Procurement Management Speaker: Gregg Macaluso

303.406.1447 gregg.macaluso@celerantconsulting.com

December 14, 2010

Prepared For: Jim Marlatt OPIM 4080

Prepared By:

Jonathan Degenhardt

303.378.4155 jddegen@comcast.net

Connor Hutchinson 720.987.7596

connor.hutchinson@colorado.edu

Wes Lorenzen 719.231.4479

wesley.lorenzen@colorado.edu

Table of Contents

List of Attachments iii

Executive Summary iv

Material Presented to Speaker v

Summary of Speaker Presentation v

Synthesis of Presentation and Class Discussion vi

Appendix A vii

Appendix B xi

Appendix C xvi

Appendix D xxiv

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List of Attachments

Appendix A: Strategic Sourcing Strategy Diagrams, Gregg Macaluso vii

Appendix B: Class Activities: Contracts and Negotiation xi

Appendix C: PMBOK Procurement Management Slides xvi Appendix D: Group Presentation Slides xxiv

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Executive Summary Material Presented to Speaker

While researching potential speakers, Mr. Macaluso was presented with a copy of the Project

Management Body of Knowledge (PMBOK) presentation given in class. Specifically, Mr.

Macalsco discussed contracts used in procurement, negotiation strategies, and make/buy

decisions.

Summary of Speaker Presentation

Mr. Macaluso had total freedom to design his presentation as he saw appropriate to the topic of

procurement management. He discussed his role at CH2M Hill as the Vice President of Strategic

Sourcing and presented the challenges of working within a projects-based organization like

CH2M Hill. Specifically, the culture of the company was dominated by project managers who

were uniformly engineers. He talked about his strategic sourcing initiative that aimed to increase

margins by 50% (from 1% to 1.5%) by aggregating procurements and finding synergies with

common purchases in order to leverage negotiating power. He further explained a strategic

sourcing diagram to illustrate six separate negotiation strategies based on relative position in the

marketplace.

Synthesis of Presentation and Class Discussion The procurement group presented an overview of the PMI Procurement Management chapter as

well as a review of Mr. Macaluso’s presentation on Strategic Sourcing. The class reviewed

common contract types and completed a contract activity worksheet to refresh situational

contract choices and consequent risk for buyers and sellers. Various negotiation tactics were

described and the class did three activities. The class also discussed the various differences

between PMI’s organizational structure and Mr. Macaluso’s role at CH2M Hill.

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Material Presented to Speaker

Initially, the procurement group presented Mr. Macalusco with a summary of the goals of the

class: to understand the Project Management Institute (PMI) methodology and to network with

professionals in the project management field. Mr. Macaluso has significant experience in the

project management workspace: as a consultant for Arthur Anderson, as the VP of Strategic

Sourcing at CH2M Hill, and as a director for Celerant Consulting. His project experience is

broad and spans the fields of construction, environmental and manufacturing. Pertaining to

OPIM 4080, Mr. Macaluso was presented with a copy of the Project Management Body of

Knowledge (PMBOK) presentation given in class. This overview served as a general explanation

of our class’ understanding of Procurement. Specifically, the procurement group described to

Mr. Macaluso the subtopics of Contracts, Negotiation and Make/Buy Decisions. Attached in

Appendix C are the PMBOK slides that Mr. Macaluso referred to prior to his presentation.

Summary of Speaker Presentation

Mr. Macaluso began his presentation with a brief description of his career. He started out by

talking about his initial consulting job with Arthur Anderson, which involved a huge amount of

travel. He worked at Arthur Anderson for a relatively short period of time, then moving on to

CH2M Hill.

Ch2M Hill undergoes approximately twenty thousand projects at a time, and it made up of

eleven different business groups such as Environmental, Nuclear, Water, Transportation, and

OMI, with has to do with municipal projects. He briefly spoke about some projects that CH2M

Hill was involved with in the past, such as industrial design and construction and water treatment

facilities. CH2M Hill will be performing projects in the future such as preparing for the 2012

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Olympics in London and the widening of the Panama Canal. In this section of the presentation he

detailed the general structure of the company, in which each project the company was

undertaking was headed up by a project manager, who was always an engineer. During his time

there, Mr. Macaluso sold the company on focusing more on procurement, and basically created

his new job of Vice President of Strategic Sourcing. In this occupation, he concentrated on

finding synergies between the project managers and enterprise wide procurement solutions.

While occupying this position, he got a meeting with the company CEO and attempted to

revolutionize the way they do business by suggesting that the company find synergies with

common purchases between separate projects. This idea was abruptly shot down because

although it would most likely allow the company to operate much more profitably, it would take

power away from the project managers, who are the most important part of the company.

Mr. Macaluso then went into detail about a Sourcing Group Positioning Matrix, which is a

tool for evaluating your negotiation strategy based on the complexity of the supply market and

the relative monetary impact you procurement on the marketplace. Along with this matrix was a

hexagon that displayed six different strategic sourcing approaches: volume concentration, best

price evaluation, global sourcing, product specification improvement, joint process

improvement, and relationship restructuring. The use of one of these approaches depends on

your relative strength in the marketplace.

Synthesis of Presentation and Class Discussion

The presentation and class discussion began with an overview of the material that Mr.

Macaluso presented the previous class period. This lead into a discussion of the importance of

understanding the organizational culture of a company. The discussion then focused on the

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difference between standard PMI procedures and the structure of CH2M Hill. Strategic

sourcing, a topic introduced by Mr. Macaluso, was the next item to be presented on.

For the class presentation the class was provided with an overview of topics from the

procurement chapter of the PMI book. A few topics that were focused on were contract types,

negotiation techniques, and summary of closing procurements. A variety of different activities

were developed aimed at engaging the class with the material. The first activity was an activity

on contracts and contract types. Using material from the PMI Book a worksheet was provided to

the class with an overview of contract types as well as two different exercises that tested their

understanding of the contracts. The second activity was focused on different negotiation

techniques. The class was provided with a matching worksheet with different negotiation

techniques; once completed the class was split up and provided a prompt explaining a

negotiation situation. The class then used the matching worksheet as well as information

provided on the slides to engage in a real negotiation. A brief analysis of the exercise was done

to further emphasize the material. Copies of the class exercises are attached in Appendix B. The

presentation was completed by a brief recap of closing procurements, further stressing the

importance of documentation and lessons learned.

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Appendix A

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Appendix B

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Procurement Management - Contract Exercise Common contract types:

• Cost Reimbursable - usually for service (and some goods) • Fixed Price – usually for goods • Time & Materials – usually for service

Specific Contracts:

Purchase Order PO ‐ Simplest form of Fixed Price Contract, often used for commodity goods 

Fixed Price Incentive Fee FPIF ‐ Fixed price with profits depending on performance: time, cost or quality 

Cost Plus Fixed Fee CPFF ‐ Costs are reimbursable but fees are fixed 

Cost Plus Incentive Fee ‐  Costs are reimbursable, profits depend on performance 

Cost Plus Percentage of Cost CPPC ‐       Requires buyer to pay all costs and use costs as a basis for fees charged by seller. Seller has   no incentive to control costs   

Time and Material TM ‐ Often done on a per‐unit or per‐hour basis, often when the scope of the work is unknown 

Who has the most risk with the following contracts? The buyer or the seller?

PO buyer / equal / seller FPIF buyer / equal / seller CPFF buyer / equal / seller CPPC buyer / equal / seller TM buyer / equal / seller CPIF buyer / equal / seller

Scenarios Of the above mentioned contracts, which would be best for the following situations?

1. You are a maintenance contractor and you are hired by a HOA to clean the gutters of 120 houses in a subdivision. The houses are newly built and appear to have regular maintenance and not many trees. FP

2. You are a general contractor hired to build a new concrete and steel building. Your client needs to have it built by a certain deadline. They are willing to pay more if you can complete the job sooner. CPIF or FPIF

3. You are a manufacturer and you receive a RFQ for one of your products from a foreign distributor. PO

4. You know exactly what needs to be done FP 5. The project requires a high level of expertise to complete and you want the best possible

performance in the finished product CPIF 6. You need work to start right away. TM 7. Many government agencies are prohibited from using this type of contract. CPPC

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Negotiation Exercise

Global Coffee Shop Company You are the procurement manager for a global coffee shop company. You are in need of very specific high quality Arabica coffee beans from Latin America. You have traveled to Mexico to try to work out a deal with the head of a small coffee farm. You must deliver the beans to the roaster within 60 days in order to make the deadline for the new blend your company is working on. You also have been told that you cannot spend more than $6/bushel. The fair trade value of the coffee is $5/bushel, and you cannot pay below that price. You were just recently promoted to procurement manager and this is your first big project. You definitely do not want drop your first contract. Please use any of the negotiating techniques to help secure your deal.

Negotiation Exercise

Small Coffee Farm You are the owner of a small coffee farm in Latin America. Luckily for you the Global Coffee Shop Company has taken interest in your finest quality beans. The Global Coffee Company wants to pay fair trade value, which is around $5/bushel, for the beans and have them delivered to their roaster 60 days from now. There are a few problems with this plan. You have done the calculations and believe that the fair trade value estimate is too low and that to break even you will need to sell your beans for no less than $9/bushel. You would like to make some sort of profit so you are offering your beans at $10/bushel. You can however offer them at a lower price if you can extend the deadline to 90 days. Business has been slow this year and a contract with Global Coffee Shop Company is a once in a lifetime occurrence, so you are not willing to lose them as a client for any reason. Please use any of the negotiating techniques or techniques from the strategic sourcing diagram to help secure your deal.

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Negotiation Tactics Activity Master Key 1. Attacks “If your organization can’t manage the details of its own operations, perhaps it should get out of the business” 2. Personal Insults “If you do not understand what you are doing, perhaps you should find another job!” 3. Good Guy/Bad Guy “I don’t think that we can agree to any of the terms in this contract” “Well let’s work together to see if we can work this out” 4. Deadline “We have a flight leaving at 5pm today and must finish negotiations before that time” 5. Limited Authority “I can’t agree to shorten my schedule by six months. I have only been authorized to offer three months” 6. Missing Man “Only my boss can agree to that request, and he isn’t here. Why don’t we agree to a price of $5 per unit. I can agree to that” 7. Fair and Reasonable “Lets be fair and rational. I think you should accept this offer as it stands” 8. Delay “Let’s revisit the issue the next time we get together” 9. Extreme Demands “We planned to give you a computer manufactured in 1988 to meet the requirement to deliver ‘a computer’ in the contract” 10. Withdrawal “This negotiation doesn’t seem to be getting anywhere and I think it may be becoming a waste of time” 11. Fait Accompli “These government terms and conditions must be in all our contracts”

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Negotiation Tactics Activity 1. “If your organization can’t manage the details of its own operations, perhaps it should get out of the business” 2. “If you do not understand what you are doing, perhaps you should find another job!” 3. “I don’t think that we can agree to any of the terms in this contract” “Well let’s work together to see if we can work this out” 4. “We have a flight leaving at 5pm today and must finish negotiations before that time” 5. “I can’t agree to shorten my schedule by six months. I have only been authorized to offer three months” 6. “Only my boss can agree to that request, and he isn’t here. Why don’t we agree to a price of $5 per unit. I can agree to that” 7. “Lets be fair and rational. I think you should accept this offer as it stands” 8. “Let’s revisit the issue the next time we get together” 9. “We planned to give you a computer manufactured in 1988 to meet the requirement to deliver ‘a computer’ in the contract” 10. “This negotiation doesn’t seem to be getting anywhere and I think it may be becoming a waste of time” 11. “These government terms and conditions must be in all our contracts”

Place the number of the statement in the appropriate box

Limited Authority

Extreme Demands

Fait Accompli Delay Personal Insults

Deadline

Fair and Reasonable

Attacks Good Guy/Bad Guy

Missing Man Withdrawal

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Appendix C

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Appendix D

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