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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 l.jpg

Chapter 12

 Indirect Spend

 Contracting for Services


Indirect spend l.jpg
“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 spend3 l.jpg
“Indirect Spend”

Definition: The spend for all purchased goods and services that are not components of the product delivered to the customer.

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MRO Supplies

23%

Some Overhead items

30%

Services


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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..


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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


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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


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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


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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!”


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Players in Service Contracting

  • Functional Authority

  • Purchasing professionals

  • Contractor (Supplier)

  • In-house consumers of the service

Commodity

Buyers

Capital Asset

Buyers

Services

Buyers


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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


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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


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Contents of the SOW

  • Objectives

  • Tasks

  • Deliverables

  • Performance Standards (Quality)

  • Schedule

  • Buyer-firm responsibilities

  • Reporting requirements including program reviews


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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?


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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)


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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


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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)


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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.


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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


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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!



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