Chapter 18
Contract and
Relationship
Management
18-1

Key Concepts
• Need For Better Contract Management
• Pre-award Conference
• Monitoring And Controlling Project Progress
» Gantt Charts
» CPM And PERT
» Closed Loop MRP Systems
• Monitoring And Controlling Total Supplier
Performance
» Supplier Performance Evaluation
18-2

Key Concepts
• Motivation
» Punishment
» Rewards
• Assistance
» Training
» Quality Audits And Procurement System Reviews
» Problem Solving
» Collaboration
» Managing The Relationship
18-3

Need for Better Contract Management
• Several changes in business have
increased the need for better contract
management:
» Collaboration is continuing to becoming more important
» Large inventories are no longer available
» Quality is expected
» Deliveries are expected to be on time, not early or late
» Schedules must be integrated and maintained
» Processes must be balanced
» Waste must be reduced or eliminated
» Communication must be in real-time
18-4

Pre-Award Conference
• All terms and conditions
• Delivery or operations schedule
• Staffing and supervision
• Site conditions, work rules, safety
• Invoicing procedures and documentation
• Materials purchase procedures
18-5

Pre-Award Conference
• Background checks and security
clearances
• Insurance certificates
• Permits
• Possible conflicts with other work
• Submission of time sheets
• Buyer responsibilities
• Collaboration milestones
18-6

Monitoring and Controlling Project Progress
• Operations Progress Reports
• Gantt Charts
• CPM And PERT
• Closed Loop MRP Systems
18-7

Production Schedule and Progress Chart (Gantt
Chart)
Description of Work Jan Feb Mar Apr May Jun
Engineering Drawing
Bill of Materials
Tooling, Etc.
Raw Material Proc.
Raw Material Rec’d.
Long-lead Proc. Parts
Production
Planned
Actual
18-8

Project Example: Capital Equipment Acquisition
Process
Label Description Time Predecessors
Activity Activity Activity Immediate
Preliminary Discussion
Solicitation of Information
Budgetary Estimates
Funding Authorization Request
Qualification of Potential Suppliers
Request for Proposal Processing
Proposal Analyses
Economic Impact Analyses
Exceptions to Specifications
Side-by-side Demonstrations
Notify Selected Supplier
Plan Negotiations
Conduct Negotiations
Execute Contract
Record Project Details
Contract Inspection
Purchase Contract Closeout
5 days
4 days
4 days
1 days
12 days
6 days
14 days
3 days
5 days
8 days
2 days
2 days
12 days
1 day
1 day
2 days
1 day
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
None
1
1
3
2
5
6,8,9,10
4,6
6
6
7
7
11,12
13
13
14,15
16
18-9

Project Example: View of a PERT Chart in
Microsoft Project
18-10

Critical Path Scheduling
• Critical Path is the longest path through
the network
• As a manager we need to know the critical
path to identify which activities we should
focus our efforts on controlling
• A delay in a critical path activity delays the
expected project completion time
• Critical path analysis also lets us know
which activities do not need to be
managed as strictly
18-11

Monitoring and Controlling Total Supplier
Performance
• Supplier Performance Evaluation
» Categorical Plan
» Weighted-Point Plan
» Cost-ratio Plan
18-12

Categorical Plan
• Requires continual evaluation
• Qualitative ratings are generated
» usually on a 3-point scale
• Individuals in departments conduct the
evaluation:
» Supply
» Engineering
» Quality
» Accounting
» Receiving
– Receiving’s evaluation factors might be: tardiness,
quantity, quality, completeness, packaging, etc.
18-13

Categorical Plan
18-14

Weighted Point Plan
• Step 1: Development of factors (selection
criteria) and weights
» Weights represent supply management’s
judgments concerning relative importance
• Step 2: Assignment of ratings
» Supplier performance on each factor must be
expressed in quantitative terms
18-15

Example: Weighted Point Plan
• Weight, Factor = Formula
» 50%, Quality performance = 100% - rejects%
» 25%, Service performance = 100% - 7% per
failure
» 25%, Price performance = Lowest price offered
divided by the price actually paid
18-16

Example: Weighted Point Plan Continued
Factor Weight Actual Performance Performance Evaluation
Quality 50% 5% Rejects 50 x (1.00 – 0.05) = 47.50
Service 25% 3 Failures 25 x [1.00 – (0.07 x 3)] = 19.75
Price 25% $100 25 x ($90 / $100) = 22.50
Overall Evaluation: = 89.75
Table 21-1
18-17

Another Example: Weighted Point Plan
Factor weight A B C
Technology
Delivery
Price
Stability
Quality
40 36 35 30
20 20 16 15
20 16 20 15
10 10 8 8
10 9 8 9
Rating total 100 91 87 77
18-18

Cost Ratio Plan Steps
1. Additional costs incurred when doing business with a
given supplier are identified
2. Costs are separated by quality, service, and price
elements of supplier performance
3. Each costs is then converted to a “cost ratio”
4. The ratio expresses the cost as a percent of the total
dollar purchase from that supplier
5. The individual cost ratios are totaled, producing the
supplier’s overall additional cost ratio
6. Supplier’s price is adjusted using its overall ratio
7. Adjusted prices are then used in supplier evaluation
18-19

Cost Ratio Plan Example
• Assume that for one supplier:
» Quality cost ratio = 2%
» Delivery cost ratio = 2%
» Service cost ratio = -1%
» Price = $72.25
• The sum of all cost ratios is 3 percent
• Hence, the adjusted price for this supplier is:
» [72.25 + (0.03  72.25)] = $74.42
• This is the price used for evaluation purposes
18-20

Motivation
• Punishment
» Litigation and punitive damages
» Not awarding future business
» Downgrading a supplier
» Billing the supplier for failures
• Rewards
» Follow on business
» Recognition
18-21

Assistance
• Transformational Training
• Quality Audits and Supply System
Reviews
• Problem Solving
18-22

Supplier Surveys
• How knowledgeable are our supply
managers?
• How accurate are our engineering
specifications?
• How clearly do we state our quality
requirements?
• How timely are our payments?
18-23

Additional Approaches to Improving Supplier
Relations
• Annual Supplier Meetings
• Supplier Roundtables
• Supplier Workshops
18-24

Collaboration
• Most successful supplier management results are
generated in collaborations
• The ultimate in collaborative relationships is a
virtual integration, wherein two independently
owned entities integrate their energies for as long
as the relationship benefits both parties
• One- or two-page memoranda of agreement
replace lengthy contracts, change orders, and
other legalistic and defensive procedures
18-25

Actions to Ensure Success of Supply Alliance
Relations
• Establish an inter-firm cross-functional team
• Team members should receive training
• Develop an inter-firm communication system
• Develop plans to increase and measure trust
• Arrange for co-location of key personnel and for
periodic visits to each other’s facilities
• Additional plans should be developed and
implemented for training on critical issues
18-26

Actions to Ensure Success of Supply Alliance
Relations Continued
• Establish measurable quantifiable objectives
• Monitor and report improvements
• Ethics should win over expediency
• Inter-firm team members need to embrace the
philosophy of collaboration
• Inter-firm team members should become
champions who ensure that their organizations
understand and support the alliance’s goals
18-27

Closing Remarks
• Without question, management of supply
contracts is a critical and challenging activity.
• Perhaps the most challenging aspect is the
evolution from controlling to managing the
relationship
• New attitudes and skills are required
18-28