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Chapter 12

Chapter 12.  Indirect Spend  Contracting for Services . “Indirect Spend”. Definition: The spend for all purchased goods and services that are not components of the product delivered to the customer. MRO Supplies. Some Overhead items. Services. “Indirect Spend”.

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Chapter 12

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  1. Chapter 12  Indirect Spend  Contracting for Services

  2. “Indirect Spend” Definition: The spend for all purchased goods and services that are not components of the product delivered to the customer. MRO Supplies Some Overhead items Services

  3. “Indirect Spend” Definition: The spend for all purchased goods and services that are not components of the product delivered to the customer. } MRO Supplies 23% Some Overhead items 30% Services

  4. Indirect Spend: Prevailing Problems • Often outside the loop of the structured purchasing process • SBUs of the same corporation buy the same items or services independently • Multiple suppliers • Multiple contracts with the same supplier • Multiple prices • Suppliers often have multiple shipping and billing addresses If the indirect spend is to be managed, purchasing must have a clear understanding of what goods and services are being purchased by the individual SBUs and from whom..

  5. Approaches to the problem • Data collection, consolidation, standardization, and directives that indirect spend will be within the system; e.g., e-catalogues or buying consortiums • Control the SBUs • Control maverick buying • Coordinate Accounts Payable with Purchasing to catch noncompliance • Outsource indirect spending

  6. Contracting for Services • The Service Sector is a growing portion of GDP • Services is a growing share of a company’s total spend (30%) • Progressive firms are discovering services “a lost, lush continent for cost reduction” • A difficult area because “services” cannot be delivered, held, inspected, inventoried, returned

  7. Service Contract Categories Professional ServicesTechnical ServicesNon-technical Services Advertising Training Services Food Services I T Systems Courier Services Janitorial Marketing Research HazMat Disposal Office moves Software Development Machine Repair Landscaping Consulting (!) Travel Services Security 3PL Photography Trash removal Two Special Categories: Construction Services and Freight Transportation Strategic Morale Tactical

  8. Facts on Service Contracting • “It’s not only the sheer dollar volume spent to acquire services but the growing impact these services have that makes the effective acquisition of services significant and important.” • Not unusual for purchasing to be involved in only half of the dollars spent on contracted services. Reasons: • In many organizations, the complexity associated with professional services requires greater expertise than buyers have. • Buying of services involves more of a close professional relationship between the user and the supplier. • End-users see no need to involve purchasing. “We are the experts!”

  9. Players in Service Contracting • Functional Authority • Purchasing professionals • Contractor (Supplier) • In-house consumers of the service Commodity Buyers Capital Asset Buyers Services Buyers

  10. Aspects of Service Contracting • The RFP • The Statement of Work (SOW); i.e., the specification or contractual requirements • The Service Contract • The SOW • The Evaluation Plan • The Compensation Agreement • Customer-furnished supplies/equipment/facilities • Miscellaneous matters • Service Contract Administration

  11. The Statement of Work • Spells out exactly what the contractor is to accomplish • Development of the SOW is the responsibility of the FA • Supply’s role relates to • EPI and ESI • Clarity • Cost • Specificity vs. Creativity • Performance Evaluation Plan • Two General Categories of SOWs 1. Detailed SOW 2. Performance SOW

  12. Contents of the SOW • Objectives • Tasks • Deliverables • Performance Standards (Quality) • Schedule • Buyer-firm responsibilities • Reporting requirements including program reviews

  13. Service Contract Administration • Purpose is continual evaluation, feedback to the contractor, and quality control • Reliability: Perform promised service dependably and accurately? • Responsiveness: Willing to respond to customer and provide prompt service? • Personnel: Courteous, individualized attention to our needs?

  14. Service Contract Administration • Many service contracts contain Award Fee • Extra profit for exceptional performance • Used as a tool to focus on certain areas • Award Fee pool and Award Fee Boards • Contract disallows appeal on Award Fee decisions • Contract Deficiency Notice (CDN)

  15. Contracting for Professional Services: Special Attention! • Lots of dollars spent here • Do an internal audit to determine how much is being spent and where • Contracting for professional services needs to be centralized • Assign specific needs/contracts to a Functional Authority • Rationalize! • However, use any given contractor only for his core expertise • Keep a data base • Preferred supplier list • Performance evaluation data

  16. Contracting for Construction Services • Conventional Method • Step 1. Pay for Architectural and engineering design • Step 2. Solicit bids from builders on the blueprints • Design-and-Build Method—Fixed Price • Design-and-Build Method—Cost Reimbursable • (CPPC or CPFF)

  17. Contracting for Transportation: Three organizational approaches • Purchasing Organization + Full Transportation Organization • Transportation management does all strategy and tactics • Purchasing Organization + Scaled down transportation function • • Purchasing selects modes and carriers, negotiates freight contracts and does carrier evaluation • • Separate transportation function manages day-to-day shipping, freight bill auditing, claims processing • Purchasing Organization + 3PL Provider for Transportation III.

  18. Considerations on 3PLs • Why outsource transportation to a 3PL provider? • Core competency assessment • Cost • Service • Why not outsource? • Choosing a 3PL Provider • Warning: Lots of entry and exit • Use multiple 3PLs but rationalize • 4PLs

  19. Miscellaneous Thoughts on Contracting for Services • Outsourcing of services often leads to better service at lower costs as compared to insourcing • Contractors for nontechnical services attempt to offer their own SOWs and contracts. Beware. • Relationships are key in service contracts. Contract administration really means managing the relationship. • Emphasis on contracts for technical and professional services is on trust. • The motto for contracts with a fixed-price, detailed SOW: “What does the contract say?” • If service is more important than price, negotiate!

  20. Let’s move on

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