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Case Study Managing Supplier Performance
Mancunian University are about to begin to let a contract for a full refurbishment of their catering facilities in the summer of 004
The University have received substantial funding for the scheme following identification of poor catering facilities as a major issue to the student body, particularly in the Postgraduate Business School which is a major source of income through the MBA programme
It is expected that the refurbishment to facilities at 8 sites, and budgeted at £6.8 million, will take place between the end of the Summer 004 term and the beginning of the Autumn term in September 004 a tight timescale which must be met
A project team has been appointed and you are to fill the role of strategic procurement advisor
Explain you approach to the project including
Organisation of the internal team
An appropriate bid process
Management of risk
Management of main and sub contractors
Measurement and management of the project timetable including a process for measuring critical path and slippage
Measurement of performance together with a performance management scheme to include penalties or performance bonus where relevant
Definition of Supplier Performance
Supplier performance measurement is the process of measuring, analysing, and managing supplier performance for the purposes of reducing costs, mitigating risk, and driving continuous improvements in value and operations. Common and consistent measurements can help companies focus resources, identify performance glitches, develop strategies for supply chain improvements, and determine the total cost of ownership (TCO) of supply relationships, products, and entire supply chains
Management of supplier performance starts at the beginning of the purchasing process. Incorrect decisions at an early stage (before award) can have serious and costly implications on performance later in the contract period.
In this scenario cost and time are of prime importance and failure to deliver on either of these will have serious repercussions.
Organisation of the internal team
The first process that has to be considered is the selection and organisation of the team. It is important that the team includes representation from all interested parties.
Traditionally contract management has been hierarchical in nature, which can result in a confused and fragmented approach with a high chance of errors. Successful management requires a co-ordinated cross-functional team, who will work together and apply their specific expertise to resolve each and every problem.
As the contract progresses it is likely that the membership of the team will change, in particular after contract award it is important that the contractor is included.
The contracting process goes through six basic stages (see below), during these stages the influence and importance of the team members fluctuates as their skills and expertise fit in with the requirements of the contract.
At the early stages the users and specifiers will have a large influence, and the team will require their expertise to design and specify the kitchens. In the middle commercial phase the emphasis moves to purchasing, finance and legal, whilst at the operations end the contractor and Estates function will be prominent.
The purchasing role sits to one side as indicated in the organisational tree below. The function here is to assist and advise the Project Manager, in this case a senior manager from Estates, and to moderate the influence of each of the other interested parties to ensure that the entire project is delivered without bias.
The team will include representative from all interested bodies
Estates Management of contract
Purchasing Administration and management of team
Finance Budget control
Catering Users
Postgrad Business School Customers
Maintenance Ongoing maintenance
An appropriate bid process
If the incorrect bid process is selected at the outset this can have can have dramatic and possibly disastrous effects later in the contract. It is therefore important to investigate thoroughly and to select the correct contract type for the work being carried out.
Although there are a large number of contract types they can be grouped into three basic types, Turnkey, Traditional and Management. Each type of contract has certain inherent advantages and disadvantages.
Turnkey
The provision of a total service or building ready for use. The contractor uses his expertise to deliver a finished product. Also known as design and build
Traditional
The customer determines the detailed requirements and the contractor delivers to these specifications.
Management
The customer identifies the general need and the contractor advises on the specification. The details are then jointly agreed and managed by the contractor.
The grid below shows the three basic contract types together with their strengths and weaknesses.
Contract type Time Money HSE Quality
Turnkey Good Good Poor Poor
Traditional Poor Good Good Good
Management Good Poor Good Good
From the above it would appear to be an easy decision, the main requirements for the refurbishment contract are
1. The contract is delivered on time and within a very tight timescale
. The contract is delivered within budget
It would not be good practice to only consider the two main driving forces, time and money and a method for considering other factors should be used. On the following page is a grid that has been constructed to allow an in-depth appraisal of the contract requirements plotted against the three contract types.
As can bee seen there are 10 criteria (in descending order of importance) which have been given an importance weighting out of a total of 100. Time and price are considered equally important and have been given 0 each followed by quality at 15 and so on until the grid is complete and the total weighting awarded is 100.
In the right hand part of the grid each contract type has been given a weighting, in this case three contracts are being considered and therefore the total weighting across all contracts for each criteria is 0 ( x 10), had there been four contracts it would have been 40 (4x 10).
This figure is then divided between the three contracts in proportion to the expected performance of the particular contract type for the relevant criteria.
The score is calculated by multiplying the priority weighting by the contract weighting. The scores are then totalled for each contract type.
As can be seen below the managed contract has the largest overall score and would therefore be the preferred choice.
Criteria Project Requirements Priority T y p e s o f c o n t r a c t
Weighting Turnkey Traditional Managed
Weighting Score Weighting Score Weighting Score
Timing Must be completed on time 0 14 80 5 100 11 0
Price Must be within budget 0 14 80 1 40 4 80
Quality High quality installation required 15 7 105 15 14 10
SHE High standard of SHE 1 5 60 11 1 14 168
Risk Avoidance Minimise risk by passing onto other parties 10 1 10 11 110 7 70
Complexity 8 sites requiring similar design 7 8 56 10 70 1 84
Variations Minor changes may be required during installation 6 18 7 4 0 10
Professional responsibility Direct contact to be maintained throughout contract 5 7 5 8 40 15 75
Staffing Some control of staff will be required 7 1 7 1 16 48
Responsibility Minimal contract links 1 6 11 6 1
Totals 100 1001 1 1087
Score = Priority weighting x contract weighting
Management of risk
Management of risk involves three key elements, identification of risk, formulation of a strategy to manage the risk and finally monitoring the strategy to ensure that the risk is mitigated.
An advantage of the above method of identifying the most suitable contract is that it identifies areas of risk. A low score, compared to the other contracts indicates that this particular contract type will have poor performance in this area.
In this case, management is the preferred method of contracting, but the score on price is extremely low at 80 compared to 40 for traditional and 80 for turnkey, indicating a high risk.
As this is one of the two most important criteria for the contract, it is important that this is managed from the outset, however as this has been discovered at an early stage it is possible to manage the risk to achieve a acceptable outcome. The later a risk is identified the harder it will be to manage the problem or to achieve the contract targets.
There are, of course, a large number of other risks involved in such a large and important contract and these need to be identified at an early stage. One of the main tasks for the team after deciding on an appropriate bid process is to identify risks and create Risk Assessment Checklist with information on the risk and solution.
It should be noted that even though time and quality have good scores it would be prudent to develop a strategy that monitors all performance criteria to ensure successful completion.
A useful tool in assessing the correct response to an identified risk is to assess the probability and then the consequences if that situation should arise (see below). High probability high consequence (Red) will require a detailed strategy to manage and monitor progress. Other areas will require less input, Orange will need substantial input, and Yellow areas will need monitoring and green areas limited or no management time.
Major areas of risk may require considerable management time and will involve a number of tools. In this case study, cost has been identified as a major potential risk. The team can start at an early stage to set up appropriate systems to moderate the risk.
A strategy to reduce the financial risk and may include the following
• Setting up of a sub group within the team to look at, and control cost. Once the contract has been awarded set up regular meetings with the contractor to review and control cost.
• Consideration of cost when creating the specification
• Spell out the cost requirements clearly in the tender
• Selection of a managing contractor who has completed other (similar if possible) projects within budget.
• Selection of a contractor who can work with, and be part of the team
• Minimise the number of variations and obtain full costing of the additional work before proceeding.
• Any additional cost to be authorised.
• Setting and monitoring of budget targets, particularly with Kitchen 1 as overspend at this stage will cascade to the following seven kitchens if not controlled
• Incentivise the project. E.g. By sharing any savings
Other risks would have to be identified and solutions found using a similar process as above. Once this is complete regular monitoring is required to ensure that risk is minimised.
One of the major areas of risk is the actual selection of a contractor, Selecting an inappropriate contractor will have profound consequences later in the contract. To assist in selecting the correct contractor you should create a Pre Qualification questionnaire (PQQ). This questionnaire is completed by all contractors responding to the tender and is used to select those that will go forward to provide a full reply to the tender.
See Measurement and management of the project timetable for a strategy to deal with the risk associated with on time delivery.
Management of main and sub contractors
Different types of contract will require different relationships between the contracting parties. It is apparent from the above that the ideal relationship will be a close one with reasonable amount of trust between the two parties.
Definition Trust (Mario Sako) Expectation held by one trading partner about another, that the other behaves or responds in a predictable and mutually acceptable manner.
There are three different types of trust
Contractual Trust Keeping promises and abiding by the accepted rules of business practice behaviour as a whole. Associated with arms length relationships in tactical profit and tactical acquisition.
Competence Trust An expectation that the partner will perform competently and in accordance with professional standards. Associated with closer relationships in tactical acquisition and strategic security.
Goodwill Trust Involves 'open' commitment a willingness to do more than is formally required and being prepared to accede to a request from a partner or to any observed opportunity that would improve performance. It is implicit that partners refrain from opportunistic behaviour. Associated with a cooperative partnership relationship in strategic security and strategic critical.
Unless there is likely to be a long-term relationship involving other contracts it is likely that competence trust possibly with a small amount of goodwill trust is the correct balance to aim for.
The relationship will change throughout the life of the contract. At the outset, during the tender and award period, it will be 'at arms length' this will be followed by a professional close relationship after award, during the set up and running of the contract and finally a more remote period at close out
Using the market management matrix is a useful tool to use to help understand how the two parties view each other. This is a high value contract with a medium to high risk and so will sit in the Strategic Critical quadrant of Supply Positioning.
We would therefore want to appoint a contractor who thought of us as Development or Core (see above).
Once the contract has been awarded the project tem would want to include representation from the contractor. It is important that the contract is involved with the team and particularly the project manager. The contract will require careful set and planning so that it can run smoothly it the mobilisation stage.
The management contractor will be responsible for all sub contractors, however the project manager would probably wish to have some input on the selection of any major sub-contractors.
A schedule of meetings will need to be agreed which out the outset may be some weeks apart as the finer details and contract schedule are worked out. These meetings will need to become more frequent as the mobilisation time approaches and will need be daily at the early stage of implementation to ensure that the first kitchen is running to schedule. If the contract is running successfully and the first kitchen is completed satisfactorily the frequency of meeting may reduce. The project manager is likely to lead these meetings with assistance from other members of the team when appropriate.
Measurement and management of the project timetable including a process for measuring critical path and slippage
Management of the timetable will be done using a gant chart. These breakdown the contract into individual operations, allotting a timescale to each. From this information a critical path can be drawn out.
Plotting actual achievements against this chart will show up slippage. It is likely that there will be some slippage at some time during the contract. Daily site meetings to monitor performance and to agree on a way forward are essential in a contract like this where time is of the essence.
Below are two gant charts showing the mobilisation phase of this contract. The first chart shows how each kitchen fits into the 14-week period allotted to complete the contract. This process allows the contractor to build up and phase down his work force. Allowing the contract to wind down with the last two kitchens (7 and 8) starting in weeks 5 and 6 respectively allows slippage of one week to be made up by starting both kitchens together in week 6.
The second chart shows a breakdown of each operation for each kitchen. His chart would normally be extended to show all kitchens, however each subsequent kitchen ( to 8) is only a repetition of kitchen .
The critical path is shown in red. The workforce will move from one kitchen to the next, which sometimes allows operations to float. Other operations fall on the critical path e.g. Gas, electric and water have to complete kitchen 1 by the end of week so that they are available to start work on kitchen at the beginning of week .
All the schedules need to be agreed at an early stage. It is important to ensure that the contractor has the personnel available, either through his own workforce or through agreed subcontractors. Checks on the contractor's workflow and order book should be done prior to award to ensure that he is not overstretched.
During the mobilisation stage monitoring progress and agreeing ways to reduce, remove and make good any slippage need to be done at a daily site meeting.
Measurement of performance together with a performance management scheme to include penalties or performance bonus where relevant
Measurement of performance is important and the method by which this is to be done should be indicated in the tender document. It is obviously important to measure performance of anything that has been identified as a risk.
Penalties are not allowed under English Law, however liquidated damages are allowable.
Measurement of performance against time is done using gant charts as discussed above, however the contract could include provision for the contractor to provide temporary kitchens should the contract not be completed on time. This clause would have to be discussed in detail but would include contingency to provide a mobile kitchen for each unit not completed by 7/0/04. A trigger mechanism could be performance against the gant chart at the end of week 10. Any slippage that could not be made good at this stage would indicate that the contract would be completed late and therefore the requisite number of temporary kitchens (including temporary buildings) would be made available by the contractor.
Obviously this will have an effect on cost, the contractor will need to take into account the cost of providing this should he not meet his time deadlines.
Another way of improving performance would be to provide a cash incentive. An additional payment could be made at a milestone if it was completed on time. For example an additional payment could be made at the completion each kitchen providing it was completed on time. This could be paid in conjunction with an agreed stage payment or held until the end of the contract and paid as a final bonus.
Measurement must involve the keeping of detailed records and they can be used
• As evidence in the event of a dispute
• To provide information for price negotiation
• Highlight areas of underperformance
• Provide an audit trail
Any gap between actual and expected performance should be brought to the attention of the contract manager and the contractor at the earliest opportunity so that the difference can be addressed
The records should include
• Master contract
• Correspondence
• A daily diary which will include
o All events
o Problems
o Delays and waiting time
o Accurate record of on site resource
o Photographs of progress, problems or incidents
o Instructions given especially details of any variations and agreed additional costs
o Minutes of meetings
o Work sheets and any other written information including arrivals and departures
o Performance against agreed KPI's
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