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Material Procurement Anoop K.N. 251091 Harshad.K-251092 Rohit .K-251093 Santosh. K-251094 Saurabh K-251095 Vijay K-251096

Submitted to: Prof A.K.Garg

1/30/2012

Material Procurement

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PROCUREMENT OF MATERIALS FOR CONSTRUCTION PROJECTS

Procurement is the acquisition of goods or services. It is favourable that the goods/services are appropriate and that they are procured at the best possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location.

Efficient planning of materials procurement and storage on construction sites can lead to significant improvements in construction productivity and project profitability. Existing research studies focus on material procurement and storage layout as two separate planning tasks without considering their critical and mutual interdependencies. This paper presents the development of a new optimization model for construction logistics planning that is capable of simultaneously integrating and optimizing the critical planning decisions of material procurement and material storage on construction sites.

The model utilizes genetic algorithms to minimize construction logistics costs that cover material ordering, financing, stock-out, and layout costs. The model incorporates newly developed algorithms to estimate the impact of potential material shortages on-site because of late delivery on project delays and stock-out costs. An application example is analyzed to demonstrate the capabilities of the construction logistics planning model in simultaneously optimizing material procurement decisions and storage layout plans.

The procurement of construction project is vast in scope because it involves the gathering and organizing of myriads of separate individuals, firms and companies to design manage and build construction products such as houses, office buildings, shopping complex, roads, bridges etc. for specific clients or customers. Procurement comes the word procure which literally means to obtain by care or effort; to bring about and to acquire. System is about organized method, approach, technique, process or procedure. In this context,


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3 project procurement is very much concerned with the organized methods or process and procedure of obtaining or acquiring a construction product such as a house, shopping complex or road and jetty.

It also involves arranging and coordinating people to achieve prescribed goals or objectives. The Aqua Group (1999) described procurement as the process of obtaining or acquiring goods and services from another for some consideration. Masterman (1996) described project procurement as the organizational structure needed to design and build construction projects for a specific client. It is in a sense very true because the process of obtaining a building by a client involves a group of people who are brought together and organized systematically in term of their roles, duties, responsibilities and interrelationship between them.

Today, there are several types or variations of project procurement systems being widely used in the construction industry. They range from the traditional system to the many variations of fast-tracking systems such as turnkey, design and build, build-operate-transfer, management contracting, cost-plus contracting etc. The introduction of many variations of project procurement system was induced by the quest for more efficient and speedier project delivery system and better project performance. They are innovations to the traditional delivery method aimed at meeting the changing demand of clients or customers. The different procurement systems present have brought changes not only to the process and procedure of project delivery but also the aspects of management and organization.

THE ISSUES

As mentioned earlier, the introduction of different fast-tracking project procurement systems is the attempt by the industry to provide better deal to its clients or customers, who are increasingly insisting for better value for money from their projects in term of cost, time and quality. The different project procurement systems present different methods, process and procedure of designing and construction of projects for the client.

These different systems also prescribe the variation of the organizational structure of the project teams in term of role, responsibility and authority. So how do the different procurement systems affect the project performance given that


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4 the method, process, procedure and organization vary according to the systems? This paper looks at the different procurement systems and their attributes and how each of them affects the project performance.

There are many procurement systems, as will be highlighted later, being used in the construction industry now days. However the focus is only on the type of procurement systems that commonly used in Malaysia now days i.e. traditional system; design and build method, management contracting method and professional construction management method. The parameters for the measurement of project performance are many, but in this case consideration is given to only three elements time, including speed of delivery, cost and quality.

THE EFFECT OF THE DIFFERENT PROCUREMENT SYSTEMS ON PROJECT PERFORMANCE

After having considered the concept and the working process and procedure of the different project procurement systems, let us now look into the general effect of the different system on project performance. As highlighted earlier, the focus of this paper in on three procurement systems (1) Traditional system (2) Design and Build and Turnkey Procurement Systems (3) Management contracting and Professional Construction Management Systems. The discussion is limited to the main project performance parameters time, cost and quality.

1) Traditional Procurement System

Time

Due to its linear or sequential approach, the traditional procurement system has been identified as the slowest project delivery approach. However, this approach is more preferable because it provides clear accountability and better design and construction control by the client. Since the pre-contract stage of this system is longer, more time is available for the client and the project team to scrutinize and review the design before construction.

Cost


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5 This system provides more price certainty to the client at the very early stage of the project. It also gives the client firmer and more competitive price because the design plus the Complete working drawings have been fully developed and detailed out prior to tendering. It eliminates any design or construction ambiguity or uncertainty which often causes the contractors to unnecessarily inflate the price. In the case where bill of quantities is used, the bidding tend to be more fair as such the project cost is also lower. The system also better cost control as such cost increase due to variations is minimized, but works were often disrupted when there are too many variations (due to unforeseeable problems) and it tend to cause the cost to inflate.

Quality

The traditional procurement system also provides a high degree of quality certainty and functional standards. It is also a system that provides an opportunity for the building owner to combine the best design, management and construction expertise between consultants and contractor. It also provide more time for client and consultants to review and fully develop the design and specification thus allowing better documentation preparation. However, this system does not provide opportunities for contractor to contribute his construction technology and management expertise because they only come into the scene after the design has been fully developed and approved.

2) Design and Build and Turnkey Procurement Systems

Time

Design and build and turnkey project procurement system are called fast-tracking or build-it-fast project delivery system where the design and construction are integrated. The design free pre-tender process allow for earlier construction date. It also allows the process of detail design and construction to run almost in parallel and concurrently to each other, thus reducing the overall project development period considerably.

As a single entity responsible for both the design and construction, the contractor is able to control not only the construction time but also the time reserved for the design of the project, thus reducing the overall contract


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6 duration. In this type of procurement system, the contractor has always been selected based on its vast experience, knowledge and competency in construction, as such by giving it the design responsibility, the contractor very often able to reduce construction time. This is done by him rationalizing the design and construction process and site activities.

Cost

Although the cost is fixed at the tender stage and is subject to design changes, it is often higher than the traditional contracting system. Apart from the fact that very limited contractors are invited to submit tenders, the lack of design and specification detailing during tender, has made the contractors to jack up the price to allow for many uncertainties. This is because once accepted, the tender price will be the final contract sum. It is not subject to change, unless there are variations required or instructed by the client. Such additional cost cannot be avoided because under this procurement system the contractor will to take much of the financial risk.

However, as many have claimed, the significant cost saving in this type of procurement system is made through the reduction of the overall development period. The cost of contractors uncertainty can be set-off by the reduction in loan interest and early financial return or benefits. Cost saving may also be made when the contractor applies his construction knowledge and experience to simplify design and work. At the same further cost saving can be made when the client offer the contractor some form of incentive if he is able to save a significant amount of cost.

Quality

The integration of design and construction allows the contractor to utilize his knowledge and experience to develop much compacted and coherent work program and to develop more efficient design and project control programme. At the same time it allows the contractor to be innovative to further improve the construction process and techniques thus allowing for better work and process quality.

However, it is more often found that the quality of work under this contracting system tend to be questionable. The assigning of the designing


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7 and construction to a contractor has caused the client to loose control of the design and supervision of the work. This is especially so when the client does have his own team of consultants. As far the contractor is concerned, they tend to cut corners in order to maximize their profit, especially when they feel that they have under price their quotation during when tendering for the work.

3) Management Contracting and Professional Construction Management Systems (Both systems operate almost on the same concept, except that in Management Contracting, the package contractors enter into contract with the management contractor. In Construction Management System, the Package Contractors enter into contract with the client)) Time

As mentioned earlier, the essence of these two methods of project procurement is that a contractor has the knowledge, experience and competency to better manage the design and construction of a project. It is a factor that allows for more efficient and effective coordination of works, materials, manpower and plants, thus making construction time shorter compared to other procurement systems. This is especially so, given the fact that the same management contractor is able to manage and contribute towards the development of the design. It allows the management contractor to improve build ability or constructability.

At the same, the system also allow for early start of construction compared to the traditional approach. The preparation of simple or basic tender (bidding) document and the shift of the process of schematic and detail design to construction phase, allow for an early start of construction. As pointed earlier, under these two systems, the detail design (shop drawings) is carried out (either by the consultant or package contractors) during the construction stage. All these factors brought about a considerable reduction of the overall project time compared to the traditional or even design and build contracting systems.


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8 Cost

The cost of the project procured using this system tends to be lower than those using other procurement approach. This is because the cost of the project is actually the sum of prices quoted by the package contractors. With the management contractor being the consultant, no extra cost is being added up for main contractors profit margin. The only additional cost is the consultant fee that the client has to pay to the management contractor or to the construction management consultant.

Quality

As an agent responsible for the construction, the management contractor or the professional construction manager tend to be more serious with the standard and quality of the work done by the package contractors. Their experience as contractor or construction manager made them more proficient and more effective in ensuring high quality works. Their knowledge and experience also made them more adept in selecting materials and components of the right type and quality. These factors have contributed to a better standard and quality of the completed construction products.

CONCLUSION

Cost, time and quality are the three most important parameters of project performance. It has been stressed that in todays highly competitive and uncertain business environment, clients are demanding for better value from their investment. They want their project to be completed on time, within the estimated cost and with the right quality. The use of the various project procurement systems shows that the construction industry is now trying to meet the clients needs. This is because the different procurement method will have different effect on the cost, time and quality of the project. Each project procurement system has its own peculiarity in term of the pre-tender and post tender activities and processes, division of risks between client and contractors, and the effectiveness of project monitoring and control.

It is very important at the very outset of the project to carefully consider all factors when selecting the most appropriate procurement approach for a construction project. This is because each system has its own feature and


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9 peculiarity that will have effect on the cost, time and quality of the project i.e. the project performance.

Almost all purchasing decisions include factors such as delivery and handling, marginal benefit, and price fluctuations. Procurement generally involves making buying decisions under conditions of scarcity. If good data is available, it is good practice to make use of economic analysis methods such as cost-benefit analysis or cost-utility analysis.

An important distinction is made between analyses without risk and those with risk. Where risk is involved, either in the costs or the benefits, the concept of expected value may be employed.

Direct procurement and indirect procurement

TYPES

Direct procurement

Indirect procurement

Raw material and production goods

Maintenance, repair, and operating supplies

Capital goods and services

F E A T U R E S

Quantity Large Low Low

Frequency High Relatively high Low

Value Industry specific Low High

Nature Operational Tactical Strategic

Examples Crude oil in petroleum industry

Lubricants, spare parts

Crude oil storage facilities

Based on the consumption purposes of the acquired goods and services, procurement activities are often split into two distinct categories. The first category being direct, production-related procurement and the second being indirect, non-production-related procurement.

Direct procurement occurs in manufacturing settings only. It encompasses all items that are part of finished products, such as raw material, components and


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10 parts. Direct procurement, which is the focus in supply chain management, directly affects the production process of manufacturing firms. In contrast, indirect procurement activities concern operating resources that a company purchases to enable its operations. It comprises a wide variety of goods and services, from standardized low value items like office supplies and machine lubricants to complex and costly products and services like heavy equipment and consulting services.

Procurement systems

Another common procurement issue is the timing of purchases. Just-in-time is a system of timing the purchases of consumables so as to keep inventory costs low. Just-in-time is commonly used by Japanese companies but widely adopted by many global manufacturers from the 1990s onwards. Typically a framework agreement setting terms and price is created between a supplier and purchaser, and specific orders are then called-off as required

Procurement process

Procurement may also involve a bidding process i.e. Tendering.

Procurement steps

Procurement life cycle in modern businesses usually consists of seven steps:

Information gathering: If the potential customer does not already have an established relationship with sales/ marketing functions of suppliers of needed products and services (P/S), it is necessary to search for suppliers who can satisfy the requirements.

Supplier contact: When one or more suitable suppliers have been identified, requests for quotation, requests for proposals, requests for information or requests for tender may be advertised, or direct contact may be made with the suppliers.

Background review: References for product/service quality are consulted, and any requirements for follow-up services including installation, maintenance, and warranty are investigated. Samples of the P/S being considered may be examined, or trials undertaken.


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11 Negotiation: Negotiations are undertaken, and price, availability, and

customization possibilities are established. Delivery schedules are negotiated, and a contract to acquire the P/S is completed.

Fulfillment: Supplier preparation, expediting, shipment, delivery, and payment for the P/S are completed, based on contract terms. Installation and training may also be included.

Consumption, maintenance, and disposal: During this phase, the company evaluates the performance of the P/S and any accompanying service support, as they are consumed.

Renewal: When the P/S has been consumed or disposed of, the contract expires, or the product or service is to be re-ordered, company experience with the P/S is reviewed. If the P/S is to be re-ordered, the company determines whether to consider other suppliers or to continue with the same supplier.

Additional Step - Tender Notification: Some institutions choose to use a notification service in order to raise the competition for the chosen opportunity. These systems can either be direct from their e-tendering software, or as a re-packaged notification from an external notification company.


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MATERIAL PROCUREMENT POLICY:

There are several system of purchasing available to the buyer. The system to be adopted depends on the factors like

Demand Supply Price Urgency of requirement Vendor/ Supplier Type of material Organization culture Powers of delegation Imports Capital Consumables Seasonal commodities

We are familiar with the well known system of batering, which is practiced even today in some part of the world. The simplest purchasing system is buying off the counter, on a cash transaction. Each system has own advantages and disadvantages and organizations will have to choose a system suited to meet their requirements. It is noted that the OBJECTIVE OF THE PURCHASING POLICY is to buy the required material in the right quantity from the right source at right time and Price to obtain the maximum value for rupee of expenditure.


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1. Right quanlity: No general description if the material or desired attributes will be sufficient , like High quality or poor quality etc. The definition must be in greater detail and must be described in the purchase order. Significant elements like dimension , physical, chemical and other properties , suitability and purpose must all be clearly stated.

2. Right quantity: This is also one of the base considerations. It has special meaning the context, that is to say what quantity should be purchased at a time.

3. Right price: Price is not just one of the terms and conditions of the purchase order, but is an important economic consideration which is a guiding factor. A most common equation used in this connection is

Value = Quality / Price

Value varies in direct proportion to quality and inversely to price paid. But where quality is defined in a specification, it is a constant and the comparison of value can be mad in terms of price alone. It follows therefore that the lower the price, the greater the value.

4. Right source: Source selection is also an important factor. Besides the factors mentioned earlier, reliability and timely delivery have to be seriously reckoned with. Actually there are four stages of source selection

Survey stage Enquiry stage Negotiation stage Experience stage.


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In purchasing, the starting point is recognition of need of the material. What is available in the market? Who makes such a product? or, who can make it or supply it most economically? All these questions must be answered before a supply order is placed.

5. Right time: Right time implies that in order to be effective, purchases should be made, in such a way that stores and materials are made available in time when needed, it being purchasing departments duty to see that the delivery schedule is honored. In order to get some price advantage when some seasonal purchases are resorted to, timing plays its due role

6. Right place: Right place means right place of delivery. Every purchase contract , in addition to time of delivery, must clearly state the place of delivery and such other terms like free delivery or ex-factory delivery. Generally F.O.B(free on board), F.O.R( Free on rail), C.I.F( Cost , insurance and freight) paid term are part of the price agreement. Large organizations usually have a written purchase policy to be adhered to by all. The purchasing activities are always subject to audit and hence the systems should be so designed that the do not give rise to any structures. The purchase executive has to dispose of excess materials, scarp etc in addition to his buying activities. The amount involved in these items will be rather high, if these are metallic in nature, which requires the disposal system to be properly designed. Therefore if the purchase executive has to effectively use the resources at his disposal, his systemshould be well established and flexible enough to cope with the ever changing environment.


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NO YES

Purchase Requisition

Is the Source already determined?

Requirement conversion to request for quotation

Maintain Quotation

Quotation comparison & choose suitable source

Convert purchase requisition to Purchase order

Release of purchase order as per schedule of authority

Goods reciept

Logistics invoice verificatiion

Requirement Conversion to purchase order


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16 S U P P L I E R S E L E C T I O N P R O C E S S

Choosing the right supplier involves much more than scanning a series of price lists. Your choice will depend on a wide range of factors such as value for money, quality, reliability and service. How you weigh up the importance of these different factors will be based on your business' priorities and strategy.A strategic approach to choosing suppliers can also help you to understand how your own potential customers weigh up their purchasing decisions.This guide illustrates a step-by-step approach you can follow that should help you make the right choices. It will help you decide what you need in a supplier, identify potential suppliers and choose your supplier.

1) Thinking strategically when selecting suppliers

2) What you should look for in a supplier

3) Identifying potential suppliers

4) Drawing up a shortlist of suppliers

5) Choosing a supplier

6) Getting the right supplier for your business

1)Thinking strategically when selecting suppliers

The most effective suppliers are those who offer products or services that match - or exceed - the needs of your business. So when you are looking for suppliers, it's best to be sure of your business needs and what you want to achieve by buying, rather than simply paying for what suppliers want to sell you.


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17 For example, if you want to cut down the time it takes you to serve your customers, suppliers that offer you faster delivery will rate higher than those that compete on price alone.

For some pointers to help you identify what you want from suppliers, see the page in this guide on what you should look for in a supplier.

The numbers game It's well worth examining how many suppliers you really need. Buying from a carefully targeted group could have a number of benefits:

1) It will be easier to control your suppliers

2) Your business will become more important to them

3) You may be able to make deals that give you an extra competitive advantage

For example, if you've got a rush job for an important customer, your suppliers will be more likely to go the extra mile if you spend $1,000 a month than if you spend $250.However, it's important to have a choice of sources. Buying from only one supplier can be dangerous -where do you go if they let you down, or even go out of business?Equally, while exclusivity may spur some suppliers to offer you a better service, others may simply become complacent and drop their standards. 2)What you should look for in a supplier 2.1Reliability, Remember - if they let you down, you may let your customer down. 2.2Quality The quality of your supplies needs to be consistent - your customers associate poor quality with you, not your suppliers. 2.3Value for money The lowest price is not always the best value for money. If you want reliability and quality from your suppliers, you'll have to decide how much you're willing to pay for your supplies and the balance you want to strike between cost, reliability, quality and service. 2.4Strong service and clear communication


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18 You need your suppliers to deliver on time, or to be honest and give you plenty of warning if they can't. The best suppliers will want to talk with you regularly to find out what needs you have and how they can serve you better. 2.5Financial security It's always worth making sure your supplier has sufficiently strong cash flow to deliver what you want, when you need it. A credit check will help reassure you that they won't go out of business when you need them most. 2.6A partnership approach A strong relationship will benefit both sides. You want your suppliers to acknowledge how important your business is to them, so they make every effort to provide the best service possible. And you're more likely to create this response by showing your supplier how important they are to your business.

3)Identifying potential suppliers

You can find suppliers through a variety of channels. It's best to build up a shortlist of possible suppliers through a combination of sources to give you a broader base to choose from. 3.1Recommendations Ask friends and business acquaintances. You're more likely to get an honest assessment of a business' strengths and weaknesses from someone who has used its services. 3.2Directories If you're looking for a supplier in your local area, it's worth trying directories such as Yellow Pages and Thomson. 3.3Trade associations If your needs are specific to a particular trade or industry, there will probably be a trade association that can match you with suitable suppliers. 3.4Business advisors Local business-support organisations, such as chambers of commerce, can often point you in the direction of potential suppliers Exhibitions offer a great opportunity to talk with a number of potential suppliers in the same place at the same time. Before you go to an exhibition, it's a good idea to check that the exhibitors are relevant and suitable for your business. 3.5Trade press Trade magazines feature advertisements from potential suppliers.


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19 4)Drawing up a shortlist of suppliers

Once you've got a clear idea of what you need to buy and you've identified some potential suppliers, you can build a shortlist of sources that meet your needs. When considering the firms on your shortlist, ask yourself the following questions:

Can these suppliers deliver what you want, when you want it? Are they financially secure? How long have they been established? Do you know anyone who has used and can recommend them? Are they on any approved supplier lists from trade associations or

government? Do some research and try to slim your list down to no more than four or five candidates. It's a waste of time for you and the potential supplier if you approach them when there's little chance of them fulfilling your requirements.

5)Choosing a supplier

Once you have a manageable shortlist, you can approach the potential suppliers and ask for a written quotation and, if appropriate, a sample. It's best to provide them with a clear brief summarising what you require, how frequently you'll require it and what level of business you hope to place. 5.1Get a quotation It's worth asking potential suppliers to give you a firm price in writing for, say, three months. You can also ask about discounts for long-term or high-volume contracts. 5.2Compare potential suppliers When you've got the quotation, compare the potential suppliers in terms of what matters most to you. For example, the quality of their product or service may be most important, while their location may not matter. 5.3Price It is important, but it shouldn't be the only reason you choose a supplier. Lower prices may reflect poorer quality goods and services which, in the long run, may not be the most cost effective option. Be confident that your supplier can make a sufficient margin at the price quoted for the business to be commercially viable. Check that the supplier you employ is the one that will be doing the work. Some suppliers may outsource work to subcontractors, in which case you should also


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20 investigate the subcontractor to determine if you are happy with this arrangement. Wherever possible it is always a good idea to meet a potential supplier face to face and see how their business operates. Understanding how your supplier works will give you a better sense of how it can benefit your business. And remember that your business' reputation may be judged on the labour practices of your suppliers. It makes good business sense to consider the ethical dimensions of your supply chain. Negotiate terms and conditions Once you've settled on the suppliers you'd like to work with, you can move on to negotiating terms and conditions and drawing up a contract

6)Getting the right supplier for your business

6.1Know your needs Make sure you know what you need. Don't be tempted by sales pitches that don't match your requirements. Understand the difference to your business between a strategic supplier, who provides goods or services that are essential to your business - such as high-value raw materials - and non-strategic suppliers who provide low-value supplies such as office stationery. You will need to spend much more time selecting and managing the former group than the latter. 6.2Spend time on research Choosing the right suppliers is essential for your business. Don't try to save time by buying from the first supplier you find that may be suitable. 6.3Ask around People or other businesses with first-hand experience of suppliers can give you useful advice. 6.4Credit check potential suppliers It's always worth making sure your supplier has sufficiently strong cash flow to deliver what you want, when you need it. A credit check will also help reassure you that they won't go out of business when you need them most. 6.5 Price isn't everything Other factors are equally important when choosing a supplier - reliability and speed, for example. If you buy cheaply but persistently let down your customers as a result, they'll start to look elsewhere.


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21 6.6 Agree on service levels before you start It's a good idea to agree on service levels before you start trading so you know what to expect from your supplier - and they know what to expect from you 6.7Don't buy from too many suppliers It will be easier for you to manage - and probably more cost-effective - if you limit the number of sources you buy from. This is particularly the case with low value-added suppliers. ...but don't have just a single supplier It's always worth having an alternative supply source ready to help in difficult times. This is particularly important with regard to suppliers strategic to your business' success.


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