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Supply Chain


  • Supply Chain Management (SCM) - management/oversight of the flow (and storage) of goods and services (materials, information, finance) from point of origin to point of consumption (and between and within companies). the management of upstream and downstream relationships with suppliers and customers
  • Procurement Management (PM - 
  • Contract management is the process of systematically and efficiently managing contract creation, execution and analysis to maximize operational and financial performance at an organization, all while minimizing risk.
Contract management includes negotiating the terms and conditions in contracts and ensuring compliance with the terms and conditions, as well as documenting and agreeing on any changes or amendments that may arise during its implementation or execution.
contracts as assets

A. Designing

  • Downstream vs. upstream
  • Inputs vs. outputs
  • Supply vs. Demand
  • Competency vs. Capacity

B. Procuring

  • Specifications
  • Contract language vetting
  • Tendering
  • Awarding

  • Create supplier selection criteria and follow a structured approach to short-listing and selecting suppliers

C. Contracting

Scope of


  • Machinery
  • Tools
  • Consumables

Types of Contracts

a) Leases
  • Capital lease
  • Operating lease
b) Service Agreements

Sales invoices

Types of Service Contracts

  • Preventive
  • Full comprehensive
  • Guaranteed

  • Full-Coverage Service Contract A full-coverage service contract provides 100% coverage of labor, parts, and materials as well as emergency service. Owners may purchase this type of contract for all of their building equipment or for only the most critical equipment, depending on their needs. This type of contract should always include comprehensive preventive maintenance for the covered equipment and systems. If it is not already included in the contract, for an additional fee the owner can purchase repair and replacement coverage (sometimes called a “breakdown” insurance policy) for the covered equipment. This makes the contractor completely responsible for the equipment. When repair and replacement coverage is part of the agreement, it is to the contractor’s advantage to perform rigorous preventive maintenance on schedule, since they must replace the equipment if it fails prematurely. Full-coverage contracts are usually the most comprehensive and the most expensive type of agreement in the short term. In the long term, however, such a contract may prove to be the most cost-effective, depending on the owner’s overall O&M objectives. Major advantages of full-coverage contracts are ease of budgeting and the fact that most if not all of the risk is carried by the contractor. However, if the contractor is not reputable or underestimates the requirements of the equipment to be insured, they may do only enough preventive maintenance to keep the equipment barely running until the end of the contract period. Also, if a company underbids the work in order to win the contract, they may attempt to break the contract early if they foresee a high probability of one or more catastrophic failures occurring before the end of the contract.

  • Full-Labor Service Contract A full-labor service contract covers 100% of the labor to repair, replace, and maintain most mechanical equipment. The owner is required to purchase all equipment and parts. Although preventive maintenance and operation may be part of the agreement, actual installation of major plant equipment such as a centrifugal chillers, boilers, and large air compressors is typically excluded from the contract. Risk and warranty issues usually preclude anyone but the manufacturer installing these types of equipment. Methods of dealing with emergency calls may also vary. The cost of emergency calls may be factored into the original contract, or the contractor may agree to respond to an emergency within a set number of hours with the owner paying for the emergency labor as a separate item. Some preventive maintenance services are often included in the agreement along with minor materials such as belts, grease, and filters. This is the second most expensive contract regarding short-term impact on the maintenance budget. This type of contract is usually advantageous only for owners of very large buildings or multiple properties who can buy in bulk and therefore obtain equipment, parts, and materials at reduced cost. For owners of small to medium-size buildings, cost control and budgeting becomes more complicated with this type of contract, in which labor is the only constant. Because they are responsible only for providing labor, the contractor’s risk is less with this type of contract than with a full-coverage contract.
  • Preventive-Maintenance Service Contract The preventive-maintenance (PM) contract is generally purchased for a fixed fee and includes a number of scheduled and rigorous activities such as changing belts and filters, cleaning indoor and outdoor coils, lubricating motors and bearings, cleaning and maintaining cooling towers, testing control functions and calibration, and painting for corrosion control. Generally the contractor provides the materials as part of the contract. This type contract is popular with owners and is widely sold. The contract may or may not include arrangements regarding repairs or emergency calls. The main advantage of this type of contract is that it is initially less expensive than either the full-service or full-labor contract and provides the owner with an agreement that focuses on quality preventive maintenance. However, budgeting and cost control regarding emergencies, repairs, and replacements is more difficult because these activities are often done on a time-and-materials basis. With this type of contract the owner takes on most of the risk. Without a clear understanding of PM requirements, an owner could end up with a contract that provides either too much or too little. For example, if the building is in a particularly dirty environment, the outdoor cooling coils may need to be cleaned two or three times during the cooling season instead of just once at the beginning of the season. It is important to understand how much preventive maintenance is enough to realize the full benefit of this type of contract.
  • Inspection Service Contract An inspection contract, also known in the industry as a “fly-by” contract, is purchased by the owner for a fixed annual fee and includes a fixed number of periodic inspections. Inspection activities are much less rigorous than preventive maintenance. Simple tasks such as changing a dirty filter or replacing a broken belt are performed routinely, but for the most part inspection means looking to see if anything is broken or is about to break and reporting it to the owner. The contract may or may not require that a limited number of materials (belts, grease, filters, etc.) be provided by the contractor, and it may or may not include an agreement regarding other service or emergency calls. In the short-term perspective, this is the least expensive type of contract. It may also be the least effective—it’s not always a moneymaker for the contractor but is viewed as a way to maintain a relationship with the customer. A contractor who has this “foot in the door” arrangement is more likely to be called when a breakdown or emergency arises. They can then bill on a time-and-materials basis. Low cost is the main advantage to this contract, which is most appropriate for smaller buildings with simple mechanical systems.
  • End-Results Contracting End-results or end-use contracting is the newest concept in service contracting and is not yet widely available. The outside contractor takes over all of the operational risk for a particular end result, such as comfort. In this case, comfort is the product being bought and sold. The owner and contractor agree on a definition for comfort and a way to measure the results. For example, comfort might be defined as maintaining the space temperature throughout the building from 72o to 74o F for 95% of the annual occupied hours. The contract payment schedule is based on how well the contractor achieves the agreed-upon objectives.This type of contract may be appropriate for owners who have sensitive customers or critical operational needs that depend on maintaining a certain level of comfort or environmental quality for optimum productivity. How risk is shared between the owner and contractor depends on the type or number of end results purchased. If comfort defined by dry-bulb temperature is the only end result required, then the owner takes on the risk for ameliorating other problems such as indoor air quality, humidity, and energy use issues. Maximum contract price is tied to the amount and complexity of the end results purchased.
  • Maintain productive working relationships with suppliers
  • Reduce the potential for disputes and legal action

D. Control

Risk of contract management:


spares holdings

critical spares -


e. Measurement and Review

  • MIlestones
  • Invoices
  • Quality

Contracts - Risks
ISO section ___

which of the following contractor risks do you feel protected against
  • insolvency
  • non performance
  • dispute
  • HSE risks
  • regulatory non compliance
  • reputation risk- damage to business
  • authority limit risk - ill informed buying

Contracts - Objectives
An objective is "a result to be achieved" (ISO 55000)

The outcomes of the contracting policy are as follows:
  • To mitigate risk to the organization
  • To help the organization balance supply and demand
  • To help the organization supplement its competencies and capacities.
  • To unlock/create value for the organization
  • To ensure quality in the delivery of services for which the organization is not qualified to deliver itself
  • To manage productivity
  • To ensure compliance with regulatory authorities

Goals/Success Factors
  • There are no disputes
  • There are no surprises
  • the expected business benefits and value for money are being achieved
  • the organization understands its obligations under the contract
  • the supplier is cooperative and responsive
  • professional and objective debate over change can be had
  • supplier insolvency/bankruptcy
  • supplier non performance

  • Kraljics procurement positioning model - bottleneck,strategic, routine, leverage
  • Procurement - positioning model  (supp;ly market complexity vs. expenditure
  • supplier positioning model - development, core, nuisance, exploit
  • power dependency model - buyer dominance, independence, interdependency, supplier dominance cox 2003 (buyer power relative to suppl;ier power)
  • Telgens box 2004 - commodity catagories vs. contract compliance

Risk threat responses

  • reduction (treatr)
  • removal
  • transfer
  • retention
  • share

relationship management
  • Mutual trust
  • Mutual respect
  • mutual understanding
  • open and construcrive environment
  • contributing to joint management of contract deliery

KPIs should be
  • proportionate
  • fit for purpose
  • easy to suipport by evidende
  • accepted by stakeholders
performance measures
  • responsiveness

Contracts - Policy
A policy is the "intentions and direction of an organization as formally expressed by its top management" (ISO 55000)

  • All contracts shall be written
  • All contracts shall be supported by a business case
  • All contracts must/shall be recorded in a schedule of contracts
  • Every signing officer who has signed a Contract pursuant to this Policy shall keep an original of such Contract or, when not available, a true copy thereof, as well as the necessary supporting documents, in his/her office or a place under his/her control.
  • No individual may sign any contract that creates an obligation or undertaking on behalf of the University unless that individual has signing authority in accordance and in compliance with this Policy.
  • There shall be a contract manager to ensure oversight of all contracts

Contract Controls
ISO Section __

which of th following controls/treatments have you used?
  • Schedule of types of contracts
  • Stages of award
  • Risk controls
Risk controls
  • indemnification/hiold harmless
  • limitation of liability
  • waiver of subrogation

Control - Stages of contract/Flow Charts

       A.  Pre-award (upstream)
  • Identify need
  • Prepare the business case
  • Secure management approval
  • Assemble the team
  • Author
  • Define the procurement apporach
  • Establish the form of contract
  • Develop contract management plan
  • Develop contract exit strategy
  • Drafting specifications and requirements
  • Establish pre-qualification, qualification and tendering procedures
  • Appraise suppliers
  • evaluate tenders
  • Negotiate
  • Approve, execute
       B.  Post award (downstream)
  • Obligation management
  • Assessment of risk
  • Revisions and amendments
  • Contract administration
  • Relationship management
  • Auditing and reporting
  • Renewal
  • Contract closure

Preparing the business case
  • the outcomes of the contract
  • critical success factors
  • the possible alternatives
  • the risks, including the extent and where they may fall
  • identification of any contingent needs and ramifiations of proceeding
  • timescale

Controls - Schedule of Contracts

Types of contracts


Contracting - Roles
Some of the key responsibilities of a "contract manager" include the following:
  • Contracts (various: including formal, short form, and annual contracts)—Drafting, Evaluation, Negotiation and Execution:
    • Non Disclosure Agreements, Sales / Purchasing Agreements, Sub-contracts, Consulting Agreements, Licensing Agreements, Master Agreements, review of customer proposed terms and conditions
    • Distribution Agreements (resellers, agents, joint marketing etc.)
    • Commercial and Public (Federal, State and Local Municipalities) Contracting
  • Serve as the point of contact for customers on contractual matters. Act as contractual “middleman” between company employees and customers, ensuring timely review and approval / reconciliation of variations.
  • On all standard and nonstandard contracts, provide redlined recommendations and often negotiate directly with customer attorneys or purchasing staff until consensus has been reached
  • Maintain contractual records and documentation such as receipt and control of all contract correspondence, customer contact information sheets, contractual changes, status reports and other documents for all projects.
  • As needed, provide guidance on contract matters to project managers or other operational staff, including training to new project managers and other employees in contracting practices and procedures.
  • Develop and implement procedures for contract management and administration in compliance with company policy. As appropriate, contribute to or influence company policies.
  • Monitor compliance by company employees with established procedures. Identify areas of recurrent pressure.
  • Work with Risk Management Department / Finance to coordinate contractual insurance requirements.
  • Work with Finance to ensure adherence to broader finance and risk requirements such as revenue recognition, pricing and discounting policies,, export controls etc. May include ‘financial engineering’ and understanding / evaluating economic impact of terms and term options.
  • Support Product Management / Marketing to ensure company products and services are offered with appropriate, competitive terms and conditions
  • Monitor competitive terms. Monitor customer satisfaction with our terms and conditions and contracting practices. Recommend changes.
  • Ensure that signed contracts are communicated to all relevant parties to provide contract visibility and awareness, interpretation to support implementation.
  • Handle on-going issue and change management
  • Monitor transaction compliance (milestones, deliverables, invoicing etc.)
  • Oversee Service Level Agreement Compliance
  • Ensure contract close-out, extension or renewal.

Contracts - Measurement

3.3.3 Performance measures can be either generic or bespoke in nature. Typical KPI categories include:
Product/Service Quality
Best Practice & Continuous Improvement;
Asset/ Service Availability
Customer Focus
Environmental factors (e.g reduction in energy consumption)
Ethical and Social Issues (e.g checking the supply chain)
or regarding equalities, considering the inclusiveness and accessibility of the service and catering for the needs of all customers).

3.4 Binary Assessment
3.4.1 Some aspects of a service can be assessed in a binary way. These aspects are either adequate or inadequate, with nothing to be gained by improving them beyond the level of adequacy.

3.4.2 An example would be compliance with standards - if the service complies with the relevant standards, then it is satisfactory in that respect: no additional work need be done in that area. Similarly, many IT applications are either "off" or "on".
3.5 Numerical Assessment
3.5.1 Some service aspects are measurable numerically; they can be counted and measured in a simple, mathematical way. Examples would be capacity, throughput, transaction volumes and accuracy.

3.5.2 It is relatively simple to create KPIs for numerical aspects; quality is expressed numerically, and there is a set numerical value, or proportion, that is deemed acceptable. The KPI scoring section provides an example.

3.5.3 It may be desirable to stipulate a desired rate of change in a metric - for example, to process 100 licences a week for the first month and to seek a 2% increase on that figure in each following month. This would be a requirement for continuous improvement.
3.6 Subjective Assessment
3.6.1 Some aspects of a service will be hard to measure because they involve subjectivity - usability and flexibility, for example. However, it is still important to agree what is to be measured and how the information will be acquired - through user surveys, perhaps.
3.6.2 Subjective aspects should not be neglected simply because mathematical techniques cannot be applied to them; it is a question of gathering information and analysing it with as much objectivity as possible.

3.6.3 It may be that something that is quantifiable can provide a 'handle' on a much less tangible aspect. Such a measure is known as a proxy measure, since it acts as a substitute for a measure that cannot easily be created. For example, an indication of "staff morale" may be provided by a measure of staff turnover rate.
Contracting Cycle Length
Efficiency is crucial to improving profit margins. Unfortunately, the contracting process is often anything but efficient. Negotiations frequently stall, drafting can become a seemingly never ending back and forth, and things often break down during the performance phase, which creates a whole bunch of other problems and delays. As a result, companies should pay close attention to the length of its contracting cycles to determine where improvements can be made, as well as which contracting partners may need to be cut out altogether.
If a company notices that it runs into similar problems with one particular vendor or at a certain step in the process, it has to figure out how to adjust to avoid repeating the same mistakes over and over again. As a company's contracting volume increases, it should get easier and easier for each contracting cycle to be completed in a timely fashion, as experience breeds wisdom.
Consistent Quality
Contracting relationships that add value are those that involve parties who perform in a timely manner and do so exactly as stipulated by the contract. It doesn't matter if the contracting relationship relates to the provision of different types of goods or services, there must be consistent quality every time. Companies should not have to scramble to make changes or push back its deadlines to accommodate for any inconsistencies.

If a company cannot rely on a particular contracting partner's ability to perform properly, this will obviously cause problems in the short-term, likely delaying any anticipated output. However, it will also interfere with a company's long-term objectives since problems at any point in the contracting process will end up diverting resources. Thus, companies must make its expectations with respect to quality clear and ensure that these are met every single time.
Schedule Adherence
In addition to receiving quality goods and services from every contractual relationship, timeframes must be established for deliverables, and timeliness should be monitored. Full performance is irrelevant if it occurs months after the fact. Consistent and timely performance over the course of a contracting relationship will make it easier to assess whether long-term goals will be met, and if issues are anticipated far enough in advance, the appropriate adjustments can be made.
Cost Effectiveness
This is probably the most important piece to monitor. And, cost effectiveness is obviously about a lot more than just a contract's price terms. Every phase of the contracting process has to make sense financially. The length of the contracting cycle impacts costs, performance or a lack thereof impacts costs, and the quality of the good or service delivered impacts costs.

Any contractual relationship that ends up requiring the investment of time and resources that were not planned for ahead of time is not cost effective. Therefore, companies must pay attention to the amount of time and money it is spending for each contract to ensure it is getting maximum value.


      Before contract
  • Blend of work force management (WFM) vs. supply chain management (SCM)?
  • How do you identify/approve supplier sources?
  • Do you have a model of all the inputs and outputs for your supply chain?
  • How do you tender?
  • Do you ever consider the "point of origin" when choosing supplies/services?
  • Who writes your contract specifications (eg. roof renewal)?
  • How do you synchronize supply with demand?
      During contract (inventory)
  • How many active contracts do you have?
  • What are all the different types of agreements that you have - consulting, contracting, suppliers, employer/employee, leases, etc?
  • How many active capital leases and operating leases do you have?
  • Do you have a schedule of contracts?
  • Who supplies parts for maintenance?
  • Who owns the equipment (owner or contractor)?
  • What types of ownership (cap lease or op lease)?
  • How many of your contracts are full coverage, full labour and PM
  • Do you coordinate suppliers with other airport stakeholders to secure volume based pricing?
  • How do you determine appropriate spares/inventory holdings? Do you know your critical spares?
  • Who holds spares/inventory - contractors or owner?
  • How do you improve trust and collaboration between supply chain partners?
  • How do you assess the productivity of your supply chain? 
  • Do you know all the risks associated with contract management?
  • Which of the risks have you identified and the mitigation measures?
  • How do you identify supplier contract milestones. Do you record these in a master calendar?
  • How do you review supplier performance against contracts
  • How do you resolve supplier performance issues?

Supply chains are a key upstream factor in organizational success and must therefore be carefully managed. Failure to do so will result in procurement delays, downtime and business interruption.
Fig. Supply chains are a key upstream factor in organizational success and must therefore be carefully managed. Failure to do so will result in procurement delays, downtime and business interruption.

See also:

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