What is Procurement & How to Plan Project Purchases?
Traditionally, the objective of a well-planned procurement process in business is to acquire goods and services in response to internal needs. By accomplishing this objective companies streamline business activities, reduce cost of raw material, and practice better supply management. In terms of project management, the procuring activity involves exploring the most cost-effective way of providing project teams with needed products and services, within available funds and time frames. To recognize how this process can be planned out, first we must understand what procurement is about and what basic steps are involved in defining purchasing requirements for projects and identifying potential sellers.
What is Procurement? Common Definition
Basically, procurement means the act of obtaining (either through purchase or making) goods and services needed by an organization to carry out their specific business operations. It is an essential component of business management framework that lets companies provide their initiatives with all items required for successful business functioning.
Apparently, procurement can be defined as a kind of process that repeats multiple times for a certain purpose. Just like any other process, procuring means consuming certain resources to convert available inputs into desired outputs. For example, purchasing spares for a car involves investing monetary resources and using available mechanical skills and time to install the parts and repair the car. Another example is, an organization acquires building material and involves workers in a construction project for building an extension.
By efficiently and effectively managing purchasing decisions a business organization can:
- Support operational requirements
- Manage the supply base efficiently and effectively
- Set strong relationships with other business processes and functions
- Keep purchasing strategies integrated into organizational goals and objectives
Define Procurement Process in Project Management
For successful completion, projects require certain products and/or services (which are called “procurement items“) that must be defined and specified according to the project requirements and be delivered on schedule. By defining right procurement activities at the project planning phase and ensuring on-time and complete delivery, the project manager (PM) provides the team with all items they need to produce deliverables and move the project to successful completion. The following defines purchasing in project management:
The process of project procurement means a series of steps and procedures that are carried out throughout the project life-cycle to obtain required items from external suppliers or to produce part or all of those items internally within the organization by involving the appropriate capacity. It determines a method of defining the procurement requirements, managing purchases and dealing with the suppliers in order to ensure a desired level of project performance.
This process requires project managers and other stakeholders to plan and manage the ordering, payment, receipt, review and justification of items from external procurers. However, if an organization has their own manufacturing capacity, items can be made internally (and externally from the project), with partial (or without full) involvement of external resources.
Here are the key participants of the project procuring activity:
- Project manager (PM), who takes ultimate responsibility for planning and controlling purchases and acquisitions
- Purchasing (contracts) department, that deals with the team, executives and vendors to move the project across the procuring cycle.
- Procurement office, who is in charge of planning and leading the sourcing, supply management and delivery control. This executive reports directly to the PM.
- Manufacturing division, that produces necessary items internally, without suppliers involved.
- Suppliers, that procure necessary products and services.
- Team Members, who help the PM with planning procurements and use and consume items for project implementation
- Experts, who provide technical and marketing consulting
Note that it is not necessary that all of these roles will be included in a project. In practice, only several roles can be distributed among project participants (for example: PM, purchasing dept, team and suppliers).
Planning For Project Purchases in 4 Steps
The purpose of procurement process planning is to identify and define purchasing requirements for a given project and to formulate the intended course of action for managing contracts and purchase orders. The PM in cooperation with the purchasing & contracts department (mainly with the department head) takes responsibility for planning the process at early stages and also providing oversight and management for all procuring activities throughout the project life-cycle. This executive needs to collaborate with the department, project team, PMO, suppliers and other key players to develop a procurement management plan and keep track of the process.
According to the traditional process (defined by PMI), a procurement management plan is a subsidiary plan within the hierarchy of the general plan for project management that defines what’s required to be acquired for the project and how to deliver products and services on schedule and as per specification. This document also determines how the purchasing activity will be managed through the project lifecycle, from initiating contacts and developing respective documents through managing product deliveries and closing deals with selected vendors and contractors. Below you can view the key steps to answer the question “What is procurement in projects” and how to plan for purchasing:
Step 1. List Items to be Procured
First of all, the PM holds meetings with the team to talk about possible procurement requirements and list those items (products and services) that are required for successful work completion. Meetings help the manager get expert judgment from the team regarding timelines and preliminary specification. Then the executive communicates the items list to the PMO for revision and approval. After the items are approved the list is submitted to the purchasing dept which decides on ways of buying or making the required products/services. The step finishes once the department decides on the most appropriate method of purchasing and reports to the PM.
Step 2. Set Decision Criteria for Selecting Vendors
As a rule, there are many potential vendors that can meet the procurement requirements and provide the items needed for the project, yet they deliver goods and services under different terms and conditions. So the challenge is to analyze the market and decide on those vendors that will procure the necessary items within the required time frame and at a reasonable cost.
This challenge can be solved by setting decision criteria that will help make the best choice. Decision criteria can’t be identical for different organizations because each organization sets the specific definition of procurement and purchases for their projects. Therefore, the project manager should closely work with the purchasing & contracts division and PMO (or another governance body) to agree on the criteria for selecting and awarding the best purchasing contracts for their project.
As an example, here several considerations that can help set decision criteria:
- Schedule compliance (the vendor is able to procure all items in compliance with the delivery schedule)
- Quality (all items comply with the quality requirements defined in the buying contract)
- Cost (the cost of delivery is reasonable and doesn’t exceed the expected cost)
- Past Performance (we dealt with the vendor in past and the performance was fine, so there is a higher probability to work with the same vendor this time)
Step 3. Deal with Procurer
Once the decision criteria have been set at the previous step, now the department can begin to negotiate with the vendors that meet the criteria and can deliver the procurement items under the most favorable options. The department head needs to hold regular meetings with the project manager to report on the state of negotiations and review the progress of each procured item. These meetings also help ensure that each item complies with the requirements established in the specifications and is delivered according to the project procurement plan. Any delays in delivery and schedule can be prevented early, and required amendments to the specifications can be made “on the fly” before items are shipped, if the procurer is able to meet the new terms.
In case of failed delivery or procured items do not comply with the specifications, the PM needs to meet the team to determine what products/services should be ordered additionally and in what time frames. The project schedule should be revised and corrected accordingly. Then the department needs to communicate with the current procurers or new contractors on the additional specifications and new timing. Once these issues are solved, the department head needs to report the PM on the new delivery schedule.
Step 4. Measure Performance of Purchasing Activities
Performance metrics allow decision makers to determine whether their project stays on schedule in terms of purchasing activities. Use of such metrics paves the way for identifying where improvements to the purchasing plan are required and why. An analysis of vendor performance can also be carried out to examine data on the performance of current sellers and then use this data for decision criteria (e.g. “Past Performance” criterion) in future projects.
The purchasing department takes responsibility for measuring project procurement performance and reporting on the performance data to the PM.