PROJ410 Case Study 3

Contract Close-Out - PROJ410 Case Study 3

DeVry University
Contracts and Procurement
PROJ410 Case Study 3
Company Background:
Multi !ui"ment Manu#acturin$ %td is a leadin$ manu#acturers and distri&utors o# li$'t- and medium-si(ed
construction e!ui"ment) *'e com"any 'as &een su""lyin$ construction e!ui"ments to #ortune +00
com"anies en$a$ed in various in#rastructures and construction related turn,ey "ro-ect) Multi !ui"ment
Manu#acturin$ %td 'as an e.tensive "roduct line / $enerators0 rammers0 rollers0 "late com"actors0 li$'t
to1ers0 "um"s0 1elders0 concrete installation e!ui"ment and more) Many o# t'e "roducts come in unusual
s'a"es0 si(es and "ac,a$es0 and some need mec'anical alterations &e#ore #inal s'i"ment) *'e lo$istics
#unction in Multi !ui"ment Manu#acturin$ %td is res"onsi&le #or &rin$in$ materials to and #rom a
com"any2s manu#acturin$ #acilities0 storin$ #inis'ed "roducts0 and deliverin$ t'ese "roducts to customers)
*'is im"ortant tas, includes t'e trans"ort and stora$e #unctions) *'e com"any is decidin$ to outsource its
lo$istics #unctions0 so t'e com"any can #ocus on its core com"etency) *'e com"any 'as e."erimented in
t'e "ast 1it' o"eratin$ its o1n 1are'ouses and coordinatin$ consi$nment &ut #ound t'at its service level
o#ten 1as su##erin$ as a result) *'e 1ron$ "roducts #re!uently 1ere s'i""ed0 serial num&er re"ortin$ 1as
com"romised0 and deliveries 1ere recorded inaccurately) Multi !ui"ment Manu#acturin$ %td reco$ni(ed
t'at t'e com"any3s tradition o# service 1as at sta,e and decided to e."lore additional o"tions)
Assessment of Business processes to outsource and cost saving report
*'e com"any is loo,in$ #or t'e outsourced "artner or vendor 1'o can "rovide t'e 1are'ousin$0
trans"ortation0 and inte$rated lo$istics nation1ide and accommodate t'e volume and variety o# Multi
!ui"ment Manu#acturin$ %td3s s'i"ments as 1ell as t'e s"ecial re!uirements #or many o# its "roducts)
S'i#tin$ lo$istics to su""lier &rin$s u" a ma-or "ro&lem) *'in$s t'at need to &e considered are 1'at i# t'e
su""lier 1ould not &e a&le to deliver "roducts to t'e com"any-desi$nated locations as ra"idly as could t'e
com"any2s o1n truc,s) Com"any is loo,in$ #or a vendor 1'o s"eciali(es &ot' in truc,in$ and 1are'ousin$
su""lies) Currently0 t'e com"any is 'avin$ an in-'ouse #leet o# +00 truc,s) *'e cost o# "er-ve'icle
o"eratin$ cost #or a truc, #leet ran$es #rom 4400 to 4+00) *'ere is a sur"risin$ amount o# "a"er1or,
associated 1it' maintainin$ a truc,in$ #leet0 1'ic' leads to very su&stantial $overnment #ines i# t'e
"a"er1or, is not com"letely #illed out and correctly #iled) 5not'er advanta$e o# usin$ truc,in$ su""liers is
t'at t'is $reatly reduces a com"any2s #i.ed asset investment) 6# a com"any #inds t'at t'e e."ense o#
"urc'asin$ and maintainin$ an in-'ouse #leet o# +00 truc,s is a&sor&in$ most o# its availa&le ca"ital0 t'e
solution is to li!uidate t'e #leet alon$ 1it' any maintenance #acilities and e!ui"ment) One o"tion is to sell
t'e #leet to t'e su""lier0 1'o can use it to service0 t'e com"any2s needs) *'is 1ay0 Multi !ui"ment
Manu#acturin$ %td 1ill end u" 1it' a su&stantial amount o# cas' t'at it can use #or a variety o# needs7
"ayin$ o## de&t0 #undin$ e."ansion0 or &uyin$ ot'er com"anies) 8ettin$ rid o# an in-'ouse #leet can &e a
considera&le source o# cas')
PROJ410 Case Study 3
5n advanta$e o# usin$ &ot' truc,in$ and 1are'ousin$ su""liers is t'at a com"any can convert a lar$e
amount o# #i.ed costs to varia&le costs0 1'ic' reduces a com"any2s &rea,-even "oint0 ma,in$ it less li,ely
to succum& to a dro" in &usiness) *'e su&stantial #i.ed costs in t'is area include 1are'ouse #acilities0
stora$e rac,s0 #or,li#ts0 tractors0 trailers0 and maintenance #acilities) 9y eliminatin$ t'ese #i.ed costs0 a
com"any can also ac'ieve a su&stantial im"rovement in its return-on-assets measurement) One "ro&lem
1it' t'is scenario is t'at t'e amount o# #i.ed costs only dro"s 1'en t'e com"any actually sells o## its
#acilities and e!ui"ment) Ot'er1ise0 t'e com"any 1ill 'ave to maintain t'em0 1'ile still incurrin$
de"reciation e."enses and "ayin$ a su""lier to "er#orm t'e truc,in$ and 1are'ousin$ services) *'ere#ore0
as lon$ as assets can &e ra"idly dis"osed o#0 a com"any can cut into its &rea,-even "oint &y s1itc'in$ its
1are'ousin$ and truc,in$ #unctions to su""liers)
5 1are'ouse su""lier is use#ul #or t'e com"any as it 1ants to use a lar$e num&er o# distri&ution "oints as
#inal assem&ly areas) Com"any 1ill &e a&le to &uild t'e smallest num&er o# com"onents to stoc, and
storin$ t'ese com"onents at a 1ide ran$e o# distri&ution locations0 1'ic' are t'en assem&led accordin$ to
customer s"eci#ications at t'ose locations) *'is results in t'ousands o# "ossi&le "roduct variations &ein$
s'i""ed 1it' a minimum o# inventory) *'is 1ill allo1 t'e com"any to reduce its investment in inventory
1'ile $ettin$ #inis'ed "roducts to customers sooner 1it' no additional investment) Multi !ui"ment
Manu#acturin$ %td can s'i#t inventory amon$ a multitude o# locations as customer demand s'i#ts over time0
so it can o##er t'e s'ortest "ossi&le delivery times) Maintainin$ a lon$-term relations'i" 1it' a t'ird-"arty
lo$istics "rovider ena&les com"anies to rea" si$ni#icant &ene#its #rom outsourcin$)
Cost savings report
- Savin$ o# o"eratin$ cost o# +00 truc,s #leet :Cost ran$es #rom 4400 to 4+00;truc, "er mont'< =
USD +00 > :5vera$e USD 4+0 "er truc,< > 1? = USD ?)@ million
- Cas' 8enerated out o# sellin$ +00 truc,s to t'e su""lier;vendor or a t'ird "arty
- 6nsurance cost Saved = USD +00 > ?+000 = USD 1?)+ million
- Savin$ Aare'ouse and 6nventory carry cost : +0000 S! #t o# 1are'ouse s"ace > USD B "er S! #t
"er mont'< = USD 3)B million
- Aor,ers em"loyed #or loadin$ and unloadin$ truc,s can &e em"loyed some1'ere else in t'e
com"any and t'us resultin$ in cost savin$ o# : 100 1or,ers > USD +0000< = USD + million
- 5dditional Cost savin$ o# ot'er e!ui"ments involved in t'e 1are'ousin$ and truc,in$ = USD 1
million
PROJ410 Case Study 3
*otal Cost savin$ resultin$ #rom t'e outsourcin$ 1ould &e = USD :?)@C1?)+C3)BC+C1< / 5nnual Cost o#
t'e contract
*otal Cost savin$ resultin$ #rom t'e outsourcin$ 1ould &e = USD ?4)D / 5nnual Cost o# t'e contract
Establishing the preliminary performance targets / level of service
Total dollar amount of billings done to their customers / *'e "er#ormance metric #or t'e vendor 1ould
&e t'e inventory turnover or t'e actual sales made to t'e com"any2s customers) Easter inventory turnover
1ould #etc' more dollars to t'e com"any) *'is can &e measured at a mont'ly level and com"ared a$ainst
t'e "er#ormance tar$et)
Contribution to increased sales Ae can also measure as to 1'at 'as &een t'e vendor2s contri&ution to
increase t'e sales o# t'e com"any) *'e increased sales can result #rom &etter inventory;demand "lannin$0
on time deliveries o# e!ui"ments to t'e customers and &etter relations'i" mana$ement 1it' t'e end
customers)
Reliability / Relia&ility 1ill &e measured &y t'e ac'ievement o# customer demand #ul#ilment on-time0
com"lete0 1it'out dama$e0 etc) 6t is im"ortant t'at all t'e deliveries o# construction e!ui"ments 'a""en on
time and 1it'out any #rei$'t loss or dama$e) *'e "er#ormance metric in t'is case 1ould &e nos) o# on time
deliveries made in a mont' and amount o# dama$e claimed &y customers in a mont') Dama$ed $oods can
&e easily trac,ed) *'ese data collected can &e measured a$ainst t'e "er#ormance &enc'mar, #i$ures)
Responsiveness - *'e time it ta,es to react to and #ul#il customer demand) 5ny demand or order t'at is
"assed on to t'e vendor0 'o1 !uic,ly are t'ey a&le to res"ond to t'ose orders 1it'out causin$ any delay in
t'e s'i"ment or t'e time o# recei"t o# t'ese materials &y t'e customer)
Agility - *'e a&ility o# su""ly c'ain to increase;decrease demand 1it'in a $iven "lanned "eriod) *'is can
&e measured in terms o# demand varia&ility and t'e #le.i&le 1are'ouse stora$e and cost t'ereo#0 #le.i&ility
in usin$ truc, #leet de"endin$ on t'e varia&ility in t'e demand)
Cost based metric / *'ere s'ould &e "er#ormance metric and incentive attac'ed to ,ee"in$ t'e cost o#
1are'ouse0 cost o# trans"ortation and insurance;dama$es 1it'in a limit and "ossi&ly it s'ould &e tied to
incentive to encoura$e t'e vendor to contain t'e cost to t'e e.tent "ossi&le)
Assessment of the type of contract chosen for each business unit outsourced
*'e ty"e o# t'e contract c'osen #or outsourcin$ t'e lo$istics #unction o# t'e com"any 1ould &e driven &y
various #actors suc' as o"eratin$ cost0 uncertainty in t'e mar,et0 #uel;$as "rices variation0 1are'ousin$ cost
PROJ410 Case Study 3
and construction e!ui"ment demand #luctuation) %o$istics is an im"ortant "art o# t'e Multi !ui"ment
Manu#acturin$ %td2s &usiness and t'e com"any doesn2t 1ant to let $o t'e control over t'is im"ortant
#unction) Euel is one o# t'e lar$est e."enses t'at motor carriers #ace) Savin$s o# even 'al# a cent "er $allon
can add u" to t'ousands o# dollars) Fee"in$ in line 1it' t'e varia&ility in t'e demand and also t'e
#luctuation $as;#uel "rices0 t'e com"any doesn2t 1ant to $o #or #i.ed "rice or unit rate contract as it 1ill not
&e #air;$ood #or t'e vendor &ut instead0 it 'as decided to o"t #or cost-reim&ursa&le contracts) *'e cost-
reim&ursa&le contract 1ill ensure t'at t'e com"any 1ill "ay t'e seller #or t'e seller2s actual costs0 "lus a
#ee0 1'ic' &asically re"resents t'e seller2s "ro#it) Cost-reim&ursa&le contracts are used 1'en t'ere are too
many uncertainties #or t'e seller to #eel com#orta&le ta,in$ on t'e ris, o# a #i.ed-"rice contract) 6n t'is case0
t'e Cost-Plus-6ncentive-Eee :CP6E< 1ould &e a""ro"riate and t'e vendor 1ould receive "re-determined #ee0
an incentive &onus0 i# t'e contractor ac'ieves "re-determined success criteria) Cost 1ould &e measured
ta,in$ t'e #ollo1in$ costs into account7
Cost per mile Vendor;su""lier 1ould su&mit a detailed &illin$ statement to t'e &uyer a&out t'e various
com"onents o# a #rei$'t and trans"ortation costs) *'is measurement 1ill vary $reatly &y destination and
mode o# trans"ort &ut can &e avera$ed to $ive t'e com"any a measure o# a vendor2s "ricin$ "er#ormance) 6t
can also &e trac,ed se"arately #or eac' s'i""in$ destination to see i# t'e "ricin$ o# individual s'i"ments &y
destinations)
6nsurance cost per dollar shipped *'e vendor 1ill ty"ically o&tain insurance #or eac' s'i"ment made
out o# a country0 1'ereas s'i"ments 1it'in a country are usually covered &y a com"any2s annual insurance
"olicy) *'is rate 1ill vary 1ildly de"endin$ on 1'ere t'e s'i"ment is $oin$ &ut it can &e avera$ed out over
many s'i"ments to s"ot trends in insurance costs)
Cost to load/unload truck Com"anies ty"ically use t'eir o1n la&or to load and unload truc,s t'at arrive
at t'eir o1n 1are'ouses) 6# t'e su""lier does c'ar$e #or t'is service0 t'e com"any s'ould trac, t'e cost and
com"are it to mar,et rates to see i# t'e su""lier is c'ar$in$ an inordinate amount #or t'is service)
Cost per s!uare foot Vendor can c'ar$e t'e com"any #or 1are'ouse stora$e in a variety o# 1ays) *'e
ty"ical met'od is to c'ar$e #or s!uare #eet o# s"ace ta,en u" &y t'e com"any2s inventory0 &ut t'is rate can
&e accom"anied &y c'ar$es #or movin$ t'e inventory 1it'in t'e 1are'ouse0 c'ar$es #or cu&ic #eet o# s"ace
occu"ied suc' as a #ee "er stora$e rac, used0 or even c'ar$es #or a minimum amount o# s"ace0 irres"ective
o# t'e actual amount o# inventory &ein$ stored)
"etermining the evaluation criteria that #ill be used to select the preferred vendor
%o$istics su""lier Selection s'ould &e &ased on an o&-ective set o# criteria0 1'ic' t'e selection committee
s'ould use to create a numerical ran,in$ o# all candidate su""liers) *'e criteria s'ould &e !uantitative)
Selection criteria used &y t'e com"any 1ould &e as #ollo1s7
PROJ410 Case Study 3
- Su""lier2s &ac,$round and #inancial in#ormation a&out t'eir com"any
- 1are'ouse "ro.imity to t'e com"any0
- on-time delivery record0
- driver trainin$ and accident record0
- "roven record in movin$ s'i"ments t'rou$' customs in s"eci#ic countries0
- Proven a&ility to assem&le "roducts into #inal con#i$urations at distri&ution "oints)
6n addition to t'e a&ove list0 t'e Multi !ui"ment Manu#acturin$ %td 1ill use t'e #ollo1in$ additional
criteria to select t'e ri$'t vendor)
Compare supplier pricing to industry rates $ Selectin$ a su""lier 1'o costs si$ni#icantly more t'an t'e
mar,et 1ill not $o over 1ell 1it' com"any mana$ement) *'e "ricin$ com"arison s'ould #irst esta&lis'
&enc'mar, avera$e "ricin$ #or t'e industry0 as 1ell as lo1 and 'i$' "ricin$ ran$es) *'is in#ormation can
eit'er &e o&tained #rom a survey or a &enc'mar,in$ com"any) *'e "rices s'ould &e com"ared to t'e
&enc'mar, rates to see 'o1 1ell eac' su""lier #ares in relation not only to its com"etitors &ut to t'e
avera$e mar,et rates)
%nspect supplier #arehouses $ 5n ins"ection o# su""lier 1are'ouses s'ould al1ays &e "art o# t'e
selection "rocess) *'e selection team s'ould investi$ate t'e ade!uacy o# #ire-su""ression systems0 sa#ety
#eatures0 and insurance covera$e) Su""lier assurances are not ade!uate in t'is areaG only an on-site
ins"ection is su##icient to &e sure t'at t'ese im"ortant criteria are &ein$ met)
%nspect supplier commercial driver&s license 'C"() records $ 6t is im"ortant to ,no1 i# a "ossi&le
truc,in$ su""lier 'as drivers 1it' "oor accident records) *'is in#ormation is availa&le t'rou$' t'e
su""lier2s commercial driver2s license activity re"orts0 1'ic' must &e ,e"t on #ile &y t'e su""lier and
s'ould &e revie1ed &y t'e selection team) Poor driver "er#ormance can im"act t'e delivery o# a com"any2s
$oods and is a si$n o# eit'er "oor driver 'irin$ "ractices or inade!uate driver trainin$)
Check supplier references $ 5 s'ort on-site revie1 o# a su""lier2s o"erations 1ill not al1ays yield a clear
"icture o# "er#ormance) 5not'er 1ay to $et t'is in#ormation is t'rou$' re#erence c'ec,s) *'e selection
team s'ould use a standard !uestionnaire #or tal,s 1it' all re#erences so t'at t'ere is a $ood &asis #or
com"arison &et1een t'em) *'e selection team can loo, t'rou$' trade ma$a(ines #or clues and can as, t'e
re#erences i# t'ey are a1are o# any ot'er customers o# t'e su""lier) *'ese additional re#erences can "rovide
#ar more relevant in#ormation t'an t'e ori$inal ones)
PROJ410 Case Study 3
%dentifying the number of vendors to provide the services to be outsourced
Com"any mi$'t t'in, to $o a'ead 1it' t1o vendors0 one #or t'e 1are'ousin$ and ot'er one #or truc,in$
and deliveries) *'e reason #or t'is is &ecause eac' line o# t'e #unction re!uires a very di##erent set o#
e."ertise and 'avin$ at least t1o su""liers 1ould &ene#it t'e com"any in terms o# &etter control and
mana$ement) 6t could also &e t'e case t'at a#ter revie1in$ t'e su""lier &ids0 t'e com"any #inds t'at no
su""lier "rovides t'e correct mi. o# services to ade!uately meet t'e com"any2s needs) 6n t'is case0 it may
&e "ossi&le to select a lead su""lier0 1it' several ot'er su""liers su&contractin$ to "rovide services to t'e
com"any) Multi !ui"ment Manu#acturin$ %td 1ould &e $ood to $o alon$ 1it' a t1o vendors as t'e
mana$ement o# a t1o vendors 1ould &e &etter #rom t'e cost0 mana$ement0 and control;"eo"le "ers"ective)
6# t'e entire $rou" o# candidates 'as e.ce"tionally 'i$' "ricin$0 t'e selection team s'ould consider
&roadenin$ t'e num&er o# su""liers under consideration to see 1'at ,ind o# service can &e o&tained at
lo1er "rice levels)
Timeline for the bid activities and time duration for each contracting process
Contracting *rocess *lan "uration
Plan Purc'ases and 5c!uisitions sta$e ? Mont'
Procurement Plannin$ ? Mont's
Re!uest Seller Res"onses ? Mont'
Vendor Selection 1 Mont's
Contract 5dministration ? Mont's
Contract Close-Out 1+ Days
*lan *urchases and Ac!uisitions stage $ *'is "'ase involves 1'et'er to ,ee" t'e lo$istics #unction in-
'ouse or to $o outside and loo, #or vendors) 5t t'e end o# t'is "'ase0 com"any 1ill 'ave a documented
"ro-ect "rocurement "lan) 5 contractor administrator s'ould &e a""ointed 1'o can mana$e t'e entire
contractin$ "rocess #or t'e com"any) *'is transition is a lon$ and detailed "rocess0 re!uirin$ t'e attention
o# a #ull-time contractor administrator) Ait'out someone in t'is "osition0 t'e contractin$ "rocess 1ill li,ely
ta,e lon$er to com"lete0 'ave more mista,es0 and cost more money)
*rocurement *lanning $ 6n t'is "'ase0 Multi !ui"ment Manu#acturin$ %td 1ill "re"are t'e solicitation
document :REP<) *'e REP $ives t'e su""lier &ac,$round in#ormation a&out t'e com"any and its industry0
and it descri&es t'e lo$istics #unction t'at t'e com"any 1is'es to outsource0 s"eci#ic tas,s to &e ta,en on &y
t'e su""lier and a deadline #or 1'en t'e REP must &e received at t'e com"any)
PROJ410 Case Study 3
Re!uest +eller Reponses $ Multi !ui"ment Manu#acturin$ %td 1ill issue a re!uest #or a "ro"osal t'at 1ill
&e sent to "otential sellers) *'e Contract 5dministrator o# Multi !ui"ment Manu#acturin$ %td s'ould
derive a set o# selection criteria #or "ic,in$ a su""lier) *'ese criteria s'ould &e as !uantitative as "ossi&le)
,endor +election - 9ased on its revie1 o# su""lier #acilities0 e!ui"ment0 "er#ormance records0 and
re#erences0 Multi !ui"ment Manu#acturin$ %td can no1 ma,e an in#ormed decision to select a su""lier)
Ho1ever0 t'is s'ould not &e a !ualitative decision) 6nstead0 t'e selection team s'ould assi$n 1ei$'tin$ to
eac' o# its selection criteria and score eac' su""lier candidate on eac' item) *'e su""lier 1it' t'e 'i$'est
score s'ould &e $iven t'e com"any2s &usiness)
-inali.e the contract Once t'e su""lier 'as &een selected0 it must &e $iven time to conduct a t'orou$'
revie1 o# t'e com"any2s materials mana$ement systems) *'is $ives it enou$' in#ormation to determine t'e
com"any2s actual re!uirements0 1'ic' may vary #rom t'e ones t'e su""lier 1as told a&out 1'en it 1as #irst
&rou$'t into t'e selection "rocess) Once t'e su""lier 'as t'is in#ormation0 it is in a muc' &etter "osition to
ne$otiate a #inal contract 1it' t'e com"any &ased on realistic ,no1led$e and e."ectations &y &ot' t'e
com"any and t'e vendor)
PROJ410 Case Study 3
References:
Jo'n F) Halvey and 9ar&ara M) Mel&y) :?00@<) 9usiness Process Outsourcin$) Second dition) Jo'n Ailey
and Sons0 6nc)
Steven M) 9ra$$) :?00B<) Outsourcin$7 5 8uide toISelectin$ t'e Correct 9usiness UnitIJe$otiatin$ t'e
ContractIMaintainin$ Control o# t'e Process0 Second dition) Jo'n Ailey K Sons)