The procurement function at H. K. Ferguson Company
E. E. DUNN
J. D. TREVENEN
H. K. Ferguson Company
Ed. note: The Northern California Chapter of PMI has conducted an ambitious lecture series designed to provide a forum for evaluating project management approaches and methods. These state-of-the-art lectures present existing techniques as developed within major engineering and construction firms. As this series of lectures presents a unique opportunity to learn the latest project management methods, they are being presented in Project Management Quarterly for the benefit of all the membership. The following is the seventh in the series.
This article describes the technology of Project Management as it is envisioned and practiced by H. K. Ferguson Company with special emphasis on procurement.
Ferguson, a M-K subsidiary, performs engineering and construction in its own name and, with various members of the Morrison-Knudsen orgaization, combines into project teams to design and build facilities worldwide. The current Gresik Cement project combines the services of the HK Ferguson Company, (engineering and procurement), International Engineering Company (engineering) and Morrison Knudsen International (construction).
The corporate Ferguson organization located in Cleveland is a self-contained organization with the president reporting to a Morrison-Knudsen executive vice-president in Boise.
FERGUSON — DIVISIONAL ORGANIZATION
The divisional organization is described in Figure 1 and is structured to support each project. Project managers report directly to the general manager.
TYPICAL PROJECT ORGANIZATION
The project organization parallels the divisional organization (Figure 2). Communications between Ferguson and the client are primarily through the project manager with business development and the general manager maintaining parallel contacts.
We work on mid range sized projects with relatively sophisticated clients and use the project team (task force) approach wherever possible. The organization of our engineering & construction groups within the project is similar to these departments in other E & C firms.
Procurement is defined as the activity required to obtain the physical elements of the project. It is the link between engineering and construction in achieving the overall goals of the project. The seven procurement steps which occur during the life of a typical project are described in Figure 3.
At Ferguson procurement is part of support services (Figure 4). We consider the functions performed by the personnel in the box on the left to be procurement. The project support services supervisor coordinates all support services activities on the project.
• Material Control
The material control group is responsible for developing quantities and preparing requisitions for all types of bulk materials requiring advance purchase (structural steel, duct work, piping, cable, etc.). In addition, material control is responsible for the preparation of bid package requisitions (including the preparation of written scope of work and assembling of appropriate documents) for soliciting bids for contracts and subcontracts.
The contracts engineer receives the bid packages from material control after which he solicits and receives bids from subcontractors. Major subcontractors are prepared in the division office. Smaller subcontracts and the analysis of all contracts are handled by field subcontract personnel. The formulation of contract bid documents, solicitation, evaluation and negotiations of bids and the award and the administration of contract parallel closely the purchase of major engineered equipment.
Purchasing is responsible for soliciting bids and placing purchasing orders for the required materials, equipment and related services at the lowest cost and best delivery which must reflect operating and maintenance economy as well as first cost.
Purchasing extends from receipt of a requisition through installation of equipment to resolution of claims and expiration of manufacturers warranty.
The expediting group assures continued vendor performance in accordance with the established project plan. The expediting department is set up to perform liaison work both internally and externally between various engineering disciplines, purchasing agents, planning and scheduling groups, sales and production personnel, quality control officials and transportation and field staff.
It transmits and disseminates accurate and necessary information within the shortest possible time to keep the project manager, the project engineer, construction and planning & scheduling personnel appraised of the equipment and material leadtimes, and shipping schedules to maintain and maximize ontime performance.
Technical and commercial expertise is helpful in this job, but diplomacy and a large measure of common sense, together with the ability to communicate is what we expect of our expediting personnel. Their job is not easy.
An adjunct to expediting is the staff traffic group who provide shipping and packaging assistance to the purchasing agent and expediting personnel.
• Project Support Services
On a typical project we assign a project support services supervisor, a purchasing agent and an expeditor.
Materials control engineers and contracts engineers may be assigned or are available from the divisional staff for assistance at appropriate stages of the project. Also assigned to the project as part of the support services function are the cost engineer and the planning and scheduling engineer.
Field purchasing agents, subcontracts managers and cost & schedule personnel report to the project superintendent or construction manager but have functional direction from the support services supervisor in the division office.
TYPICAL PROJECT PROCUREMENT
For the purposes of this discussion we will define the procurement operation as it would occur on a typical process facility project.
We will assume that we have a 50 million dollar cost plus fixed fee project with Ferguson engineering, procuring and constructing the entire facility. We will consider the purchase of a vendor design and fabricated equipment package which meets design and perfomance criteria prepared by Ferguson who solicit competitive proposals from several vendors.
The project plan within which this procurement operation must function will have been outlined during the proposal stage. It included the scope of work outline, the scope of Ferguson services and the tentative project schedule and budget. This plan is amplified, upon receipt of notice to proceed, to further develop a more detailed time table for the front-end work, the establishment of the conceptual budget, and the detail staffing of the project.
Purchasing at this stage provides input to the project plan including scheduling data, market pricing information to the budget, and input to the project procedure manual.
Step 1 — Request for Quotation. (Figure 5)
The first activity is the preparation by Engineering and approval by the client of the specification. This is the technical document which describes the equipment. It is supported by standard specifications common to many major equipment packages and they describe such components as motors and piping, and procedures such as quality control.
Next, the preparation of the requisition which will include the following items if it is to be sufficiently complete for bidding purposes.
- A written scope of work describing what is required including equipment numbers for the major components.
- Drawings which further describe the scope.
- A list of specifications outlining the performance and/or design criteria.
- Next, a list of data sheets to be filled in by the vendor showing how he will meet the design criteria.
- The number and type of vendor drawings and data.
- A delivery date or network extract from the planning and scheduling department showing the required key dates derived from the overall project schedule.
- Cost coding for cost control purposes.
- Any special bidding instructions such as alternate pricing.
- A list of recommended vendors, if not previously established.
- Special owner’s requirements such as spare parts, operation and maintenance manuals, and vendor technical assistance during the startup phase.
The purchasing agent receives his document and prepares a request for quotation (RFQ) which includes:
- Data from the requisition.
- Purchase order terms and conditions (company standards).
- Special purchase order terms and conditions.
- Bidding instructions.
- The bid form.
Special purchase order terms and conditions include:
- Special payment terms, including progress payment and retention requirements.
- Escalation terms for labor, material and overhead.
- Special invoicing instructions including the basis for payment & the invoicing of freight.
- Expediting requirements such as vendor contacts, drawing and fabrication schedules, copies of vendor POs.
- Packaging requirements (co-ordinated by the traffic department) — including shipping method; handling, rigging and slinging provisions; marking and tagging requirements.
These “requests for quotations” with attachments will then be sent to the prospective vendors (from the approved bidders’ list) for preparation and submittal of a proposal.
At this time the purchasing & expediting report is initiated. Requisition numbers and description are obtained from engineering and material control, schedule data from planning & scheduling and cost data is obtained from estimating.
After the receipt of all of the proposals the purchasing agent prepares a bid tabulation sheet which is limited to a listing of the vendors to whom the RFQs were sent, whether or not they bid, and the quoted price and delivery.
Step 2 — Bid Analysis (Figure 6)
The purchasing agent forwards the bid tabulation sheet together with the vendor proposals to engineering for the technical analysis of the proposals. At the same time purchasing is reviewing the non-technical aspects for conformance and cost and scheduling are also reviewing the package to assure themselves that the budget and schedule is valid. Substantial deviations are immediately brought to the attention of the project manager for resolution.
Copies of the bid tabulation are forwarded to the client’s engineering representative at the Ferguson division office for his concurrent review.
Should a meeting with the vendor or additional vendor data be required for a completely responsible vendor proposal, the purchasing agent will initiate the necessary action which will be monitored by the project expeditor.
Step 3 — Recommendation to Client and Purchase Order Issue (Figure 7)
The client’s engineering representative gives his recommendation to his home office management.
The analysis of each of the project team members is brought together by engineering in the form of a bid analysis which is the basis for a formal recommendation to the client.
The project manager reviews this total recommendation package for completeness and practicality, and conformance to the overall project plan. He then transmits it to the client for approval.
Upon approval, the purchase requisition package including all of the necessary technical data which forms the purchase order is transmitted to purchasing. Purchasing adds the negotiated purchase order terms and conditions and is ready to issue the purchase order.
The formal issue of the purchase order may not occur at this time. Instead a letter of intent may be issued to permit the vendor to proceed with vendor drawings while awaiting resolution of purchase order details and paperwork.
Step 4 — Vendor Drawings and Their Approval (Figure 8)
Once the purchase order has been issued copies go to all members of the project team including the client, construction in the field, and the business manager.
Inspection starts the preparation of the inspection schedule. The business manager enters the purchase order as a commitment in the monthly cost report which is known as the job condition statement at Ferguson.
Expediting requests the vendor to submit his vendor drawing schedule. Ferguson has had varying degrees of success in obtaining this document from the vendor. We find that one of the most difficult expediting jobs is the determination that, in fact, we have received all of the necessary vendor drawings. The obvious ones such as layouts, foundations data, etc. present no problem, but subvendor information and the secondary vendor drawings are extremely difficult to cope with when determining what is required of the vendor engineering department. This phase of the job requires very close coordination between the expeditor and the cognizant discipline engineer who is following the particular purchase order.
As the shop drawings are received, including those of major subvendors, engineering logs-in the vendor drawings, noting date received, drawing number and description. The drawings after review are returned under cover of a vendor transmittal letter.
The project expeditor reviews the log, vendor transmittal receipts and vendor transmittal letters on a weekly basis and advises the project manager and project engineer where delays are occurring in the turnaround of vendor drawings. When the vendor receives his drawing back he makes any modifications noted by engineering and resubmits for final approval.
At this time he will be issuing the shop order to initiate the manufacture of the equipment and will be issuing any other subvendor purchase orders necessary to complete the equipment package.
Step 5 — Certified Vendor Drawings and Vendor Purchasing (Figure 9)
The expeditor remains in constant contact with the vendor to make sure that he has received all of the engineering data necessary to proceed with the manufacture of the equipment. If the vendor is waiting for an official notification, it is the expeditor’s job to get it to him, or at least a reasonable substitute.
Effective questions, persistant calling and application of persuasion to all members of the project team at this crucial period can often clear up problems with an eraser or phone call before the remedy becomes a cutting torch.
Vendor’s material procurement is followed at this time. Material receipt is a critical milestone in the manufacturing process and very few vendors are totally self-sufficient. Just because a vendor says the item is in stock does not mean that the item is there. This answer is a standard one and we find that it is often erroneous. Only constant contact and questioning can assure the expeditor that the vendor is fulfilling his requirements.
Few vendors, if any, operate on a project management basis.
The vendor is at this time preparing and issuing certified drawings to engineering. The expeditor diligently pursues these drawings as they form the information necessary for the field to plan their work operations and for material control to check gaps in the supply of total materials and equipment to the site.
Step 6 — Vendor Manufacture and Shipment (Figure 10)
From an expeditor’s standpoint, the vendor’s start of manufacture is especially important to monitor. We find that if a job starts in a fabrication shop on time, it will generally ship on time.
The expeditor is expected to make detailed reports which are as concise as possible. He does not attempt to editorialize, and his report should be sufficiently clear so that a stranger, on picking it up, can read it and know the current situation immediately. He is the prime contact between the project team and the vendor at this time.
The expeditor obtains the vendor’s manufacturing schedule and utilizes the field expeditors to inspect the shop and make sure that manufacture has in fact commenced.
Physical evidence of materials on the shop floor, formal drawings on the shop foreman’s desk, and marked equipment components in assembly areas, demonstrate to the field expeditor that manufacturing is taking place and that the milestone dates for special steps in the manufacturing process are being met.
Once the equipment manufacture is complete, it is the expeditor’s job to notify the inspection department at least one week in advance that the equipment is ready for final inspection. The inspectors’ most accurate and consistent form of information is the expediting report. The inspection department is probably using the vendor quality control as the primary source of inspection data. The expeditor should determine from the Ferguson inspector whether the vendor quality control people have supplied all of the inspection certificates required of them.
Once the inspection department is satisfied that the equipment meets their requirements, it is ready to ship.
In advance of shipment the expeditor reminds the vendor of the possible necessity for special moving equipment, and he utilizes the Ferguson traffic department to assist in obtaining the equipment and routing the shipment.
Very few vendors actively trace shipments once they leave the plant, so the project expeditor must obtain through the vendor shipping department or the field expeditor, trailer or car number, pro numbers, booking or air bill numbers, and in the case of special trailers, driver’s name and routing.
Step 7 — Receipt of Equipment at Site, Installation and Start-up (Figure 11)
Upon receipt at the jobsite the field inspector will inspect the equipment and the warehouse will prepare and issue a receiving report noting any deviations that are found by the inspectors. The receiving report will be transmitted to expediting who will notify the project team by entering the information on the purchasing & expediting log. This information will be used in the monitoring reports issued by the scheduling department.
At this stage the expediting effort is complete with the exception of such items as operating manuals or spare parts that may have not yet been received in the field.
During installation the field may request through purchasing that the vendor supply installation and/or preoperational testing assistance.
This completes the procurement function.
As Figure 3 shows, it begins at the very start of the project with procurement input to the project plan, and does not finish until the warranty provisions of the order have been satisfied.
The project manager, in controlling his project, has to be able to view the project from the aspect of each of his team members.
- From the way engineering looks at it.
- From the way construction sees it.
- And as described from the procurement view point.
An essential tool for project planning, a work breakdown structure organizes a project’s total scope to help practitioners track projects across disciplines and project life cycles.