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NICMAR

Material Procurement
Anoop K.N. 251091
Harshad.K-251092
Rohit .K-251093
Santosh. K-251094
Saurabh K-251095
Vijay K-251096

Submitted to: Prof A.K.Garg

1/30/2012

Material Procurement
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PROCUREMENT
PROJECTS

OF

MATERIALS

FOR

CONSTRUCTION

Procurement is the acquisition of goods or services. It is favourable that the


goods/services are appropriate and that they are procured at the best possible
cost to meet the needs of the purchaser in terms of quality and quantity, time,
and location.
Efficient planning of materials procurement and storage on construction sites can
lead to significant improvements in construction productivity and project
profitability. Existing research studies focus on material procurement and storage
layout as two separate planning tasks without considering their critical and
mutual interdependencies. This paper presents the development of a new
optimization model for construction logistics planning that is capable of
simultaneously integrating and optimizing the critical planning decisions of
material procurement and material storage on construction sites.
The model utilizes genetic algorithms to minimize construction logistics costs that
cover material ordering, financing, stock-out, and layout costs. The model
incorporates newly developed algorithms to estimate the impact of potential
material shortages on-site because of late delivery on project delays and stockout costs. An application example is analyzed to demonstrate the capabilities of
the construction logistics planning model in simultaneously optimizing material
procurement decisions and storage layout plans.
The procurement of construction project is vast in scope because it involves the
gathering and organizing of myriads of separate individuals, firms and companies
to design manage and build construction products such as houses, office
buildings, shopping complex, roads, bridges etc. for specific clients or
customers. Procurement comes the word procure which literally means to
obtain by care or effort; to bring about and to acquire. System is about
organized method, approach, technique, process or procedure. In this context,
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project procurement is very much concerned with the organized methods or
process and procedure of obtaining or acquiring a construction product such as a
house, shopping complex or road and jetty.
It also involves arranging and coordinating people to achieve prescribed goals or
objectives. The Aqua Group (1999) described procurement as the process of
obtaining or acquiring goods and services from another for some consideration.
Masterman (1996) described project procurement as the organizational structure
needed to design and build construction projects for a specific client. It is in a
sense very true because the process of obtaining a building by a client involves
a group of people who are brought together and organized systematically in term
of their roles, duties, responsibilities and interrelationship between them.
Today, there are several types or variations of project procurement systems being
widely used in the construction industry. They range from the traditional system
to the many variations of fast-tracking systems such as turnkey, design and
build, build-operate-transfer, management contracting, cost-plus contracting etc.
The introduction of many variations of project procurement system was induced
by the quest for more efficient and speedier project delivery system and better
project performance. They are innovations to the traditional delivery method
aimed at meeting the changing demand of clients or customers. The different
procurement systems present have brought changes not only to the process and
procedure of project delivery but also the aspects of management and
organization.

THE ISSUES
As mentioned earlier, the introduction of different fast-tracking project
procurement systems is the attempt by the industry to provide better deal to its
clients or customers, who are increasingly insisting for better value for money
from their projects in term of cost, time and quality. The different project
procurement systems present different methods, process and procedure of
designing and construction of projects for the client.
These different systems also prescribe the variation of the organizational
structure of the project teams in term of role, responsibility and authority. So how
do the different procurement systems affect the project performance given that
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the method, process, procedure and organization vary according to the systems?
This paper looks at the different procurement systems and their attributes and
how each of them affects the project performance.
There are many procurement systems, as will be highlighted later, being used in
the construction industry now days. However the focus is only on the type of
procurement systems that commonly used in Malaysia now days i.e. traditional
system; design and build method, management contracting method and
professional construction management method. The parameters for the
measurement of project performance are many, but in this case consideration is
given to only three elements time, including speed of delivery, cost and quality.

THE EFFECT OF THE DIFFERENT PROCUREMENT SYSTEMS ON


PROJECT PERFORMANCE
After having considered the concept and the working process and procedure
of the different project procurement systems, let us now look into the
general effect of the different system on project performance. As highlighted
earlier, the focus of this paper in on three procurement systems (1)
Traditional system (2) Design and Build and Turnkey Procurement Systems
(3) Management contracting and Professional Construction Management
Systems. The discussion is limited to the main project performance
parameters time, cost and quality.

1) Traditional Procurement System


Time
Due to its linear or sequential approach, the traditional procurement system
has been identified as the slowest project delivery approach. However, this
approach is more preferable because it provides clear accountability and
better design and construction control by the client. Since the pre-contract
stage of this system is longer, more time is available for the client and the
project team to scrutinize and review the design before construction.

Cost
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This system provides more price certainty to the client at the very early stage
of the project. It also gives the client firmer and more competitive price
because the design plus the Complete working drawings have been fully
developed and detailed out prior to tendering. It eliminates any design or
construction ambiguity or uncertainty which often causes the contractors to
unnecessarily inflate the price. In the case where bill of quantities is used, the
bidding tend to be more fair as such the project cost is also lower. The
system also better cost control as such cost increase due to variations is
minimized, but works were often disrupted when there are too many
variations (due to unforeseeable problems) and it tend to cause the cost to
inflate.

Quality
The traditional procurement system also provides a high degree of quality
certainty and functional standards. It is also a system that provides an
opportunity for the building owner to combine the best design, management
and construction expertise between consultants and contractor. It also
provide more time for client and consultants to review and fully develop the
design and specification thus allowing better documentation preparation.
However, this system does not provide opportunities for contractor to
contribute his construction technology and management expertise because
they only come into the scene after the design has been fully developed and
approved.

2) Design and Build and Turnkey Procurement Systems


Time
Design and build and turnkey project procurement system are called fasttracking or build-it-fast project delivery system where the design and
construction are integrated. The design free pre-tender process allow for
earlier construction date. It also allows the process of detail design and
construction to run almost in parallel and concurrently to each other, thus
reducing the overall project development period considerably.
As a single entity responsible for both the design and construction, the
contractor is able to control not only the construction time but also the time
reserved for the design of the project, thus reducing the overall contract
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duration. In this type of procurement system, the contractor has always been
selected based on its vast experience, knowledge and competency in
construction, as such by giving it the design responsibility, the contractor
very often able to reduce construction time. This is done by him rationalizing
the design and construction process and site activities.
Cost
Although the cost is fixed at the tender stage and is subject to design
changes, it is often higher than the traditional contracting system. Apart from
the fact that very limited contractors are invited to submit tenders, the lack
of design and specification detailing during tender, has made the contractors
to jack up the price to allow for many uncertainties. This is because once
accepted, the tender price will be the final contract sum. It is not subject to
change, unless there are variations required or instructed by the client. Such
additional cost cannot be avoided because under this procurement system
the contractor will to take much of the financial risk.
However, as many have claimed, the significant cost saving in this type of
procurement system is made through the reduction of the overall
development period. The cost of contractors uncertainty can be set-off by
the reduction in loan interest and early financial return or benefits. Cost
saving may also be made when the contractor applies his construction
knowledge and experience to simplify design and work. At the same further
cost saving can be made when the client offer the contractor some form of
incentive if he is able to save a significant amount of cost.
Quality
The integration of design and construction allows the contractor to utilize his
knowledge and experience to develop much compacted and coherent work
program and to develop more efficient design and project control
programme. At the same time it allows the contractor to be innovative to
further improve the construction process and techniques thus allowing for
better work and process quality.
However, it is more often found that the quality of work under this
contracting system tend to be questionable. The assigning of the designing
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and construction to a contractor has caused the client to loose control of the
design and supervision of the work. This is especially so when the client does
have his own team of consultants. As far the contractor is concerned, they
tend to cut corners in order to maximize their profit, especially when they
feel that they have under price their quotation during when tendering for the
work.
3) Management Contracting and Professional Construction Management
Systems (Both systems operate almost on the same concept, except that in
Management Contracting, the package contractors enter into contract with
the management contractor. In Construction Management System, the
Package Contractors enter into contract with the client))
Time
As mentioned earlier, the essence of these two methods of project
procurement is that a contractor has the knowledge, experience and
competency to better manage the design and construction of a project. It is a
factor that allows for more efficient and effective coordination of works,
materials, manpower and plants, thus making construction time shorter
compared to other procurement systems. This is especially so, given the fact
that the same management contractor is able to manage and contribute
towards the development of the design. It allows the management
contractor to improve build ability or constructability.
At the same, the system also allow for early start of construction compared
to the traditional approach. The preparation of simple or basic tender
(bidding) document and the shift of the process of schematic and detail
design to construction phase, allow for an early start of construction. As
pointed earlier, under these two systems, the detail design (shop drawings) is
carried out (either by the consultant or package contractors) during the
construction stage. All these factors brought about a considerable reduction
of the overall project time compared to the traditional or even design and
build contracting systems.

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Cost
The cost of the project procured using this system tends to be lower than
those using other procurement approach. This is because the cost of the
project is actually the sum of prices quoted by the package contractors. With
the management contractor being the consultant, no extra cost is being
added up for main contractors profit margin. The only additional cost is the
consultant fee that the client has to pay to the management contractor or to
the construction management consultant.
Quality
As an agent responsible for the construction, the management contractor or
the professional construction manager tend to be more serious with the
standard and quality of the work done by the package contractors. Their
experience as contractor or construction manager made them more
proficient and more effective in ensuring high quality works. Their knowledge
and experience also made them more adept in selecting materials and
components of the right type and quality. These factors have contributed to
a better standard and quality of the completed construction products.
CONCLUSION
Cost, time and quality are the three most important parameters of project
performance. It has been stressed that in todays highly competitive and
uncertain business environment, clients are demanding for better value from
their investment. They want their project to be completed on time, within
the estimated cost and with the right quality. The use of the various project
procurement systems shows that the construction industry is now trying to
meet the clients needs. This is because the different procurement method
will have different effect on the cost, time and quality of the project. Each
project procurement system has its own peculiarity in term of the pre-tender
and post tender activities and processes, division of risks between client and
contractors, and the effectiveness of project monitoring and control.
It is very important at the very outset of the project to carefully consider all
factors when selecting the most appropriate procurement approach for a
construction project. This is because each system has its own feature and
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peculiarity that will have effect on the cost, time and quality of the project
i.e. the project performance.
Almost all purchasing decisions include factors such as delivery and handling,
marginal benefit, and price fluctuations. Procurement generally involves
making buying decisions under conditions of scarcity. If good data is
available, it is good practice to make use of economic analysis methods such
as cost-benefit analysis or cost-utility analysis.
An important distinction is made between analyses without risk and those with
risk. Where risk is involved, either in the costs or the benefits, the concept of
expected value may be employed.
Direct procurement and indirect procurement
TYPES
Direct
procurement

Indirect
procurement

Raw material Maintenance,


Capital
and production repair,
and goods and
goods
operating supplies services
F
E
A
T
U
R
E
S

Quantity

Large

Frequency High

Low

Low

Relatively high

Low

Value

Industry specific Low

High

Nature

Operational

Strategic

Crude oil
Examples petroleum
industry

Tactical
in

Lubricants,
parts

spare

Crude oil
storage
facilities

Based on the consumption purposes of the acquired goods and services,


procurement activities are often split into two distinct categories. The first
category being direct, production-related procurement and the second being
indirect, non-production-related procurement.
Direct procurement occurs in manufacturing settings only. It encompasses all
items that are part of finished products, such as raw material, components and
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parts. Direct procurement, which is the focus in supply chain management,
directly affects the production process of manufacturing firms. In contrast,
indirect procurement activities concern operating resources that a company
purchases to enable its operations. It comprises a wide variety of goods and
services, from standardized low value items like office supplies and machine
lubricants to complex and costly products and services like heavy equipment and
consulting services.
Procurement systems
Another common procurement issue is the timing of purchases. Just-in-time is a
system of timing the purchases of consumables so as to keep inventory costs low.
Just-in-time is commonly used by Japanese companies but widely adopted by
many global manufacturers from the 1990s onwards. Typically a framework
agreement setting terms and price is created between a supplier and purchaser,
and specific orders are then called-off as required
Procurement process
Procurement may also involve a bidding process i.e. Tendering.
Procurement steps
Procurement life cycle in modern businesses usually consists of seven steps:

Information gathering: If the potential customer does not already have an


established relationship with sales/ marketing functions of suppliers of
needed products and services (P/S), it is necessary to search for suppliers
who can satisfy the requirements.
Supplier contact: When one or more suitable suppliers have been
identified, requests for quotation, requests for proposals, requests for
information or requests for tender may be advertised, or direct contact
may be made with the suppliers.
Background review: References for product/service quality are consulted,
and any requirements for follow-up services including installation,
maintenance, and warranty are investigated. Samples of the P/S being
considered may be examined, or trials undertaken.

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Negotiation: Negotiations are undertaken, and price, availability, and


customization possibilities are established. Delivery schedules are
negotiated, and a contract to acquire the P/S is completed.
Fulfillment: Supplier preparation, expediting, shipment, delivery, and
payment for the P/S are completed, based on contract terms. Installation
and training may also be included.
Consumption, maintenance, and disposal: During this phase, the company
evaluates the performance of the P/S and any accompanying service
support, as they are consumed.
Renewal: When the P/S has been consumed or disposed of, the contract
expires, or the product or service is to be re-ordered, company experience
with the P/S is reviewed. If the P/S is to be re-ordered, the company
determines whether to consider other suppliers or to continue with the
same supplier.
Additional Step - Tender Notification: Some institutions choose to use a
notification service in order to raise the competition for the chosen
opportunity. These systems can either be direct from their e-tendering
software, or as a re-packaged notification from an external notification
company.

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MATERIAL PROCUREMENT POLICY:


There are several system of purchasing available to the buyer. The system to be
adopted depends on the factors like

Demand
Supply
Price
Urgency of requirement
Vendor/ Supplier
Type of material
Organization culture
Powers of delegation
Imports
Capital
Consumables
Seasonal commodities

We are familiar with the well known system of batering, which is practiced even
today in some part of the world. The simplest purchasing system is buying off the
counter, on a cash transaction. Each system has own advantages and
disadvantages and organizations will have to choose a system suited to meet
their requirements. It is noted that the OBJECTIVE OF THE PURCHASING POLICY is
to buy the required material in the right quantity from the right source at right
time and Price to obtain the maximum value for rupee of expenditure.

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1. Right quanlity: No general description if the material or desired attributes


will be sufficient , like High quality or poor quality etc. The definition
must be in greater detail and must be described in the purchase order.
Significant elements like dimension , physical, chemical and other
properties , suitability and purpose must all be clearly stated.

2. Right quantity: This is also one of the base considerations. It has special
meaning the context, that is to say what quantity should be purchased at a
time.
3. Right price: Price is not just one of the terms and conditions of the
purchase order, but is an important economic consideration which is a
guiding factor. A most common equation used in this connection is
Value = Quality / Price
Value varies in direct proportion to quality and inversely to price paid. But
where quality is defined in a specification, it is a constant and the
comparison of value can be mad in terms of price alone. It follows
therefore that the lower the price, the greater the value.
4. Right source: Source selection is also an important factor. Besides the
factors mentioned earlier, reliability and timely delivery have to be
seriously reckoned with. Actually there are four stages of source selection
Survey stage
Enquiry stage
Negotiation stage
Experience stage.

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In purchasing, the starting point is recognition of need of the material.
What is available in the market? Who makes such a product? or, who can
make it or supply it most economically? All these questions must be
answered before a supply order is placed.

5. Right time: Right time implies that in order to be effective, purchases


should be made, in such a way that stores and materials are made available
in time when needed, it being purchasing departments duty to see that the
delivery schedule is honored. In order to get some price advantage when
some seasonal purchases are resorted to, timing plays its due role

6. Right place: Right place means right place of delivery. Every purchase
contract , in addition to time of delivery, must clearly state the place of
delivery and such other terms like free delivery or ex-factory delivery.
Generally F.O.B(free on board), F.O.R( Free on rail), C.I.F( Cost , insurance
and freight) paid term are part of the price agreement.

Large organizations usually have a written purchase policy to be adhered to


by all. The purchasing activities are always subject to audit and hence the
systems should be so designed that the do not give rise to any structures.
The purchase executive has to dispose of excess materials, scarp etc in
addition to his buying activities. The amount involved in these items will be
rather high, if these are metallic in nature, which requires the disposal
system to be properly designed. Therefore if the purchase executive has to
effectively use the resources at his disposal, his systemshould be well
established and flexible enough to cope with the ever changing
environment.

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Purchase Requisition

Is
the Source
already
determined?
NO

YES

Requirement conversion to request for quotation

Requirement Conversion to purchase order

Maintain Quotation

Quotation comparison & choose suitable source

Convert purchase requisition to Purchase order

Release of purchase order as per schedule of authority

Goods reciept

Logistics invoice verificatiion


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SUPPLIER SELECTION PROCESS

Choosing the right supplier involves much more than scanning a series of price
lists. Your choice will depend on a wide range of factors such as value for money,
quality, reliability and service. How you weigh up the importance of these
different factors will be based on your business' priorities and strategy.A strategic
approach to choosing suppliers can also help you to understand how your own
potential customers weigh up their purchasing decisions.This guide illustrates a
step-by-step approach you can follow that should help you make the right
choices. It will help you decide what you need in a supplier, identify potential
suppliers and choose your supplier.

1) Thinking strategically when selecting suppliers


2) What you should look for in a supplier
3) Identifying potential suppliers
4) Drawing up a shortlist of suppliers
5) Choosing a supplier
6) Getting the right supplier for your business

1)Thinking strategically when selecting suppliers


The most effective suppliers are those who offer products or services that match or exceed - the needs of your business. So when you are looking for suppliers, it's
best to be sure of your business needs and what you want to achieve by buying,
rather than simply paying for what suppliers want to sell you.

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For example, if you want to cut down the time it takes you to serve your
customers, suppliers that offer you faster delivery will rate higher than those that
compete on price alone.
For some pointers to help you identify what you want from suppliers, see the
page in this guide on what you should look for in a supplier.
The numbers game It's well worth examining how many suppliers you really need.
Buying from a carefully targeted group could have a number of benefits:
1) It will be easier to control your suppliers
2) Your business will become more important to them
3) You may be able to make deals that give you an extra competitive
advantage
For example, if you've got a rush job for an important customer, your suppliers
will be more likely to go the extra mile if you spend $1,000 a month than if you
spend $250.However, it's important to have a choice of sources. Buying from only
one supplier can be dangerous -where do you go if they let you down, or even go
out of business?Equally, while exclusivity may spur some suppliers to offer you a
better service, others may simply become complacent and drop their standards.
2)What you should look for in a supplier
2.1Reliability,
Remember - if they let you down, you may let your customer down.
2.2Quality
The quality of your supplies needs to be consistent - your customers associate
poor quality with you, not your suppliers.

2.3Value for money


The lowest price is not always the best value for money. If you want reliability and
quality from your suppliers, you'll have to decide how much you're willing to pay
for your supplies and the balance you want to strike between cost, reliability,
quality and service.
2.4Strong service and clear communication
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You need your suppliers to deliver on time, or to be honest and give you plenty of
warning if they can't. The best suppliers will want to talk with you regularly to find
out what needs you have and how they can serve you better.
2.5Financial security
It's always worth making sure your supplier has sufficiently strong cash flow to
deliver what you want, when you need it. A credit check will help reassure you
that they won't go out of business when you need them most.
2.6A partnership approach
A strong relationship will benefit both sides. You want your suppliers to
acknowledge how important your business is to them, so they make every effort
to provide the best service possible. And you're more likely to create this
response by showing your supplier how important they are to your business.
3)Identifying potential suppliers
You can find suppliers through a variety of channels. It's best to build up a
shortlist of possible suppliers through a combination of sources to give you a
broader base to choose from.
3.1Recommendations
Ask friends and business acquaintances. You're more likely to get an honest
assessment of a business' strengths and weaknesses from someone who has used
its services.
3.2Directories
If you're looking for a supplier in your local area, it's worth trying directories such
as Yellow Pages and Thomson.
3.3Trade associations
If your needs are specific to a particular trade or industry, there will probably be a
trade association that can match you with suitable suppliers.
3.4Business advisors
Local business-support organisations, such as chambers of commerce, can often
point you in the direction of potential suppliers
Exhibitions offer a great opportunity to talk with a number of potential suppliers
in the same place at the same time. Before you go to an exhibition, it's a good
idea to check that the exhibitors are relevant and suitable for your business.
3.5Trade press
Trade magazines feature advertisements from potential suppliers.

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4)Drawing up a shortlist of suppliers


Once you've got a clear idea of what you need to buy and you've identified some
potential suppliers, you can build a shortlist of sources that meet your needs.
When considering the firms on your shortlist, ask yourself the following
questions:
Can these suppliers deliver what you want, when you want it?
Are they financially secure?
How long have they been established?
Do you know anyone who has used and can recommend them?
Are they on any approved supplier lists from trade associations or
government?
Do some research and try to slim your list down to no more than four or five
candidates. It's a waste of time for you and the potential supplier if you approach
them when there's little chance of them fulfilling your requirements.
5)Choosing a supplier
Once you have a manageable shortlist, you can approach the potential suppliers
and ask for a written quotation and, if appropriate, a sample. It's best to provide
them with a clear brief summarising what you require, how frequently you'll
require it and what level of business you hope to place.
5.1Get a quotation
It's worth asking potential suppliers to give you a firm price in writing for, say,
three months. You can also ask about discounts for long-term or high-volume
contracts.
5.2Compare potential suppliers
When you've got the quotation, compare the potential suppliers in terms of what
matters most to you. For example, the quality of their product or service may be
most important, while their location may not matter.
5.3Price
It is important, but it shouldn't be the only reason you choose a supplier. Lower
prices may reflect poorer quality goods and services which, in the long run, may
not be the most cost effective option. Be confident that your supplier can make a
sufficient margin at the price quoted for the business to be commercially viable.
Check that the supplier you employ is the one that will be doing the work. Some
suppliers may outsource work to subcontractors, in which case you should also
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investigate the subcontractor to determine if you are happy with this
arrangement.
Wherever possible it is always a good idea to meet a potential supplier face to
face and see how their business operates. Understanding how your supplier
works will give you a better sense of how it can benefit your business.
And remember that your business' reputation may be judged on the labour
practices of your suppliers. It makes good business sense to consider the ethical
dimensions of your supply chain.
Negotiate terms and conditions
Once you've settled on the suppliers you'd like to work with, you can move on to
negotiating terms and conditions and drawing up a contract
6)Getting the right supplier for your business
6.1Know your needs
Make sure you know what you need. Don't be tempted by sales pitches that don't
match your requirements. Understand the difference to your business between a
strategic supplier, who provides goods or services that are essential to your
business - such as high-value raw materials - and non-strategic suppliers who
provide low-value supplies such as office stationery. You will need to spend much
more time selecting and managing the former group than the latter.
6.2Spend time on research
Choosing the right suppliers is essential for your business. Don't try to save time
by buying from the first supplier you find that may be suitable.
6.3Ask around
People or other businesses with first-hand experience of suppliers can give you
useful advice.

6.4Credit check potential suppliers


It's always worth making sure your supplier has sufficiently strong cash flow to
deliver what you want, when you need it. A credit check will also help reassure
you that they won't go out of business when you need them most.
6.5 Price isn't everything
Other factors are equally important when choosing a supplier - reliability and
speed, for example. If you buy cheaply but persistently let down your customers
as a result, they'll start to look elsewhere.
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6.6 Agree on service levels before you start
It's a good idea to agree on service levels before you start trading so you know
what to expect from your supplier - and they know what to expect from you
6.7Don't buy from too many suppliers
It will be easier for you to manage - and probably more cost-effective - if you limit
the number of sources you buy from. This is particularly the case with low valueadded suppliers.
...but don't have just a single supplier
It's always worth having an alternative supply source ready to help in difficult
times. This is particularly important with regard to suppliers strategic to your
business' success.

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