A project procurement vision statement
by John L. Homer
RECENTLY, I READ a newspaper story about a train wreck on an a mail train out of New York. The story described how a broken gauging bar on the track allowed track separation, causing the train to leave the tracks at 50 miles an hour. The neglected gauging bar, probably a $10 part with perhaps a $200 installed cost, caused millions in damage. Fortunately, no one was killed in the incident. Reflecting on the details of this accident, I thought how intolerant our society has become of neglect that leads to personal injury and yet how oblivious we project professionals can be of project neglect. Far too many projects become train wrecks through ineffective management process. Let's consider, for example, how the management of project procurement can impact the overall project.
Shady Practices and Poor Communication. In a speech to a chapter meeting of AACE International, claims consultant James Zack commented that his experience with owner-furnished equipment purchases was so negative that he doubted there was value in making any material purchases in advance of a construction contract or of having purchases made by anyone but the contractor. His overwhelming experience was that when owners furnished equipment, contractors schemed to show all deliveries of that equipment were firmly astride the critical path to project completion. This practice virtually assured that delivery slippage of some items purchased by the owner would become support for contractor claims.
Does it have to be this way?
Some months ago, I received information, from a neighbor over a backyard grill, that the fabrication and delivery of goods critical to the construction shutdown phase of one of my firm's projects was lagging behind schedule. In fact, the first stage of fabrication on the goods would not begin until several weeks after their “scheduled delivery” to the project! I spoke with a project manager in my firm about one of our projects, and its upcoming shutdown phase of construction. The next day, I spoke with a project manager in my firm about the matter. The project manager's prediction was that giving this information to those responsible for delivery of the goods would result in a thank you and no further action.
The following Monday this information was presented to the systems contractor and engineer-construction manager, who jointly specified, ordered, and scheduled delivery of these goods. That they had no knowledge of, or interest in, the delivery slippage was obvious. More than predictive, the words of the project manager were prophetic.
In subsequent weeks the project turnaround phase played out in full fury. Several contractors, employing hundreds of men, suffered the cost consequences of the missed delivery. The conditions arising during this project can easily be compared to the scene of a train wreck. The restart of the plant was delayed. Other project goals were not met. Claims will follow. The only hope of profit from project performance now passes to the lawyers.
Unlike the train engineer, who had no warning, the project management in this case had ample warning that the project could not meet its goals without change in the process. As soon as delivery information was available it was clear that changes were necessary in the management plan. Still, the changes did not occur and the project drove straight on to its destruction.
Does it have to be this way?
Re-visioning Project Procurement. For my company's (BMW Constructors Inc.) internal training in project planning we have developed a vision of planned construction activity, which attempts to explain the impact on project outcome of effective planning. This model has proven useful in providing an overview of the expected results of our planning effort.
After reflecting on ineffective procurement management, I propose “a vision of managed project procurement”:
Goods, services, and equipment procured in pursuit of the project objectives will be selected following full consideration of all elements of project impact of the procurement from specification through operation. Procurement efforts will be guided by project objectives and provide prompt feedback to project leaders when those objectives must be modified or clarified. Any considered compromises, or trade-offs, that potentially impact on the accomplishment of the project objectives will be brought to the attention of project leadership before final decisions are made. Clear, open, and accurate communication will be maintained throughout the project about procurement activities.
In proposing this vision I do not take issue with the PMBOK Guide and its task-list approach to procurement. I do, however, find that section of the Guide too narrow to illuminate the purpose behind the many activities it lists, or to sketch the energy levels required to make procurement management a contributor to successful project outcomes.
How might this vision be implemented? The accompanying case study looks at my specific experience with a project that I feel effectively managed the procurement process. The following guidelines explore the implementation of this vision procurement by an owner or nonperforming construction services organization.
■ The goods procured must be selected with consideration of the full burden of activity associated with the goods through to operation.
Reader Service Number 5020
A Vision of How It Was and Could Be: A Procurement Case Study
In 1978–79 I was involved in a paper mill expansion for Continental Forest Industries (a division of Continental Group Inc., of Greenwich, Conn.) that exemplified the principles of effective procurement management better than any single project experience since. The project was originally budgeted in the feasibility study at 39 months, but the owner's marketing plan demanded that the schedule be compressed. In the end, the entire cycle from authorization to making paper was reduced to 22 months. The management of the procurement phase played a big role in making this possible. Some of the management issues involved in the procurement were:
■ Timely decision process on engineering and procurement issues
■ Broad-view consideration of the project impact of procurement decisions
■ Clarity of responsibility for procurement processes
■ Opportunistic decision processes
■ Effective expediting.
The role of timely procurement decisions was critical. The engineer's original procurement process schedule was compressed by approximately one month on each critical issue. On paper, the savings came out of the time allotted to the engineer for soothsaying over vendor quotations. In fact, the engineer had built most of this time into his schedule to assuage his fear that the owner would not make timely decisions. A process change was accomplished by scheduling weekly decision meetings in the engineer's office throughout the most intense period of the procurement.
The clarity of vision of the project objectives, shared among all project team members, assured full consideration of the impact of procurement decisions. For example, the paper machine vendor was required to fully assemble the press section on the manufacturing floor before shipment, eliminating the possibility of misfits on final field assembly. Typical purchasing efforts, judged only by low price, could not have made this decision.
Responsibility lines were clear. All requisitioning of equipment, requests for quotation, and comparison of offerings was conducted under the direction of the engineer. Still, the responsibility of the purchase remained clearly with the owner. Discharging that responsibility involved using a team of players from all project organizations, but all contact with the vendors after purchase was made in a coordinated manner, in the name of the owner. Long-term relationships between key vendors and the owner were used as leverage points. Preservation of those relationships was balanced with project need.
This line of responsibility was used effectively when a late change in the project scope required an additional 1500-hp motor and starter, which would be installed in the existing mill. Management wanted to obtain it from their standard supplier, who quoted an unacceptable 6-week delivery. In conference the electrical contractor commented that there must be something unusual driving that delivery. Painful exploration with the vendor, proposing removal of required features one by one, found one feature the cause of the delivery delay. The decision to add this feature by field installation took delivery from 6 weeks to 1 week, at minimal cost. The owner's relationship and leverage with the vendor were a significant factor in obtaining cooperation for this exploration.
Trade-offs on price and schedule were considered in arriving at appropriate decisions. For example, it was projected that house cranes would be needed 10 months into the project. However, there was an opportunity to reduce the cost of the building steel if the cranes were accepted for delivery at 12 months. The argument was raised that the project could not possibly need the cranes for 12 months despite the published schedule. Yet after a decision to purchase house cranes from a vendor with an 8-month delivery was made, within 20 months, the house cranes were in routine use.
On this project, management recognized that the goal of expediting is on-time delivery, not superhuman effort to minimize the disruption of late delivery; thus, expediting encompassed all processes from order placement to final delivery. Initiatives included a tracking system for all goods ordered by the owner, wide distribution of information, use of late-delivery penalty clauses, visits to manufacturing sites for quality and schedule checks, and management's direct involvement in the expediting effort.
Management's commitment to meeting their obligation, as purchaser, to remove roadblocks was translated into a flexible monitoring and expediting system for all owner-furnished items of equipment and instrumentation. The resulting system tracked over 20,000 items of equipment from identification through delivery to the project site. This system design allowed for tracking of major components and minor missing pieces. Any item could have notes attached on reports and have subcomponents identified and tracked separately at any time—remarkable when you consider that it was implemented in a card-based computer environment. In spite of the technical challenge, the system result was better than any I have seen since.
The system we used depended totally on paper reports for distribution of information, yet we regularly updated and widely published the information twice a month. Any manager, in any phase of the project, was given access to the most current information available about all items in the owner's procurement control.
Vendor contracts incorporated late-delivery penalty clauses. These same penalties were consistently explained to manufacturing schedulers as “substantial penalties, the triggering of which will be of direct interest to your company's president.” Total penalties assessed: negligible. Total impact of late delivery on project objectives: also negligible.
The expediting effort was dispersed by assignment of vendor responsibility among project management team members. Calls and responses were tracked, generating a comprehensive history on both major orders and missing items. Management's direct involvement assured focus, continuity, and a can-do attitude that was described in capsule form in this snippet of conversation overheard between a technical representative and his home office: “I know that moving that propane evaporator 2,000 miles and installing it this coming weekend is impossible, but if you could see what these guys just did you would not question that they can do the impossible.”
Successes traceable to elements of this overall procurement system were legion:
A site visit to a supplier's subcontractor exposed both quality and schedule problems. This visit resulted in the owner's demand that the subcontractor be replaced. Many truckloads of material were pulled from the shop and placed with other subcontractors. The subcontractor site had been picked at random as a test of the supplier's ability to monitor his own subcontractors. We fought hard with the supplier for this inspection, but all objections to visits to the vendor's subcontractors were subsequently dropped. Resulting negative impact on the schedule of the project: none.
Near the end of the project the salesman for this vendor commented, “In selling equipment for this company for 20 years this is the first time all my delivery promises have been kept.”
Schedule was maintained by changing structural steel delivery requirements to accommodate exceptionally cold weather. The original plan called for shop-painted steel. Temperature conditions did not allow the proper curing of the paint in the mid-Atlantic fabricating plant, so the application of the finish coats was relocated to the site. Continuing bad and increasingly cold weather required a change in prime painting location and in the prime paint specification. Impact on the project schedule: none.
Critical condensate pumps ordered with a 12-month delivery cycle were delivered 4 months early. Cost: 10 telephone calls.
Large vacuum pumps were originally scheduled to come from a factory not even in operation when the order was placed. The placement of the order was made conditional on review of the construction schedule for the new facility. Faced with our knowledge of construction realities, and our insistence on sharing that knowledge, the vendor chose to move manufacturing to an existing plant. The pumps were delivered on time.
Fan pumps were delivered slightly late after the manufacturer's representative responded to a routine follow-up inquiry by stating that the pumps would be 60 days late. Confronted with a history of the repeated promises made, and a reminder of the “substantial” penalties the firm could suffer with late delivery, the vendor found a way to shift manufacturing schedules through spot overtime for a different order and obtain a delivery very close to the original promised date.
Stainless tanks were delivered 48 hours late because of a truckline bankruptcy. Rapport with transportation companies and the shipper was such that when the bankruptcy was declared on a weekend, stranding the tanks at an unknown location, we were able to locate them and “steal” them from a yard on Monday. A previous shipment had been delayed a like amount through poor selection of carrier. The education of the vendor about our requirements meant he was aware of this problem, and shared information almost as fast as it happened.
Pumps were delivered on the promised delivery date after assigning an expediter to “camp” in the factory offices until the pumps were on the truck. This vendor had destroyed his credibility when pumps were observed on the manufacturing floor with engineering data indicating they were part of another order the day after these same pumps were pointed out on the floor as being in our order.
This case study shows that managing the procurement effort can help the project accomplish its objectives. With the same level of management support and drive to succeed, plus today's technology for tracking, information sharing and communication, the contributions of good procurement management to the bottom line could be mind-boggling. ■
■ Responsibility for goods, through delivery, remains with the purchasing organization. Responsibility for the order includes tracking the order to avoid surprises.
■ All project participants are entitled to full access to the most accurate information available on delivery status.
■ Effective expediting must encompass efforts to ensure on-time delivery, not just superhuman efforts to minimize the impact of late delivery.
The first guideline we might call the systems view. Effective project procurement cannot take place without a view broader than price, for if we are not buying the right goods price is irrelevant. In one recent project two identical machines were provided by the owner for project installation. One of these machines was provided fully assembled. The other was provided disassembled. The owner's procurement people claimed to view the decision as a cost saving. In their minds the first machine provided a model of how to assemble the second machine. The second machine was purchased at a lower price because it was disassembled.
This is an example of the narrow view often taken of procurement responsibilities. Aside from the contractor's claim that the contract information on which the bid was based assured preassembly, the purchase was management malpractice. In this case the resource cost to the project of field assembly could not be more than the premium for preassembly. From the project, or systems, view the savings in purchase price has no positive impact. It can only have positive impact in one metric, purchase price, and on one function, procurement. Moving the cost to the contractor, whether above the table or below it, is not a positive impact on the project.
Should goods be purchased assembled or in pieces? Should motors be purchased mounted on the pump bases or separately? I don't have a right answer for these questions, but I do know the project suffers if they are not considered carefully. Those considerations must involve more than the purchasing agent and an evaluation based on low-price purchases.
Dr. W. Edwards Deming was quick to condemn this low-price mentality as anti-quality, but it persists. In another instance I observed the purchasing department celebrating the low price they got on some specialty pipe fittings during the same period when the construction, field personnel, were arguing with the vendor because they couldn't make them work.
The second guideline states that responsibility stays with the buyer. But who is the buyer? On a typical project, and depending on the situation, the actual placement of the order might be made by the owner, an engineer, a construction management firm, or a contractor. To further complicate the issue, the engineer or construction manager may purchase the goods on the owner's purchase orders and assign follow-up responsibility to a contractor. Who then is the buyer? The issue is not simple, but separation of tasks must leave clear the responsibility for assuring delivery. Someone must maintain continuity.
A common practice seems to be that the engineer purchases goods on the owner's paper and the specifications assign any expediting responsibility to the contractor. There are several pitfalls in this approach:
■ It may not be in the contractor's interest to bring about on-time delivery. As James Zack noted, the contractor's needs may be best served by late delivery to support a claim.
■ When the going gets tough, effective action may require leverage. If a 20-year history with a supplier exists in the plant, then the contractor, or the engineer, is not likely to have the same leverage. If the plant retains the leverage, then the owner must retain the responsible involvement.
■ Conversely, when the order is in trouble, the relationship with the vendor may be severely strained. It may not be in the owner's interest to put a 20-year relationship at risk in the hands of a contractor's employee who cares only about the project delivery objective at the expense of the future of the relationship.
The test of responsibility is the power to make decisions. That power must rest with someone, and be understood by all. The easiest way to do this is to designate “the purchaser” and ensure that all contact with the vendor be coordinated through the purchaser. The absolute worst case is to so separate tasks as to extinguish responsibility for delivery. Unfortunately, this is far too common.
The idea that “an order placed is an order best forgotten” fits only with out-of-control projects. Goods do not magically appear on the unloading dock on the date specified in the order. A reasonable procurement system must encompass means and methods of capturing updated information throughout the delivery cycle. Obtaining information is a process amenable to effective management. It is not free; in fact it may be a costly process. Considering cost narrowly, it may appear to be an unnecessary cost. After all, you can't do something less expensively than not doing it at all. But consider the cost in the broad project context: if failure to spend the money can doom the project, then the expenditure may be a must-spend cost.
It isn't enough for the project to possess delivery information—it must be shared. In far too many projects, the management of one part or phase develops the attitude that information shared is power lost. This does not work and cannot be allowed for the project to succeed. The power value of information comes from sharing it, not hoarding it. Technical barriers to sharing information scarcely exist anymore; but technical issues were never the biggest barrier. The project must open communication lines by deciding what information will be collected and shared. In most projects the first proposed design of process will be about 10 times what is doable. Still, 10 percent of an ideal is infinitely better than nothing.
When goods fail to appear is an expensive time to gear up “expediting” efforts. The impact is already being felt. The train is already out of control. Effective material control encompasses monitoring, communication, quality control, problem recognition, and problem resolution. Too many times project expediting is designed to fit the problem resolution area only. One sometimes suspects procurement people of setting fires so they can exercise their heroic methods. The vision statement, hopefully, will help us focus on the responsibility to get materials in place on time, not on superhuman efforts just to narrow the gap between promise and performance.
THE PROCUREMENT OF GOODS is an important part of most projects. Those projects with ineffective procurement management practices risk derailment. A planned procurement effort, with management focused on contributing to meeting project objectives, can bring success to procurement efforts, and contribute to a smooth ride to success. ■
John L. Homer is the director of continuous quality improvement and training at BMW Constructors Inc., a general contractor based in Indianapolis, Ind. He is also an adjunct instructor in a masters degree project management program at ITT Technical Institute.
Reader Service Number 5079
PM Network • March 1998
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