National University of Singapore

TSC 3222

Global Sourcing & Supply

Management
Nephy Perez

Lecture 10
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Key Topics

▪ Project Management
▪ Supplier Contract Management

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 Supplier Contract
Management

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Contract management

What is Contract
Management?

Contract management encompasses

everything from establishing the
business case and confirmation of
need through to relationship
management and reviewing
performance.

Please read the CIPS Contract

Management Guide for further
details (within the ‘reference materials’ folder of LumiNUS) Source: CIPS.org

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Supplier Contract management

Elements of a Supplier Contract:

• Introduction
• Definitions
• Scope of agreement
• Purchase orders
• Supply and delivery
• Specifications, quality, and health, safety, environment
• Payment
• Liability
• Force majeure
• Effective date and termination
• Intellectual property
• Assignment and contracting
• Technology improvements
• Most favored customer
• Confidentiality
• Statistics
• Key performance indicators and compensation
• Notices
• Severability
• Third-party rights
• Free trade areas
• Human rights considerations
• General
• Governing law
• Signatures
• Appendices (schedules)

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Supplier Contract management

Elements of the Contract Schedules (appendices/attachments)

▪ Product/process/service specifications, statement of work, or

scope of work
▪ Prices and price adjustment mechanisms
▪ Health, safety, and environmental guidelines and requirements
▪ Packaging materials
▪ Approved method of manufacture, delivery, or service
deployment
▪ Delivery targets and lead times
▪ Supplier’s hours of operation
▪ Storage and inventory control
▪ Quality assurance manual
▪ Loss allowance calculations and throughput allowances

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Supplier Contract management

Developing a Supplier Contract

▪ Often modified from earlier agreements without material changes
o Minimizes administrative effort
o Assumes that previous contracts are appropriate for current agreement
o Start with general form and/or sample contracts
▪ Otherwise, obtain advice from Legal counsel

Information to be addressed in Contract

▪ What is being bought and cost International Contracts
▪ How purchased item is to be shipped and delivered ▪ Dispute Resolution
Mechanism - in the event of
▪ How items are to be installed (if appropriate) dispute
▪ Legal Jurisdiction - Choice
▪ How and when buyer will accept products of law
o Acceptance clause ▪ Payment currency and
clauses regarding
▪ Appropriate warranties fluctuation
▪ Remedies ▪ Language
▪ Force majeure
o Including liquidated damages ▪ Excuses contract
performance under
o Clauses specifying consequences for late performance non-controllable
▪ For further matter not considered in main agreement circumstances

o Standard terms and conditions

▪ Dispute resolution mechanisms

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Supplier Contract management

Range of different contract price mechanisms

Fixed-price (Rate) contracts Type of Contract
Buyer Supplier
Risk Risk
▪ Firm fixed price
▪ Fixed-price with escalation Firm-fixed price Low High

▪ Fixed-price with redetermination Fixed-price with escalation

▪ Fixed-price with incentives Fixed-price with redetermination

Fixed-price with incentives

Cost-based contracts Cost plus incentive fee

▪ Cost plus incentive fee Cost-sharing

▪ Cost-sharing Time and materials

▪ Time and materials Cost plus fixed-fee High Low

▪ Cost plus fixed-fee

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Supplier Contract management
Fixed Price Contract
▪ Most basic contractual mechanism
▪ Price stated does not change
▪ Regardless of environmental changes
▪ Can be obtained using
▪ Price quotation
▪ Supplier response to RFP
▪ Negotiations
▪ Simplest and easiest contract
▪ Supplier bears financial risk in rising market
▪ Buyer assumes financial risk in declining market
▪ Supplier may add contingency fee if uncertainty is
high
▪ Important for buyer to understand underlying
market conditions
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Fixed-price with escalation
▪ Used for longer-term contracts
▪ Where costs are likely to increase
over time
▪ Escalation clauses allow either price
increase or decrease in base price
▪ Should be tied to independent, well-
established published third-party index
Fixed-price with redetermination
▪ Used when parties cannot accurately predict labor
or material costs and quantities required upfront
▪ Target price is determined using “best guess”
estimates
▪ At predetermined time, buyer and supplier review
actual experience and redetermine fixed price
Fixed-price with incentives
▪ Terms and conditions allow cost-savings sharing
with supplier
▪ Predetermined rate of sharing – often 50/50
▪ Similar to fixed-price with redetermination
contract
▪ Typically utilized under conditions of high unit
cost and relatively long lead times
Supplier Contract management
Cost Based Contracts
▪ Used when there is high risk of large supplier
contingency fee that would be included in fixed-
price contract
▪ Lower risk of economic loss for supplier
▪ Economic risk is transferred from supplier
to buyer
▪ But can result in much lower cost to buyer
▪ Need to include terms and conditions that require
supplier to carefully monitor and control costs
▪ Parties must agree on allowable costs
▪ Generally applicable when goods and/or services
are expensive, complex, or important to buyer and
there is high degree of uncertainty
Cost plus Fixed Fee
▪ Supplier receives reimbursement for all allowable
costs up to predetermined level plus fixed fee
▪ Fixed fee represents percentage of targeted cost
▪ Supplier is guaranteed minimal level of profit above
its costs
▪ Little motivation to control costs
▪ Should include cost productivity goals
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Cost plus Incentive Fee
▪ Similar to fixed-price plus incentive except
incentive is based on changes in allowable
supplier costs
▪ May include cost-savings sharing at
predetermined rate
▪ Appropriate when parties are confident of initial
target cost estimates
Cost Sharing
▪ Allowable costs are shared between parties on
predetermined percentage basis
▪ Key is identification of a firm set of operating
guidelines, goals, and objectives
▪ Need to spell out expectations clearly
▪ Important during periods of rising prices
Time and materials
▪ Generally used in plant and equipment maintenance
agreements
▪ Costs cannot be determined prior to actual
repair
▪ Based on agreed upon hourly labor rate plus
overhead and profit percentage
▪ Requires “not to exceed” amount
▪ Low buyer control over estimated maximum price
Supplier Contract management

Length of Contracts
Spot contracts
Purchases that are made on nonrecurring or limited basis
Short-term contracts
Contract purchases that are routinely made over relatively
limited time horizon
Long-term contracts
Made on continuing basis for specified or indefinite period
(often >1 year)

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Supplier Contract management
Long Term Contracts
Potential Benefits
▪ Assurance of supply
▪ Access to supplier technology
▪ Access to cost/price information
▪ Volume leveraging
▪ Supplier receives better information for
planning
Considerations
▪ What is the potential for opportunism?
o How likely is supplier to take
advantage of buyer? Or vice versa?
▪ Is this the right supplier to engage in a long-
term contract?
▪ Is there fair distribution of risk and gains
between parties involved?
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Risks
▪ Supplier opportunism
▪ Selecting the wrong supplier
▪ Supplier volume uncertainty
▪ Supplier foregoes other business
▪ Buyer is unreasonable
Contingencies
▪ Initial price
o Too high → inflated future profits
o Too low → reduced supplier motivation
▪ Price-adjustment mechanisms
o Choice of appropriate index or related
product
▪ Supplier performance improvements
▪ Evergreen, penalty, and escape clauses
Supplier Contract management

Service Based Contracts

IT systems contracts
▪ Systems contracting risks
▪ Level of service
▪ Turnkey vs. modular vs. shared
▪ IT systems ▪ Price
▪ Facility management services ▪ Performance criteria
▪ Offshoring risk
▪ Construction ▪ Procedures
▪ Research and development
▪ Freight, Logistics and distribution Consulting Contracts
▪ Payment on delivery of final report
▪ Customer service operations ▪ Late-payment penalties
▪ Processing services ▪ Negotiable promissory note or collateralized
promissory note
▪ Accounting and audit services ▪ Arbitration agreement
▪ Consulting Contracts ▪ Need to develop standard consultant
agreement template
----
▪ Avoidance of misunderstanding
▪ Maintenance of working independence and
freedom
▪ Assurance of work
▪ Assurance of payment
▪ Avoidance of liability
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▪ Prevention of litigation
Supplier Contract management
Barriers to Supplier Development
Problem
Buying company’s purchase volume from supplier
does not justify development investment
No immediate benefit to supplier development is
evident to buyer
Importance of purchased item does not justify
development efforts
Lack of executive support at buyer organization for
supplier development
Supplier is reluctant to share information on costs or
processes
Supplier is not convinced development will provide
benefits
Supplier lacks engineering resources to implement
solutions
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Solution
▪ Parts standardization across product lines
▪ Single sourcing
Pursue small wins to build momentum
Take a longer-term focus
Include integrated solutions to be used in future
designs
Prove the benefits
Document and publicize
Find way to deal with non-contractual issues
Let suppliers know where they stand
Supplier evaluation and measurement system
View supplier performance vs competitors
Direct support by buyer personnel
 Project Management

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 Project procurement

Definition of a project

‘A specific, finite task to be accomplished combined with seven factors

common to projects: importance, performance, finite due date,
interdependence (between departments and competing projects),
uniqueness, resources and conflict’.

A project should have definite starting and ending
points (time), a budget (cost), a clearly defined
scope—or magnitude—of work to be done, and
specific performance requirements that must be
met.
The role of the project manager is that of an
enabler. Her job is to help the team get the
work completed, to “run interference” for the
team, to get scarce resources that team
members need, and to buffer them from outside
forces that would disrupt the work.

The first rule of project management is that the

people who must do the work should help plan it.

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 More than scheduling!
One of the common misconceptions about
project management is that it is just
scheduling.
Scheduling is a major aspect but it is not as
important as understanding of what the
project is supposed to accomplish or
constructing a good work breakdown
structure (WBS) to identify all the work to be
done and leading teams to success even
when confronted with obstacles.
Actually, without practicing good project
management, the only thing a detailed
schedule is going to do is allow you to
document your failures with great precision!
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One of the key aspects of project
management is that it requires bringing
many people together often from different
divisions, functions, companies or roles.
So co-ordinating others in consideration of
the time, cost and outcomes is the project
management task.
A critical path schedule is one that has a
number of parallel paths, and one of them
is longer than the others and determines
how long it will take to complete the job or,
ultimately, whether the given end date can
be met.
One of the common causes of project
failures is that the project sponsor
demands that the project manager must
finish the job by a certain time, within
budget, and at a given magnitude or
scope, while achieving specific
performance levels.
 Life cycle of a troubled project.

every project begins as a

concept, which is always
“fuzzy,” and that the project
team must formalize the
definition of the job before
doing any work. However,
because of our ready-fire-aim
mentality, we often start
working on the job without
ensuring that we have a proper
definition or that the mission
and vision for the job are
shared by everyone. This
invariably leads to major
problems as the
project progresses.

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 Project procurement and risk management

Examples of the business contribution of procurement

to project success

Managing
Contribution to the
Research into the timelines in the
project business
supply chain procurement
case
process

Development of Analysis of Negotiation on

contract terms bidders’ project key facets of
and conditions cost models tenders

Benefits
Contract Changes
realization &
management of expansion to
sourcing
deliverables scope
strategy

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 Project procurement and risk management

A procurement tender lifecycle

Project
Tender
initiation Negotiation
analysis
document

Supply market Invitation to Finalise

research tender contract

Pre- Design and

Soft market
qualification of Construction
testing
supplier phase

Another more detailed

Project follows to realize
the Design and
Construction
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 Project procurement and risk management

Compete – Tender & Evaluate

Advantages and disadvantages

Advantages Disadvantages
Client determines quality Poor record on cost
certainty
Tendering process is Claims become more likely
competitive
Flexibility in scope Client carries a lot of risk
changes
Tendering costs lower Large client team needed

Comparable in programme Contracts can be

to design and build adversarial

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 Project procurement and risk management

Collaborate - Design and build

advantages and disadvantages
Advantages Disadvantages
Reduced risk to client Contractor controls quality

Allows for competitive Changes to scope can be

tenders
Comparable in approach
with traditional approach
Client supervision team can
be smaller
Tender preparation reduced
costly
Contractor can increase
profit by reducing costs that
could impact on quality
Mobilisation includes a
design period
Client may not share in
value engineering benefits

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 Project management Lifecycle

Initiate

Plan

Execute

Close
Video Reference: https://www.youtube.com/watch?v=8-Msk4ff8ew
Video Reference II : https://www.youtube.com/watch?v=lMs8_aWYc5o

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 Project procurement and risk management

PRINCE2® seven project processes

• Starting up a project
1.
• Directing a project
2.
• Initiating a project
3.
• Controlling a project
4 keys 4.
• Managing product delivery
5.
• Managing a stage boundaries
6.
• Closing a project
7.

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 Project Management

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 Project Management – Key Activities

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 Project Management - Planning

► Problem statement.
► Project mission statement
► Project objectives
► Project work requirements, including a list of all deliverables, such as reports, hardware,
software, and so on. It is a good idea to have a deliverable at each major project
milestone sothat progress can be measured more easily.
► Exit criteria. Each milestone should have criteria established that will be used to determine
whether the preceding phase of work is actually finished. If no deliverable is provided at a
milestone, exit criteria become very important.
► End-item specifications to be met. This means engineering specifications, architectural
specs, building codes, govern- ment regulations, and so on.
► Work breakdown structure (WBS). This is an identification of all of the tasks that must be
performed in order to achieve project objectives. A WBS is also a good graphic portrayal
of project scope
► Schedules (both milestone and working schedules should beprovided
► Required resources (people, equipment, materials, and facilities). These must be specified
in conjunction with the schedule
► Control system
► Major contributors. Use aa RASCI or a linear responsibility chart
► Risk areas with contingencies when possible

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 Project Management – Planning - Sign off
Sign-Off of the Plan
Once the plan has been prepared, it should be submitted to stakeholders for
their authorization/signatures. Following are some comments about the
meaning of a signature and suggestions for handling the process:
► A signature means that the individual is committed to his contribution,
agrees with the scope of work to be done, and accepts the specs as valid. A
signature on the part of a contributor does not mean a guarantee of
performance. It is a commitment. Because there are factors outside our
control, few of us would like to guarantee our performance. However, most
would be willing to make a commitment.
►The plan should be signed in a project plan review meeting
► People should be encouraged to “shoot holes in the plan” during the
review meeting, rather than wait until problems develop later on.
Changing the Plan (Change Control)
It would be nice to think that a plan, once developed, would never change.
However, that is unrealistic. If no change control is exercised, the project
may wind up over budget, behind schedule, and hopelessly inadequate, with
no warning until it is too late. Here are suggestions for handling changes to
the plan:
► Changes should be made only when a significant deviation occurs.
► Change control is necessary to protect everyone from the effects of
scope creep
► Causes of changes should be documented for reference in planning
future projects.
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Effective Planning hints
Plan to plan. It is always difficult to get people
together to develop a plan. The planning
session itself should be planned, or it may
turn into a totally disorganized meeting of the
type that plagues many organizations. This
means that an agenda must be prepared, the
meeting should be time limited to the degree
possible, and people should be kept on
track. If someone goes off on a tangent, the
meeting facilitator should get the person
back on track as quickly as possible.
► The people who must implement a plan
should participate in preparing it. Otherwise,
you risk having contributors who feel no
sense of commitment
► Be prepared to replan. Unexpected
obstacles will undoubtedly crop up and must
be handled.
► Anticipate & Plan for risks. Because
unexpected obstacles will crop up, always
conduct a risk analysis (“What could go
wrong?” ) to anticipate the most likely ones
 Project Management

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 Project Management

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 Project Management

PID – Project Initiation Document

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 Project Management

Determine how Quality & Risk Management will be managed during the project

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 Project Management - Risk

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 Project Management – Risk Register

Risk Register

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 Work breakdown structure (wbs)

“When do you stop breaking down the work?”

The general guideline is that you stop when you reach

a point where either you can estimate time and cost to
the desired degree of accuracy or the work will take
an amount of time equal to the smallest units you
want to schedule.

The WBS should always be developed before

the schedule is workedout, but without trying
to identify the sequence of activities.

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 Linear responsibility & RASCI chart

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 Project Management – Communication

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 Project Management

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 Project Management

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 Project Management – Critical Path

Bar Chart -> Gantt Chart

Critical Path Method (CPM) and if

includes probability then Program
Evaluation and Review Technique
(PERT)

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 Project Management

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 Project Management

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 Project Management

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 Project Management

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 Further Reading: PM2 Project Management Methodology

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 Project procurement and risk management

Typical project management issues

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 Project procurement and risk management

Project risk management

Key considerations summary

► Conduct a project risk assessment to identify, assess,

prioritise and agree actions required to manage high-risk issues

► Identify business critical risk issues

► Determine the risk reporting processes

► Monitor all risks on a regular basis throughout the project life

► Ensure mitigation strategies are in place and monitored

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 Project procurement and risk management

Project procurement risks

! Risks associated with the procurement route, e.g. PFI/PPP

! Potential delays in procurement decision making

! Inadequate tender documents

! Lack of adequate capital to find the project

! Lack of competition

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