LAB ASSIGNMENT 2 – 60 MARKS (10%)

After completing this lab session, you should be able to:

• Identify the systematic process on project procurement management.
• Use the make-or-buy cost analysis in planning and purchasing.
• Use the weight scoring model in selecting seller’s proposal.

12.1 Introduction to Project Procurement Management

Project Procurement Management involves engaging in a systematic process to purchase or acquire

the needed products, services, or results from an outside source which will perform the work.
Procurement Management encompasses contract management and control processes necessary to
administer contracts or purchase orders. It also includes processes which assist in administering a
contract to assure the buyer/seller relationships are properly managed. The procurement
management processes are:

• Plan Purchases and Acquisitions – This process is part of planning process group and it
involves in identifying what is needed, and when it is needed. Then how to ensure that you
have what you need when you need it.
• Plan Contracting – Plan Contracting is commonly first engaged in the planning process
group. The Plan Contracting process involves documenting the products, services, and
results requirements and identifies potential sellers.
• Request Seller Responses – Request Seller Responses process obtains information,
quotations, bids, offers, or proposals from sellers as appropriate. This is a part of the
executing process group
• Select Sellers – This is commonly a part of the executing process group. The Select Sellers
process is where the offers are reviewed, and a chosen vendor rises to the top of the
Analytical Hierarchy Process. Commonly negotiations are started in written form.
• Contract Administration - This is a part of the monitoring and controlling process
grouping. The Contract Administration Process manages all aspects of the contract and the
relationship between the buyer and the seller including managing seller performance

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 and changes, providing a basis for future work, and managing the relationship with the
project’s buyer.
• Contract Closure - The Contract Closure Process ensure completion and settling terms of
any contracts including resolving any open items and closing each contract.

Each Procurement Management process results in a specific deliverable which is used as the
foundations for the subsequent process. Combined the procurement management processes
provide a best practice pattern for managing contracts and vendor relationships on a project.

12.2 Planning Purchases and Acquisition

Planning Purchases and Acquisition involves identifying which project needs to use products or
services outside the organizations. An important output of this process is make-or-buy decision.
There are a few tools and techniques in order to help project managers in making decision such as
make-or-buy analysis, expert judgement and contract types.

In this lab we will look into make-or-buy analysis techniques. A cost comparison is important for
two reasons. First, a multi-year/month/day analysis is more likely to reveal whether outsourcing
will generate long-term savings. Second, a multi-year contract is usually more attractive to
potential vendors, which creates more competition and drives down the costs of the contract.
Below are some guidelines on performing the make-or-buy analysis.

How To Perform A Make-Or-Buy Cost Analysis

A make-or-buy cost analysis involves four basic steps:
* Step 1: Define the service
* Step 2: Calculate the in-house costs that could be avoided by outsourcing the service
* Step 3: Calculate the total costs of outsourcing
* Step 4: Compare the cost savings from outsourcing to the costs incurred
To simplify the step, the analysis is limited to a single year. In actual practice, the analysis should
cover a three- to five-year period, and steps 2 through 4 should be repeated for each year.
The totals for each year should be discounted to their present value.
Example of make-or-buy analysis case study:

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Suppose you need a piece of equipment for a project that has a purchase price of $12,000. Assume
it has a daily operational cost of $400. Suppose you could lease the equipment for $800 per day,
including operational cost.

Step 1: Lease a piece of equipment.

Step 2: In house cost = ($400 x 30 days) + $12,000 = $12000 + $12000 = $24,000
Step 3: Total cost outsource = $800 x 30 days = $24,000
Step 4: If you compare, the purchase and lease cost is equal.

Referring to this case study, it is practical for you to decide whether you need the equipment for
more than 30 days. If you need less than 30 days, it is advisable to lease it rather than purchasing
it.

12.3 How to Select Sellers

Buyers are advice to select the appropriate sellers once they receive the appropriate proposals by
accepting or rejecting it. This is often called as source selection and it take a long period to decide.

Experts in source selection highly recommend the buyers to use formal proposal evaluation sheets
during source selection. One of the valid tools is weight scoring model.

These are the steps in identifying the weight scoring model:

1. Identify criteria important to the project selection process.

2. Assign weights (percentages) to each criterion so they add up to 100 percent.

3. Assign scores to each criterion for each project.

4. Multiply the scores by the weights to get the total weighted scores.

In conclusion, the higher the weighted score, the better. The sample of evaluation sheet for
selecting sellers is as shown in Table 12.1. In this example the highest weight is Project 2 which
is 78.5: -

Table 12.1: Sample Proposal Evaluation Project using weight scoring model

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 12.4 Lab Assignment 2 (Individual Exercise) – 60 Marks (10%)
Answer Question 1 and 2. Submit your exercise in ULearn.

Question 1: Make-or-Buy Analysis

i. Suppose that your company is trying to decide whether it should buy the equipment for terminating
the fiber cable, which takes thirty days. Suppose that leasing the equipment costs
RM1500 per day. Buying the equipment costs RM15000 plus RM150 per day as operation
cost. Your task is to help your company to decide whether to go on to lease the equipment or
to buy on its own.
a) Explain how to make the make-or-buy calculation.
A make-or-buy cost analysis involves four basic steps:
* Step 1: Define the service
* Step 2: Calculate the in-house costs that could be avoided by outsourcing the service
* Step 3: Calculate the total costs of outsourcing
* Step 4: Compare the cost savings from outsourcing to the costs incurred
(2 Marks)
b) Perform the make-or-buy calculation for the problem above.
Step 1: Lease a piece of equipment.
Step 2: In house cost = ($150 x 30 days) + $15000 = $19500
Step 3: Total cost outsource = $15000 x 30 days = $45000
Step 4: If you compare, the purchase and lease cost is equal.

150d + 15000 = 1500d

15000=1500d-150d
15000=1350d
15000/1350=d
d=11.11
d=11
(5 Marks)
c) Based on your calculation result, justify briefly whether the equipment should be
leased or purchased.
Equipment should be buy because only in day 12 the lease cost have been exceed the
buying cost. So if the equipment need to be used its better to buy instead.

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 (3 Marks)

ii. Your company intended to decide on buying or leasing the equipment for testing and reporting
the Wifi coverage in twenty locations, which takes thirty days. Suppose that leasing the
equipment costs RM1000 per day. Buying the equipment costs RM10,000 plus RM125 per day
as operation cost.
a) Perform the make-or-buy calculation for the problem above.
Step 1: Lease a piece of equipment.
Step 2: In house cost = ($125 x 30 days) + $10000 = $13750
Step 3: Total cost outsource = $1000 x 30 days = $30000
Step 4: If you compare, the purchase cost is lower.

125d + 10000 = 1000d

10000=1000d-125d
10000=875d
10000/875=d
d=11.11
d=11
(5 Marks)

b) Based on your calculation result, justify briefly whether the equipment should be leased or
purchased.
(3 Marks)

Question 2: Selecting the Appropriate Seller’s Proposal.

i. The Perbadanan Perindustrian Johor has provided three IT project proposals to upgrade their
network infrastructure. The top management of Perbadanan Perindustrian Johor has decided
to implement the weighted scoring model to accept only two proposals in order to control
cost. The selection criteria are listed below:

• Available spare parts: 5% Technical Expertise: 25% Established Product: 25%

• 3 years warranty: 15%
• Established Company: 15%
• Branch in Melaka: 15%
Upon analysis, the score for Project 1 for each criterion is 90, 70, 90, 90, 90 and 50 respectively.
The score for Project 2 are 90, 80, 70, 70, 80 and 90. For Project 3, they are 90, 20, 50, 60, 60,
and 90.

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 (a) Tabulate a weighted scoring model similar to Table 12.2 and determine the project
proposal that should be rejected. Justify your selection based on your result.
(10 Marks)
Table 12.2: Project Proposal Evaluation Project
Proposal 1 Proposal 2 Proposal 3
Criteria Weight Rating Score Rating Score Rating Score
Available spare parts 5 4.5 90 4.5 90 4.5 90

Technical Expertise 25 17.5 70 20 80 5 20

Established Product 25 22.5 90 17.5 70 12.5 50

3 years warranty 15 13.5 90 10.5 70 9 60

Established Company 15 13.5 90 12 80 9 60

Branch in Melaka 15 7.5 50 13.5 90 13.5 90

Total Scores 100% 79 480 78 480 53.5 370

Proposal 3 and 2 should be rejected cause it has lower weight score

b) Besides the weighted scoring model, list other methods for selecting IT projects.
Implementing a balance scoreboard
(1 Marks)

(c) What are the main types of contracts that you have to implement if you decide to
outsource?

Fixed price or lump sum contracts: involve a fixed total price for a well-defined
product or service

(2 Marks)

(d) Briefly describe FOUR (4) reasons on outsourcing.

• To reduce both fixed and recurrent costs
• To allow the client organization to focus on its core business
• To access skills and technologies
• To provide flexibility

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 (4 Marks)

ii. Your management has decided to implement indoor and outdoor wireless networking project in
your organization. Your top management has decided to use the weighted scoring model to
accept only one proposals due to cost limitation. Therefore you have to identify the proper
selection criteria to fulfill the project’s goal. The list of percentage for your proposed selection
criteria are listed below:
• Criteria 1: 30%
• Criteria 2: 25%
• Criteria 3: 20%
• Criteria 4: 15%
• Criteria 5: 10%

The score obtained for Project 1 for each criterion is 90, 70, 80, 70 and 70 respectively. The score
for Project 2 are 90, 60, 70, 70 and 80. For Project 3, they are 90, 90, 50, 60 and 70.

(a) Proposed your FIVE (5) selection criteria for accepting this project proposals.

• Cost
• Technical Approach
• Management Approach
• Warranty
• Technical Assist
(5 Marks)

(b) Briefly explain the importance of each selected criteria in ii (a) related to the percentage
given above.
• Cost – Cost for the project
• Technical Approach- Cost for setup it
• Management Approach – Project Management
• Warranty – Warranty for sparepart
• Technical Assist – Tehnical Assist after installation
(5 Marks)
(c) Based on selection criteria obtained in ii (a), tabulate a weighted scoring model.
Proposal 1 Proposal 2 Proposal 3
Criteria Weight Rating Score Rating Score Rating Score

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 Criteria 1 30 27 90 4.5 90 4.5 90

Criteria 2 25 17.5 70 20 5 22.5 90

Criteria 3 20 16 80 14 70 10 50

Criteria 4 15 10.5 70 10.5 700 9 60

Criteria 5 10 7 70 8 80 7 70

Total Scores 100% 78 61.5 53

(10 Marks)

(d) Determine the project proposal that should be rejected and accepted. Justify your selection
based on your result.
Proposal 1 should be accept because its has the highest weight score while proposal 2 and 3
should be rejected
(5 Marks)