SN Panigrahi

SN Panigrahi is a Versatile Practitioner, Strategist, Energetic Coach, Learning Enabler & Public Speaker.
He is an International-Corporate Trainer, Mentor & Author
He has diverse experience and expertise in Project Management, Contract
Management, Supply Chain Management, Procurement, Strategic Sourcing, Global
Sourcing, Logistics, Exports & Imports, Indirect Taxes – GST etc.
He had done more than 150 Workshops on above
Published more than 500 Articles; 80 + YouTubes & more than 80
SlideShares Presentations
He is an Engineer + MBA +PGD ISO 9000 / TQM with around 30 Yrs of Experience
He is a certified PMP® from PMI (USA) and become PMI India Champion in 2016
Certified Lean Six Sigma Black Belt from Exemplar Global / KPMG
Trained in COD for 31/2 Yrs. on Strategy & Leadership
GST Certified – MSME – Tech. Dev. Centre (Govt of India)
ZED Consultant – Certified by QCI – MSME (Govt of India)
Member Board of Studies, IIMM
Co-Chairman, Indirect Tax Committee, FTAPCCI
9652571117 Empanelled Faculty in NI MSME
SN Panigrahi [email protected]
Hyderabad
He has shared his domain expertise in various forums as a speaker & presented a number of papers in various national and
international public forums and received a number of awards for his writings and contribution to business thoughts. 2
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AGENDA

Procurement – Sourcing – Purchase – Negotiation & Contracting

Strategic Sourcing

Power of Procurement

Cost Control – Cost Reduction – Cost Avoidance

Target Costing

E- Sourcing – Balanced Score Card – Procurement & Quality

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Procurement is an end-to-end process that covers everything from planning

purchases to negotiating pricing, making the purchases, to handling inventory control
and storage.
Procurement is the business function concerned with acquiring (procuring) the goods
and services that are vital to an organization. So, procurement is essentially the
umbrella term under which broadly you’ll find Purchasing, Sourcing & Supplier
Management.

Sourcing Purchasing

Supplier Management

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Invoice
Managing Requiremen Identify
Matching /
Contracts ts Definition Need
Payment

Negotiation Category Receipt of

Purchase
Style & Analysis / Define Goods /
Manage Requisition
Methods Strategy Performance Services
Performance
Expectations

Supplier
Selection
Market Purchase Approval /
Criteria / Assess Initiate
Research Order Release
Qualify Relationships Relationships
Suppliers

Manage Negotiation &

Suppliers Create / Refine
Supplier Groups
Contracting
Compliance
& Risks
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What is Procurement?

Procurement is an all-inclusive function that describes the activities and

processes used to acquire goods and services.
Importantly, and distinct from Purchasing, Procurement includes the Activities
in Establishing Fundamental Requirement; Sourcing Activities, such as
Market Research and Vendor Evaluation; and Negotiation of Contracts
In short, purchasing is a subset of procurement functions.

Procurement is the process of placing purchase orders with each of the

suppliers, getting order confirmation, following up with suppliers until
materials are delivered, and then ensuring the materials are paid for.

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Procurement has Following 3 Process :
Plan Procurement : Procurement generally starts with planning what to buy, where to buy, when to buy, and how
much to buy, and then concludes with closing the contract.
This is about the planning of procurement, which covers what to buy, when to buy, how and how much to buy,
and what contract type to be used.

Conduct Procurement Conduct procurement is about finalizing the order award. This covers the
steps involved in making requests for quotes, conducting bidder's conferences and strategic negotiations, and
awarding the contract.

This is where the contract is being administered against the contract requirements, and only the appropriate
changes to the contract order are being dis- cussed for further approval from the change control board or
approval committee.

Close Procurement This is the final phase in the procurement—the time to formally close the order and settle
all possible claims. However, it should be noted that even if there are unsettled claims, the phase needs to be
completed.
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 Plan Procurement

Conduct
Procurement

Close
Procurement

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➢ How procurement will be coordinated with other project aspects, such as
project schedule development, control processes
➢ Timetable of key procurement activities
➢ Procurement metrics to be used to manage contracts
➢ Stakeholder roles and responsibilities related to the procurement,
including the authority and constraints of the team when an organization
has procurement department
➢ Constraints and assumption that could affect planned procurement
➢ Legal jurisdiction and currency in which payments will be made
➢ Determination of whether independent estimates will be used or whether
they are needed for evaluation
➢ Risk management issues (requirements for performance bonds, insurance
contracts to mitigate risk)
➢ Pre-qualified sellers

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 Demand Side Sourcing Side

What What Goods / Services are Required What Goods / Services are Available

Where the Goods / Services Required Where the Goods / Services Available
Where Location / Dept. / Sec. / Cost Center Market Place – Global Search

Why Reasons / Justification for Requirement Reasons / Justification for Outsourcing

When Time Period / Schedule of Requirement Time Period / Schedule of Delivery

Who Who is the Indenter / User Who can Supply – Suppliers Base

How How much

SN Required
Panigrahi / Qty by the Indenter How much to Dispatch / Deliver13

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• Delivery methods – Different for professional services versus construction projects
✓ For professional services:
➢ A Service provider with no subcontracting
➢ A Service provider with subcontracting allowed
➢ Joint venture between buyer and services provider
➢ A Service provider acts as a representative
✓ For industrial or commercial construction projects:
➢ Turnkey, design build (DB), design bid build (DBB), design-build operate (DBP), build own
operate transfer (BOOT) etc.
• Contract payment types
✓ Fixed fee contracts are suitable when the type of work is predictable and the requirements are well
defined and not likely to change
✓ Cost plus contracts are suitable when the work is evolving, likely to change, or not well defined
✓ Incentives and awards may be used to align the objectives of buyer and seller
• Procurement phases
✓ Sequencing or phasing of the procurement
✓ Procurement performance indicators and milestones to be used in monitoring
✓ Criteria for moving from phase to phase
✓ Monitor and evaluation plan for tracking progress
✓ Process for knowledge transfer
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Procurement Policies
A business procurement policy governs the procurement of goods & Services and provides
guidelines for purchasing professionals, departmental managers and employees covering
Supplier Selection & it’s Criteria, Purchasing Limits, Authorizations, Awarding Contract,
Values & Ethical Considerations etc to ensure that the business spend money efficiently and
effectively and obtain value for money from its suppliers to save money and make an important
contribution to business operations & profitability.

A procurement policy is an overarching principle used to set direction and influence decisions. It
should be used to guide to decision making under a given set of circumstances within the
framework of objectives, goals and management philosophies as determined by senior
management.

One example would be a Competitive Bidding Policy that states any procurement over a certain
dollar amount must be competitively bid through either a price quote or a request for proposal.

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Procurement Procedures

A procurement procedure is a particular way accomplishing something that, in

many cases, implements a policy. It should be designed as a series of steps to
be followed in a consistent and repetitive approach or cycle, with the goal of
accomplishing an end result.

Using our example from above, a set of procedures would also be developed
to implement the Competitive Bidding Policy.

If example, Bidding Procedures to be Followed, Negotiating Contracts

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Moving a firm’s internal activities (production & service delivery) to outside providers. Why do it? Drivers

❖ Core competencies, stick to the knitting. No strategic expertise outsource

❖ Improvement - contractor is more competent, reliable, high quality, price/cost effective, release of
management time

❖ Finance: releases internal assets. Out-source costs are less than or equal to DIY costs

❖ Short term revenue gains - selling off fixed to out-source agent

❖ Specialist labour market - cannot hire expert staff we need.

❖ No expected loss of flexibility or growth potential

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PROCUREMENT OBJECTIVES AND KPI’S

OBJECTIVE 1: Support Operational Requirements

• Understand business requirements

• Buy products and services
– At the right price
– From the right source
– At the right specification that meets users’ needs
– In the right quantity
– For delivery at the right time
– To the right customer

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Right Source
Right Payment
Right Quality
Terms

Right Contract Right Quantity

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R’s
Right Delivery
Right Price
Mode

Right Service Right Time

Right Place
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OBJECTIVE 2: Manage the Procurement Process and the

Supply Base Efficiently and Effectively

To manage the procurement process and supply base efficiently

and effectively, procurement must follow the following key steps:
• Identify opportunities where the procurement team adds • Manage internal operations
true value: – Management of procurement staff
– Evaluation and selection of suppliers based on sound ethical norms and standards – Development and maintenance of
a) All purchases must go through the approved procurement processes policies and processes
b) Engineering and other functional inputs are part of this process
c) Contractual agreements will be done with the involvement of Procurement
– Introducing and leveraging appropriate
d) Increased use of sourcing teams technology and systems
– Review of specifications or scope of work
a) Review the requirements for the material or service being provided
– Defining procurement strategy and
b) If possible, suggest alternative standardized materials that can save the organization money structure
c) Periodic review of categories can allow greater leveraging of requirements
– Purchasing will act as the primary contact with the supplier
– Provide procurement leadership to the
a) Manage the supply base, identification and mitigation of risks organization
b) Identify new potential suppliers and develop relationships
c) Improvement and development of non-competitive existing suppliers
– Provide professional training and
d) Determine the method of awarding contracts growth opportunities for employees
e) Support local business (local procurement) and consider social responsibilities wherever possible
without compromising objective 1

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OBJECTIVE 3: Develop strong relationships with other groups within the organization

– Continued liaison with internal customers to achieve greater understanding of requirements and
integration
– Timely, pro-active communication with internal customers
– Sharing of information i.e. market trends, price, quality, delivery, forecast and demand
– Highlighting achievements

OBJECTIVE 4: Support organizational Goals and Objective

– Develop purchasing strategies that support organizational strategies:

a) Monitor supply markets and trends i.e. material price increases, shortages, changes in supply and
interpret the impact these trends will have on the organization
b) Identify the critical materials and services required to support the company strategies in KPA’s
particularly during new project development
c) Support the organization’s need for a diverse and globally competitive supply base
d) Develop supply options and contingency plans that support company plans
e) Quality reporting as required and continued improved communication
f) Develop KPI’s for Procurement personnel which will support the objectives and organizational goals
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Procurement Key Performance Indicators:

1) Inventory
– Monitor spend on Stock, Direct Charge and Service spend, monthly
– Major Reagents and Consumables based on 80/20 Pareto principle – Stock on Hand сover 2-3 month on
average; Purchase prices against Budget; Monitoring of the Market Trends
– Percentage of Stock Inventory covered by BPA (small value; high turnover items)
– 95% service level for normal stock and 100% service level for Critical, Insurance, major consumables and
reagents
2) Supplier performance
– Price Structure, Discount, Payment terms based on 80/20 Pareto principle
– Lead time monitoring
– Deficiency report
3) Buyer Performance
– Saving (monthly) by assigned category
– RFQ/PR processing; actual vs. target (2 weeks for regular; 1-3 work days for Urgent)
– Spend/Number of PO/Number of Items by Buyer
4) International/Local Spend Analysis
– Target to increase the local spend
– Newspaper advertisement
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➢ Business awareness and strategic procurement ➢ 8. Quality management

➢ Developing & managing procurement systems ➢ 9. Service level agreements
➢ Purchasing techniques and methods ➢ 10. Ethical behaviours in
➢ Supplier evaluation and selection procurement
➢ Risk and value management ➢ 11. Relationship management
➢ Contract management Legal aspects of (client-server)
procurement (contracts) ➢ 12. Performance evaluation of
➢ Purchasing negotiations suppliers & self
➢ 13 Change management

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What is Sourcing?
As the term implies, sourcing is concerned with finding the best supplier for goods and
services. Sourcing is the subset of procurement that comes before any purchases are
made.
Before you can procure materials from your suppliers, you must first find and vet those
suppliers. When you have an effective strategic sourcing process in place, you’ll find
reliable, affordable, and quality suppliers to supply the goods you need. Good work here
makes the procurement process more streamlined and efficient.
Why is Sourcing Important?
Sourcing adds value to the procurement cycle:
Strong supplier relationships help ensure consistent quality and availability.
Vendor contracts and purchase orders spell out terms and eliminate potential
misunderstandings.
Businesses with the most advanced collaboration with suppliers outperform peers by a
twofold margin.
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The Sourcing Process

While the procurement process is much lengthier, sourcing is just as
important and makes everything possible in the first place:

Develop Your Consumer’s Needs

As a sourcing manager, your job is to ensure you get the materials required
to produce the products your customers require. This process can be broken
down into some easy steps:

• Identify Customer Needs

• Assess Market Offerings
• Develop Material Specifications
• Define Winning Supplier Qualities

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Assessing Supplier Market

Market
Structure

Risks & Competi

Opportun tion
ities

Supply Supply
Standards
of
Market Chains;
Business
Business / Practices
Socio-
Env.Factors

Substitute Price

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Behavior /
Goods / Trend
Services

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Source Selection
Continuously Evaluate & Up Determine Criteria – Key
Date – Vendor Rating – Audit & Evaluation Category & Factors
Continuous Review with Weightages

Evaluate & Select the

Identify Sources of Potential
Suppliers –
Supplier
Keep in Qualified Vendors List

Determine Methodology to Shortlist the Suppliers from

Assess & Evaluate Suppliers – Selection Pool Based on
Second Level Screening Preliminary Criteria

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 Source Selection Criteria
Criteria Sub Criteria Weightage Vendor A Vendor B Vendor C

Assigned Score Assigned Score Assigned Score

Value Value Value On 1-5 Scale
Financial Financial Stability 25
Soundness Credit Rating Typical Values
Banking Arrangements & bonding
Financial status 5 Meets All
Technical Experience. 30 Requirements & Offers
Ability Plant and Equipment Some Added Value
Qualified Personnel
Other Facilities & Ability - Quality 4 Meets All the
Systems Requirements
Management Past Performance and Quality. 15
Capability Management Organization 3 Generally Meets
Experience of Technical Personnel. Critical Requirements
Management knowledge
2 Meets Some
Health and Organization Policy 10
Safety Healthy & Safety Certifications
Requirements but a
OSHA Incident Rate. Few Major Gaps or
Management safety accountability Issues
Reputation Length of Time in Business 10 1 Fails to Meet Overall
Past Failures
Past Owner / Contractor
Requirements, Serious
Relationship & Disputes if Any Concerns
Compliance Legal Status 10 0 Does not Meet
Default of any Legal Obligations Requirements / Fail to
Total Score Answer / Irrelevant

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Vendor Rating

The Criteria for Vendor Rating as per Past

performance – records on the contractor’s
procurement activities undertaken in the past
include the following:

•Delivery – an ability of the contractor to procure

all required items within desired delivery dates

•Quality of the procurement services – an ability of

the contractor to provide products with the
expected quality

•Price / Cost of the procurement services – a

comparison of prices provided by several
contractors

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Purchasing

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Purchasing
Purchasing

The term purchasing refers to the process of ordering and receivi

ng goods and services. It is a subset of the procurement process,
as explained above. Generally, purchasing refers to the process
involved in ordering goods such as the request, approval, or
creation of a purchase order (PO) record, and the receiving of
goods. Therefore, in simple words, purchasing is a subset of
procurement and is part of procurement functions.

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Purchase Process : P2P Cycle

Identify
Needs
Write
Specifications
Raise
Purch. Requisition
`
Cost / Budget Check & Scrutiny
PR Approval

Evaluation Quotes Vendors Selection & Selection of a Verification & Study

Receipt and Opening Bid Notification / Procurement Method By Purch. Dept.
RFQ
CONTRACT
------- --------- ------- ------ -----
-- --- ------ ------- ------ ------- -
-------- ------ ABCD ------ ------ ----
---- ----------- -------- ------- -----
------- ----- ------- -12345 --- -----
--- ---- ----- ------- ----- ---- ------
----- ------ ------ ------ XYZ
VENDOR
SIGNATURE
Negotiations Review By Contracts
Proposal Approval Award Contract/PO
Committee

Payment Material Receipt & Inspection Material Delivery

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Negotiation &
Contract

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 CONTRACT
=
AGREEMENT • Contracts – Legal
(meeting of the minds )
PROMISOR / PROMISEE /
OFFEROR / PROMISE / OFFER OFFEREE /
documents between
L
E
SELLER ACCEPTANCE BUYER L
E
buyer and seller and is
G G also called
A A
L L
R
E
L
+ R
E
L
▪

▪
Agreements
An understanding
A A
T
I
ENFORCEABLE BY LAW T
I
▪ A subcontract
O COMPETENT TO CONCTRACT O ▪ A purchase order
N FREE CONSENT N
S
LAWFUL OBJECT
S (unilateral
H H
LAWFUL CONSIDERATION
I I agreement)
P NOT VOID P

LEGAL OBLIGATIONS 40
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Contract
Life Cycle Management

Contract
Creation
Contract Contract
Analysis Collaboration

Establish Contract Contract

Relationships
LifeCycle Execution

Contract
Closure Contract
Monitoring
Contract
Administration

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Phases of the Contracting Process
Pre-Solicitation
Identifying the requirement, performing market research, and preparing the statement of work and solicitation package.

Solicitation
Identifying prospective goods / service providers, distributing the solicitation package, and receiving proposals.

Evaluation
Evaluating the technical and price proposals submitted by the offerors. The proposals must be responsive to the solicitation package.

Award
Making the best value decision for the award, obtaining all pre-award approvals, executing the contract with the successful offeror, notifying the
unsuccessful offerors, and conducting debriefings.

Administration
Ensuring that the contractor adheres to the terms and conditions of the contract, monitoring contractor performance, processing and paying invoices,
executing modifications, handling claims, and closing out the contract.
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Time & Cost

Fixed Price
Material Reimbursable
Firm Fixed Price Cost Reimbursement
(FFP) or Lump (CR) or Cost Plus
Sum Contract Fixed Fee (CPFF)

Fixed Price Plus Cost Plus

Incentive Fee Incentive Fee
(FPIF) (CPIF)

Fixed Price with

Cost Plus Award
Economic Price
Adjustment (FP/EPA) Fee (CPAF)

Fixed Price with Cost Plus

Re-determination Percentage of
(FP/RD) Cost (CPPC)
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Contracting Methods
• For this contract, contractors are required to quote rates for individual items of work on the basis of schedule of quantities
1. Item rate contract furnished by the client’s department.

• In this form of contract, the client’s department draws up the schedule of items according to the description of items sanctioned in
2. Percentage rate contract the estimate with quantities, rates, units and amounts shown therein.

• In this form of contract, contractors are required to quote a fixed sum (lumpsum amount) for execution of a work complete in all
3. Lumpsum contract respects i.e., according to the drawings, design and specifications supplied to them with the tender within the specified time.

• This is a contract where the contractor quotes rates for the item work exclusive of the elements of materials which are supplied by
4. Labour contract the client’s Department.

5. Materials supply • In this form of contract, the contractors have to offer their rates for supply of the required quantity of materials , inclusive of all
contract local taxes, carriage and delivery charges of materials to the specified site within the time fixed in the tender.

• As the name signifies the piece-work agreement, it is that for which only a rate is agreed upon without reference to the total
6. Piece-Work agreement quantity of work to be done or the quantity of work to be done within a given period.

7. Cost plus percentage • In tendering for work on a “Cost Plus” basis, the contractor is paid the actual cost of the work, plus an agreed percentage in
rate contract addition, to allow for profit.

8. Cost plus fixed fee • In this type of contract, the contractor is paid by the owner an agreed lump-sum amount over and above the actual cost of work.
contract
9. Cost plus fluctuating fee • In this type of contract, the contractor is paid by the owner the actual cost of construction plus an amount of fee inversely variable
contract according to the increase or decrease of the estimated cost agreed first by both the parties.

• This is the type of contract where the contractor is paid on a cost-plus percentage work performed under this contract. In addition,
10.Target contract he receives a percentage plus or minus on savings or excess effected against either a prior agreed estimate of total cost or a target
value arrived at by measuring the work on completion and valuing at prior agreed rates.
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 An open inquiry that spans the market seeking broad data and knowledge. RFIs are used to gather information. An RFI is a
RFI – Request For solicitation that procurement sends to a broad base of potential suppliers. Its purpose is for conditioning, gaining
Information information, preparing for an RFP or RFQ, forming a strategy, or building a database & Knowing Supply Base.

RFP – Request For Proposal A business needs-based request for specific solutions to the sourcing problem. An RFP is procurement’s solicitation sent to
potential suppliers with whom a creative relationship or partnership is a consideration.

IFB – Information For Bid A part of the sealed bid process giving detailed written specifications including all the terms and necessary conditions for
projects and invite contractors to bid their proposals for various projects.

RFQ – Request For A chance for potential suppliers to competitively cost the final chosen solution(s). An RFQ is a solicitation sent to potential
Quotation suppliers. It contains, in exacting detail, a list of all relevant parameters of the intended purchase.

Tender Notice It is process to call vendors for doing a certain job or provide certain service at a competitive price. Usually done through
Press Advertisements & Public Notices

An invitation to negotiate is not an offer. An invitation to negotiate is merely a preliminary discussion or an invitation by one
Invitation For Negotiation party to the other to negotiate or make an offer.

Pre-bid meetings are gatherings scheduled after an invitation for bids or request for proposals is advertised. Their purpose is
Pre-Bid Conference to clarify any concerns bidders may have with the solicitation documents, scope of work and other details of the requirement.

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 Contract Administration
Managing : SQSCC
Justification - Scope and the Specifications - Service / Performance level -
SCOPE
Flexibility especially in early stages of long term contracts

Set out clearly the expected Performance and Quality - metrics– quality level
QUALITY & measurement; Improvements above baseline ; Responsibility : both mutual
and individual

SCHEDULE Time Targets – duration- Breakup of schedule of deliveries

Value for money; Price to be paid – CTC – Against Budget – Outflow –

COST
Schedules; Savings in cost & overrun - Revenue maximization - leakages

Compliance Compliance with All statutory & Legal Provisions – Contractual Agreements

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 Preparation
Closure/ Leverage
Conclusion Buying Potential

Establish NEGOTIATION Strategy

Relationships

Negotiate Meeting
Ethically Protect financial
exposure & risk
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 In the Single-Stage, One-Envelope bidding procedure, the
Single Stage bidders submit bids in one go containing both the price
Evaluation proposal and the technical proposal

In the Two-Stage, Two-Envelope bidding procedure, the

bidders submit simultaneously two proposals, one
Contract Two
containing the technical proposal and the other the price
Evaluation Stage proposal. Initially, only the technical proposals are opened
Evaluation at the date and time indicated in the bidding documents.
The price proposals remain sealed

A multi-stage process is Considered only where there are

Multi
multiple potential suppliers and generally used when High
Stage Value-High Risks are Involved or where Specifications are
Evaluation not very Clear and inviting Innovative Proposals
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Contract
•Can be in the form of a simple purchase order or a complex document
•Is a mutually binding agreement that obligates the seller to provide the specified products, services or results
and obligates the buyer to pay the seller for them
•Is a legal relationship subject to remedy in the courts

✓ Statement of work ✓ Warranty

✓ Schedule baseline ✓ Limitation of liability
✓ Performance reporting ✓ Product support
✓ Period of performance ✓ Fees and retainer
✓ Roles and responsibilities ✓ Penalties
✓ Seller’s place of performance ✓ Incentives
✓ Pricing ✓ Insurance and performance bonds
✓ Payment terms ✓ Subordinate contractor
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approvals
✓ Place of delivery ✓ Change request handling
✓ Inspection and acceptance criteria
✓ Termination clause
✓ Alternate Dispute Resolution (ADR) mechanism
✓ Jurisdiction
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Aligning & Standardization of

Contract Processes; Setting
Policies, Streamlining
Contract Procedures –
Adopting Best Practices
Policy Assessment of Demand /
Framework Requirement; Defining Scope;
Schedule & Mile Stones;
Assessment of Financial and
Economic Non-financial Value; Budgetary
Pre-award
Environmental & Sustainability
Contract Allocation and Assessment of
Social Aspects other Resource Requirements;
Assessment of Risk Factors;
CONTRACT Defining Regulatory and
Role and Scope of
Statutory Compliances; Source
Evaluation – CHALLENGES
Selection; Bidding Process
Indicators,
Performance Performance
Parameters, Assessment Contract - Detailing, Defining and
Benchmarking; Contract Award Recording all Terms &
Evaluating Closure Conditions as Mutually
Performance; Agreed; Contract Award,
Analysing Deviations; Signing and Communicating
Post-award
Contract Closeout; Contract Kick-off Meeting; Identifying &
Lessons Learned Fixing Responsibilities and
Ownership; Mobilising and
Synergising Resources;
Executing & Managing
contracts
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Risk Factors Risk Factors Risk Factors

National and international impact of Accidents / safety Rain and flood
monetary policies Late drawings and instructions Productivity of equipment
Non Availability of material Unsuitable leadership style of Suitability of materials
Third party delays contractor's construction manager
Changes of regulations
Poor site management and Unsuitable management structure
Subsurface conditions of geology
supervision and style of contractor
Delayed dispute resolution
Low speed of decision making Availability of labour
involving all project teams Lack communication between client,
Changes in the work or design
consultant, and contractor
Non-Availability of plant and Change order negotiation
equipment Defective work
Government policies
Delayed site access Productivity of labour
Actual quantities of works
Subsurface conditions of ground
water
Insolvency of contractor or owner

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Clearly Defined Signed

Scope & Agreement with
Obligations the Terms

Deliverables & Well Defined

Acceptance Criteria Stakeholders With
Close Out & Lessons Roles &
Learned Responsibilities

Well Defined
Well Defined
Change
Communication
Mechanism

Well Defined
Performance
Measurement
Criteria

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Boilerplate Clauses
Insolvency and Bankruptcy Notices Agency

Force Majeure Entire Agreement Environment

Confidentiality, Intellectual Dispute Resolution Conflicts of Interest, Fraud

property and Data and Competition Law
Protection
Publicity Assignment and Sub- Discrimination
Contracting
Waiver Statutory Regulations Amendment

Termination for Breach Health and Safety Law

Terms of Payment No Third Party Rights

Time of the Essence Severance

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Strategic sourcing is a collaborative process that allows an organization to align purchasing power with
its overall value proposition. It improves efficiency and quality through building a robust, diverse supply
base.

Strategic sourcing initiates with in-depth sourcing reviews and developed comprehensive agreements with
suppliers and service providers who were identified as having the greatest impact on the company’s operation.

There are important reasons why strategic sourcing is a smart move for organizational success.
Impact on Bottom Line
Risk Management
Relationship Building

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One difference between the two is that strategic sourcing looks at all cost
elements of a company’s operation that involve outside suppliers. Over the
years, strategic sourcing has become an institutionalized procurement
process that seeks to continuously improve and reevaluate corporate
purchasing activities in all “spend” categories, including fleet management.

The general difference between strategic sourcing versus traditional

sourcing is that sourcing focuses on supplier pricing whereas strategic
sourcing has evolved into a more dynamic process with cost being only
one component of a hierarchy of corporate needs, such as assurance of
supply, service, quality, innovation, and regulatory compliance, none of
which can be sacrificed for lower price alone.

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The broader objectives of Strategic Sourcing are to:
• Integrate Sourcing & Procuring functions into corporate strategy to
provide competitive advantage
• Establishing a roadmap to increase profitability through Innovative
Strategic Sourcing
• Increase collective comprehension of cost drivers and value enhancing
initiatives
• Proactively leverage the organization's spend
• Reduce the costs of purchased goods and services
• Elimination of non-value added activities in the process
• Improve visibility, control and operational efficiencies
• Fortifying a dynamic Supply Base & Improve Supplier Performance
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 58
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 59

Seeks to Continuously Improve and Reevaluate corporate purchasing activities in all “spend” categories, including fleet
management.
SN Panigrahi
 PROCUREMENT STRATEGY - PROCESS

Based on outcomes after Assessing

Supply Mkt., Assessing
Demand & Internal Processes

ANALYSE
SPEND
& IDENTIFY
IMPLEMENT- COST
IDENIFY
MEASURE- DRIVERS
COST SAVING
FIND SHORT FALLS
OPPORTUNITIES
IMPROVEMENT PLANS
& AFTER ASSESSING
ITERATE RISK-BENEFIT

ADOPT RIGHT DEVELOPE

SYSTEMS & PROCUREMENT
TECHNOLOGY STRATEGY
CREATE
SOURCING

S.N.Panigrahi
TEAMS &
IMPART
TRAINING
60
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 Procurement Types

Involves materials purchased for use in the Involves any commodity or service that a
manufacturing or distribution supply chain company buys that does not result directly
that are "directly" related to the production in finished goods.
of finished goods.
Ex : Raw Materials, Consumables

(Maintenance, Repair (Operations Resource

and Operations) Management)
Overhaul or maintenance Products and services Capital Goods : Labour Contracts,
items : Spare Parts, used to facilitate daily Equipment's, Machinery, Security Contracts,
Electrical, business routines such Erection &
Mechanical as office supplies, Commissioning
stationaries, travel, Contracts,

S.N.Panigrahi
& Electronic parts
Lubricants, furniture, computers AMC Contracts
Fuels & Gases, consumables and
Safety and printers etc. these are
Healthcare items high volume – low
value items. 61
SN Panigrahi
 PROCUREMENT TYPES
DIRECT INDIRECT
PROCUREMENT PROCUREMENT

Raw Materials
MRO ORM CAPITAL GOODS SERVICES
Direct Prod. Items

Volume / Qty Very High Low to Moderate Low to Moderate Low Low to Moderate

Value Very High Moderate Low High Moderate

Frequency of
Low Moderate to High Moderate Low Moderate
Ordering
Nature Operational / Strategic Tactical Operational / Tactical Strategic Operational / Tactical
Delivery Criticality /
Critical Routine to Critical Generally Low Critical Routine to Critical
Risk
Impact on P/L High Moderate Low High Moderate to High
FEATURES

Supply Base (No.) Few Few to Large Large Few Few to Large

Quality Impact High Moderate to High Low High Moderate to High

Controlled Inventory Highly Essential Essential Not so Essential Essential ----------------

Spare Parts,
Electrical, Office supplies, Labour Contracts,
Mechanical stationaries, Security Contracts,
Equipment,
Raw Materials, & Electronic parts travel, furniture, Erection &
Examples Machinery,
Consumables Lubricants, computers Commissioning
Capex
Fuels & Gases, consumables and Contracts,
Safety and printers etc. AMC Contracts
Healthcare,

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 Strategies For Procurement

Following are Strategies for Procurement that support the efforts of Procurement in Cost reduction.

Cost Savings (Price reductions; Volume reductions; Process cost reduction; Acquisition cost reduction;
Inventory reduction; Cycle time reduction etc.);

Supply/Value Chain Analysis

Internal Policy Decisions
Procurement Process Improvement
Category Management
Collaborative Procurement
Leverage Buying Power –Buyer / Supplier Dependency
Proactive Approach –Demand & Supply Forecasting
Align Demand and Supply
Expand the wings to global level (Global Sourcing)

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Focus on total cost of ownership (TCO), Life Cycle Costs not price

63
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 Strategies For Procurement
Cont…..

Consolidation – Requirements (Club inter unit reqts. + extended period reqts) / Suppliers Consolidation
Rationalize the supply base and create strategic alliances with key suppliers
Contract Management – Review Suppliers Terms & Conditions
Supplier Relationship Management
Supplier Performance Management (Audits)
Develop Long-term Sourcing Relationships and Optimize;
Make Use of Technology
e-Procurement / Reverse Auction
Sustainable procurement
Optimize Company-owned inventory
Develop / Implement a Standardization Program – Process & Item / Specifications
Creating Core Competencies and Focusing on them
Establish Appropriate Levels of Control and Minimize risk
Team Integration & Alliance
Capability Building
64
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 65
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 Procurement Strategy : Internal Policy Decision

High

Centralise Cross
Execution Functional
Strategic Importance

De-
centralise Simplify
ordering
Low

High
Complexity of Buy
Low 66
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 Procurement Strategy : Portfolio Matrix
High STRATEGIC (Critical)
BOTTLENECK (Unique)
Low Value – High Impact; High Value – High Impact;
Risk (Market, Performance, Complexity) Risk Unique Requirements, Supplier Tech. / OEM item; Unique Specs. / Tech. Critical;
Scarce Sources/Few Suppliers, Difficult to Substitute Few Suppliers- Difficult to Substitute;
Performance Measurement Critical; Reduce Risk & Cost
Monopoly Mrk.; High entry barrier Strategic Decisions; Collaborative Appr. / Alliances;
Ensure Continuity & Quality of Supply Pro-active, Supplier Relationship &
Strengthen Sourcing base; Performance Mgt
Items : OEM, Insurance Spares, Instrument Items, Items : Critical Raw Materials, Lubricants
Safety items Project Capital Items,
Critical service Contracts;

ROUTINE (Generic) LEVERAGE (Commodities)

Low Value – Low Impact; High Value – Low Impact;
Operational / Admn. small items Standard Products; Adequate Availability,
Readily & Easily available; Many Suppliers; Substitution Available;
Thrust on Cost Reduction & Avoidance; Easy to swift between suppliers- Low Cost Move
Consolidate & Reduce No. of Suppliers; Thrust on Unit Cost Reduction,
Cut Transaction Costs; Standardise-Simplify Leverage Purchase Power; Hard Negotiations
Decentralise & Delicate; Periodic market test, Market- price analyses
Opt for e-Procurement or long term contracts Global Sourcing, E-Procurement (reverse auction)
Items : Stationary, Bolts & Nuts, Furniture's, Items : Electrodes, Bearings, Mech./Elect. Spares,
General office items Moulds/ Castings

High
Low

Value (Cost, Importance, Impact on Profit)

Low 67
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 Procurement Strategy : Action Scenarios

High STRATEGIC STRATEGIC

SECURITY CRITICAL
ENSURE MANAGE
Market difficulty / Complexity of SUPPLY SUPPLIER
switching / Business impact •Long term contracts •Detailed market & supplier
knowledge
•Stockholding •Purchase Price & Cost Analysis
•Alternative products (PPCA)
•Manage/develop supplier
•Price indexation
•Contingency planning

TACTICAL TACTICAL
ACQUISITION PROFIT
MINIMISE DRIVE
ATTENTION PROFIT
•Purchasing Cards
•Short Term Contracts
•Call-off Contracts
•Framework Contracts
• Decentralized Purchasing
•Market Knowledge
•e- purchasing
•Flexibility / Switch over

68
Low Relative Cost
SN Panigrahi High
 Buyer – Supplier Dependency : Procurement Strategy
The three Procurement Strategies Suggested are as follows :

Exploit – Leverage high buying power to secure good prices,

Consolidation, Long-term Contracts, Demand Quality, Good Credit
Terms, Low Inventory, JIT.
High Low supply risk is involved in these items.
(Dependence of Suppliers on Buyer)
Buyers Strength

Balance
Exploit Exploit
(Critical)
Balance – Take a middle path between the exploitation approach and
the diversification approach described below.
Exploit Balance Diversify
Low Level Balance : More Buyers & More Suppliers – Dependence of
Buyer-Supplier on each other is Low. Balanced Inventory, Opportunity
Pricing & Buying – Shift Suppliers
Balance
Diversify Diversify
(Low Level) Critical Balance : Levels of Inter-dependence is Very High. Secure un-
Low High interrupted Suppliers, Keep High Inventory, Bulk Buying – Cost Advantage,
Low

Supply Market Strength Ancillarisation.

(Dependence of Buyer on Supplier) Diversify – Reduce the supply risks by seeking alternative suppliers
or alternative products. Long-term Assured Contracts, Incentives / bonus;
Process Modification; In-house Production / Ancillarisation.

69
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 Power Of
Procurement

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70
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 Power of Procurement

Since procurement has a greater role in cost saving, purchasing personnel have a
demanding role to procure the goods and services on the basis of value and cost
effectiveness, and get the best deals from suppliers and vendors.

Whether it is the money spent on goods or services for direct inputs (raw goods
and materials used in the manufacture of products), indirect material (office
supplies and other expenses that do not go into a finished product), or services
(permanent / temporary and contract labor, out sourced services, etc.), a company
needs a mechanism by which they are not only able to save, control expenses but
also optimize costs.

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 Why Purchasing is Important

Industry Cost Materials as % of Sales Revenue

Petroleum 76%
Automobile 70%
Wood Products 61%
Textile Mills 59%
Food Manufacturing 59%
Machinery 50%
Electrical Equipment 49%
Computers and electronics 44%

72
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 Why Purchasing is Important

Value-added contributions

Cost Technologies and

Quality innovation
Sales Customer service
Profits Competetive
Product advantage
development time

S.N.Panigrahi
73
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Cost of goods sold (COGS) is the cost of acquiring or manufacturing the products that a company sells during a period, so the only
costs included in the measure are those that are directly tied to the production of the products, including the cost of labor, materials, and
manufacturing overhead.
74
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 75

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 76

Procurement Cost Saving

1. Avoid/Reduce Maverick Spend •Strategic sourcing

2. Consolidate Suppliers & Deliveries •E-sourcing and e-auctions
3. Consolidate Purchasing Requests & Intervals •Specification optimisation
4. Centralize Procurement •Demand management
5. Review Purchasing Requirements •Process optimisation
6. Review the Specification of Purchased •Low cost country sourcing – Global
Products. Sourcing
7. Review Stock Replacement Strategies •Outsourcing
8. Ensure that Correct Management Controls are
in Place

SN Panigrahi
 Porter’s Generic Strategies

Cost Advantage
Lower Cost Differentiation

Broad Cost
Differentiation
Target Leadership
Competitive
Scope

Narrow Differentiation
Target Cost Focus
Focus
77
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 78

Cost Control Cost Avoidance

Cost Reduction

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 79
Cost Control Cost Reduction COST Avoidance
1. Meaning Cost control is concerned with keeping the Cost Reduction refers to the real and permanent Cost avoidance, also referred to as “Soft Savings,”
expenditure within acceptable limits. reduction or Cutting in the unit cost of the goods is any action that Eliminates / Avoids / Delays
manufactured or services rendered. Referred as incurring of costs in the future.
“Hard" cost saving
2. Focus Focuses on the minimization of wastage or Focuses on minimization of cost through new Focus on Postponing, Deferring
Checking the Cost than the reduction of cost. production process, improved plant layout, Suspending or Delaying Expenditure or
scientific material handling, Negotiation etc. Eliminating Costs or Preventing their Occurrence
in the first place.
3. Examples Department wise Annual Budget / Spend the direct reduction of a capital or operating a delayed price increase, despite rising costs on the
Limits; expense, such as a decrease in the annual lease commodity markets a negotiated purchase
payments, a reduction in the telecommunications price that is lower than the initial quote
cost, or a reduced annual IT maintenance fee
additional value-add services in a
a process improvement that results in contract that are free-of-charge
real and measurable cost reductions, such as a
process improvement that allows more units to be long term contracts with price-
produced on the line in the same time-frame protection provisions
(productivity improvement) and/or with the same
amount of raw material inputs (waste reduction) the identification of a new production
a net reduction in prices paid for the process that supports utilization of a lower cost
raw materials procured when compared to prices material
paid in the previous year
3. Basis Of Routinely applied on a Continuous basis & Applied when an opportunity for cost reduction Cost avoidance measures are never reflected in
Application Regular Reviews is identified which offers a competitive advantage financial statements or your annual budget.
for a longer time. It is a planned process.
They are only reflected in instances where a
4. Use Of Heavily relies on accounting techniques. Cost reduction may not involve the use of
proposed action is not implemented, thus resulting in
Accounting It is a preventive function – Exercised through accounting technique.
a cost increase.
Techniques Budgetary Controls & Audits. It is a corrective function.
Cost Control & Reduction Measures are reflected in financial statements and your Annual
Budget.
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 80

Procurement Supply Planning Cost; Purchasing Cost; Supplier Quality

Costs Cost

Inventory
Raw material / Input W/H Cost; Finished Goods W/H Cost
Costs

Delivery (Supply
to Customer) Demand Planning Cost; Design & Engg. Cost; Making
Cost Cost; Demand Fulfillment Cost

Supply Chain Logistic

Inbound Cost; Outbound Cost; Reverse Logistic Cost
Costs
Costs
Processing Order Processing Cost; Customer Servicing Cost; IT
Costs operating Cost

Finance Cost Accounts Receivable Cost; Accounts Payable Cost;

Financing Cost

Misc. Cost Obsolescence Cost; Shrinkage Cost ; Opportunity Cost ;

Disposal Cost

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 81

Steps in Business Case Analysis:

(1) Define the scope of the situation;
(2) Identify the opportunity presented (cost reduction, quality improvement, service improvement, customer satisfaction
improvement, etc.). Show how the opportunity helps achieve business unit and corporate objectives.
(3) Select suppliers and other supply chain members who can service the scope and meet the opportunity presented;
(4) Standardize data so combinations and comparisons can be made "apple to apple";
(5) Develop different scenarios to illustrate the range of possible outcomes from implementation of the case situation;
(6) Link the case to measurements and strategy.

Identifying Potential Savings Opportunities. Examine your supply chains. Look for four "keys" to supply chain cost reduction
opportunities:
• Large amounts of money flowing or sitting;
• large movements or storage of physical material;
• Large elements of time in obtaining, processing, and delivering materials, services, and products;
• information on what is happening in your supply chain.

Other ways to look at your supply chain:

• Which items or processes are most critical to the success of your product/firm? What is most
important to the suppliers in your supply chain? What is most important to the customers in your
supply chain? What is most important to third parties in your supply chain? What can be
eliminated from the supply chain without reducing the economic value to ultimate customers?
What products or customers are currently unprofitable? What elements of your supply chain

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 82

Supply Chain Cost Saving Opportunities

1. Materials Management
Reduction in inventory/carrying costs
Inventory buyback
Return of project surplus material
Use of available surplus materials
2. Transactions Process Management
Consolidate purchases
EDI, E-commerce – savings vs. previous method
Reduction in business unit/project transactions
Consolidated invoicing savings
3. Managed Services/Manpower Redeployment
Reduced manpower / man-hours
Contractor procurement – man-hour savings/project
Integrated services savings
JIT II – Managed open stores savings
4. Product/Commodity Cost Management
Standardization
Material substitutions – improvements in supply chain
Price increase cost avoidance
Leveraged purchasing power (price reductions negotiated due to leveraged spend, volume discounts, order size discounts, etc.
SN Panigrahi
 83

Supply Chain Cost Saving Opportunities

5. Quality/Process Savings
Reduction in inspection, testing, downtime
Improvements in transportation, expediting, and logistics costs
Improvements in cycle times
Reduction in rework
6. Specifications
Are we using the correct specs? Review
Can we rationalise the variants/sub variants? Make a try
7. Price
Are we buying the product the most optimal way?
Number of suppliers
Import/domestic or a combination of both
Commercial terms

8. Logistics
Are we getting the product to our premises the right way?
Mode of packing and transportation
Handling losses
Stages of inspection
Inventory Management
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 84

Supply Chain Cost Saving Opportunities

9. Contracts
Are we negotiating contracts with favourable terms
Are we administering & monitoring contracts properly
Are we aware of contractual risks
10. Usage
Are we using the product the right way?
Operating parameters
Work practices
Wastage/recycling

11. Customer service

Give customers what they really want, not just what you think they want.

12. Sales and operations planning (S&OP)

Get your process right first, and define your systems after.

13. Outsourcing
Both parties can benefit from a healthy and proactive partnership

14. Asset utilization

Get more productivity out of fewer assets
SN Panigrahi
 85

Sources of Competitive Advantage

Competitive Advantage : The Ability to Create More Economic Value Than Competitors.
There must be something different about a firm’s offering vis-à-vis competitors’ offerings.
If all firms’ strategies were the same, no firm would have a competitive advantage
Competitive advantage is the result of doing something different and/or better than competitors

COST
ADVANTAGE

COMPETITIVE
ADVANTAGE

DIFFERENTIATION
ADVANTAGE

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 86

Drivers of Cost Advantage

• Indivisibilities; Specialization and division of labor;

Economies of Scale •For example, Wal-Mart's "everyday low prices" are due to its huge buying power.
•Companies can achieve economies of scale by increasing production and lowering costs.

• know-how picked up through experience; Increased dexterity; Improved organizational routines;

Economies of Learning Efficiency and growth is driven by training and specialization resulting in profitable, high added value
goods and services.

• Process innovation; Reengineering business processes; Aims to ensure continuous production through
Production Techniques harmonization between the supply of components and their use or assembly

• Standardizing designs & components;

Product Design •Design for manufacture

Differential Input Access • Location advantages; Ownership of low-cost inputs; Non-union labor;
•Bargaining power
• Ratio of fixed to variable costs
Capacity Utilization • Speed of capacity adjustment

• Organizational slack; Motivation &

Residual Efficiency culture; Managerial efficiency, Policy Choices

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 87

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 88

A cost object is often a product or department for which costs are accumulated or
measured.
For example, a product is the cost object for direct materials, direct labor and manufacturing
overhead.
The factory maintenance department is a cost object for the cost of the maintenance
employees and the maintenance supplies. Later the factory maintenance department costs
will be assigned to products, which are also cost objects.

A cost object can also be a customer, a machine, a group of machines, a group of

employees, etc
A cost driver is the unit of an activity that causes the change in activity's cost. cost
driver is any factor which causes a change in the cost of an activity. Cost Driver causes a
change in the consumption of a resource, or influences quality or cycle time.
Cost drivers are the root causes of a cost – the things that “drive” costs.

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 89

Cost Drivers
Cost Object Eg.: Raw Materials,
Components, Labour Service
Eg.: PEN in Assembling

Cost Drivers
Example Raw Material
Cost of Pen (Object) is Influenced by Qty Consumed, Price,
Specifications
1. Qty of Raw Material it Consumes
2. Price of Raw Materials
3. Specifications (Alternate Availability)

If any of the above factors are changed, then Cost

of Object also changes

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 90
Cost Drivers : Examples

Activity / Cost Object Cost Driver Base

Direct materials Qty (kgs / Tons / Nos etc); Price, Mat. Specifications
Direct labor No. of Hrs / Days; No. of Labours; Man Days; Wages, Labour Productivity
Maintenance Machine Hours; No of M/Cs
Material handling No. of boxes / Weight; No of equipments, No of Moves, Distance
Machining Machine Hrs
Assembly Labour Hrs
Inspections Number of Setups / Inspections
Castings Weight (Kg)
Consultancy / Engg. Supervision No. of Hrs / Days; No. of Engrs / Persons
Customer service No. of service calls attended, No. of staff in service department, No. of warranties handled, Hours spent
on servicing
Transport Distance; Material Weight; No. of Trips
Packing Material Specifications, Qty, Labour
Marketing Number of advertisements, Number of sales personnel
Customer Service Number of service calls attended, number of staff in service department, number of warranties handled,
Hours spent on servicing
Production No. of machines, machine operator(s), floor space occupied, Raw materials

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 91

SN Panigrahi
 Why TCO ?
What is TCO?
The essence of the concept is that the full costs of a decision should be evaluated, rather than focusing on the
initial purchase Price.
TCO encompasses costs like development, purchase, operation, maintenance, support, environmental and disposal.
TCO analysis supports purchase decisions for a wide range of assets. These include especially items with significant maintenance
and operating costs across ownership life. The total cost of ownership is, therefore, at center stage when leaders face purchase
decisions for large IT systems, vehicles, buildings, laboratory equipment, medical equipment, factory machines, and private
aircraft, for instance..
Today, TCO analysis for these kinds of assets is in fact a central concern in
Budgeting and planning
Asset life cycle management
Comparing different proposals
Prioritizing capital acquisition proposals
Vendor selection
Lease Vs. buy / Make Vs buy decisions

TCO takes into account benefits, risks and the time value of money. Calculation of TCO is not on the nominal sum of
the costs, but rather preferably on the present value of the costs.

SN Panigrahi
 TCO : Example
When purchasing a car consumers often consider only one variable – sticker price – and based on the
sticker price in the example below, Example A, the non-hybrid is the more economic choice

Example A Example B
(Non hybrid) (Hybrid)
Purchase price Sticker Price: Sticker Price:
$22,151 $23,650

Example A Example B
(Non hybrid) (Hybrid)
Purchase price Sticker Price: $22,151 Sticker Price: $23,650

Acquisition process and lifecycle costs*:

− Depreciation
− Taxes and Fees $9,981 $10,549
− Insurance Premiums $1,600 $1,635
− Fuel $10,216 $10,216
− Maintenance $10,700 $5,600
− Repairs $3,050 $3,050
− Interest on Financing $671 $671
− Stimulus - Auto Assistance $3,840 $3,953
Ownership Amendment $1,500 $1,500

Purchase price after TCO analysis Price: $40,058 Price: $35,658

(cost is 53 cents per (cost is 48 cents per
mile to drive)** mile to drive)**

*End of Life Costs are not included in this example

**Cost of ownership is assumed over a five year period and 15,000 miles a year
Source: http://www.edmunds.com/advice/buying/articles/59897/article.html
TCO analysis indicates that the cheaper car to buy is actually the more expensive car to own
and operate SN Panigrahi
An assessment of the best net overall outcome is to take account of all relevant ‘whole of life’ costs and
benefits, that is the full cost of each good, service, construction or consultancy over its expected useful
life, not just at time of purchase.

Whole of Life Criteria Supply: A Supply: B

Purchase Price 100 130
Life of the asset (warranty 5 Years 10 Years
period)
Maintenance Cost per year 10 per Yr 10 per Yr
(whole of life cost) (50 (10 per Yr X 5 Yrs)) (100 (10 per Yr X 10 Yrs))
Operating Cost per year 20 per Yr 10 per yr
(whole of life cost) (100 (20 per Yr X 5 Yrs)) (100 (10 per yr X 10 yrs)
Total Cost of Asset--whole of 250 for 5 Yrs OR 330 for 10 yrs
life 500 for 10 Yrs

In this example, if both assets provide the same service—a 10 year supply—then, Asset B would provide
the better value for money because it has the lower whole of life cost when we compare costs, even
though it is initially more expensive to purchase.
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 Life Cycle Hidden Cost

Ex- Works Price Taxes

Freight Material Handling Purchase
Insurance Costs Cost

Operating Costs

Repair Cost TCO

Interest on Finance
Energy / Hidden
Fuel Costs
Consumpti Depreciation
on Cost

Obsolescence Cost

Disposal Cost Less Salvage Cost

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 96

Purchase Logistics
TCO Cost Transfer charges
Taxes / Duties

Depreciation
Facilities / W.H. Maintenance,
Insurance
Cost Operating Exp.
Interest

Facilities / W.H. Obsolescence &

Environmental Cost
Holding / Safety Cost Cost of Disposal

TCO analysis permits the projected costs for each stage in the life cycle to be broken down into individual years, thereby increasing the
transparency of the cost patterns.
Purchase Operation Development and growth
Hardware
Software
Staff provision
External consultancies
Facilities

SN Panigrahi
 TCO Analysis : Example
TCO Calculation
Cash Outflows Year 1 Year 2 Year 3 Year n Total
Software
One-time license - Design SW
One-time license - Database SW
One-time license - Admin. Software
Annual Software maintenance
Total Software
Hardware
Service System Purchase
PC System Purchase
Engineering WS System Purchase
Storage space purchase
Other peripheral HW
HW Maintenance.
Total Hardware
Personnel Labor
Initial training - Design engineers
Initial training - Manufacturing Management
Design engineering Labor
Manufacturing Labor
IT staff Labor
Total Personnel Labor
NW & Comms Costs
WAN costs
Hosting services
Continuing training - IT support
Networking SW and HW operations labor
NW User help desk
Total Support Personnel
Facilities & Other costs

S.N.Panigrahi
Computer Room renovation and security
Offsite backup and disast recovery service
Process analysis & Management consulting
Total facilities and Other costs
TOTAL COSTS
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 98

TCO in Supply Chain Influencing Factors

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 99

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 100
E-Auctions
Forward Auction & Reverse Auctions
An e-auction is a transaction between sellers (the auctioneers) and bidders (suppliers in business to business
scenarios) that takes place on an electronic marketplace.

E-auction is the process of conducting an auction to sell or buy assets, natural resources or other goods
through online competitive bidding.
Some Popular e-Platforms
Forward Auction : For Selling
Reverse Auction : For Buying Metal Junction http://www.metaljun
Advantages : ction.com/
•For buyers https://www.mjuncti
on.in/
•An e-auction provides procurement professionals with competitive prices
for their products, pitching the suppliers directly against each other to see Ariba https://www.ariba.co
who can offer the lowest prices. It also streamlines the procurement m/
process and saves times, since each supplier is not required to submit a
full proposal. Steelez https://www.steelez.
•For suppliers com/
•E-auctions tend to be open, allowing smaller businesses to compete in Salasar https://salasarauctio
the process, which in turn also enables suppliers to compete in new n.com/
sectors. A winning bid can lead to more business, as most buyers will look
to source their ‘non-core’ products from their existing supplier.
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 103

Balanced Scorecard Approach to Procurement Performance

Balanced Scorecard Approach to Procurement Performance:

The Balanced Scorecard is a performance measurement
framework developed by Robert Kaplan and David Norton that
adds strategic non-financial performance measures to traditional
financial metrics and provides a more 'balanced' view of
organizational performance.
On the procurement side, here’s a macro approach to deploying a
balanced scorecard as shown below:

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 104
Balanced Scorecard
Relationship between the Four Perspectives

Financial

Vision & Business

Customer Strategy Process

Learning &
Growing
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 105

Balanced Scorecard Approach to Procurement Performance

• Decreasing Costs • Customer Satisfaction
• Spend & COGS savings • Increased Quality
• Resource Optimization • Improved Delivery
• Payment Terms • Optimum Cost
• Leveraged Agreements • Cross Functional Groups
• Supplier Consolidation • Communication
• Low Cost Country Sourcing
• Competitive Bidding

Procurement
Balanced Scorecard
• Sourcing Methodology
• Strategic Sourcing
• Team Building
• Risk Protection
• Talent Inside
• Supplier Alliances
• Org. Capability
• Contract Management
Performance System • Agile Staffing
• Operational Matrices • Employee Development &
Training
• Analytical Negotiation &
Decisions • Employee Satisfaction
• Advanced Technology • Employee Turnover

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 106

Procurement Balanced Scorecard

FINANCIAL CUSTOMER
➢Consumer Complaints Related to
➢ Measurable Cost Savings Purchased Materials and Services
➢ Pricing Trends vs. Reference Price ➢ Internal customer satisfaction
➢ Total Cost of Ownership (TCO) ➢ Use of cross-functional teams in
➢ Cost per Transaction selecting and evaluating suppliers
➢ Procurement Budget Management ➢ Supplier satisfaction

INTERNAL BUSINESS PROCESSES LEARNING & GROWTH

➢suppliers accounting for 90% of spend
(supplier concentration) ➢Training / development time and $
➢% compliance with preferred suppliers ➢ Professional certifications
➢ Lead time from requisition to order ➢ Sharing of best practices
➢ Average value of purchase order ➢ Employee satisfaction
➢ Employee turnover

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Quality, Delivery & Cost (QDC)

These indices may be classified into three groups of measurable deliverables that have Value
Proposition to Customers viz
➢ Quality,
➢ Delivery,
➢ Cost
Indices under these broad categories integrates all others three perspectives of Balanced
Scorecard, that are Finance, Business Processes and Learning & Growth.
Improvements in all the four key Balanced Scorecard areas ultimately lead to improvements in
Quality, Delivery & Cost (QDC).

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Procurement Performance :
Value Propositions for Customers

Performance can be divided

into three major groups
according to their purpose
Procurement

Increased Quality
Improved Delivery
Optimum Cost

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Some metrics to consider as part of your scorecard are shown below:

•Spend. Purchasing Budget as a percentage of total purchasing spend; total purchasing spend per purchasing
employee; on-contract spend as a percentage of total spend; percentage of spend under supply chain
management; supplier diversity spend
•Savings. Total savings achieved; total savings as a percent of purchasing spend; total savings per purchasing
employee; supply chain department ROI on cost
•Suppliers. Total suppliers; active suppliers; active suppliers per 1 million dollars of spend; spend with strategic
suppliers as a percentage of total spend; other supplier relationship and risk metrics
•Operational Metrics. Internal cycle time for req to PO; percentage of purchase orders and releases received on
time; percentage of critical requests meet within one business day
•Accounts Payable. Total invoices per accounts payable employee; total cost per invoice processed; percentage
of invoices processed through EFT and EDI; dollars saved as a result of discounts taken; percentage of invoices
processed via Web-based e-invoicing
•Others. Compliance to safety requirements; average training spend per employee; metrics used to measure
green purchasing initiatives

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Procurement and Quality

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Quality
Management

Quality Assurance Quality Control

Quality Assurance is a Proactive Measure aims to Quality Control is a Reactive Measure to Detect
Prevent Defects before they occur through Defects after they have Happened. It’s Product-
Planning, Processes Improvements, Design oriented and doesn’t improve quality or make quality
Documenting and Measures Inbuilt in the Process to more efficient—it only focuses on Testing to Verify
Manufacture that Ensures Acceptance or Rejection at the End of Process.
Conformance to Customer Requirement – First Non-conforming test results should result in
Time Right in terms of it’s Functionality, Safety and Corrective and Preventive action (CAPA)
Effective Products with Zero Defects. investigation to determine the root cause of quality
issues and update processes to prevent the problem
Tools Used : Quality Planning, Establishing Product from happening in the future.
Specifications, Quality Audit, FMEA, Quality
Management System (QMS), Lean Six Sigma, Tools Used : After Production Testing, Inspection,
Proper Employee Training CAPA, Re-Work, Repair etc
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Cost of Quality Cost of Poor Quality
Cost of Good Quality
(Cost of Non-
(Cost of Conformance)
Conformance

Prevention Costs Internal Failure

Advanced Cost External Failure
Product Quality Planning
Process Delay; Down
Costs
(APQP); Appraisal Costs
Failure Mode and Effects Time; Waste: Repairs and servicing:
Appraisal costs are Performance of Of both returned products
Analysis, or FMEA;
associated with measuring unnecessary work or and those in the field
Product or service and monitoring activities
requirements: related to quality. holding of stock as a Warranty claims: Failed
Establishment of result of errors, poor products that are
Eg.: Verification: Checking organization, or
specifications for incoming replaced or services that
of incoming material, process
materials, processes,
setup, and products against communication are re-performed under a
finished products, and
agreed specifications Scrap: Defective product guarantee
services
Quality audits : or material that cannot be Complaints: All work and
Quality planning: Creation
of plans for quality, reliability,
Confirmation that the quality repaired, used, or sold costs associated with
system is functioning
operations, production, and
correctly Rework or rectification: handling and servicing
inspection; Correction of defective customers’ complaints
Supplier rating: Assessment
Quality assurance :
and approval of suppliers of material or errors Returns: Handling and
Creation and maintenance of
the quality system; QMS;
products and services Failure analysis: Activity investigation of rejected
required to establish the or recalled products,
Training: Development,
preparation, and causes of internal including transport costs
maintenance of programs product or service failure

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Preventing Poor Quality Pays

Prevention Costs

Appraisal Costs With More

Benefit
Investment in
Prevention
Activities,
$ External Failure Cost
Prevention Costs
other Cost
will
Drastically
Falls Down.
Appraisal Costs Net there will
Internal Failure Cost be More
External Failure Cost
Benefit
Internal Failure Cost

Before Quality After Quality

Cost Alignment Cost Alignment
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A low-cost, low-quality option may also involve compromising on certain

ethical standpoints (such as sourcing from uncertified suppliers).

Paying for high-quality solutions provided by reputable, legitimate

providers tends to incur a higher price – while bringing greater results
and, consequently, Benefit to the Organization.

Utilizing purchasing potential: effectively reducing costs.

Procurement Greatly Contribute in Improving Quality by Ensuring

Inward Supply of Right Goods & Services there by Support Outcome
of Quality Deliverables

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