Vendor Selection and Development

Prepared by ASHER RAMISH

Lecture 9-10
 Synopsis
• Contract definition and significance
• Elements of contract
• Types of contract
• Contract hurdles and management
• Contract utilization in terms of controlling
• SOR, SOW, SLA
• Contract utilization in terms of conflict resolution
• Vendor selection decision model

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 Contract definition & significance
“ An agreement between two or more persons which
creates an obligation to do or not do a particular
thing.”
[Black’s Law Dictionary, 6th ed.]

• Vendor will work from your contract

• It’s a guide for him to earn money
• A good contract should cover all areas like
scheduling (time), cost (budget), quality and
functionality

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Contracts can have many names…

• Contract
• Agreement
• Memorandum of Understanding
• Terms and Conditions
• Appointment Letter
• Handbook

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What Does a Purchase Contract Do?

• Establishes the terms and conditions by

which the parties agree to conduct business
• Defines the type of relationship
• Provides a way for the parties to obtain
mutual benefits
• Represents the understanding of the parties

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 Elements of a Purchase Contract
• Introduction of the contracting parties
• Scope of agreement
• Specifications, quality, and health, safety, and
environment
• Supply and delivery
• Payment
• Liability
• Force majeure
• Notices

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 Elements of a Purchase Contract

• Effective date and termination

• Intellectual property and confidentiality
• Assignment and contracting
• Key performance indicators and compensation
• Technology improvements
• Third-party rights
• Signatures
• Appendices (schedules)

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 Contract Life Cycle Management

• Contract life cycle management “is the

process of systematically and efficiently
managing contract creation, execution
and analysis for maximizing operational
and financial performance and minimizing
risk.” (CIPS)

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CIPS Contract Management Cycle

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 Types of Contracts

• Fixed-price contracts
– Firm fixed price
– Fixed-price contract with escalation
– Fixed-price contract with redetermination
– Fixed-price contract with incentives

• Cost-based contracts
– Cost plus incentive fee
– Cost-sharing contract
– Time and materials contract
– Cost plus fixed-fee contract

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 Desirability of Contract Types
Environmental Fixed-Price Cost-Based
Incentive Contract
Condition Contract Contract
Desirability of Use
High component
Low High
market uncertainty

Long-term
Low High
agreements
High degree of
Low High
trust

High process/
technology Low High
uncertainty

Supplier’s ability to
Low High
affect costs
High $ value Low High

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 Contract hurdles

• Time consumed in thinking / writing

• Poorly written contract terms / conditions
• Language problem in most countries
• Weak accountability or monitoring tools
• Ending up in Win-Lose most of the time
• Data base not accessed frequently due to a hard
copy, generally found to be in the big registers in
procurement stores.

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Key guidelines to manage contract
• Try not to fix but manage them
• Only pay for measured performances
• No ambiguity in procedures
• Back up plans to be clearly
mentioned
• Warranties (action time based)
• Remedies (action time based)
• Justify the vendor & let him
commit the contract neutrally

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 How to utilize contract in terms of
Controlling?

• We can increase control in operations through

– SOR i.e. statement of requirements
– SOW i.e. statement of work
– SLA i.e. service level agreements
– Change indications / rules
– Deficiency letters
– Meetings at regular intervals, ending in a concrete,
mutual and a win-win decision
– Participate in all meetings

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Statement of Requirement – SOR

Statement of requirement may take the form

of a conformance specification – where the
organization sets out how the supplier should
meet its needs - or a performance or output-
based specification where the supplier is
given scope to propose solutions to an
expected and known end result.

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 Statement of Work – SOW

• A statement of work (SOW) is a document routinely

employed to define procurement-specific
activities, deliverables and timelines for a supplier
providing services to the customer organization.

– The SOW typically also includes detailed requirements and

pricing, with standard regulatory and governance terms and
conditions. It is often an important supplement to a master
service agreement or request for proposal (RFP).
– Statement of work is only one part of the whole contract
management process that is much bigger.

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 Statement of Work – SOW (Format)

• Purpose
• Scope of Work
• Location of Work
• Period of Performance
• Deliverables Schedule
• Applicable Standards
• Acceptance Criteria
• Special Requirements
• Type of Contract/Payment Schedule
• Miscellaneous

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 Service Level Agreement – SLA

• SLAs are negotiated agreements designed to

create a common understanding about
services, priorities and responsibilities and
are applicable in two situations.
– Firstly, internally used and provided specialist
support services and
– Secondly when outsourcing.

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 Service Level Agreement – SLA
• The purpose of SLAs and setting service levels is
– to enable the customer to monitor and control the
performance of the service received from the supplier
against agreed standards.
• Service levels should be agreed and benchmarked
for both customers and suppliers and should be:
– established at a reasonable level
– prioritized by the customer in order of importance and on an
agreed scale for example critical, major, urgent, important,
minor, easily monitored
– unambiguous and understandable by all parties
– open to re-negotiation at any time.

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How to utilize contract in terms of
Controlling?
• Also …
– Performance measures should be SMART i.e.
specific, measurable, achievable, realistic, time
based
– Effective reporting system
• Reports regarding problems
• Accurate status reports (ASR)
• Automated
• Contract compliance reports (CCR)

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 Control through KPI’s
• On time delivery
• Maintaining above 95%,
measured against
committed date, till
product reaches
customer’s premises

• Order picking • Maintaining above 98%,

accuracy measured as no. of
orders picked accurately
divided by the no. of
orders received. (using
the order receipt and
packing slips)
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 Control through KPI’s
• Loss or damage
• Maintaining above 99%,
measured as no. of
shipments w/o loss or
damage divided by no.
of shipments.

• Perfect order • Maintaining above 75%,

fulfillment measured as no. of
orders delivered to
customer’s req. date,
time, perfect condition &
full documentation = .
95*.93*.94*.90=75%
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How to utilize contract in terms of
conflict resolution?
• We can decrease conflicts in operations
through
– Job responsibility to be attached with skill and not
with the no. of persons who might not be skillful.
– Update of the contract
– Dispute resolution
– Defining roles directly related with Performance
indicators

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 Met or Not met ….?

• Vendor has MET measurement criteria

– Issue letter stating your acceptance
– Prepare for payment accordingly
• Vendor has NOT MET performance
measurement criteria:
– Issue deficiency letter and review response
– Update issue report (i.e. problems) & remedies
– Update KPI for measurement history
– Monitor vendor’s corrective action / preventive
actions

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 Last but not least

• If violations are continuous begin evaluation

of options:
– To replace
– Dispute Resolution process

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 Means of Settling Disputes
Action Description
Legal action File a lawsuit in a federal/state/local court
Nonlegal action
Arbitration Use of an impartial third party to resolve a
contractual dispute
Mediation
Intervention by a third party to promote settlement,
reconciliation, or compromise between the parties

Minitrial An exchange of information between managers in

each organization, followed by negotiation
Rent-a-judge A neutral party conducts a “trial” between the
parties and is responsible for the final judgment
Dispute prevention A progressive schedule of negotiation, mediation,
arbitration, and legal proceedings agreed to in the
contract
Vendor selection decision model

Vendor selection RFI, RFQ / RFP Detailed

teams evaluation of A
vendors again
Simple evaluation
Technical through factor
of responses
assessment of rating method
through factor
requirement rating method
Negotiations with
Criteria to be most suitable
Select a group of
defined by team candidates
top A vendors

Prioritizing the Forming of

parameters i.e. Detailed analysis
contract
criteria to be performed
for top A vendors

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