chapter 41 chapter 13 ٠ contract types ٠ supplier management
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Chapter 4 1
Chapter 13
٠ Contract Types٠ Supplier Management
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1. Supplier Selection2. Price3. Contract Type
The type of contract chosen is important because contracts by their nature:
-Allocate risk-Influence supplier performance
Three key decisions in procurement:
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Three General Categoriesof Contracts
1. Fixed Price Contracts2. Cost Reimbursable Contracts3. Incentive Contracts to incentivize
- Cost control
- Technical achievement - Schedule
- Other
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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
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FFP FP/Escalation FP/Redetermination FPI
Example: TC = $1000
T = 100
TP = $1100 CP = $1300
Share Ratios = 50/50 70/30
Contract Types by Risk Level to the buyer-firm
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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
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Two other Contract Types
Award Fee contracts
Letter Contracts
Award Fee is tied into another type of contract; e.g., CPIF + Award Fee
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CPIF Contract
Price
50/50
100/0
70/30
100/0
Cost
TP
TC
R. I. E.
Buyer/Contractor Share Ratios
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For next class period . . .
Submit your individual case analysis of
Selection of a Pressure Vessel Manufacturer
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Spot contracts (transactional)
Short-term contracts (transactional) Evergreen Clauses (partnership)
Long-term contracts need to reflect and guide a relationship (partnership or alliance)
The Issue of Long-term Contracts
Issues include: initial price, mechanisms for price adjustments, expectations, confidentiality agreement, special clauses on incentives, etc.
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Supplier complacency Selecting the wrong supplier
Downsides to long-term contracts from the buyer-firm’s perspective
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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.”
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Starts with Pre-Award Conference All terms and conditions Specifications Milestones Delivery schedule Review buyer responsibilities Performance evaluation and
feedback: Access, reports, conferences
Supplier Management
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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)
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Earned Value (EV) Accounting
Background: The Spend Plan Concept
$
Time
Plan
Actual
TNow
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Earned Value Concept
BCWS BCWP ACWP$1000 $800
Schedule Variance equals BCWP – BCWS = -
$200
BCWS BCWP ACWP$1000 $800 $860Cost Variance equals ACWP – BCWP = $60In this example, the contractor has an unfavorable schedule variance (behind schedule) and an unfavorable cost variance (over budget)
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Earned Value Concept
BCWS BCWP ACWP$1000 $800
Schedule Variance equals BCWP – BCWS = -
$200
BCWS BCWP ACWP$1000 $800 $860Cost Variance equals ACWP – BCWP = $60The “spend plan” analysis however has everything looking great. Budget to date is $1000 and expenditures to date are only $860!
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Bendix Corporation’s performance on Contract AF-8260 16 Weeks into the Contract:
ACWP = $220,440BCWP = $216,000BCWS = $214,440Total Budget at Completion (TBC) = $660,000
Example Problem
Evaluate Bendix Corporation’s performance by computingthe cost variance and the schedule variance to date.
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Evaluate Bendix Corporation’s performance on Contract AF-8260 16 Weeks into the Contract:
ACWP = $220,440BCWP = $216,000BCWS = $214,440Total Budget at Completion (TBC) = $660,000
SV = BCWP – BCWS = +1,560 CV = ACWP – BCWP = +4,440
Cost Performance Index (CPI) = ACWP/BCWP = 1.02056Estimate at Completion (EAC) = CPI x TBC = $673,567
Example Problem
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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
Motivation in Supplier Management
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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 RoundtablesReview company’s procurement program with key suppliers as a way to manage and improve relationships
Relationship Management
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