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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


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“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



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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




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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



Capital Asset




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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


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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!