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Chapter 13

Chapter 13. ٠ Contract Types ٠ Supplier Management. Three key decisions in procurement:. Supplier Selection Price Contract Type The type of contract chosen is important because contracts by their nature: -Allocate risk -Influence supplier performance.

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Chapter 13

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  1. Chapter 13 ٠Contract Types ٠ Supplier Management

  2. Three key decisions in procurement: • Supplier Selection • Price • Contract Type The type of contract chosen is important because contracts by their nature: -Allocate risk -Influence supplier performance

  3. Three General Categoriesof Contracts • Fixed Price Contracts • Cost Reimbursable Contracts • Incentive Contracts to incentivize • - Cost control • - Technical achievement • - Schedule • - Other

  4. The concept of Risk • Risk is uncertainty • Suppliers are risk averse • Types of risk: - Technical risk - Cost risk - Schedule slippage • Extremes in contract risk: FFP CPPC increasing risk to buyer increasing risk to supplier

  5. Contract Types by Risk Level to the buyer-firm • FFP • FP/Escalation • FP/Redetermination • FPI Example: TC = $1000 T = 100 TP = $1100 CP = $1300 Share Ratios = 50/5070/30

  6. Contract Types by Risk Level to the buyer-firm • CPIF Just like a FPI but - No ceiling - Minimum and Maximum Profit amounts • Time and Materials Contracts • CPFF • CPPC

  7. Two other Contract Types • Award Fee contracts • Letter Contracts Award Fee is tied into another type of contract; e.g., CPIF + Award Fee

  8. CPIF Contract Price 100/0 TP 70/30 Buyer/Contractor Share Ratios 50/50 100/0 Cost TC R. I. E.

  9. For next class period . . . • Submit your individual case analysis of Selection of a Pressure Vessel Manufacturer

  10. The Issue of Long-term Contracts • Spot contracts (transactional) • Short-term contracts (transactional) • Evergreen Clauses (partnership) • Long-term contracts need to reflect and guide a relationship(partnership or alliance) Issues include: initial price, mechanisms for price adjustments, expectations, confidentiality agreement, special clauses on incentives, etc.

  11. Downsides to long-term contracts from the buyer-firm’s perspective • Supplier complacency • Selecting the wrong supplier

  12. Supplier Management • Post-Award Activities “Once a contract has been negotiated and signed, the real work begins.” “It is the buyer’s responsibility to ensure that all of the terms and conditions of the agreement are fulfilled.” 

  13. Supplier Management • Starts with Pre-Award Conference • All terms and conditions • Specifications • Milestones • Delivery schedule • Review buyer responsibilities • Performance evaluation and feedback: Access, reports, conferences

  14. Supplier Management • Continues with either Routine or Special activities 1. Routine (Administrative actions for follow-up) 2. Special (Employ formal performance tracking) • Gantt Charts • CPM • Earned-Value Accounting • Site Visits and Weighted-Point Evaluations • Recurring Reports (Cost, Schedule, Technical) • Program Assessment Reviews (PARs) • On-site Monitors (Buyer-firm co-location)

  15. Earned Value (EV) Accounting Background: The Spend Plan Concept $ Plan Actual TNow Time

  16. Earned Value Concept BCWS BCWP ACWP $1000 $800 Schedule Variance equals BCWP – BCWS = -$200 BCWS BCWP ACWP $1000 $800 $860 Cost Variance equals ACWP – BCWP = $60 In this example, the contractor has an unfavorable schedule variance (behind schedule) and an unfavorable cost variance (over budget)

  17. Earned Value Concept BCWS BCWP ACWP $1000 $800 Schedule Variance equals BCWP – BCWS = -$200 BCWS BCWP ACWP $1000 $800 $860 Cost Variance equals ACWP – BCWP = $60 The “spend plan” analysis however has everything looking great. Budget to date is $1000 and expenditures to date are only $860!

  18. Example Problem Bendix Corporation’s performance on Contract AF-8260 16 Weeks into the Contract: ACWP = $220,440 BCWP = $216,000 BCWS = $214,440 Total Budget at Completion (TBC) = $660,000 Evaluate Bendix Corporation’s performance by computing the cost variance and the schedule variance to date.

  19. Example Problem Evaluate Bendix Corporation’s performance on Contract AF-8260 16 Weeks into the Contract: ACWP = $220,440 BCWP = $216,000 BCWS = $214,440 Total Budget at Completion (TBC) = $660,000 SV = BCWP – BCWS = +1,560CV = ACWP – BCWP = +4,440 Cost Performance Index (CPI) = ACWP/BCWP = 1.02056 Estimate at Completion (EAC) = CPI x TBC = $673,567

  20. Motivation in Supplier Management • Punishment • Bill backs • Award Fee denial • Downgrade a supplier • Remove supplier from approved list • Rewards • Incentive fee • Formal recognition • Follow-on business • Elevate level of relationship

  21. Relationship Management • Supplier Surveys • Are our buyers knowledgeable? • Are we ETDBW? • Do we “team” with you? • Do we pay on time? • Are our buyers and technical people available to you? • Do we engage in any questionable or poor business practices? • Are we a preferred customer? • Supplier Roundtables Review company’s procurement program with key suppliers as a way to manage and improve relationships

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