Project Performance Management

Shankar Shrestha (st115579)

PURCHASING PRACTICES
Prime contractors spend up to 90% of a construction projects turnover on buying goods and services, and thus suppliers have a large impact on project performance. Therefore, the purchasing function management of the prime contractor has a large influence on the overall performance: the more developed (i.e. mature or professional) this function is, the greater is its positive contribution. According to Hakansson and Wootz (1975), in the mid-1970s, price was the most important factor in selecting a supplier, not quality or supplier size. Abratt (1986) suggested that technical service and product reliability ranked the highest in supplier evaluation. Purchasing managers need to periodically evaluate supplier performance in order to retain those suppliers who meet their requirements in terms of several performance criteria. Six attributes are frequently used as performance criteria: on-time delivery, quality, price/cost targets, professionalism, responsiveness to customer needs, and long-term relationships with the purchasing company. Further, in making their choices the purchasing managers must necessarily make trade-offs among different levels of these attributes. Conjoint Analysis is the appropriate method for measuring preferences where several attributes are used jointly in an overall evaluation. Good input, proper process and output monitoring process are three basic things to be considered in purchasing practices. Suppliers should be chosen carefully before contract with them. The term supplier covers subcontractors, material suppliers, service suppliers , etc. The needs should be defined in detail and the appropriate sources for quality products should be identified. For that several qualified suppliers can be considered to make comparison analysis among them. Meanwhile, the price can be negotiated in order to lower the cost with allocated budget. After these initial steps, monitoring inventory flow and inventory turnover ratio (goods soldaverage inventory) helps in maintaining efficient use of the warehouse and guarding the quality of the product on the flow. The delivered materials should be checked in terms of quality, delivery time, quantity and cost of the overall purchasing process. Nevertheless, the final goal of the process is good quality products saving cost and exact delivery time. INPUT Choosing good suppliers
Definition of Needs Source & Product identification Supplier Evaluation Supplier Performance Comparison Analysis Select Suppliers Negotiate the price & terms

PROCESS Inventory Flow Inventory Turnover Ratio Exact time Budget and Quality Proper quantity delivery

OUTPUT Delivered Materials Good Quality On time Delivery Proper Quantity

Material Cost = Cost Estimation

Cost Budget All the activities necessary to manage supplier relationships in such a way that their activities are aligned with the companys overall business strategies and interests are management of the purchasing function or purchasing management. A company with a well-developed purchasing function may be applying world-class best practices

Project Performance Management

Shankar Shrestha (st115579)

whereas less-developed companies are unlikely to be applying these best practices. The level of purchasing maturity reflects the extent to which the purchasing function is integrated into the strategic management decision-making process. To increase the likelihood of making good purchasing decision, the certain good practice guidelines should be followed. The guidelines may contain seven stages. Approaching the purchase in this way will help to get the right solution, the right supplier and ultimately the most beneficial investment for the business. Planning the purchase, placing an order with a supplier and ensuring that the services are implemented successfully, all are covered by these guidelines.
Stage 1 Plan the Purchase To identify the business need, make a business case and assess any major risks Stage2 Detail the Requirements To provide a written statement of the business needs and solution requirements Stage3 Identify Suppliers & Request a Quotation To issue a set of clearly written requirements to suitable Suppliers Stage4 Evaluate the Suppliers' Responses To evaluate Suppliers' responses & determine the preferred Supplier and solution

Identify 'lessons learned' for the next purchase

Stage7 Implementation

Stage6 Place Order with Supplier To negotiate and agree acceptable contractual arrangements for the solution

Stage5 Select the preferred Supplier To validate the evaluation and make a final decision on the preferred Supplier

To ensure that the hardware, software and services are implemented successfully

Good Purchasing Practices: The more responsibility taken for the solution, the better the outcome will be. Inadequate or incomplete statements of requirements may lead to arguments with Suppliers about solution performance. This can affect the final cost and in extreme cases, may lead to legal action. It is best to be clear from the start to avoid unnecessary confusion or disappointment at a later date. Making the best decision can be difficult, but approaching it objectively will help to provide some peace of mind. In case of unsure context, it is better to ask an informed and trusted business contact or an independent adviser to audit the decision and provide impartial advice. This is particularly worthwhile in the case of high risk and high cost purchases. For simple purchases, in-depth checking of the Supplier may not be necessary; however, it is essential for high risk, high cost and business-critical purchases. Selecting the supplier is the responsibility of the Purchaser , or purchasing team, and should not be left to external advisers. At unsure legal implications of a clause or decision, an independent legal adviser should be consulted. Ensuring we are protected when things go wrong is often appreciated only when problems occur or the supplier relationship breaks down. At this point it is too late, the only option is to accept the situation or take legal action. Either way, it will cost money to resolve the problem. When the solution is implemented and working, take time to review the purchase. The 'lessons learned' are invaluable; they are the key to ensuring that the next purchase will be even more successful.

Project Performance Management

Shankar Shrestha (st115579)

References: Designing a tool for an effective assessment of purchasing maturity in construction Jeroen Bemelmans, Hans Voordijk and Bart Vos; 2011 Chinese purchasing managers' preferences and trade-offs in supplier selection and performance evaluation; Venkatapparao Mummalanenia, Khalid M. Dubas and Chiang-nan Chaoc Guide to purchasing ICT: a good practice guide for small businesses (www.accredituk.com)