A CSC Company UNCLASSIFIED Fundamentals in Mastering Purchasing Presenter: Jennifer Kupec - CPCM, PMP ®

A CSC CompanyUNCLASSIFIED

UNCLASSIFIED

Fundamentals in Mastering Purchasing

Presenter:

Jennifer Kupec - CPCM, PMP ®

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Purchasing Purchasing refers to a function in business whereby

the enterprise obtains the inputs for what it produces, as well as other goods and services it requires. In larger businesses, the function is frequently carried out in a purchasing department, headed by a purchasing manager.

Purchasing is the informal name of the department in Procurement responsible for issuing Purchase Orders for goods, including material and equipment. In most US Corporations, Purchasing Agents are typically referred to as “Purchasing Specialists” or simply as “Buyers”.

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Basic Work Process BASIC WORK PROCESS: Purchasing Agent receives a requisition. The Purchaser then evaluates the requisition to determine which suppliers would best

supply the material and includes those suppliers on the List of Bidders, or those who will be solicited to submit quotation.

The formal request for a quotation is known as an Request for Quotation (RFQ) or Request for Proposal (RFP), depending on the complexity of the material or service.

The RFQ/RFP can be as simple as text written in an email, to a complex document requesting engineered drawings, manufacturing locations, multiple points of contact at each branch location, and financial statements.

The Purchaser will also determine the validity period of the Solicitation of Bids known as the "Bid due Date", the date when the window to submit proposals ends.

After the bids are received the Buyer will evaluate the proposals and tabulate the bids, usually on a spreadsheet. A bid tabulation is essentially a spreadsheet with catorgies used to informally compare each supplier's proposals to determine which proposal best meets the Buyer's needs.

After the bids are tabulated, the Buyer will make a decision in regards to which supplier will be recommended and will award the order and the Seller will proceed in supplying the material in accordance with the agreed upon terms.

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Fundamentals Understand the Requirement Perform Analysis Prepare for Negotiations Execute

Always Document!

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Requirements Understand the requirements! Ask yourself?

• Does the requirement make sense?• Is it reasonable to ask the contractor to

provide the requirement?• Do you understand the deliverables?• Do you know a better alternative to the

requirement that is being asked for?

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Evaluate Overall Price Reasonableness With Price Analysis

Price analysis - process of examining and evaluating a proposed price to determine if it is fair and reasonable

Cost analysis - not a substitute for price analysis Perform a price analysis whenever there is a valid base

for analysis Cost analysis - insight into what it will cost the firm Cost analysis does not necessarily provide a picture of

what the market is willing to pay

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Basis for Price AnalysisSelect the basis for comparison in determining if a price is fair and reasonable, such as: Proposed prices received in response to the solicitation Commercial prices Previously proposed prices and contract prices for the

same or similar end items Parametric estimates or estimates developed using

rough yardsticks Independent public body estimates Prices obtained through market research

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Price Reasonableness Decision Price analysis is a subjective evaluation Resolving differences between cost and price analysis:

• If price analysis does not support the cost analysis, reexamine the cost analysis result

• Consider alternative methods of contract completion • If the results of cost analysis and price analysis

cannot be reconciled, refer the contract action to the next level

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Identifying Cost Drivers Cost drivers - aspects of proposal or contract requirements that if changed

would have a major impact on contract price

What are some possible cost drivers? • Contract terms and conditions

• Delivery requirements• Technical requirements

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Considering the Cost Driver Effect on Contract Price Example 1 - Normal delivery time for Candy Bar A is six

months after receipt of an order at a unit price of $1.00. The requiring activity wants the candy bar in three months at the same price. The bidder can get the candy bar in three months, but only at a premium price of $1.25.

What is the cost drivers in Example 1?• Example 1 - Schedule is a cost driver with a shorter

delivery schedule resulting in a cost increase.

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Identify Sources of Cost Risk

Most cost estimates include a "point estimate"

In most cases, the point estimate is one of a range of possible costs

There are usually variances between projected and actual costs

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Cost Risk Increases when market prices are volatile or

cost information is lacking There are a variety of methods for reducing

and controlling contract cost, among the most important are the appropriate use of:• An appropriate contract type • Clear technical requirements • Public body furnished property • Other contract terms and conditions

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Contract Type Decision Remember contract type decisions are

subject to negotiation Contract Type and contract price are closely

related and should be negotiated together The objective is to negotiate a contract type

and price that will result in reasonable contractor risk and provide the contractor with the greatest incentive for efficient and economical contract performance

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Elements by Contract Type Establish a position on key elements that

will define the contract pricing arrangement You may be able to:

• Restrict negotiations to total price• Negotiate agreement on

several elements needed to define the pricingarrangement

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Contract Elements by Contract Type

Contract Type Pricing Elements Requiring Negotiation

Firm fixed-price and firm fixed-price level of effort

Total price

Fixed-price award fee

Award fee pool Fixed price (including normal profit) Plan for periodic evaluation

Cost-plus-incentive-fee

Target fee Cost sharing arrangement under target cost Cost sharing arrangement over target cost Minimum fee Maximum fee Target cost

Cost-plus-award-fee

Estimated cost Base fee Award fee

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Contract Elements by Contract Type (cont.)

Contract Type

Pricing Elements Requiring Negotiation

Cost-plus-fixed-fee

Fixed Estimated cost fee

Time-and-materials

Labor-hour rate(s) Material handling costs (indirect costs) or provision to

charge material on a basis other than cost Ceiling price

Labor-hour Labor-hour rate(s) Ceiling price

$$$

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Added Value Add value to your team

• Understand the contractors available to perform different kinds of work

• Understand the market and what is fair market value for a product or service

• Support you analysis with facts and not fiction

• Document decision and execute timely• Question things that do not make sense

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Consider Contracting Alternatives Consider alternatives offered by your

contractors But ensure support from technical personnel

is available to help you review complex proposals

Analysis support may also be needed from:• Requiring activity personnel • Technical personnel • The cognizant auditor

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Caution About AlternativesBefore bringing a potential alternative, consider: Costs Terms and conditions affected by the proposed

alternative The nature of the discussions

• In a non-competitive environment, changes in terms and conditions may be directly negotiated

• In competitive procurements, it may be necessary to amend the RFP and notify other bidders

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Pre-negotiation Documentation Draft elements of a Price Negotiation

Memorandum (PNM) before negotiations:• Purpose of the negotiation • Description of the acquisition• Exception(s) used and its basis

The extent to which the purchasing agent: • Relied on the data submitted • Recognized any submitted data as inaccurate,

incomplete, or non-current• Determined that an exception

applies and will not requirecertification

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Additional DocumentationDocument important aspects of the procurement situation that affected pre-negotiation objectives, such as:

The items or services and quantities being purchased The place of contract performance The delivery schedule or period of performance Differences between the proposed delivery schedule

and the objective schedule

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Any previous buys of similar products and related information

Any public body-furnished material Any unique aspects of the procurement

action Any outside influences or time

pressures associated with the procurement

Additional Documentation (Cont.)

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Summarizing Pre-negotiation Positions Outline the bidder's estimating rationale, the

public body's pre-negotiation objective, and key differences between the two positions

Generally, this summary begins with a tabular presentation similar to the following:

Cost Element Proposed Objective Difference Reference

Engineering Direct Labor

$1,000,000 $900,000 $100,000 See Para A

Engineering Overhead

$2,500,000 $2,025,000 $475,000 See Para B

Subtotal $3,500,000 $2,925,000 $575,000

G&A Expense $350,000 $292,500 $57,500 See Para C

Total Cost $3,850,000 $3,217,500 $632,500

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Consider Risk by Developing a Range of Positions

The classic approach to developing a negotiation range calls for three positions – minimum, objective, and maximum The cost objective should be the best estimate of

what the effort should cost The minimum, sometimes called the "going in

position," should be at the lowend of the reasonable range

The maximum is at the high end of the reasonable range

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Document the References Used in Position Development

Be able to find key references during management review of contract negotiation objectives, during negotiations, and during preparation of the price negotiation memorandum

Why is this important?• If a question arises later concerning

defective pricing, it is vital that you have a detailed record of the information that you relied on during negotiations

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Thank You for Coming!

PresenterJennifer KupecCPCM, PMP®(703) 980-3943

A CSC Company UNCLASSIFIED Fundamentals in Mastering Purchasing Presenter: Jennifer Kupec - CPCM, PMP ®

Documents

reasonable cost analysis

firm cost analysis

purchasing specialists

proposed price

pmp slide

mastering purchasing

overall price reasonableness

suppliers proposals