What is Procurement Strategy?
Procuring materials to the correct specification, quantity, quality and price and delivering
them to the work site on time is one of the most critical project activities:
- between 20% and 60% of a projects cost will be allocated to materials;
- almost invariably one or more of the material items will be on the critical path of the project;
- malfunctioning equipment or materials will delay start up;
- late, damaged or under-ordered materials can cause delays during construction giving rise to claims from contractors.
Thus materials procurement and logistics should have major Project Management
attention. The depth which any project will need to develop its own Procurement strategy will very
much depend on the OU, the size of the project and the environment in which it is working. Where they are necessary, it is essential that the strategy:
- fully support the overall company objectives
- are consistent with existing group and OU procurement and logistics strategies and policies
- are consistent with the projects contracting, commercial and other relevant strategies
Particular attention needs to be paid to the Group’s Global Procurement Strategy so as to
maximise the benefits of bulk purchasing.
Whatever the depth required, it remains important that a project specific procurement
strategy for goods and services is established at the earliest opportunity. This would
normally mean in ORP Phase 2-Select. When developing a procurement strategy it is
recommended that the Procurement Business Model be used as a checklist to ensure that
all relevant activities have been addressed during the development of the strategy. Key concepts in the project procurement strategy should:
- Minimise Total Cost of Ownership (TCoO)
- Maximise Leverage
- Optimise use of eProcurement tools
• Minimise Total Cost of Ownership (TCoO)
TCoO is the concept of minimising the Total Cost of Ownership (or leasing) over
the project’s life.
Minimum total cost (Capex plus Opex) can be achieved by using important feedback
such as operational, maintenance, equipment performance data in the design/engineering
and specification stages in order to arrive at the optimum procurement decisions. In
particular, revisiting standards and specifications in order to ensure maximum uniformity
of materials and equipment and minimum (expensive) additional requirements over and
above the normal external industry standards can result in important savings. Where
possible, the use of functional specifications should be considered.
The involvement of suppliers in the early stages of design in order to achieve the above
objectives will be an essential step in the process.
A review of services such as Project Management, Procurement, Expediting, Inspection,
Transport, Construction, Commissioning, Start up and Operations/ Maintenance should
be made in order to identify and quantify costs. This will minimise overlaps/duplication
and ensure ‘fit-for-purpose’ services at the lowest cost. Studies have shown a wide range
of costs in the acquisition phase (specify-bid-order) of procurement. In their
procurement plan, projects should make realistic estimates of the acquisition cost
activities. This will highlight awareness and possible areas for business improvement.
Questions that should be asked in developing a procurement strategy are:
- do we own it already? – If not …
- can we barter it inter- or ex-company? If not…
- can we buy it secondhand? If not…
- can we buy it new? – or perhaps a lease deal may prove a better TCoO result?
As part of the TCoO concept, the procurement strategy needs to address:
- spare parts (insurance spares, construction and commissioning spares, first year operational spares)
- factory acceptance testing
- vendor representatives
All of these issues are addressed in 4.4.2, Procurement.
Maximise Leverage
Shell EP Global Contracting Strategy must be part of the project’s consideration in
developing its own procurement strategy.
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This will maximise the Group’s procurement
leverage by identification of total goods and services needs. Combinations with other
projects/Companies or SIEP should be pursued. Limiting the number of suppliers
combined with a careful selection process in order to ensure that the right suppliers are
selected who know what our requirements are, have a proven record from a quality and
delivery point of view at preferential prices and can make a contribution towards the
achievement of minimum TCoO. Long term supply contracts should be considered with
these selected suppliers, resulting in closer relationships, leading to more sharing of
information such as operational experience, manufacturing costs, operating costs, risks and
benefits. It should be borne in mind that these require a different attitude and approach
than is traditionally applied, both within the Group and with the suppliers.
Use should be made of existing agreements where appropriate. Particular consideration
should be given to internationally negotiated Group agreements, such as those produced
through coordination initiatives between two or more OUs. These agreements provide
benefits in terms of:
- leveraged prices
- additional security from established quality suppliers
- increasing the use of common standards
- lower acquisition costs arising from reductions in man hours spent on technical and commercial evaluations
Optimise Use of eProcurement Tools
The goal of eProcurement (eP) is to gain and sustain a significant reduction in supply
chain cost through the deployment of eP across the Group:
- deployment of on-line bidding
- requisition-to-pay tool
- procurement management information system
Project teams should consult with the OU eP focal point and the International
Directorate Strategic Sourcing Department when formulating their procurement
strategies to ensure that eP is properly covered in those strategies
Procurement Strategy
Procurement Strategy
Depending on the maturity of the operating company, materials procurement and
logistics will be influenced by some of the following:
Organisation: Existing Materials Function
- Do they normally procure engineering materials?
- Are they experienced in and do they have the procedures and resources for engineering procurement?
- Do they have standard well-tried logistics procedures and resources?
Standard Materials
Do you have standard lists of materials ex-SIEP listing? Own listing (possibly derived from SIEP list) using local experience.
Commercial, political environment
- Tender Board requires transparent commercial bidding and spreading of orders.
- Local manufacturers and commercial organisations should be encouraged to supply materials.
The project manager’s freedom to devise his/her own strategy will be limited by existing constraints and practices. Nevertheless he/she should review the optimum strategy and at least request improvements and changes to the existing practices if he sees them as justified overall. There are basically three procurement strategies that can be applied to project procurement, for all of or separate parts of a project, each having its advantages, disadvantages and caveats.
Company own procurement
Many OUs are fully set-up to procure materials for Engineering projects and for
Operations (Drilling, Production and Maintenance). In considering the procurement
strategy, the project manager should check that the supply department have the
resources, experience and procedures to give adequate attention to a possible high peak
load of procurement on top of the priorities of the Operation’s base load. In today’s
customer/supplier relationships it might well be that the OU Procurement Department
can provide a lower TCoO than external sources. This needs to be carefully examined.
Procurement via a consultant/managing contractor (reimbursable)
Most large consultants have competent procurement departments. Using such a
consultant or contractor department removes the interface between the engineering
consultant and the company supply department as far as requisitions and vendor
documentation are concerned.
However, the OU project team will still be involved technically and most probably on
the commercial side, with ensuring that bids are properly requested, evaluated and
approved and payments are made in accordance with the agreement. Interfaces and
responsibilities will need to be firmly defined.
Procurement as part of a lump-sum EPC on turnkey contract
This strategy removes all the OU/contractor interfaces and allows the contractor to make
use of his skills and experience. The OU/project team will be involved in monitoring,
quality assurance and, in particular, in ensuring that the contractor does not deviate from
the contract vendors’ list for his own commercial or schedule benefits without the OU’s
interest being fully protected.
In this context it would be very risky for any EPC or turnkey contract to be allowed
without agreement on a list of approved vendors, including those for minor common
items, from which the contractor can choose. However, items proposed by the contractor
that are not on the vendor’s list should not be automatically rejected by the project team.
Well-presented proposals should be reviewed and accepted if they have a balance of
operational, commercial or scheduled advantages.
Nevertheless an EPC or turnkey strategy will almost inevitably reduce the control the
OU project team has on the project materials.
Often EPC/turnkey procurement is seen as a strategy to reduce project lead times because
it reduces interfaces and allows quicker procurement using the contractor’s supposedly
more flexible procedures. However, this is not always the case as EPC/turnkey contracts
usually take longer than conventional contracts to bid and award.
If an OU has a well set-up project team, integrated with an experienced supply department
and if critical materials items can be identified, schedule advantages may be possible using a
non-EPC/Turnkey approach. This can be decided by comparing the alternative schedules.
Where it is required it has been shown as being fully practical in the bid document to
request the EPC/turnkey contractor to ensure that a given realistic percentage of
procurement is allowed in a specific country or region.