.Analysis of performance to date and recommending action if necessary.
Quality assurance & Quality control:
Quality assurance and quality control are procurement activities dealing with the accomplishment of design specifications. A quality assurance program is run by the vendor and control by the buyer at production time. Planning and scheduling for testing and checking are established at purchase order issuance.
A quality control program is run by the project owner to ascertain that received and installed equipment and material comply with designed specifications and quantities.
Contractor Quality Control
1. Regulate production procedures
2. Test materials and equipment
3. Inspect workmanship
OWNER QUALITY ASSURANCE
1. VERIFY: Contractor's quality control function is properly performed.
2. ENSURE: The results for each of the completed functions comply with the project specifications.
Shipping & delivering to site:
Materials and equipment transportation is an extremely delicate task and requires extensive planning. Adequate planning includes consideration of:
.Insurance coverage;
.Proper packing;
.Local and foreign custom requirements;
.Lead times;
.Cost analysis;
.Local transportation to site capabilities;
.Local traffic restrictions;
.Project schedule required delivery dates;
.Financial implications; and
.Temporary storage arrangements.
Project Procurement Financial Implications
The cost of project material and equipment represent an important part of the total budget, big enough to cause serious financial damage if good cost control is not exercised.
Decision-making for procurement organizations essential role in project management is based on:
.Purchase records;
.Specifications files;
.Vendors' performance records;
.Price historical information; and
.Exhaustive research.
With today's computer aids these tasks have become less of a load for the purchasing organizations and quick management information related to purchasing requirements data may be retrieved from data files if they are kept adequately updated. Projects cash flow are very much concern with timely acquiring materials and equipment and avoiding unnecessary expenses tied to transportation expediting or temporary storage. The procurement organization purchasing plan must follow the construction approved schedule and its periodic revisions.
Material procurement has to be concerned with:
.Market studies;
.Trend analysis;
.Make-or-buy studies;
.Price-cost analysis;
.Supply sources investigation;
.Value analysis;
.Value engineering analysis;
.Latest purchasing innovations; and
.Computer advances.
Only then, it will be able to provide management support in its financial decision-making activities.
Procurement Engineering Value Analysis
Procurement engineering value analysis is a disciplined examination of the project procurement requirements to eliminate unnecessary costs brought up by:
.Over design;
.Lack of original ideas;
.Insufficient information;
.Temporary business pressures and the like.
Value is defined as the relationship between price and worth of the function of a particular element.
Value = price / worth
The primary concern of any design is the function. Too frequently, the subject of cost is pushed into the background and then forgotten. A value engineering program will not let the team forget about cost and it will generate a healthy relationship between function and cost.
Value engineering may be applied to the procurement functions as follows:
1.-Set up a plan.
Before starting any procurement activity, ascertain that the procurement team has a plan of action.
Follow the value engineering plan approach by breaking down the plan in phases as follows:
.Feasibility;
.Information;
.Creativity;
.Evaluation;
.Proposal; and
.Implementation.
2.- Get all the facts.
Become familiar with the procurement elements by factually reviewing them. Find answers to the following questions:
.What is the lead time required for fabrication?
.How much does it cost?
.How many units will be needed?
.How many suppliers are there?
.When are the units needed?
3.-Know about costs.
To make a complete analysis of any procurement element, it is essential to know not only the total cost, but the breakdown of the total cost. This breakdown should include logistics, trade trends and the like.
4.- Set a currency value on each main idea.
Rank your cost reduction ideas and start working on those offering a better return.
5.- Update your information continuously.
Keep good information about vendors activity and materials market developments. Participate in procurement related professional associations for they are continuously updating information and presenting new approaches and ideologies.
Procurement and The Computer
Purchasing and materials management is one of the project areas that have benefited most from the introduction of sophisticated yet easy to master computer applications.
Computers applications have brought along:
.Reduction of paper work;
.Ready access to collected data;
.Communications improvement;
.Fast response to changes in purchasing variables;
.Automated data analysis;
.Virtual elimination of filing; and
.A host of other intangible benefits.
Some specific project procurement tasks improved due to computer activity are:
At project proposal phase:
Creating and maintaining vendors' data, creating and maintaining quotations' data, evaluating suppliers, reviewing quotations, processing planned items requirements, generating cash requirement reports, maintaining a master data base, and generating materials take-offs.
At preconstruction phase:
Generating requisition and purchase orders, reviewing and approving requisitions, updating cash flow requirements, monitoring and controlling suppliers, and monitoring project management interface.
At construction phase:
Altering purchasing orders, answering order inquiries, estimating time of arrival, closing purchase orders, updating historical data bases, consolidating cash flow requirements, and providing instant
information and communication
Additionally, computers provide real time processing capabilities. The new available data is entered on line into the computer and information systems are updated forthwith. Computers hardware configuration may be designed according to the customer needs and expanded as business expand without losing flexibility, quality or money.
Software is found galore for all kind of business activities or may be designed in-house following friendly, easy-to-learn, powerful, computer languages. Computers have changed the face of materials management and procurement activities as much as they have done with any other business.
Vital functions as statistical information for the formulation of purchasing policy, can be updated as new data is entered and reported as:
.Historical purchasing activity;
.Prices variance;
.Purchasing order analysis and evaluation;
.Purchasing evaluation by vendor;
.Vendors delivery records;
.Purchasing economic indicators;
.Purchasing backlog;
.Rejections by vendor; and
.Cash flow updates.
All of the above mentioned are always available and revised to the latest trends thanks to computers. Computers let you sort your information, summarize it, break it down into components, present it in alternate formats, and highlight business most relevant areas at incredible speeds.
Procurement Measurement
Normally for a major project, the procurement of long lead technical equipment and materials is a function of the engineering effort and it is included in the engineering budget as a separate item.
The procurement effort consists of three major functions:
.Material Take-offs;
.Purchase Requisitions; and
.Purchase Orders
To measure physical progress of the procurement effort, each of the three major procurement functions should be weighted as a percentage of the total procurement effort. This weight factor should be based on the budgeted manhours for each function relative to the budgeted manhours for the total procurement effort.
Material Take-offs
Physical progress measurement for material take-offs is based on the estimated number of drawings requiring material take-offs versus the number of drawings for which take-offs have been completed.
For example:
The estimated drawings requiring take-offs = 150
Drawings with take-offs complete = 75
Physical progress would be: (75/150)(100) = 50%
Purchase Requisitions (RFI)
Physical progress measurement for purchase requisitions is based on the estimated total number of purchase requisitions versus the number of requisitions approved for purchase. For example:
The total estimate of Purchase Requisitions = 200
Purchase Requisition approved for purchase = 50
Physical progress would be: (50/200)(100) = 25%
Purchase Orders (PO)
Progress should be based on both the quantity of purchase orders placed and the cumulative dollar value of materials shipped from the manufacturer's plant (explanted). The quantity of purchase orders placed will contribute 50 percent progress and the dollar amount of total material value explanted will contribute the remaining 50 percent.
For instance, the purchase order quantity is 100 with 28 purchase orders placed. The total cost of purchase materials is estimated at 50 million dollars and from this amount approximately 1 million dollars of materials has been explanted. Progress would be calculated as follows:
28 PO's placed out of 100 = 0.28( 0.5 )100 = 14%
$ 1 MM of materials explanted out of = 0.02 x 0.5 (100) = 1%
Progress to date for purchase orders:
14+1=15%
Total Procurement Progress
By evaluating the physical progress of each major procurement function, the total procurement progress can be determined.
REFERENCES
Hodges, H.G.,"PROCUREMENT HANDBOOK", Harper & Brothers publications, 1991
Duran, J.M.,"QUALITY CONTROL HANDBOOK", McGraw Hill Book company, 1994
Dobler, D.W.,"PURCHASING AND MATERIALS MANAGEMENT", 1997
Lasser's, J.K.,"BUSINESS MANAGEMENT HANDBOOK", McGraw Hill Book Company, 1998
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