GPM First
Chapter 10 of The Essentials of Project Management (978-1-4724-4253-6) by Dennis Lock

Managing Purchasing

10

The total cost of purchased goods and services exceeds half the total costs of most projects and can even be as high as 80 per cent. Thus efficient purchasing is essential for the success of any project. Delays caused by materials shortages or purchasing errors can damage a project, causing work interruption, delays and expensive idle time.

Outline of the Purchasing Function

Purchasing is part of a wider materials management function that can include vendor appraisal, contract negotiation, freight, goods inwards inspection and the safe handling and storage of goods received. It extends beyond the boundaries of the purchaser’s premises to include supervisory expediting and inspection visits to suppliers, packing and transport arrangements, port and customers clearance for international movements, and involvement whenever special provisions have to be made for insurance, credit guarantees and other commercial arrangements.

The purchase of a high-cost item can often be regarded as a mini-project in itself. The process is usually cyclical, because it begins and ends with the buyer. Just as a project has a life cycle, so does the purchase of a significant item for a project. Compare the purchasing cycle in Figure 10.1 with the project cycle shown earlier in Figure 1.1.

In this chapter the word ‘buyer’ is used to describe the person or group responsible directly for the purchasing function. This might be a purchasing agent, purchasing manager or a suitably experienced buying clerk in a purchasing department. The organization that supplies the goods might be known as the supplier or the vendor, and might be the manufacturer of the goods or a stockist or agent.

Methods will depend to a large extent on the type of industry and the nature of the goods being purchased. At one end of the scale is the urgent item obtained by sending someone to the nearest hardware store with some petty cash. At the other extreme is the purchase of a complex piece of capital plant or an enormous bulk purchase of materials. Figure 10.2 lists purchasing procedures applicable to many projects. In this figure, items ranged to the left would apply to low-cost purchases, while those to the right of the illustration would be needed only for buying high-cost items, including those needing special import-export documentation and international freight procedures.

 
10.1 Purchasing cycle for a high-value project item

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Specifying the Goods to be Purchased

The first step in purchasing is to specify the requirements. In many projects, this function is often the responsibility of a project engineer or designer.

Parts lists or purchase control schedules are often used to list all the requirements. Both methods are similar and require the engineer to list each item, give the quantity required, and add a description and a specification or catalogue number. The correct revision status of all specifications must be given.

In construction and civil engineering projects the quantities of bulk construction materials required are listed on take-off lists.

Sometimes a relevant standards specification will exist that can be quoted to specify the requirements of a purchase. There are some specifications provided by official bodies, including the armed services.

Bought-out parts, equipment and materials can often be specified by reference to a manufacturer’s catalogue or part number. This might seem to be a sufficiently rigid description of the goods. However, most manufacturers reserve the right to modify their designs. If goods are supplied by a stockist, that stockist might decide to restock from more than one manufacturer, and there might be significant differences in the materials quality or design.

 

10.2 Some purchasing procedures applicable to projects

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Some companies take no chances and produce their own drawings and specifications and allocate part numbers themselves. This practice costs engineering time, but has much to commend it. Apart from removing any ambiguity about what is being ordered, provision is thus made for a common part-numbering system. That simplifies purchasing procedures, stock handling, stores procedures and cost accounting.

The project engineers must always write a detailed purchase specification for complex or specially manufactured goods or for any item that could give rise to safety and reliability difficulties if it were to be incorrectly supplied. Companies with good project experience will keep outline specifications in their digital files, greatly reducing the design or engineering time and effort to write a particular purchase specification.

Early Ordering of Long-Lead Items

Engineers and others responsible for initiating project purchases have a duty to inform the purchasing department of goods that are likely to have long lead times. They must ensure that ordering instructions are passed to the purchasing department as soon as possible. This often means issuing advance information on such things as special bearings, castings, motors and other bought-out components, although the relevant assembly drawings and final bills of material or purchase schedules remain unfinished or even unstarted.

It is sometimes desirable to issue advance information, even when the goods cannot be specified in exact detail, to allow the purchasing department to get provisional quotations from suppliers. In a really urgent case the buyer can reserve capacity in a manufacturer’s works by issuing a letter of intent.

Some engineers have a dangerous tendency to contact potential suppliers directly on matters that could lead to verbal contracts being made. Of course there will be many times when designers and engineers need to speak to suppliers on technical issues but care must always be taken to leave discussions on contractual matters to the purchasing department.

Choosing the Best Supplier

The buyer’s first responsibility is to select a suitable supplier. Occasionally only one supplier can be found, or one may be specified as the preferred supplier on the project engineer’s requisition.

There are, of course, occasions when urgency is the most important factor, when there is simply no time in which to conduct a thorough supplier selection procedure. In all other cases, the supplier should be chosen after the collection and perusal of several competitive quotations.

Purchase Enquiries and Invitations to Tender

Whenever competitive quotations are required, the engineers must help the buyer to compile a bid package. This package will include the technical specification and commercial needs of the project. The engineers might have a preferred supplier, or a shortlist of possible suppliers. Buyers in the purchasing department will usually have their own knowledge of the market and might know of others who should be approached.

Obtaining Bids

For high-cost purchases items the procedures are often very rigid, with strict procedures for issuing invitations to tender (ITT) and methods for receiving and assessing the resulting bids.

Purchases and contracts for projects in the public sector above specified threshold values are subject to special directives within the EU, which can add months to the purchasing process. The intention of these directives is to achieve fair competition and work opportunities throughout the EU. Opportunities for new contracts may not be advertised in the UK before a contract notice has been published in the Official Journal of the EU. There are exceptions for contracts for secret work.

Sealed Bids

The buyer might wish to obtain bids according to a sealed bids procedure. The process is outlined in the sequence shown in Figure 10.3.

Potential suppliers might be asked to present their sealed bids in two separate packages, one technical and the other commercial. The buyer (in collaboration with the relevant project engineer) will open all the technical bids first and the project engineer will reject those that fail to meet the specification. Then the surviving commercial bids are opened and compared.

In many cases there will be dialogue or negotiation between bidders and the buyer during the bidding period. These discussions can obviously influence the final prices and deliveries quoted. It is important not to give any supplier an unfair advantage during such discussions by revealing information not available to the other competitors. The ITT procedure will usually ensure that when a bidder asks a question or seeks clarification, both the bidder’s question and the buyer’s answer will be made known to all the other bidders.

Bid summary and evaluation

Potential suppliers might be in different countries, using their own national currencies, with very different journeys and transport methods needed to get the goods to the project site. The buyer will need to deal with all these variables so that the bids can be compared on a similar basis. A bid summary form can be used for that purpose.

A bid summary example is shown in Figure 10.4. This is intended to convert all bids into one common currency, and to include all required items that some bidders might quote as optional extras. Estimated packing, carriage, insurance, port and customs costs arising from foreign bidders have to be included. This procedure helps to ensure that the total delivered costs at the project point of use are compared for all potential suppliers on a like-for-like basis.

 

10.3 A typical sealed bids process

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10.4 A bid summary example

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The buyer would usually be expected to favour the lowest bidder, but this choice must be tempered by the bidder’s reputation for quality, delivery performance and commercial standing.

It is usually undesirable to allow the buyer to choose a supplier without technical evaluation and agreement from the relevant project engineer. The bid summary form illustrated in Figure 10.4 is not intended to record all the details of such technical deliberations.

Responsibility for shipping goods

It is important that the boundaries of responsibility for transportation are clearly defined in bids and on purchase orders. Incoterms, defined and published in many languages by the International Chamber of Commerce, are accepted worldwide as the succinct and definitive method for setting out these boundaries.

International freight movements for projects can involve complex procedures. Unless the purchasing department is thoroughly familiar with these, a freight forwarding agent should be used.

Purchase Order

Authority for the buyer to make a purchase is often initiated by the issue of a purchase requisition to the buyer by the project engineer (or other nominated person from the project team). For purchases of significant size or complexity, the requisition can comprise two parts:

  1. The technical specification, which the buyer will subsequently forward to the chosen supplier as an attachment to a purchase order.

  2. The commercial specification. This might be an informal note provided by the engineer advising the purchasing department of things such as the project budget and delivery requirements. Thus this could include confidential comments or instructions from the engineer to the buyer that are not intended for passing on to the chosen supplier. However, the buyer will take this commercial specification into account when preparing the purchase order and its conditions of contract.

 

Issuing the purchase order is perceived as the most routine and obvious part of the purchasing function. Typically, it involves completing a purchase order form, adding an authorizing signature, and sending it to the supplier, together with any supporting drawings and the technical specification. A standard purchase order form should normally be used, although that may not be possible when ordering online. The information on a purchase order usually comprises:

  • A purchase order serial number (for identification and subsequent information retrieval).

  • The description and name of the goods to be supplied.

  • The quantity required.

  • The agreed purchase price, as quoted by the supplier and accepted by the purchaser.

  • The delivery date required.

  • The reference number and date of the supplier’s quotation (or catalogue number of the goods).

  • The address to which the goods are to be delivered.

  • The terms (Incoterms) on which delivery is to be made. This will show liability for transport, packing, insurance costs, and so on.

  • Invoicing instructions.

  • An authorizing signature.

 

The project time schedule must always allow time for the preparation and issue of purchase orders. Unless emergency measures are contemplated, two weeks should often be regarded as a minimum estimate for purchase lead time, even for items that can be supplied from a supplier’s stock. Purchase lead times should be shown as tasks on network diagrams.

Contractual Conditions

One aspect that should concern the project manager is that each purchase order sets out commercial conditions which, once accepted by the supplier as a contract, commit the buyer (and therefore the project) to all implied cost and legal implications. It is customary for companies to standardize their usual commercial conditions of purchase and print them on the reverse of their purchase order forms.

After receiving the purchase order, the chosen supplier will be expected to return an acknowledgement accepting the terms, or at least confirming details of quantity, description, price and delivery. Naturally these details must be compared with the supplier’s original quotation, and the buyer will question any discrepancy. When the order has been accepted by the supplier, a binding legal contract exists.

Purchase Order Amendments

Should it become necessary to change any aspect of a purchase order after issue, the supplier’s agreement should be sought to determine the effect on price and delivery, and to ensure that the proposed change is within the supplier’s capability. Once these facts have been successfully established, an amendment to the original purchase order must be issued.

Each purchase order amendment should bear the same serial number as the original purchase order, suffixed by an identifying amendment number (amendment 1, 2, 3 etc.). Purchase order amendments should be given the same distribution as the original purchase orders.

Expediting

For purchases where the delivery waiting time is more than a few weeks the buyer will usually make routine checks with the supplier to ensure that no delivery delay will occur.

For some complex or high-value equipment, especially where this is manufactured specially to order, the purchaser might wish to send an inspector or expediter to the supplier’s premises to witness progress at first hand.

Inspection and Expediting Visits

The buyer might wish to arrange visits to a supplier’s premises to check on progress, inspect workmanship or witness tests. Such visits could be linked to the certification of stage payments. This is a function where overseas purchasing agents can be most useful when dealing with offshore suppliers.

There are several ways in which responsibility for carrying out inspection and expediting visits can be allocated or delegated. Where suitable engineers are available to the purchase agent concerned, it is often convenient to arrange visits which combine the inspection and estimating functions.

For purchases from overseas suppliers the project purchaser might employ an overseas purchasing agent who is based within practicable reach of the supplier. That agent can then represent the project contractor by carrying out local inspection and expediting visits.

The project manager (and possibly the client) will expect to see a quality and progress report from the relevant purchasing agent following each visit to a supplier. The inspecting engineer or expediter will probably be asked to use a convenient standard summary form for this purpose, an example of which is given in Figure 10.5.

Alternative Sourcing

If expediting appears to be failing, the design engineers might be able to suggest an alternative item that can be obtained more quickly. The solution might mean finding another source of supply. If the original order does have to be cancelled because the supplier has failed to make the agreed delivery, there should be no kickback, because the supplier has broken the contract by failing to perform.

 
10.5 An inspection and expediting report example

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Shipping, Port and Customs Formalities

Marking and Labelling

The purchasing agent must ensure that every consignment is properly marked before it leaves the supplier’s premises. The marking method required should be stated on the purchase specification, and will usually involve suppliers stencilling easily recognizable markings on packing crates so that each item can be clearly identified through all stages of its journey and, not least, by the site personnel when it finally arrives. The purchase order number usually has to be included in all markings.

Freight Forwarding Agents

It is best to entrust arrangements for long-distance transport, shipping, airfreight, seaport and airport and international frontier formalities to a specialist organization. The purchasing agent will undoubtedly have considerable experience and expertise, but the employment of a reputable freight forwarding agent will be invaluable.

Freight forwarding agents operate through worldwide organizations. They have their staff or representatives stationed at or near many of the world’s ports and airports. They are able to monitor the progress of every consignment through all stages from initial loading to final delivery.

Collaboration between the purchasing agent and a freight forwarding agent can achieve benefits from the economy of scale obtained when different consignments are consolidated to make up complete container loads.

The combined expertise of the purchasing and freight forward agent can be a great comfort to project staff confronted for the first time with the need to deal with the formidable array of documents associated with the international movement of goods. Failure to get the documentation right first time can lead to delays, the impounding of goods, and to legally imposed penalties.

Local knowledge provided by the forwarding agent’s contacts in the countries along the delivery route can yield important information about the type and capacity of port handling facilities, warning of any unusual congestion or industrial disputes (with suggestions for alternative routes), and details of inland road and rail systems (including size and weight restrictions). For example, the agent in one case was able to prevent an expensive mistake by pointing out that a local railway company operated an unusually short restriction on the maximum length of loads, because the route included tunnels with unusually sharp curves. At another port, the local agents were able to warn about a peculiar security problem, where the local shanty-town inhabitants were always on the lookout for fresh supplies of building timber. If such timber happened to exist in the shape of well-constructed packing crates protecting expensive project equipment standing on the dockside – well, who could blame them?

Goods Receipt

Receipt of the goods is not the end of the story. Each consignment must be examined on receipt to check for possible loss or damage in transit. There might also have been some mistake, either in the quantity supplied or in the nature of the goods. This applies where the goods are to be delivered to the contractor’s premises or to a construction site managed by the contractor.

Goods inwards inspectors may wish to examine the goods more thoroughly to ensure that they comply with requirements although, in recent years, the tendency has been to place more reliance on the suppliers’ own quality procedures.

If the goods are accepted, the goods inwards personnel will usually issue a goods inwards certificate. The issue of a goods inwards certificate has several purposes. It is often the signal to the accounts department that they can release payment of the supplier’s invoice, although a counter signature from the project manager might also be needed.

If a consignment is not received in satisfactory condition it will be sent smartly back whence it came accompanied by an explanatory rejection note. Rejection notes produce opposite reactions to those caused by goods inwards certificates. For example, the accounts department will not pay the supplier’s invoice, and the purchasing department will redouble its expediting efforts.

Shortages

Project tasks are sometimes delayed because of materials shortages or have to be started before all the necessary materials have been received. Shortages arise through breakages, theft, inadequate general stock levels, purchasing mistakes, late delivery from suppliers and a variety of other reasons.

Shortage Lists

No project manager likes to see any job delayed because of shortages. A method often used to deal with shortages depends on the issue of shortage lists. These documents can be used for all kinds of projects – for factory materials or for shortages on a construction site for example. A shortage list is the personification of management by exception. It should:

  • be quick and simple for the manager or supervisor of the job affected to use;

  • describe the missing materials by type and quantity;

  • provide precise, unambiguous information to the person responsible for purchasing so that the purchase order can be identified, allowing the supplier to be contacted and chased.

 

In addition, a shortage list system should:

  • indicate the degree of urgency;

  • allow information feedback, so that the manager or supervisor involved can be told when to expect delivery.

 

The essential elements of a shortage list are illustrated in Figure 10.6.

 
10.6 Example of a materials shortage list

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Vendors’ Documents

Provision must usually be made for the project engineers to receive and approve documents from the suppliers of machinery or equipment which is manufactured specially for the project. The term ‘vendors’ documents’ is usually applied, although the providers of the goods might also be referred to as manufacturers, sellers, suppliers or subcontractors.

The first step in ensuring the timely receipt of vendors’ documents is to make certain that the obligations for providing them are spelled out clearly on the purchase orders or purchase specifications.

When the equipment is delivered, a final set of drawings, certified test results, operating and maintenance manuals and a recommended spares holding list will be needed for some machinery or other manufactured equipment. In some cases, suppliers might be required to supply all these documents translated into a foreign language, according to the nationality of the project end user.

Foundation, Capacity and Installation Drawings

In addition to general layout or assembly drawings, there is usually a requirement for the early receipt of installation instructions. For example, heavy plant and machinery might require foundation drawings, power supply requirements and overall weights and dimensions, the lack of which could hold up work on the project. Obtaining such information, and progressing any necessary approvals, is all part of the essential expediting process.

Retention of Vendors’ Documents

The project engineering company will have obligations in providing a backup service to the client after project handover. These obligations usually extend beyond the initial guarantee period, and can involve the provision of advice or services in maintaining, repairing, replacing, operating, modifying or extending plant or buildings provided for the original project.

Since much of the plant in an industrial project will incorporate equipment purchased from third-party suppliers, the contractor must be able to find and consult any relevant vendor document for many years after project completion if good post-project service is to be given. The contractor will therefore need to keep a complete project set of vendors’ documentation safely in its own files or archives (either in their original paper state, or on some other medium of suitable quality and durability).

It is not sufficient to rely on being able to obtain additional or replacement copies from all the various suppliers in the future. The commercial world is a volatile place. Some original suppliers might lose or destroy their records, be swallowed up in mergers or takeovers, or simply cease trading.

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