A Strategic Approach To Procurement Construction Essay
The university of Heriot Watt is planning to build a new auditorium. This auditorium should include 200 seats, high specification technology, multimedia theatre with air conditioning and comfortable tiered seating that provides excellent visibility. The auditorium should feature a full size interactive screen and computer driven presentation facilities, perfect for conferences, lectures and presentations. People who will cooperate and be responsible for the auditorium’s construction, is the client with the design team, the project team, the contractors and some specialist engineers.
A STRATEGIC APPROACH TO PROCUREMENT
The aim of the procurement system is to improve the project objectives of time, cost and quality. (Adekunle Sabitu Oyegoke and Juhani Kiiras,2009). “Construction procurement is concerned with understanding how the client requires a project to be structured and managed so that a suitable arrangement of organisations can be formed and the relationships between those organisations managed to reflect the client’s priorities for project delivery”(Dr. Derek Thomson,1999).
The Principal of Heriot Watt University is the client who should be in communication with the project manager. The client could authorize the client sponsor to communicate with the project manager and the other partners. The design team can be chosen by the client or by the project manager. The project manager will have his own team, which will be the project team, and it will be responsible for the whole project and relationships. Moreover, project manager is responsible to find a contractor for the auditorium construction. Due to high specification technology, multimedia theatre and a full size interactive screen and computer driven presentation facilities, project manager should find specialist engineers. The chosen specialist engineers could be an office which consists of mechanical engineers for the air conditioning and heating installation, electrical engineers for the lighting and scenes, network operators for the communication network and finally engineers for the audio/visual installations.
All the above will also be controlled through INSTABUS CONX (Building Management System), either by using a laptop or desktop computer but also by mobile solutions such as “tablets” or “smart phones” which can access the program through a specialized web page which is user-friendly and has versatile functions for anyone.
The procurement approach of the project can be also translated into a diagram, during the strategic project planning process that shows the relationship between different organisations which take place into a project.
An indicative Organisational Breakdown Structures (ΟΒS) diagram:
CRITICAL ANALYSIS OF ALTERNATIVE PROCUREMENT ROUTES FOR THE PROPOSED PROJECT
“The suggested procurement route is a potential tool in realizing complete sustainability in construction in terms of environmental and social sustainability, as well as economic sustainability.” (Adekunle Sabitu Oyegoke and Juhani Kiiras,2009). The procurement route will be selected in accordance with answering in several questions about the investment cost, life cycle cost, cost risk, progress risk and quality risk of the project.(Ola Lædre, Kjell Austeng, Tore I. Haugen and Ole Jonny Klakegg , 2006).
The procurement route, which we suggest for this kind of project, is the Design and Build. This gives the client the ability to liaise only with the project manager for any issue as he is the one responsible. “Inherent Buildability”. Also the client will have a firm price for the project prior the construction. As construction in this type of procurement route is following the design almost simultaneously, the total duration of the project is significantly reduced compared to traditional routes. Last but not least, Contractor’s design liability can be extended to include fitness for purpose.
The risks of such procurement route can be the following. Cost will be controlled and the risk in general will be low due to most contracts are based on lump sum basis. Also the construction time has a small risk although the design and construction are progressing in parallel, both design and build contractors usually fix the time and be committed to it, however on the other hand we have high design/quality risk due to when the design and build contractor control the design there are risks related to both design suitability and to the capabilities of the design build contractor to accomplice such tasks.
One of the disadvantages of such route is that the client needs to appoint a build contractor before design is complete. There cannot be a complete design overview unless client appoints consultants. The client will have a difficulty to prepare adequate brief, in order to explain to the project manager the exact building specification. Contractor’s bids are difficult to compare. The contractor is liable for the design limited by a standard contract. Finally client driven changes can be expensive.
One more procurement type that will be selected for this project, is the Management Contracting procurement route. This method has some common elements with the “design and build” and the “design and manage” procurement routes.
In the management contracting method, the client is advised early by the management contractor for the project’s design programming and buildability. The management contractor programmes, packages and obtains tenders for the works, which are each let on a competitive basis on lump-sum, firm-price contracts with the management contractor.
The construction manager becomes a member of the design team and contributes construction knowledge and management expertise. Moreover, he frequently compete at first stage tender to ensure that the client is charged a competitive fee for their management input. Alternatively, they can be appointed by negotiation. Once on the project, the management contractor is responsible for providing advice on the division of the project into work packages, each of which is normally procured by competitive tender. The management contractor finds it easier to identify with the client’s needs and interests and integration of the team becomes possible. Decisions regarding the appointment of sub-contractors are made jointly (by the designers and the management contractor or construction manager) thus making use of a wider range of experience.
One of the advantages of this procurement route is the time saving eventual
of the hole project duration, because design and construction will be moving together (concurrent working). The concurrent working helps to accommodate the late changes, that may arise(που μπορει να προκυψουν), easily. Another advantage is that the traditional adversarial barriers breaks down. Also, the work packages let competitively. Potential buildability.
The cost risk which exists and is medium, is that the actual cost is unknown until the last package is let. A time risk which is medium, is that the total construction duration is a consequence of package selection. The design risk is low because there is a close link between client, designers and constructors
On the other hand, one disadvantage of this procurement route., is that a good quality brief will be needed by the client and the project should be relied on a good quality project team. Some further disadvantages of this approach is that the contractor faces little risk since s/he has limited responsibility in case of bankruptcy etc. Furthermore, despite the fact that a guaranteed maximum price is set due to the nature of the process which is prime cost makes it more preferable to contractors.Finally, cost increases can be quite significant and it is usual to have an upward adjustment of the initial cost plan.
AN EVALUATION OF WHAT FACTORS WOULD INFLUENCE THE DEVELOPMENT OF AN APPROPRIATE PROCUREMENT STRATEGY AND HOW IT COULD BE IMPLEMENTED
When an executive is required to execute a purchase program for a particular product in
a given time horizon, s/he has the option to either purchase volumes covering
just the current requirements or purchase quantities that exceed the requirements
taking into consideration that the regular supply of the business against future increases
in demand or prices for raw materials is ensured. Toward this direction, the following purchasing strategies- policies are distinguished:
• Buying to requirements
• Forward buying
• Hand to mouth buying
• Speculative buying
Buying to requirements is a strategy that suits business needs in materials which correspond to requirements that are fully defined.
Many companies implement a rolling production schedule containing a final stable part of 1-3 months duration. In this case, the implementation of buying to requirements strategy ensures the supply of the fixed portion of production at constant prices. Generally, such a strategy can be characterized as conservative, while many companies consider it as the most appropriate under conditions that involve risks of price increases.
In particular, it ensures the uninterrupted production, but ignores price trends and conditions in the market. Therefore, it can result in high purchasing prices and maintain relatively high levels of stocks, but there is a certainty that the items purchased will be used anyway.
Forward buying is a strategy that attempts to plan in the future.
The purchasing department has the responsibility to know every time the long-term market trends in prices and supply environment (e.g. availability, capacity suppliers, etc.). Therefore, it should recognize the trends of published financial information, weather conditions and the impact of political events on supply networks to make decisions that contribute to business profitability. Forward buying is not speculative. Specifically, it aims to meet the needs in materials derived from long-term planning processes and operational forecasts, which of course may or may not be materialized.
Forward buying can be applied to all categories of items, but it mainly refers to purchases of 'stock' items (such as raw materials and common materials).
Obviously, in forward buying of large quantities there are involved greater risks compared to purchases of small quantities at fixed prices associated with predefined requirements. For this reason, the ultimate goal is to take over calculated risks in order to balance and weigh several factors. The main factors influencing forward buying are:
Prices - The examination of historical price trends may give clues for their future behavior. For this reason, it is important to study the reasons that caused the past trends. This analysis does not always provide answers to what will happen in the future, but it may help in determining the size and the general direction of shifting trends, ie whether the changes will be erratic, violent, disorderly, inflationary or deflationary.
Supply and Demand - the information is necessary for the total production capacity and consumption. If there are sufficient natural resources, then it should be taken into consideration the other factors that influence the flow of goods in the market. If the supply is limited, then the potential uses of substitutes or the creation of additional supply purchases should be analyzed.
Number and Position of Resources - For goods purchased by many reputable suppliers located near the business, there is no need to adopt forward buying strategy. Instead, they should be applied to goods purchased with few suppliers who are geographically away from the business. In addition, it is important the size and financial stability of purchasing sources.
Transportation - Reasons related to transportation may affect the commitment to high volumes. Both the weather and the capacity of transport must be taken into consideration.
Cyclic changes in the economy - they have both psychological as well as actual
influence in the development of a purchasing policy markets. In times where economic
activity is at its peak, the markets for precautionary reasons are maximized and as a result the lists of suppliers’ orders to grow. Market executives because they anticipate further growth, they tend to increase the quantities of orders. Conversely, in periods of recession orders to suppliers are reduced and purchasing executives are under pressure to maintain minimum stocks. In addition, fears of further deterioration of their economy discourage them from buying large quantities.
Other factors that may influence forward buying related to domestic and international political conditions, the cost of holding stocks and changes in legislation.
Forward buying may have particularly high costs (e.g. financial costs, cost of holding inventory, unanticipated price drops etc). For this reason, proper preparation and proper planning are prerequisites for successful implementation. It requires forecasting mainly on prices and supply of materials. In addition, it is important to establish specific procedures for approving expenditures for forward buying since they affect many parts of the business. For example, the sales and production departments will have to agree that the provisions of the requirements should be weighed in light of maximizing return on investment.
Hand to mouth are applicable to unstable conditions and when there is imminent danger of falling prices or conditions where the production of specific objects can be reduced sharply and without warning. In this case, the purchased quantities are smaller than those considered economically acceptable. This strategy is not related to the Just in Time logic, which requires the use of long term contracts. Instead, each market is unique and is given to the price prevailing at that time.
Speculative buying is not related to official corporate forecasts, but with expectations of future unplanned orders. Purchases by investors or speculators aim at gaining profits through the resale of hardware and not in support of production. These purchases are not the responsibility of the supply departments and are shifted to management, which has to choose among different investment opportunities. This strategy is practiced in certain business sectors and mainly stock exchange items.
If the purchasing executive forecasts that the prices of materials will follow an upward or downward trend since purchases must be made individually, s/he can apply the strategies mentioned above in the following way. In periods of increasing prices, s/he will implement forward buying strategy.
The actual average price that s/he will pay for quantities will be considerably smaller than the average market price. On the other hand, if s/he wants to minimize the price risk, s/he can pursue hand to mouth buying both during the rise and the fall in prices. In this case, the actual average price is equal to the average market price during the economic cycle.
EXAMINATION OF ADVANCE PROCUREMENT PRACTICES SUITABLE FOR THE PROJECT
The advanced procurement is “a journey which organisations should undertake to achieve an integrated, strategic approach to the supply side of their operations to gain maximum benefits. It brings together the skills of the staff, the governance of the organisation and appropriate strategies, systems and procedures to add value from the management of the supplier base and
to enable improved efficiencies to be identified and captured.”A
In order to have advanced and successful procurement policy the following key objectives have to be ensured (University of Plymouth, 2012):
● Good quality, readily accessible administrative information about markets and company supply.
The executives responsible for managing company expenditures are properly trained (Certified Supply Managers) and they are capable, committed to continuous professional development and motivated.
●Those responsible for dealing with their suppliers have the appropriate expertise and
● There is the adequate infrastructure in the Supply Department.
The clear and unambiguous relationship between those who are involved in the operation of markets within the company.
● The identification of the internal and external customers of the organization
and satisfaction of their needs as well as the involvement of the leaders of the organization.
● The effective communication between the Department and all those related to the management of purchasing and supply.
● The effectiveness of technology, systems,procedures and processes of the Department.
● The recognition and elimination of unnecessary costs wherever this is possible and leading professional procurement in all activities.
● The understanding and proper management of the supply base.
● The application of Strategic Sourcing procedures.
● The development of Supply Management strategies: Rationalization of the supply base, standardization and / or minimization of codes, the strategic cooperation with suppliers, etc.
● The minimization of supplier risks through proper procurement management and supply chain control.This also involves the measurement of supplier performance “ beyond price”.
● The improvement of existing supply policies / regulations.
The diagnosis and understanding of each expenditure category is
answering the following questions:
● Who's Buying?
● What is he buying?
● How often does the purchase take place?
● In what quantities?
● From which vendors?
● Under what conditions and at what prices?
The above list is not absolute and may not be suitable for all organizations. It's just a good place to start. There are many ways that the purchasing department can add value to an organization. The list adapts to the history of the Organization, culture, politics and philosophy regarding the operation of purchases and supply.
5.An evaluation of what factors would influence the development of an appropriate procurement strategy and how it could be implemented
The Design and Build (D&B) was suggested as the most adequate procurement route. D & B has many advantages. With the D&B the contractor is solely responsible for the design of the unit and the technology to be used, for getting operating licenses by authorities, for the cost of the D&B, the time plan, and of achieving the required returns. If the build is done by another contractors and the design by another then the above responsibilities are difficult to allocate. Therefore, the University should take care and appoint one contractor.
A further advantage is that the cooperation of constructors and designers at the stage of the study enables the design to be improved since this way a better combination of design and build experience is achieved. With D& B, the contractor is bound to a fixed flat fee, therefore, the University can calculate its exact project costs.
The University can also estimate the project’s time plan since the contractor is committed to a timetable which may be rebutted only by unforeseen events. In addition, the monitoring of construction focuses on qualitative data since a series of other procedures (measurements etc.) are greatly simplified. Finally, supervision can be easier since it controls the construction quality and time schedule, given the fact that the contractor is committed to the performance of the processes. This way, the University will supervise the contractor in a less time consuming manner.
One disadvantage of D&D is subjectivity in the selection of the contractor. The University can overcome this issue by setting scoring criteria. These criteria must be quantified, based on quantitative data from the study offer (e.g. energy consumption) and on performance guarantees.
Another disadvantage is that the study may result in high cost. Therefore, the University should try to avoid design tasks anyway will be made by the contractor in the design (eg, electrical panels, etc.) and require only elements of the design processes of equipment, energy consumption etc.
Quality data of metal construction etc. as well as specifications of the study should be formulated in detail in the tender documents of the University and shall be binding for all the participants, without requiring detailed studies of the offer. This way the cost of the study can be reduced by less than 50%.
Delays during the bid are another hindrance. The delays are mainly due to the evaluation system with three stages (control of standard elements, requirements compliance control, marking) and ambiguities in the tender documents for the exclusion criteria and the criteria scores.
The University needs to formalize the exclusion criteria and the criteria scores. In addition, the three stages of assessment should be consolidated in a single stage.
The D&B project of the University should try to align and integrate the project of the auditorium with the IT department of the University since the technology applied should be compatible with the existing technology.
Furthermore, other disadvantages are concerned with all types of procurement routes and these concern e.g. bad briefings and communication.
Potential benefits of adopting alternative procurement strategies
As analyzed above, the benefits for the University will be many. These are mostly concerned with saving time and money and achieving therefore maximum quality.
Alternative procurement strategies will enable the University to find innovative sourcing models and thus improve cost structures. For example, fixed costs like the purchase of electronic equipment can be turned into variable by e.g. leasing the equipment. The focus on finding relevant cost sources can enable the operator, through procurement, to achieve to a large extent improvements in efficiency by manipulating the volume and the price of goods.
The advantages of the adoption, the side of the University, the Design and Build procurement system have been analyzed and it is suggested as the most adequate procurement system for the particular purpose and a tool to achieve the above objectives.
The adoption of a procurement strategy can only benefit both an enterprise and a public sector organization. It enables organizations to achieve rational prices for the products or services purchased and reclaim its cash flow and capital. It also gives it the opportunity to achieve value for money and seek profitable profitable purchases for finding and ensuring alternative sources for its supplies.
Procurement strategy secures the business against its suppliers through contracts and activities and it takes care for the improvement and preservation of the company’s good name to its suppliers.
In order to achieve the above, the organization should set up control and results evaluation processes and this is what is advised the University to do prior to the evolution of the project.
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