PROJECT MANAGEMENT AND FINANCE

PURCHASING, ORDERING
AND NETWORK MODELS

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 • Introduction
• Purchase cycle
• Contract Management
• Procurement process
• Development of Project Network
• Time estimation
• Determination of the critical path
• PERT Model
• Measures of variability
• CPM Model
• Network cost system.

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 PURCHASE VS PROCUREMENT
PURCHASE MEANING:
• To buy a product or service
• A product or service that has been bought
by an individual or business.

PROCUREMENT MEANING:
• The act of obtaining or buying goods and
services.
• The process includes preparation and
processing of a demand as well as the end
receipt and approval of payment.
Procurement is, essentially, the overarching or umbrella
term within which purchasing can be found.

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 PURCHASE VS PROCUREMENT

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 • The process of procurement is often part of a company's strategy because the
ability to purchase certain materials will determine if operations will continue.
• A business will not be able to survive if it's price of procurement is more than the
profit it makes on selling the actual product.
(1) purchase planning,
(2) standards determination,
(3) specifications development,
(4) supplier research and selection,
(5) value analysis,
(6) financing,
(7) price negotiation,
(8) making the purchase,
(9) supply contract administration,
(10) inventory control and stores, and
(11) disposals and other related functions.

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 STEPS IN THE PROCUREMENT PROCESS:
The process of purchasing these good and services is known as the Procure-To-Pay Cycle.
The entire Procure-To-Pay Cycle can be an involved process with numerous steps:
1) Identification of Requirement
2) Authorization of Purchase Request
3) Approval of Purchase Request Three important documents in the
4) Procurement purchasing process (Three Way
5) Identification of Suppliers
Match)
6) Inquiries Receipt of the Quotation
1. Purchase Order
7) Negotiation
8) Selection of the Vendor 2. Order Receipt / Packing Slips
9) Purchase Order Acknowledgement
3. Invoice
10) Advance Shipment Notice
11) Goods Receipt
12) Invoice Recording
13) 3 Way Match
14) Payment to Supplier
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 PURCHASE CYCLE:
14 STEPS FOR PURCHASING CYCLE WITH TENDERS:
The Need
Update Of Financial
Records Authority

Request for
Sign Off
Proposal (RFP)

Approval And
Invite Tenders
Payment

Pre Qualification
Manage Contract Questionnaire
(PQQ)

Contract Award Tenders

Negotiation Qualifying

Evaluation

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 CONTRACT MANAGEMENT:
• Contract management is
the management of contracts made
with customers, vendors, partners,
or employees.
• The personnel involved in
contract administration required to
negotiate, support and manage
effective contracts.
• A contract is an agreement between
two entities or individuals, which
serves as legal protection for both
parties involved in a potential
business deal.

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 OTHER TYPES OF CONTRACT:
• Sales contract is a contract between a company (the seller) and
a customer where the company agrees to sell products and/or services and
the customer in return is obligated to pay for the product/services bought.
• Purchasing contract is a contract between a company (the buyer) and a
supplier who is promising to sell products and/or services within agreed
terms and conditions. The company (buyer) in return is obligated to
acknowledge the goods / or service and pay for liability created.
• Partnership agreement may be a contract which formally establishes
the terms of a partnership between two legal entities such that they regard
each other as 'partners' in a commercial arrangement.

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 AREAS OF CONTRACT MANAGEMENT:
1) Authorizing and negotiation
2) Baseline management
3) Commitment management
4) Communication management.
5) Contract visibility and awareness
6) Document management
7) Growth (for Sales-side contracts)
8) Contract compliance/governance

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 PHASES OF CONTRACT MANGEMENT:
Contract management can be divided into three phases namely

1.Pre- contract phase

2.Contract execution phase

3.Post award phase (contract compliance/governance)

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 TO MANAGE A CONTRACT:
• Ensuring the delivery of products as
and when they are ordered
• Managing the ongoing dialogue
between buyers and suppliers to make
sure that agreed deadlines are met
• Throughout the process, seeking
improvements which will drive
efficiencies and increase profits
• Regular assessment to ensure that the
terms of the contract are adhered to
and key milestones are met
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 CONTRACT MANAGEMENT:
At this stage of the contract management process, both parties agree on relevant Service
Level Agreements (SLAs) and Key Performance Indicators (KPIs).

• A description of the service being • a measurable value that demonstrate

provided how effectively a company is achieving
• Reliability key business objectives.
• Responsiveness • to evaluate their success at reaching
• Procedure for reporting problems targets.
• Monitoring and reporting service level • High level KPI’s may focus on the
overall performance of the enterprise ,
• Consequences for not meeting service
while low level KPI’s focuses on
obligations
processes or employees in department
• Escape clauses or constraints such as marketing, sales and call center.

SLA KPI
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 Make or Buy Decision
• It is the determination whether to produce a component internally
or to buy it from outside the supplier
• The decision is based on the cost
• The cost for both the alternatives should be calculated and the
alternative with less cost is to be chosen.

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 Make or Buy Decision
Criteria for make
• The product can be made cheaper by the firm.
• The finished product is being manufactured only by limited farms.
• The part needs extremely quality control.
Criteria for Buy
• High Investments required for making
• Skilled workers not available.
• Demand is temporary / seasonal.

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Make or Buy Decision
• Approaches for Make or Buy Decision

• 1. Simple Cost Analysis

• 2. Economic Analysis

• 3. Breakeven Analysis
Break Even Analysis
Break Even Analysis
• The Breakeven point is the point where gains equal
the losses.

• The point where equals total costs equal total

revenues.

• There is no profit made or loss incurred at the break

even point.
Break Even Analysis
• Uses of Break Even Analysis

• To aid forecasting and planning

• To calculate the minimum amount of sales required in

order to be able to break even.

• To see how much changes in output, selling price will

affect profit levels.
Break Even Analysis
• Cost : Anything incurred during the production of
good or service to get the output into the hands of the
customer
• Types of Costs

• Fixed Costs

• Variable Costs
Break Even Analysis
• Variable Cost

• Fixed Cost

• Total Cost = Fixed Cost + Variable Cost * Units

Break Even Analysis
• Fixed Cost
• Fixed Cost is a cost which does not change in total for
a given time period despite wide fluctuations in output
or volume of activity
• Variable Cost
• Variable Costs changes as activity level increases.
Break Even Analysis
• Problem
• A component can be produced by any one of the four
processes, I,II,III and IV. Process I has fixed cost of
Rs.20 and variable cost of Rs.3 per piece. Process II
has a fixed cost of Rs.50 and variable cost of Re.1 per
piece. Process III has a fixed cost of Rs.40 and variable
cost of Rs.2 per piece. Process IV has fixed cost of
Rs.10 and variable cost Rs. 4 per piece. If company
wishes to produce 100 pieces of the component, from
economic point of view it should choose
Break Even Analysis
• No. of pieces produced, N = 100
• Total Cost = Fixed cost + Variable Cost * Units
• For Process I, Total Cost = 20 + 3*100 = 320
• Process II, Total Cost = 50 + 1*100 = 150
• Process III, Total Cost = 40 + 2*100 = 240
• Process IV, Total Cost = 10 + 4*100 = 410

• Process II – Total Cost Minimum

Pay Back Period
• Formula
• The formula to calculate the payback period of an
investment depends on whether the periodic cash
inflows from the project are even or uneven.
• If the cash inflows are even, the formula to calculate
payback period is:
Payback Period =Initial Investment / Net Cash Flow
per Period
 Problems
• There are three alternatives available to meet the demand
of a particular product. They are as follows:
• Manufacturing the product by using process A and B,
buying the product. The annual demand of the product is
8,000 units. Should the company make the product using
process A or Process B or buy it?

Manufacturing by Manufacturing by the

Cost Element Buy
the Process A Process B
Fixed Cost/year (Rs) 500,000 600,000
Variable /Unit (Rs) 175 150
Purchase price/Unit(Rs) 125
Solution
• Data Given:
• Fixed cost for Process A = Rs.5,00,000
• Fixed cost for Process B = Rs.6,00,000
• Variable cost for Process A = Rs.175/unit
• Variable cost for Process B = Rs.150/unit
• Purchase cost = Rs.125/unit
Annual Demand = 8000 units
Solution
• Total Cost for Process A
• = Fixed Cost + Variable Cost
• = 5,00,000 + 175* 8000
• = Rs.19,00,000
• Total Cost for Process B
• = Fixed Cost + Variable Cost
• = 6,00,000 + 150*8000
• = Rs.18,00,000
Solution
• Purchase Cost
• = 8000*125
• = Rs.10,00,000
• The Total cost is low for purchase compared to
process A and Process B.

• So, the company should buy the product.

 Pay Back Period

• Payback period is the time in which the initial outlay of an investment

is expected to be recovered through the cash inflows generated by the
investment.

• It is one of the simplest investment appraisal techniques.

Pay Back Period
• Formula
• The formula to calculate the payback period of an
investment depends on whether the periodic cash
inflows from the project are even or uneven.
• If the cash inflows are even, the formula to calculate
payback period is:
Payback Period =Initial Investment / Net Cash Flow
per Period
Pay Back Period
• When cash inflows are uneven, we need to calculate
the cumulative net cash flow for each period and then
use the following formula:
• Payback Period =A + (B / C) Where,
A is the last period number with a negative cumulative
cash flow;
B is the absolute value (i.e. value without negative
sign) of cumulative net cash flow at the end of the
period A; and
C is the total cash inflow during the period following
period A
Pay Back Period
• Problem

• Company C is planning to undertake a project

requiring initial investment of $105 million. The
project is expected to generate $25 million per year in
net cash flows for 7 years. Calculate the payback
period of the project.
Pay Back Period
• Solution

• Payback Period
= Initial Investment ÷ Annual Cash Flow
= $105M ÷ $25M
= 4.2 years
 DEVELOPMENT OF PROJECT NETWORK: PERT AND CPM:

1. Program Evaluation and Review Technique (PERT)

2. Critical Path Method (CPM)

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Slide prepared by : Niruban Projoth, Veltech
 PHASES OF CONTRACT MANGEMENT:
Contract management can be divided into three phases namely

1.Pre- contract phase

2.Contract execution phase

3.Post award phase (contract compliance/governance)

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Slide prepared by : Niruban Projoth, Veltech
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