REDESIGNING THE PROCUREMENT PROCESS

I studied the chronological procurement flow closely (illustrated in Figure 48). Instead of thinking of procurement as a monolithic process with varying details, I concentrated on the appearing iteration cycles in the procurement process. I noticed that the budget inquiry round, tender inquiry round and final inquiry round were similar. For me, the similarity presented remarkable improvement possibilities, if I could combine them instead of programming them separately. The aim was to program all the inquiry rounds in a single set of procurement programs in order to make the software more compact.

I divided the whole procurement process into three executing subprocesses: budget inquiries for cost estimating, tender inquiries for soliciting facilities and delivery capacities, and final inquiries for purchasing. In the chronological view towards procurement they correspond to the budget inquiry round, tender inquiry round and final inquiry round, respectively. It might be useful to describe the procurement subprocesses first separately and then unite them.

Budget Inquiry Round

Budget inquiry rounds, illustrated in Figure 59, are carried out in the early stages of the project (at the feasibility or conceptual planning stage). Budget tenders can be asked for different kinds of cost calculations, investment estimates and studies. The aim is to gather available cost information to establish a reliable cost estimate for the whole project. The estimate is used to estimate the profitability of the project and give a solid background for the project implementation decision.

A budget tender is asked from several potential suppliers in order to establish the cost level in the calculations. The preliminary inquiries are based on conceptual planning, and the inquiry specifications can be inexact. The preliminary inquiry may be very brief; e.g. a letter or a telex referencing to some previous delivery. The inquiry might well refer to an inquiry of another project.

The received budget tenders are compared, and the most promising tender is used as the base in the cost estimate.

Budget inquiries were normally omitted, if there was reliable enough cost information available for the cost estimation. The adequate cost files could be based on previous projects, cost information from the client or long term agreements. The cost files were normally applied for minor equipment and services which were not inquired to calculate the cost estimate. The cost files could be used to ensure that the budget tenders gave reliable information of the price level.

Figure 59. Budget Inquiry Round

Project Mill Concept

Generic Engineering Standards

Budget Inquiry Specifications Goal: cost estimate

Budget Comparison of Tenders Result: more accurate cost estimate

Budget Inquiry Processing Need: more accurate cost information

Tender Inquiry Round

When the client has decided to implement the project, the process is directed to find the most appropriate item. In the tender inquiry round, illustrated in Figure 60, a tender is asked for as a response to an inquiry. The aim of the tender inquiry round is to screen the known suitable suppliers.

This facility inquiring is intended to clarify the supplier status in terms of its free production capacity, engineering capability and delivery capability. The inquiry specifications are more detailed than in the budget inquiry round. They comprise the main technical specifications, and some preliminary commercial and legal terms are enclosed as well.

The processing of the inquiry is more intense than in budget inquiries and it is followed by a technical comparison of the tenders. The substance of the tender may be amended considerably in negotiations. If all the details can not be clarified, it is advisable to arrange an additional inquiry round. Additional rounds can also be employed to acquire more acceptable technical solutions or even to change the preferred technology. A new inquiry round can invoke some additional potential supplier candidates. The final inquiry round is arranged with the most successful supplier candidates.

Figure 60. Tender Inquiry Round

Final Inquiry Round

When the shortlist of supplier candidates is prepared, procurement is aimed at buying the most appropriate item. The aim is to buy according to the scope of the equipment or service at the lowest total life cycle cost. The detailed inquiry specifications comprise technical, commercial and legal specifications of the purchase. The final inquiry round, presented in Figure 61 on the next page, is arranged with the most successful supplier candidates. A final tender proposal will be asked from them and their final tenders are the basis for contract negotiations.

After the final tender proposals are received, the tenders are compared. The comparison of tenders concerns all aspects of the tenders, because price comparison is seldom enough. After the comparison, the construction manager holds contract negotiations with the most promising tenderer(s). The negotiations require a thoroughly professional approach as they are conducted in depth in technical, financial and scheduling aspects. The result of the negotiations is a recommendation to the client, who makes the purchasing decision. Signing the contract and its acknowledgment finalise the purchasing process.

Project

Inquiry Round(s)

Mill Configuration

General Instructions for Tendering Mill Standards

General Commercial and Legal Instructions Tender Inquiry Specification Goal: screening potential known suppliers

Need: information of potential suppliers Tender Inquiry Processing

Comparison of Tenders

Technical Negotiations Result: short-list of supplier candidates

Figure 61. Final Inquiry Round

Comparison of Procurement Rounds

I had noticed earlier that budget inquiry, tender inquiry and final inquiry rounds were alike, as the comparison in Table 19 shows. They were so similar that sometimes three separate rounds were combined to one or two rounds. The more standardised the item was, the more likely the tender inquiry and final inquiry rounds were combined, i.e. an inquiry round would be carried out only once before contracting. On the other hand, if the bargaining was more difficult because of technical or commercial reasons, the tender inquiry round in the middle could be carried out numerous times.

Table 19. Comparison of the Budget Inquiry, Tender Inquiry and Final Inquiry Rounds Budget Inquiry Round Tender Inquiry Round Final Inquiry Round

• Inquiry specifications

• Inquiry processing

• Comparison of budget tenders

• Inquiry specifications

• Inquiry processing

• Comparison of tenders

• Technical negotiations

• Inquiry specifications

• Inquiry processing

• Comparison of final tenders

• Negotiations

• Contract signing

I realised that budget inquiries, tender inquiries and final inquiries could be combined, because the separating differences were mostly superficial. Final inquiries have more process stages than budgeting and tender inquiring, but the existing stages in each process are the same. Because the purchasing process covered every feature in cost estimating and facility inquiring, I could program all the necessary features into one set of programs. In principle, only a classifying field would distinct the different inquiry types. The users of the procurement software just omit the features they do not need. In the final version of the construct, the budget inquiries, tender inquiries and final inquiries were combined. They were implemented in a single set of procurement programs.

Project Mill Configuration

General Instructions for Tendering Mill Standards

General Commercial and Legal Instructions Supplier Proposals

Goal: building a competitive mill with appropriate equipment

Final Inquiry Specification

Need: buying equipment or service Final Inquiry Processing

Final Comparison of Tenders

Result: purchase of equipment or service

Negotiations

Contract Signing

Comparison of Tenders

Comparison of tenders is a subprocess in each inquiry round which is carried out to evaluate the tenders from all technical, commercial and other aspects, and to make recommendations regarding the equipment and tenderers. The technical parts comprise the tenderers’ technical answers to the inquiry specifications, which might vary from tenderer to tenderer. The commercial parts may be standardised to the point that only price information varies, following the structure of the technical parts. The legal parts are normally well standardised and they are equal in each tender.

Although the inquiry specifications should clearly describe and limit the equipment and services to be tendered, the received tenders do not necessarily have an equal scope. Potential suppliers are sometimes encouraged to tender alternative solutions. In these cases, the supplier candidates are expected to bring out their views of the most appropriate solution for the area.

The tenders are equalised to match the comparison scope, as illustrated in Figure 62. In the ideal case, the comparison scope equals the inquiry specifications. Sometimes it is easier to form a separate comparison scope (for example, one of the received tenders) to measure the received tenders. If a separate comparison scope is used, it could affect the scopes of the other inquiries. The received tenders are matched either by excluding or adding cost information of additional or missing tender parts, respectively. The cost information is preferably taken from valid contracts. If this is not possible, the cost information of other tenders can be used. The last source for cost information is the cost files gathered from other projects. This historical cost information will normally need adjustments due to inflation, exchange rate changes, business situation differences etc.

The adjusting of the tender scopes leads to hierarchical presentation of cost information. Every priced part of the tender is recorded and the total price is calculated from its components, unless the tenderer has indicated otherwise, normally stating the tender as a packet consisting of inseparable parts. In principle, the cost information is recommended to follow the item structure including all the priced parts, services and other tender components.

Figure 62. Adjusting Scope Differences in Comparison of Tenders

It is nearly impossible to overestimate the importance of the writer’s skills, knowledge and proficiency in the comparison of tenders, because it is seldom a simple price comparison task. The writer must devote ample time and efforts to form his recommendations. Particularly the quality and compatibility aspects are very difficult to express in monetary values. Sometimes the ranking of the tenders is a subject of heavy critics. The software allows any ranking order that the writer sees fit.

Comparison scope (=inquiry scope): equipment, machine and installation Tender 1:

Equipment, machine and installation Tender 2:

Equipment and machine Tender X1:

Installation Tender 3:

Equipment, and installation

= X1 €

= X2 €

= X3 € Tender 4:

Equipment, machine, installation and training Priced Extra Feature:

Training Tender 5:

Equipment, machine, installation and insulation

= X4 €

= X5 € Cost Files:

Insulation Cost Files:

Machine

In document Procurement in Project Implementation (sivua 191-195)