Guidelines on Purchasing Practices

Procurement Manual
Section III

SELECTING QUALIFIED VENDORS

1. Vendor selection and evaluation is a process that can take some time and energy depending on the product or service, but is well worth the effort when the vendor chosen is competitively priced and responsive to the needs of the University.
2. The first step in selecting vendors is often research, particularly if the product or service has not been purchased before. There are a number of tools available for this initial phase:
   • Use library references such as the Thomas Register or Moody's Industrials.
   • Check the Internet. For procurement related websites see Helpful and Interesting Web Sites.
   • Consult the Yellow Pages for local suppliers.
   • Consult trade publications, directories, vendor catalogues, and professional journals.
   • Talk to salespersons.
   • Talk to colleagues in other institutions who might have purchased a similar product or service.
3. Once a list of potential vendors has been developed, begin evaluating each supplier's capabilities. Obtaining a Dun & Bradstreet financial report ('running a D&B') is a good place to start. However, a D&B contains only publicly available information or information that the vendor chooses to provide. Some D&Bs also include brief profiles of key management personnel and historical information on the company. Buyers can also check with local Better Business Bureaus.

Harvard Business School's Baker Library offers many financial databases through a PIN login at http://www.library.hbs.edu/.

4. There are a number of guidelines for vendor selection*:
   • Investigate a vendor's financial stability.
   • Check bank references.
   • If time permits and the supplier is a public corporation, obtain a current annual report.
   • Find out how long the vendor has been in business.
   • Find out who are the vendor's primary customers and ask for and check references.
   • Tour the vendor's facilities, if possible.
   • Does the facility appear prosperous?
   • Does the vendor use state-of-the art technology?
   • Is the vendor really interested in doing business with the University?
   • *Vendor partners have been pre-qualified.
5. These steps should narrow the field to the three to five vendors who will be asked to bid on the particular product or service.

PREPARING AND EVALUATING A BID

Bidding goods and services is a useful process for several reasons. The bidding process:

• allows the buyer to "comparison shop" for the best pricing and service
• allows the buyer to make an informed and objective choice among potential vendors
• encourages competition among vendors
• gives the buyer a standard for comparing price, quality, and service
• gives the buyer a list of qualified vendors for future bids

NOTE: Depending on the commodity, educational pricing, based on GSA (General Services Administration) pricing may be available. If a vendor offers GSA pricing or educational pricing based on GSA pricing, take it. You won't do better.

The bid process begins with the buyer developing a set of specifications or objectives. The buyer must do some homework, and be able to define the requirements exactly. The buyer can consult colleagues, technical personnel, trade manuals, and vendors for assistance in developing specifications. The buyer then communicates the requirements to the selected vendors by a written Request for Quotation (RFQ) or a Request for Proposal (RFP).

1. The RFQ process is designed to identify the vendor who can meet the buyer's requirements for the best price. The RFQ should be used for bidding familiar, standard items. Price, delivery and inventory are usually the most important elements of the RFQ. The RFQ should contain ALL the information necessary for the vendor to submit a valid quote:
   • The product(s) should be described in detail.
   • Specifications should be clear, concise and complete.
   • Quantity, quality requirements, packaging, F.O.B. point, payment terms, and warranty, delivery and
   • inventory requirements should all be included in the RFQ.
2. An RFP should be used for bidding services such as consulting, advertising, publication, maintenance, and computer programming. The RFP usually begins with a statement of purpose or goals and objectives - what the buyer hopes to accomplish. The RFP:
   • should clearly define an acceptable level of performance for the vendor and a definite time frame for achieving this goal
   • should ask the vendor to describe the qualifications of those individuals who may be involved in implementing the goals and objectives of the RFP
   • should ask for all of the information contained in an RFQ (see above) but also can ask for input from the vendors. The vendors might be asked how they would meet a specific objective, what unique contributions they would make toward achieving the goals outlined in the proposal, and what alternative proposals they would offer. The vendors might also be asked to solve specific problems concerning time constraints, new technology, or on-the-job training for end users. "How" is as important as "how much".
3. Tips on preparing a bid (RFQ or RFP):
   • The buyer needs sufficient time to prepare a good bid and the vendors need sufficient time to respond (two to four weeks).
   • All vendors should receive identical copies of the RFQ or RFP and any subsequent changes in the bid specification.
   • Specify a deadline for submitting all bids. If the deadline is extended for one vendor, it must be extended for all.
   • All vendors should be notified in writing if the bid specifications change. If the changes are substantial, it may be necessary to extend the submission deadline. All vendors should be notified of the extension in writing.
   • If the buyer receives a number of questions about the bid, the buyer should consider holding a pre-bid conference. The buyer will have an opportunity to clarify the RFQ or RFP for all the vendors and no vendor will have the unfair advantage of additional information.
   • When the bids are received, the buyer should sign, date and indicate the time that each is received. All competitive bids are confidential and should never be used as a bargaining tool.
4. Tips on Evaluating bids:
   • Take the time to review the bids carefully.
   • Narrow the field by determining which vendors are "responsive". A "responsive" bid provides ALL the information asked for and addresses ALL the issues in the RFQ or RFP. Eliminate bidders who are unresponsive.
   • Look carefully at proposed prices. Be wary of a vendor who substantially underbids his competitors. He may be 'low-balling" to win the bid but the quality of his product could suffer or he might be unable to meet the delivery requirements. A substantially lower price might also indicate that the vendor has misunderstood or misinterpreted the requirements.
   • If appropriate, obtain and evaluate samples.
   • If the bidding is close, ask for extended warranties (if appropriate) and compare prices.
   • Consider the vendors' past performances, after-sale support and services, technology, and the creativity used to meet the buyer's requirements or objectives.

NEGOTIATION TECHNIQUES

Negotiating successfully takes skill and practice and should result in a win - win situation for both the buyer and the seller. Good negotiators:

• do their homework
• clearly understand their requirements and objectives
• develop strategies
• never lose sight of their goals
• know where they can afford to compromise and where they cannot
• make sure their negotiating teams have whatever expertise (technical, financial, legal) is needed to increase the chances for a successful settlement
• make an effort to anticipate the vendor's strategy and to determine what the vendor hopes to gain from the negotiation process.

When to Negotiate
Buyers should negotiate when:

• the purchase involves a significant amount of money or represents an on-going effort
• the number of vendors available are too few to competitively bid the purchase (the buyer can't be sure of getting a fair price)
• new technologies or processes are involved for which selling prices haven't been determined yet
• the vendor must make a substantial financial investment in equipment, technology or other resources
• not enough time is available to competitively bid the purchase.

Negotiation Strategies
Whenever possible, the buyers should:

• negotiate on their own "turf". The physical environment should be pleasant, well ventilated and lighted
• prepare an agenda and brief the members of the negotiating team beforehand so that their strategy isn't compromised
• never lose sight of the target - what should be gained from the negotiation
• have confidence in their facts and figures. Never use information that could be questioned or proven inaccurate.
• negotiate only with vendor representatives who are empowered to make concessions
• leave plenty of room to maneuver. The greater the initial demands, the greater the probability for success.
• not be afraid to be silent. Silence can be an effective negotiating tool. If the vendor fears he is losing the business, he may talk himself into offering more and better concessions than expected.
• call a recess or lunch break if negotiations break down.
• always withhold something for concession in return for a point the vendor is willing to concede.
• always be fair. The vendor is entitled to a reasonable profit - one that allows him to stay in business for the long-run.

Negotiation Strategies to Avoid
Buyers:

• shouldn't reveal their strategies too early into the negotiation process
• should avoid getting so bogged down in details that the overall objectives are lost
• should never try to prove the vendor wrong. Leave the vendor room to retreat gracefully from a stated position.
• should avoid displays of temper, frustration and anger that can handicap the negotiation process and logical thinking.
• should not communicate anything to the vendor that reduces bargaining power, for example: "You're our only source." "We have $21K budgeted for this purchase." "I have to have it now." etc. Be intelligent and cautious.

EQUIPMENT MAINTENANCE AND SERVICE AGREEMENTS

Computers, scientific, diagnostic and testing equipment, and other specialized equipment require on-going periodic maintenance after warranties expire. One of the primary benefits of negotiating a service/maintenance agreement with the manufacturer is that the manufacturer has ready access to the parts and factory trained personnel required to maintain or repair the equipment.

New Equipment

If the equipment purchase is a 'one time' buy, service and maintenance requirements should be addressed in the bid or during negotiations with the vendor. In evaluating RFQs and RFPs, costs for service and maintenance should always be considered as part of the total price of the equipment. The LIFE CYCLE COST of the equipmentincludes purchase price for the equipment and the cost of service/maintenance extended over the useful life of the equipment - about 7 to 10 years. If the equipment will be rented or leased, the buyer should carefully review the service coverage offered as part of the rent/lease program for adequacy.

Developing Service/Maintenance Agreements for New or Previously Purchased Equipment

Buyers negotiating equipment maintenance/service agreements should fully describe the scope of the work to avoid any misunderstandings or unsatisfactory levels of service. Terms and conditions that should be agreed upon between the buyer and vendor include working hours, labor, excluded services (what the vendor is not obligated to do), warranty, excluded parts, response time, loaner equipment, and appropriate insurance coverage. Vendors usually have standard terms and conditions available for review by the buyer. If the buyer feels additional services might be required or if the terms and conditions require amending, the buyer should negotiate these elements with the vendor before the service/maintenance agreement is signed. The buyer should also try to negotiate shipping terms in case the equipment needs to be returned to the manufacturer for repairs.

Equipment that can be serviced under a common agreement should be grouped and identified by model number and manufacturer. If a number of pieces of equipment need servicing, the vendor might be willing to extend a quantity discount. The buyer should request information from individual manufacturers on standard maintenance agreements and what, if any, policy the manufacturer has on maintaining another manufacturer's equipment. The buyer and vendor should develop a mutually agreeable maintenance schedule so that the equipment will be available and accessible for servicing.

If time permits, the buyer should look at the cost of obtaining an independent contractor to handle repairs and maintenance versus the original equipment manufacturer (OEM). Service representatives from the OEM may have to travel some distance to repair your equipment - travel time the buyer will have to pay for.

Sometimes, an independent contractor will be able to handle service and repair requirements for a lower rate because the service representatives are closer. However, the buyer must be confident that the independent contractor can obtain the parts and personnel needed to service and repair the equipment.

PURCHASING CAPITAL EQUIPMENT

A Capital Equipment purchase is equal to or greater than $5,000 and has a useful life span of two or more years.

For additional information regarding capital equipment purchases, go to the Equipment Management web site at http://vpf-web.harvard.edu/osr/support/sup_spe_equip_new02.shtml.

For information on fixed assets and capitalizing equipment purchases, call the Office of Fixed Asset Accounting at 617-495-3766 or check the Equipment Decision Tree, which has been developed to help distinguish capital equipment purchases from noncapital equipment purchases and to identify the correct range of object codes to use when acquiring capital equipment. Equipment decision tree examples are also available to guide you.

Lease or Buy

Equipment purchases usually involve a substantial financial commitment - the purchase price of the equipment and the cost to service and repair it. Before purchasing the equipment, the buyer should determine whether or not a short term lease will satisfy the needs of the end user and whether or not a similar piece of equipment exists on campus, is available, and will satisfy the needs of the end user. If the buyer decides to lease the equipment, provisions should be made for upgrading the equipment, if needed.

Making the Buy

Once the decision has been made to purchase the equipment, the buyer should prepare the specifications, select the vendors, and develop the RFQ or RFP. If the equipment is standard and requires no modifications, the buyer can use the RFQ format (Preparing and Evaluating a Bid). If the equipment requires specific modifications, the buyer should use the RFP format (Preparing and Evaluating a Bid) and clearly define the specifications and the scope of the work to be performed.

Guidelines for Shipping Capital Equipment

Negotiate the F.O.B. Point (Requisition/Purchase Order). If the terms are F.O.B. Destination, the vendor is legally responsible for the equipment until it is delivered to the specified location and, if the equipment is damaged in transit, is also responsible for filing the freight claim. If the terms are F.O.B. Origin, Harvard is legally responsible for the equipment in transit from the vendor's warehouse or dock. Harvard would file a freight claim if the equipment is damaged in transit. When the F.O.B point is Origin, the equipment should be insured for full replacement value through the Harvard University Insurance Office (495-8668).

Other Issues to Address Before Purchasing Capital Equipment:

• Physical Site Preparation
  Does the receiving site have any limitations such as truck size, weight, or accessibility? Have provisions been made to remove old equipment, if necessary? Can the floor structurally support the equipment? Are freight elevators available and will the equipment fit? (Take the time to measure doorways and elevators.) Are electrical connections in place and compatible? Will the new equipment interface with existing equipment and how will this be accomplished? Request that the vendor give notification 24-48 hours before delivery.
• Installation
  Who will be responsible? What does it include? If the installation will be performed by the vendor's personnel, make sure the vendor has adequate liability and worker's compensation insurance. Can University personnel install the equipment? How long will installation take? Is installation a separate cost or included (F.O.B. Installed).
• Training
  Is training available for end users? Where will it take place? How long will it take? Is training included in the purchase price? Is a user's manual included, complete with parts list and schematic, and in English? Will the vendor provide on-going technical assistance if needed?
• Acceptance
  The equipment is expected to conform to certain performance specifications and should be tested before the buyer/end user authorizes payment to the vendor.
• Warranties
  Warranties should begin from the date of installation and training. The equipment should be operational and personnel fully trained. The buyer should avoid taking partial shipments and risk warranties on components expiring at different times. If the equipment is to be stored, arrange with the vendor for an extended warranty or have the vendor activate the warranty after the equipment has been installed and tested. Otherwise, the warranty may expire before the equipment is up and running. Buyers may find an extended preventative maintenance agreement more cost effective than whatever discount terms the vendor is offering.
• Service and Maintenance
  See Equipment Maintenance and Service Agreements (above)
• Payment Terms
  Negotiate payment terms with the vendor and specify the terms on the purchase order. Occasionally, vendors will request a partial payment when the order is placed, another payment when the order is shipped, and final payment when the equipment is accepted. Progress payments are typically made if the equipment is expensive or has been customized to the end user's specifications.
• Vendor Terms and Conditions of Sale
  Buyers should pay particular attention to the fine print on the vendor's written quotation. Some items may be negotiable, some are not. Review order cancellation policies carefully. Penalties for cancellation can involve a substantial portion of the purchase price - particularly if the equipment has already been customized to meet very specific requirements.
• Foreign Import
  Contact the Harvard University customs broker DHL Danzas AEI 617 886-6652 for information on required forms and duty charges. To apply for duty free entry for scientific equipment, see Duty-free entry for Scientific Equipment.
• Bonds
  If the equipment is complex, customized, and expensive, the buyer may require a Bid Bond, which binds the vendor to his offer (the vendor's quotation or proposal) to sell the equipment; a Supply Bond, which guarantees delivery of the equipment and is used primarily for customized equipment or components; or a Performance Bond, which guarantees that the vendor will deliver and install the equipment according to a specified schedule. Most common equipment purchases do not require bonds.

RECEIVING PURCHASES

Deliveries can be made directly to the end user's office, lab, receiving dock, or any other location specified on the purchase order. All packaging should be carefully examined for any visible evidence of damage, particularly if the purchase is fragile or costly. The person 'receiving' the purchase should make a note of the date the order was received, the name of the vendor, the quantity received, and the purchase order number. The receiving and purchase order information can be checked against the invoice to make sure that the quantities received are the same as the quantities being invoiced.

1. Damaged Shipments and Shortages

   Under Interstate Commerce Commission regulations, damaged shipments cannot be refused unless totally destroyed or unless the broken contents would cause contamination. If the shipment is refused, the vendor or shipper could dispose of the shipment, making it very difficult for the buyer or end user to initiate a successful claim. Any damage to the package, no matter how slight, should be noted on the carrier's and receiver's delivery receipt. If the shipper is unwilling to wait while the contents of the package are inspected, the receiver should note on the delivery receipt that the condition of the contents is unknown. If concealed damage is discovered during unpacking, stop unpacking, notify the shipper, and request an immediate inspection. Save damaged packaging and cartons for the shipper's claims inspector and, if possible, photograph the damaged shipment.

2. Initiating a Claim

   The shipper's main office should be notified in writing within 15 days of receipt of the damaged merchandise. The formal claim letter should:

   • describe the damage
   • give the date the shipment was received
   • include a copy of the delivery receipt with the shipper's signature and the receiver's description of the damage
   • provide the name of the vendor
   • include a written estimate from the vendor of the costs to replace or repair the damaged items
   • provide a copy of the vendor's original invoice
   • provide copies of all correspondence pertaining to the claim

   The Interstate Commerce Commission requires the shipper to acknowledge the claim within 30 days and to offer a settlement within 120 days. When terms are F.O.B. Destination, the buyer or end user should notify the vendor immediately so that the vendor can file a claim.

3. Returning Goods to the Vendor

   Goods should not be returned without first notifying the vendor. Some vendors require the buyer to obtain a return authorization number and have procedures as to how and when a return shipment should be made. Some vendors may also charge a restocking fee to offset the cost of returning the item to inventory. The buyer or end user should keep a record of the name of the individual authorizing the return, the authorization number and date, notes of any conversations with the vendor authorizing the return, the date the shipment was returned, the name of the carrier, and the vendor's complete address and the name of the individual receiving the returned goods. If the item being returned is expensive or fragile, it should be insured. Contact the Harvard University Insurance Department (495-8668) for adequate insurance.

MANAGING VENDOR RELATIONSHIPS

1. Maintaining good relations with a vendor should be as important to a buyer as getting the best price. A good buyer-seller relationship is a partnership, a win-win situation over the long run. A vendor who is treated with courtesy, honesty, and fairness will deliver a quality product at the best price, will provide good service, and will be responsive to emergency situations and special requests. A responsive vendor makes a buyer 'look good'.
2. There is also a public relations aspect to purchasing that should not be overlooked. An organization's public image can be a valuable asset. A vendor who is treated equitably and professionally is likely to communicate his positive experiences with your organization to his associates.
3. Guidelines for Successful Vendor Relationships:
   • Use established vendor partnerships to best leverage the collective University volume, to consolidate orders, and to reduce administrative processing costs. You will receive outstanding prices and excellent service.
   • Be fair. Give all qualified vendors an equal opportunity to compete for business.
   • Maintain integrity. A vendor's pricing is confidential and should never be shared with another vendor for any reason.
   • Be honest. Never inflate requirements to obtain better pricing. Negotiate in good faith. Don't change the requirements and expect the vendor to hold his pricing.
   • Be ethical. Procurement decisions should be made objectively, free from any personal considerations or benefits.
   • Be courteous. A buyer should make an effort to receive sales persons to the extent that his or her work schedule permits.
   • Be reasonable. A vendor is entitled to a fair profit.
   • Pay promptly. The purchase order you issue to the vendor is your promise to pay for the goods and services you buy in a timely manner (usually within 30 days).