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Materials Management in Project Planning-Procurement, storage and disposal

Different varieties of quality materials have to be procured in adequate quantities at the right price, stored safely in a proper place, used judiciously during the execution of the project and the waste if any have to be disposed efficiently. Here are some right parameters about the material required for the project:  Right price  Right quality and right technology Right engineering parameters Right lead time Right quantity Right source Right packaging Right transportation Right handling methods Right insurance Right legal contracts Right place of delivery Right ethical standard

Project procurement Management is a process of acquiring goods and services from a firm external to the performing organisation.

Procurement Planning: There are seven key components in a project procurement management system : 1. Project procurement planning, 2. Solicitation planning, 3. Solicitation, 4. Source selection, 5. Contracting, 6. Contract administration 7. Contract closing. 1. Project procurement planning: It is the process of discovering the needs of the project that can be satisfied by acquiring products and services from firms external to the project organisation. It involves the questions: What to procure and then how and when? Centralised procurement process has its advantages of cost savings. The organisation may have policies to procure all materials from a single or multiple suppliers. Before this process begins, some documents relating to the project would exist and they can be taken as guide: They are Scope statement, Product or service description/ PBS, procurement sources, market conditions, make or buy analysis. The project manager usually resorts to the CPM and PERT techniques to estimate the timings of the products or services to be procured. So defining the needs of the project is the most crucial task of the Project manager. The product or service description provides information pertaining to the technical specifications of the products which are to be kept in mind while procuring.

Though the content and format of a product or service description statement vary from product to product and from project to project, it must be elaborate enough to support the latter stages of project planning.  Usually product or service specifications are written or graphical representations consisting of: - Design specifications (the physical characteristics of the product), - Performance specifications ( the required operational capabilities of the end product) - Functional specifications (part of the performance specifications and identified only when the vendor mentions the utility of the product or service).  Procurement resources: Description of the resources systems and personnel- needed to procure the products and services from the market as per the specifications given in the product. - If the project is complex, then the presence of a specialised procurement team is necessary so as to properly communicate to the suppliers of the critical supplies and procure them at the right time.  Market conditions: The purchase manager should be well conversant with the market products available in the market, terms of the vendors, inflation rates, interest rates, ordering costs and the WBS etc.  Make or buy analysis: When the Project Manager is armed with the required information on the required product and the market conditions, he has to decide whether to procure them from within the organisation or from outside. - Making the product/s within the organisation has its advantages of control on quality, delivery schedule, and savings on costs. - But if that is not possible, it is better to procure the material from the appropriate vendors. - Such Make or Buy decisions should be taken after considering the direct as well as indirect costs (ordering cost, transportation cost etc.), the organisation s point of view and also the timeliness of the needs of the project. Reasons for Making: Lower Production Costs; Unreliable suppliers; Assurance of supply of adequate quantity; Utilisation of surplus labour capacity; Quality Control Protection of special design or quality (Copyrights/Patents) Reasons for buying: Inadequate capacity in own manufacturing; Reduction of inventory costs (JIT); Ensuring alternate sources of supply; Easy availability of standardised materials.

 Expert judgement: Analysis of the procurement process can be done by the specialists if available in the firm, or by the consulting firms or by the professional, technical associations conversant with the products.

Selection of vendors In the process of selection of the vendor, the vendor and the project manager try to pass on the risks to the other, at the same time expecting good performance. The contracts that the project manager would enter with the vendor may be of different types such as: Fixed Price (FP) contracts: - the price is negotiated by the vendor and the project manager and agreed upon a fixed price; the vendor has to absorb any losses or profits due to subsequent increase or decrease in prices; the process may be time consuming since the vendor may take more time to assess the risks over the contract period to arrive at the price profitable to him; the vendor may even inflate the price in anticipation of future increase in costs Cost plus Fixed Fee (CPFF) or cost plus percentage fee: In this type of contract, the project bears all the costs of the product or service and the vendor is paid a fixed fee for supplying the goods. In this type of contract, the risk is with the project manager and not the vendor. (example is a building contract, where the owner of the plot bears the costs of all materials and the labour and the vendor is paid a percentage of commission); The project manager is not assured of the final cost; there is no reward for the vendor if time and cost are saved. Guaranteed maximum and shared savings (GMSS) contracts: The vendor is not selected by tender and has to complete the contract within the guaranteed maximum amount. If the cost exceeds this guaranteed maximum , it is for the vendor to make up and the savings if any, (i.e. maximum minus the actual cost) is shared by the vendor and the project. In this type, the cost to the project is limited by a definite amount. Price negotiation has to be done carefully in order to avoid the inflation of the guaranteed maximum amount. Fixed price incentive fee (FPIF) contracts : This is similar to the FP with the difference that if the vendor is able to minimise the costs, then the saving is shared by the project and the vendor. Cost plus incentive fee (CPIF) : This is similar to the CPFF except for the flexibility of altering the fee based on a formula which compares the total project costs with target costs. Usually organisations handling R & D type of projects enter into these types of contracts and the vendors are the maximum risk takers.

It is necessary for the top management and the project manager to plan procurement management very carefully and prepare the procurement management plan and statement of the work.

The factors influencing the selection of the contract method are : hDegree of risk involved in terms of cost and time h Nature and technical risk involved; h Degree of competitive dynamics in pricing h Evaluating the price of the product or service h Level of exigency of the requirement; h The vendor s risk absorption capacity and his financial management system h Consistency of the vendor s commitment to the project.

2. The Procurement Management Plan: Is the document detailing how the processes would be managed from solicitation planning till closing the contracts: The type of contracts, the persons in charge for developing the estimates for evaluation purposes, managing multiple vendors, combining the procurement activities with scheduling etc. Statement of work (SOW): - A detailed, precise and transparent description of the product or service to be procured for the vendor to decide on his capabilities to take up the assignment. - The details will vary depending upon the nature of the product or service of type of contract. - The statement may be periodically revised by rephrased depending on the ongoing interactions with the vendor. Procurement Document: - This is a document that is used to invite proposals from the eligible vendors. - The word proposal (Request for Proposal RFP) is used when non-financial aspects like technical skills are in focus and is used while inviting architects and consultants. - A typical RFP covers many topics such as: A brief overview of the project, product specifications, mode of supply of products/services, mode and time of payment, insurance of the product/services, names of the key people with authority and responsibility to take decisions etc. - The format should be designed in such a way that it elicits in-depth, accurate and complete information from the vendor. Criteria for judging the vendor: hTotal cost of procurement h Vendor s capacity to deliver at lowest cost h Technical expertise h Management style h Financial position 3. Solicitation: The next stage is solicitation. It is the process of obtaining quotations, bids, offers or proposals from all the prospective vendors. This involves: Short-listing the vendors:  The list should contain all the information about their expertise in different functional areas.  If not readily available from sources like associations, then meeting with customers of the vendors, visiting their sites, enquiring from their bankers etc.  Meetings with the vendors: These meeting precede the proposals from the vendors and are used to eliminate all the communication gaps regarding the needs of the project and prepare the ground for further negotiations.  The negotiating team may comprise of experts from all the relevant functional departments.

 When consensus is arrived at on all the relevant issues, both the sides sign the written contract incorporating the terms and conditions. 4. Source Selection: Advertising: - This is a tool used by the project organisation to invite proposals from vendors through sealed bids. - There is no negotiation of price and the lowest bid is usually accepted. - Advantage of advertising is that a data base of potential vendors can be created from the responses received for the advertisement. - For the projects involving the government, advertising in mass media is mandatory. Vendor Selection: - This is the process of receiving proposals from prospective vendors and evaluating these proposals to choose the right vendor. - The proposals are classified into technical and commercial and both are evaluated separately in each and every proposal. The tools used for selecting a vendor are  Contract negotiation: Is a process aimed at enhancing the clarity and ensuring mutual consensus on the structural and procurement aspects mentioned in the contract, before signing it. The topics to be covered in the contract are: price of procurement, technical approach, management style, terms and conditions, legal bindings etc. The contract may be in the form of a MOU in the case of highly complex and technical products.  Weighing system: Is a process in which all the information pertaining to the qualitative aspects of the vendor is quantified. It involves identifying and scoring all the significant activities from the proposal, setting up a range for qualifying them based on the significance level and weighing them against the total scores.  Screening system: Is a process of establishing basic performance standards for qualifying the proposals and the vendors have to qualify in the performance specification test developed by the screening system. Developing independent estimates: This process is aimed at checking the authenticity of the price quoted by the vendor. The project organisation develops its own estimations of product pricing. Any gap between the vendor s and vendee s price estimates indicates that the data in the statement of work is insufficient or the vendor failed to correctly interpret the statement of work.

5. Contracting: After selecting the vendors and evaluating their quality thoroughly, the project organisation has to sign contracts with the vendors to bind them legally to deliver the specified product. The project organisation is also responsible for paying the vendor the agreed price on the successful completion of delivery. In general, the contract should contain: the definitions of  Vendor, vendee;  Responsibilities of the vendor and vendee;  The type of contract being administered and the mode of payment;  The process of change requisition and its approval;  Vendor s warranty/guarantee for the product;  Terms and conditions of closing the contract and consequences for deviating from the agreement like late delivery etc. How to order materials? 1) Electronic Ordering (Transactions Between Firms via Electronic Data Interchange EDI; Involves standardized Data Transmittal Format through Computers; Reduces Paper Transactions; Speeds Up The Procurement Time.) 2) Stockless Purchasing (Arrangement in which a supplier holds the items ordered by the customer in its own warehouse, and releases them as and when required by the customer) 3) Just in Time Purchasing (JIT originated in Japan & is generally associated with the Toyota motor company - JIT purchasing is directed towards the reduction of waste i.e. excess inventory and delay such that items only move through the production system as and when they are needed) Points to be kept in mind by the Project Manager while procuring materials: Price Volatility Timely Availability Limited Storage Space 6. Contract Administration:  Contract Administration is the process of making sure that the vendor s performance satisfies the project needs mentioned in the contract.  If there are many vendors, then they should all be handled.  In short, contract administration is about applying the project management practices to the vendor-vendee relationship integrating the results of these practices back into the project.  Project planning and implementation to check whether the vendor is progressing as per the schedule; Progress reporting : to check the vendor s performance in terms of cost, time and technical aspects; Quality management : to check and constantly monitor the quality of the product being produced; Change management : to check the approval and implementation of potential changes and communicating the incorporated changes to the people requiring it; Financial management: to ensure timely and periodic payments as agreed to in the contract.  It will be advisable for the project manager to appoint a Contract Administrator to manage the total contract administration activities.  So, the duties of a contract administrator can be derived as follows:

Managing change; Ensuring that the vendor understands specifications completely; Ensuring conformance to quality; Managing warranty on the products being produced; Managing the sub-contractors under the vendors; Monitoring the manufacturing process; Handling deviations from the contract; Resolving conflicts; Managing payment schedules and contract terminations.

 Job status: The information collected during the project planning and implementation about the jobs entrusted to the vendors completed, in process, their quality, the expenditure incurred etc. gives the picture about the job status.  Requisition for change: Any changes to be made to the terms and conditions of the contract or to the product or service specifications are covered in the statement for change request.  Any performance of the vendor which is not upto the mark may also be taken as a change.  But any disagreement between the vendor and the project manager on accepting the change can lead to conflicts and claims and have to be resolved.  Vendor billing process: The vendor should submit the bills at periodic intervals as per the terms of the contract along with the supporting documents for payments by the project manager. 7. Contract Closing:  It is a process involving verification of the product along with updating all the project documents with the final results and storing all project info for future retrieval.  This process may also form part of the contract.  The process involves the following four steps:  Contract documentation copy of contract, changes requisitions, approvals vendor performance reports, invoices and payment records, contract related audits and inspections  Procurement audit : formal review of procurement process;  Contract files : total set of indexed documents developed to include it in the final project records;  Formal acceptance and closing: process wherein the contract administrator submits a formal written notice to the vendor saying that the contract is complete.  The contract administration may have the authority (as per the contract terms) to decide to close a contract at any time.  If at the time of closing the contract, the vendor has already incurred some expenditure on the project, the project manager may have to compensate the vendor up to a certain amount as per the terms of the contract.  The possible reasons for the project administration to close the contract are: The product that was being procured is not required anymore; Technological advancement that can by-pass the product requirement; Change in the allocation of funds; Availability of substitute products; Lack of profit expectancy; Failure to supply the product or service as per the schedule; Lack of progress in the activities of the contract; Failure to stick to the terms and conditions of the contract deviation from the contract in terms of quality and performance standards.

 If there is a breach of contract on the part of the vendor, the project administration may not pay the vendor or even recover the advance amount if given earlier.  If the contract is terminated, the contract administrator has to check the breach of contract and then decide to accept, partially accept or reject the products/services supplied by the vendor.  He may then wait for some time to see if the end products/services supplied by the project are returned for rectification and if so determine the monetary value of the penalty to be charged to the vendor before finally settling his account.  Thus, terminating a contract is one of the challenging tasks of the contract administrator.  Project Inventory: The project materials occupy a sizeable chunk of the total materials required for a project.  If the inventory is not properly handled, it may result in shortage when needed and may be available in plenty at other time, occupying lot of space and precious working capital.  This will result in time and cost overruns.  Therefore the requirement of inventory should be continuously monitored and managed.  JIT , the Just in Time strategy may be used by the project to save in inventory holding costs.  Project Spares: Usually the OEMs provide the list of recommended spare parts as well as mandatory spare parts, which mostly the project managers procure.  Among all the areas of Project management, the warehousing of the project material appears to be the most neglected, even though a major chunk of the project investment is in the material.  In India, it is a common sight to see the project machinery being stored in open grounds gathering dust and rust till they are properly erected.  The responsibility of the store manager is an efficient, smooth running, economic operation of the stores to give good timely service to the project.  Obviously the store manager requires adequate space to store the materials and a group of competent staff to handle them.  The ill-effects of bad stores management: Materials like cement or paint would harden; Iron and steel items would corrode; electronic instruments would be spoiled due to humidity, heat and dust; fluids like petrol evaporate; materials containing wood get damaged by white ants; storage batteries getting damaged due to humidity; Glass sheets stacked one over another exposed to the sun crack; fire bricks disintegrate due to water; materials containing cloth and paper being eaten away by rats and cockroaches  Thus the store manager has to guard the project materials from light, sun s rays, air, heat, moisture, water, oils, dust, dirt, rats, moths, white ants, fire, explosions, theft and pilferages.