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Consulting Project: Leading waste management company uses external interim management to manage procurement risks associated with major technical projects and optimise procurement costs

 

About our client

Our client, a leading European waste management company had to decide between shutting down one of its waste incineration plants or completely renovating and modernising it. The plant no longer met the current European BAT (best available technology) standards and its outdated technology meant that maintenance and upkeep costs were too high.

The company therefore decided to invest a nine-figure sum in completely renovating and remodelling the plant and initiated one of the most challenging large-scale technology projects in Europe. Well aware that it needed help to plan and implement a project of this scale, the company opted for an innovative approach and turned to a trusted partner.

As a result, INVERTO was brought on board to support procurement operations for the complex waste incineration plant. Given the importance and scope of the project, INVERTO put together a highly experienced project team to act as interim managers and take over responsibility for certain activities over a set period.

Ambitious major project demands a structured approach

The project was to involve the complete modernisation of the old waste incineration plant and plans were made to build a new incinerator and install state-of-the-art steam turbines and cutting-edge power plants. This would not just improve energy efficiency whilst lowering greenhouse gas emissions, but also drive down maintenance costs on a sustainable basis. On its completion, the new plant would be one of the most advanced waste incineration systems of its kind.

These ambitious goals presented major challenges for the INVERTO managers working on the interim project, who were given full responsibility for coordinating and carrying out all the associated procurement operations. Their remit included conducting a preselection process for suppliers, preparing and implementing invitations to tender, carrying out contract negotiations jointly with the client and issuing final approval for the purchasing of products and services.

The team was also tasked with setting up a supplier control and reporting system to assess the risk of supplier failures and had to develop practical key performance indicators (KPIs) that could be used to evaluate supplier performance.

Last but not least, the specialists were to review the existing procurement and payment process and adapt it to the requirements of a modern procurement function. The project was to run for three years, which was a tight timeframe given European tendering guidelines and the approval times needed for a project of this type. What’s more, the project had a highly complex organisational structure and a great deal of work was involved in coordinating the wide range of external offices, interest groups and local, regional and national authorities.

Clear schedule of tasks worked through step by step

Experience shows that projects as complex as this one are extremely likely to involve delays and unforeseen risks. The interim managers from INVERTO thereby understood that risk minimisation would have to be a top priority during the project. In order to keep the project and its more than 70 individual subprojects on track, they opted for a three-pronged approach comprising procurement strategy, contracting and process management.

The first step was to agree the general procurement strategy. All the procurement orders to be issued were collated and reviewed to ascertain whether they should be put out separately or bundled with others to form turnkey orders that could be given to a general contractor. The advantage of agreeing turnkey orders is that the company transfers risk to the contractors, who take on full responsibility for the entire turnkey delivery of the plant, including the performance of their subcontractors. Based on the procurement portfolio, it became clear that the most advantageous option for the company was to compile a mixed strategy comprising individual orders and optimised, larger procurement orders.

Once the strategy had been decided, the project team developed a standardised supplier search and selection procedure based around European tendering regulations. KPIs were defined to identify the financial strengths of suppliers and references were requested for safety-relevant KPIs. This helped the team match suppliers to requirements effectively and minimised the risk that unsuitable suppliers might be included in the tendering process.

Optimising contracting and establishing standards for contracts

The second step in the project was to optimise contracting and establish standards for contracts and all necessary contract appendices. This would ensure that, from that point on, the company would issue only standardised contracts that could be easily compared.

Nine quantitative and qualitative financial, commercial and technical KPIs were used to track the development and status of procurement projects that had been initiated or completed. For the first time, this established an objective basis for assessing projects.

An incentive system was also drawn up in the form of a bonus-malus system that created transparency and helped buyers evaluate how far contractors exceeded or fell short of their requirements. Various specialist functions such as finance, technology, etc. supported the project team in formulating these KPIs, which ensured that the project team and the interim managers had the respect and support of the workforce from the outset.

This interdisciplinary approach helped reduce tension and prejudice between the specialist functions and buyers and improved understanding and awareness for the procurement function and its tasks during the “waste incinerator procurement project”.

Definition of a new general procurement and payment process

The third step centred on the definition of a new general procurement and payment process. The previous process was inadequate, as it didn’t enable the procurement team to plan long-term budgets or identify budget surpluses or shortfalls at an early stage during projects and take appropriate measures in response. What’s more, the “old” contracts often had no explicit information regarding risk distribution or contractual penalties if products or services were not delivered as agreed in the contract.

The key focus when overhauling the procurement and payment process was therefore on checking invoices received against services rendered. In practice, service providers who had been commissioned (e.g. engineers, architects, etc.) often issued their invoices before any studies or plans were available. Consequently, there was no basis on which their services could be reviewed.

The newly designed process is based on a “three-eyes principle”, whereby those placing orders must ensure that the procurement function approves their enquiries and that all deliveries, including partial deliveries, are confirmed . In the new process, this confirmation must be issued before an invoice can be approved for payment. The new procurement and payment process was further strengthened with the formulation of binding procurement guidelines that regulate day-to-day operational business.

Lessons learnt

By commissioning a specialist procurement service provider to take care of the entire procurement project for the construction of one of Europe’s most advanced waste incineration plants, the company opted for an innovative approach to the management of large-scale technical projects. It also ensured that the entire procurement process was restructured and configured for the scope of such a large project, significantly reduced the risks and complexity of procurement and drove down costs.

Today, the company has a tool kit that will enable it to plan future procurement projects in a clear and structured manner and implement them efficiently. In concrete terms, the project delivered improved cost transparency and bundled often very different procurement orders to form consistent contract sizes and turnkey contracts. In doing so, it limited risks and created a basis for achieving cost savings.

By introducing standardised contracts, the project team enabled the company to compare its suppliers effectively for the first time. And by establishing objective KPIs it created a clear basis on which procurement and specialist functions can now assess and evaluate the work of suppliers.

Furthermore, the supplier control and monitoring system was rounded off with newly designed procurement and payment processes that ensure invoices are only settled once all services have been provided and approved. All this helped to improve working capital.

Putting in place structured procurement management enhanced the long-term position of the procurement function vis-à-vis suppliers while the positive results it generated for the project also impressed the entire company and gave procurement a new status within the organisation.

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