As a project manager for a system integration company, I am constantly quoting projects with customers. An example of a typical scenario for a large project would be receiving a bid package, having a walk down meeting, asking questions and then working on the proposal. The proposal is then submitted and I anxiously await the call to find out if we are in the running for the final decision. One of the people on that call, and many times the first time I meet this person, is the purchasing agent. Then comes that dreaded question, “How can we get your price down?”
The age-old war between purchasing and contractors. No matter how hard we work on proposals to be as competitive as possible, the question on price always comes up and the battle rages on. We are now time locked to get a project off the ground but must begin the fight on rates, T&C’s and other fine details. It often ends with both sides feeling defeated because the purchasing agent has the very important job of driving costs as low as possible to ensure the company remains profitable. The contracting company has the task of performing the work for a profit otherwise they go out of business. What isn’t accounted for in this method, however, is the total cost. The battle starts at a point in time to drive one cost down rather than being involved in the entire project execution process to keep the total cost down. I believe the key is for purchasing to be involved in the entire project life cycle.
The first step is to vet potential contractors. This doesn’t mean you have an active bid package or project, it simply means purchasing needs to get out and start looking. In general, plant personnel know whether they will need integration help or not and what size projects they are expecting in the future. The purchasing agent can create criteria for the companies they want serving the plant and then find them. Then, as projects come up to bid, you know right away who is a good bidder and who not to waste time/energy on. It is very important to know the difference between being qualified to bid and qualified to do. Think about company size, number of resources with the correct skillset, insurance requirements, etc. Getting calls by business developers for integration companies? Now they can be vetted right away. The earlier you get to know integrators, the better positioned you will be at the bid table to ensure you have the right companies. This also prevents the usual mistake of just going with the lowest bidder. If they aren’t qualified, you can expect a huge cost impact as the design and implementation phases progress.
Next, purchasing agents need to know about projects before they are sent out for bid. One of the biggest factors that goes into every bid package from consultants is risk. There is an old adage in project management, do you want it fast, good, or cheap? If the scope is not clear or the schedule is not defined, it adds risk. The higher the risk, the higher the price. Remember, contractors are trying to run a profitable company as well and we must protect ourselves from the unknown. Purchasing should get ahead of this dilemma by ensuring the scope is very well defined and the schedule allows for proper execution. If you can’t determine this internally, contact one of your trusted providers to perform a FEED/FEL to establish this baseline scope and schedule. The upfront cost is worth a lot when considered against unexpected surprises on the back end of projects or higher prices during the bid process.
Lastly, understand the value the integrator is bringing to the table. It’s a common practice for the first project that the industrial automation firm works on to have a lower price in order to get in the door with the client. But, the purchasing agent shouldn’t expect reduced pricing every time. Once the value of the industrial automation firm is realized, the commensurate price should be expected. No one expects to pay more than the services provided, but you shouldn’t expect to pay less for higher skills or more value. It’s understandable to ask for a discount from the industrial automation firm for taking the initial risk of working with them. But, once they are a proven partner, a higher price needs to be acceptable after the partnership is vetted and the value is realized to keep projects running on track.
It’s important for purchasing to get involved early with the industrial automation company. Before the project is bid, get to know the company, and understand if they are a good fit. When necessary, let the firm get involved in scope development, base design considerations and developing the expected project schedule all the way from design to implementation and installation. Purchasing shouldn’t focus so much on the price at the bid table but instead should think more about the total project cost and how developing relationships will result in better lifetime costs for the company. With this approach, not only will you gain a valuable partner but you will also reach the objectives of saving costs for your company.