how a UK based business that extensively sources

Project Risk and Procurement Management

Executive Summary
The procurement field has been undergoing rapid reforms as well as creation of oversight bodies,
enactment of new bills into laws as well as embracing technology. All these processes are aimed
at minimizing downtime as well as ensuring that the buyers get quality at affordable prices. With
all these procedures comes along risks which the business is exposed to including economic
risks.
The objective of this report is to evaluate how a UK based business that extensively sources for
its materials from the country of Greece can mitigate various types of risks such as economic
risks posed to them and how the procurement function can manage their global supplier network
as well as risks associated from such relationship.
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Table of Content
Title Page …………………………………………………………………………………… i
Executive Summary ………………………………………………………………………… ii
Introduction ………………………………………………………………………………… 1
Risks of concepts in projects ……………………………………………………………….. 2
Agency risks ……………………………………………………………………………….. .3
Economical Risks …………………………………………………………………………...4
Regulatory Risks ………………………………………………………………………….. ..6
Technological Risks ……………………………………………………………………… ...6
Procurement Function Management of Vendors ……………………………………………7
E-Procurement ……………………………………………………………………………....7
Implementing Technology ……………………………………………………………….. ..8
Measuring Procurement Performance ……………………………………………………...9
Developing Procurement Strategies, Tactics and Action Plans …………………………....9
Introduction of Regulatory Department ……………………………………………………9
Taking insurance covers ………………………………………………………………….10
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Conclusion ………………………………………………………………………………..11
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Introduction
Due to the changing nature under which organisations operate, in order to thrive firms have had
to cope with the changing nature of its customers as well as the pressures posed by such
customers. Companies are expected to grow and thrive under rapidly changing business
environments. (Meyer and Schwager, 2007) states that the factors instilling loads of pressure on
organisations include; globalization, competitive prices and growing retail power.
This has been the case with the UK based business that has been forced to go global and source
for its materials from Greece in order for the business to remain afloat and continues making
profits in order to remain as a going concern. Sourcing for materials from foreign markets comes
with its fair share of ups and downs as well as risks that the UK business will be exposed to.
Globalization, market economy dynamics and change in technology are forcing firms to reinvent
their operations if they are to remain profitable and by doing so they are exposing themselves to
various risks. One way of doing so as per (Walters, 2008) is focusing on supplier relationships
and having innovative solutions to having a good relationship with the suppliers that would
deliver value for money to the customers.
The UK business will have to have strong ties and an effective relationship with the Greek
supplier as well as its other global network of suppliers to ensure that there is optimum efficiency
of operations for both the business and the suppliers. However it should be noted that it is not
going to be a smooth sail since conflicts and risks are going to be experienced under such
relationships.
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This report will clearly foretell ho w the UK business can forge and make strong ties and
relationships with the Greek supplier as well as it other global network of suppliers and also how
to mitigate the risks that will be associated with such relationships.
The Risk Concept in Projects
Risk is defined as an unexpected and undesired outcome far from the perceived outcome that has
a concept of exposure (Royer, 2000). Every business has a risk element in all its operations and
the UK business is not averse to such a scenario in that it will be exposed to risks in its
operations. However the most important fact is how to mitigate and reduce such risks from
harming the business.
Risk management is a system whereby risks are identified and appropriate measures are taken to
mitigate such risks (Okmen, 2002). From these definitions it’s clear that management of risk in
the function of procurement is the process of identifying, analyzing and mitigating the various
risks that arise from the procurement function.
The first step in being able to mitigate a risk is identifying where such a risk is coming or
emanating from. The UK business first step is to carefully evaluate its business ventures and also
its business operations especially the procurement of materials from the Greek supplier in order
for them to know where risk will come from.
The next step for the UK business is to evaluate the kind of threat such a risk poses or the harm
that such a risk can bring to the business and only then can they be able to come up with tailor
made solutions to cumb or mitigate such risks.
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The last step that the UK business will take is coming up with tailor made solutions that will
work effectively for the business in order to mitigate such risks. Such tailor made solutions
should be prepared bearing in mind the business strengths as well as their weaknesses such that
their strengths should work to their advantage in order to cumb the risks as well as overcome
their weaknesses.
Some of the risks affecting businesses are discussed below:-
Agency Risks
Agency relationship is the process whereby a party called a principal gives out work to some
other party called an agent, whereby it is expected that such an agent will carry out that work
effectively and efficiently. In supplier relationship management the buyer is the principal
whereas the supplier is the agent.
The UK business is in an agency relationship with the supplier from Greece from where they
source their food materials. The UK business is the principal while the Greek supplier is the
agent. The Greek supplier has a duty of ensuring that the UK business gets its food materials in
good condition as well as the right quantity at the agreed upon timeline. Meanwhile the UK
business had a duty to ensure that the Greek Supplier is paid on time.
This agency relationship will have problems; should desires and goals of both agent and
principal conflicts and when it becomes rather difficult for a principal to authenticate what his
agent is performing. From our case we find that the buyer is in the UK while the supplier is in
Greece and due to the geographical disparities conflicts will arise. Also it is good to note that due
to the locational differences the UK business may not be in a position to walk into the supplier
premises to know how the supplier is for example packaging the food materials, if the supplier is
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also using the stipulated food preservatives and if he is operating in a clean environment which
are all requirements when handling food stuffs.
From this point of concern the UK business has to hope that the Greece suppler acts in utmost
good faith when carrying out his operations. However the UK business cannot just rely on hope
and expect that everything is going well with the Greece supplier, they should send
representatives once in a while to check on the supplier as a means of maintaining checks and
balances to ensure that they get quality food stuffs.
According to (Floricel and Lampel, 1998) agency relationship conflicts can be mitigated by
having in place well construed contracts that clearly outlines the duties of both the agent and the
principal. A specific type of contract called behavioral based contract is what the UK business
can enter into with the Greece supplier which can enable them to monitor the actions of the
supplier as well as mitigate the conflict which can arise from such a relationship. Actions such as
the right food preservatives being used, the supplier operating in a clean environment, the
supplier having all the required licenses to handle food stuffs, all the workers in the supplier
premises being qualified and licensed to handle food as well as the right conditions such as
refrigeration facilities and cold rooms to store food stuffs.
Economic Risks
The risk element as well as uncertainty comes into play when dealing with suppliers from
different countries especially due to fluctuating currency exchange rate difference and also trying
to establish whether a particular supplier is economically viable to an organisation.
Both the UK business and the Greece supplier operate their difference in different countries as
well as both their respective countries use different currencies in that the UK uses the pound
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while Greece uses the euro. Both currencies trade at different exchange rates depending on the
forces of demand and supply. This difference in exchange rate wills expo the UK business to
foreign exchange losses.
Another economic risk that will face the business will be brexit, whereby Britain will be leaving
the European Union soon and no one knows the eventualities that such a paradigm shift will
bring especially to companies that are trading with Britain. Will the change be a positive or a
negative, only time will tell and the UK business should be ready for such an eventuality.
A carefully designed risk analysis structure will properly elaborate the likelihood of
eventualities occurring (Heerkens, 2014). Suppliers should be viewed as economic investments
which are necessary if businesses are to remain going concerns and generate returns (Kay, 2014).
Mitigation of economic risks involves firms using hedging contracts as well as tariffs to secure
the much needed constant supply as well as maintain profit margins.
The UK firm should enter into hedging contracts will the Greece supplier to ensure that it
protects itself from varying exchange rate differences over a period of time. Also the UK firm
can decide to be trading with the euro currency rather than the pound verses the euro which will
bring about exchange rate differences.
The UK business can also compel the Greek supplier to be quoting for his invoices in pounds
rather than in dollars to avoid the varying exchange rate differences that will expose the business
to economic risks such as exchange rate losses.
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Regulation Risks
Compliance to both legal and regulatory requirements is a must for any supplier especially for
suppliers operating and providing their services in different countries. This also includes
compliance to the various miscellaneous requirements of the various agencies that oversee the
regulation of the various industries in an economy (Eveld, 1981).
The UK business may not be in a position to make sure that the Greece supplier is fully
compliant with all the regulation requirements and that is why it is absolutely necessary to ask
for the proper documentation when entering into the contract or the business agreement. Such
regulation documentation should include food handler’s certificates for staff, licenses, business
permits and also compliance letters from the various regulatory bodies overseeing the food
industry in Greece, the European Union as well as the UK.
Mitigation of regulation risks is through studying the various rules and regulations that are
present in different countries as well as the various business process requirements imposed by
the various regulatory authorities overseeing the various industries in an economy.
The Greece supplier should learn all the laws and regulations that are followed in the UK as well
as adopt the business trends and also acquire all the relevant licenses in order for him not to
expose the UK business to regulatory risks.
Technological Risks
The continuous technological developments and their implementations in the day to day carrying
out of businesses is closely linked with technological gaps on the know-how of using and
implementing such technologies and this creates a risk due to inadequate knowledge as well as
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uncertainties (Regev, 2006). New technologies require pilot phases to be implemented before the
actual system starts to be used and this creates lead time.
The UK is more developed compared to Greece and therefore we expected technological gaps
between the UK business and the Greece supplier. Also a good point to note is that the UK is a
bigger economy compared to Greece in that they can improve in the latest form of technology in
the market while the Greece supplier may not be close to enjoying economies of scale and
therefore will be exposing the UK business to technological risks.
Procurement Function Management of Vendors
Procurement function as a discipline can mitigate the risks the business is exposed to as well as
managing its network of supplier by implementing the following vices:-
E-Procurement
One of the main functions in supplier relation management is managing procurement. As per
(Eadie, Perera, Heaney and Carlisle, 2007) procurement is the process of securing the
organisation’s day to day requirements optmumly and cost effectively. This process has four
dinstinct phases; sourcing for quotations from suppliers, analyzing quotations, settling on the
best quotation and after sales services.
With advancement in technology conducting business online has become the new norm as per
(Musau, 2015) hence E- Procurement. E-Procurement is conducting business via online channels
and it has revolutionaliuzed the procurement function as well as being a cure for the ails of
previous and traditional procurement functions according to (Egbu, Vines and Tookey, 2003).
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(Mandrot, 2005) clarifies e-procurement uses software’s which reduce the downtime in the
procurement function in a cost friendly manner in that it saves time in functions such as;
tendering process, creating catalogues, generating quotations, supplier evaluation and grading as
well as general communication.
This automated procedures enable faster execution of tasks, enhances relationships between the
supplier and the buyer, eliminates bureaucracy, eliminates paper work as well as other related
costs and this is the reason why many firms both in the public and private sectors are opting to
have e-procurement systems.
The UK business should engage in E-Procurement to manage its vast network of global suppliers
who are faced with vices such as changing business environments. E-Procurement will enable
the UK business to get quality suppliers, reduce lead time, eliminate so much paper work and
also be able to carry out supplier profiling. A well maintained supplier database will work
effectively for the UK business.
Implementing Technology
(Aberdeen Group, 2006) noted that integrating an ERP software or system coupled with an
effective procurement base is a good foundation to a healthy supplier relationship management.
Research should be carried out in regards to how best technology can be applied in an
organisation to improve its relationship with its suppliers.
So the UK firm should carry out research and then come up with a tailor made solution on the
appropriate software it can implement in order to effectively manage its suppliers as well as
vendors. And by doing so it will have a competitive advantage over its competitors and hence
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enhance the procurement function of managing its variety network of suppliers and vendors who
may be geographically dispersed.
Measuring Procurement Performance
There are various Procurement Performance Measurement Systems (PPMS) systems in the
market. The UK firms management need to carry out research to identify the one that can best
suite them in order for the to be measuring the performance of the procurement department when
doing so for other departments such as finance and human resource. Some of the systems that
can be adopted include; performance prism, balanced score card and performance pyramid
system. (Handfield, 2009) asserts that the various systems for grading procurements performance
contain a number of measures for finding out both the efficiency and effectiveness.
Procurement effectiveness contains vices such as; quality, ability to deliver, supplier flexibility,
supplier profile, as well as the time taken between ordering and supply (CIPS, 2010).The UK
businesses can adopt a balance score card system which uses key performance indicators when
grading suppliers such as; innovation, compliance, rating score, quality and delivery time.
By adopting such a system as the balanced score card the UK business will be able to manage its
global network of both the vendors and suppliers who the business is involved with or carries out
its day to day procurement function with.
Developing Procurement Strategies, Tactics and Action Plans
Strategies as well as tactics are a guide towards the procurement function achieving its objectives
and goals. Strategies are the guide path and are generally indicates the means an organisation
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will meet its objectives purchase wise. Strategies should be built bearing in mind the
organisation’s strengths in order to cumb its weaknesses.
Tactics and are naturally operational are the actions plans in achieving the formed strategies.
Organisations should shift focus fro transactional purchasing to value – based procurement by
evaluating their demands vis-à-vis their supply and come up with appropriate strategies and
tactics in order to have a competitive advantage (Swinder and Seshandri, 2001).
Strategies such as competitive bidding for quotations from suppliers and then carefully going
through all the quotations to clearly choose the supplier that supply the best quality for the
cheapest price can work effectively for the UK business when procuring its supplies such as food
stuff from the Greece supplier.
Introduction of Regulatory Department
Regulatory department should be introduced to oversee the procurement function and to keep all
suppliers in check. Such a department can work perfectly for the UK business when managing its
vast network of vendors and suppliers. The regulatory department should put in place laws and
regulations that should be followed by the different suppliers as well as means to mitigate such
suppliers from vices such as non-payments from buyers.
Taking Insurance Covers
Marine covers as well as insuring goods in transit covers especially for the UK business that has
to source for its food materials from Greece is a good way of making sure that such goods arrive
safely and in case there is any damage the insurance cover can compensate the buyer for the loss.
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Conclusion
(Rwoti, 2005) beckons supplier relationship management helps procurement officers come up
with strategies when handling suppliers and therefore achieve a value for monies spent in the
purchasing function as well as reduce the risks associated with the procurement function such as
non – delivery and stock outs. It also gives authority to the procurement department to only give
key mandate to those suppliers that are capable.
(Magnus, 2006) argued that an organisation practicing good supplier management stands to
benefit from reduced quality costs since the products delivered will be of the right quality.
Supplier relationship management should go beyond procuring goods and services (Carl and
Pearson, 2002). It establishes a beneficial relationship for both buyer and supplier and ensure
mutual successes for both parties (Dalpe, 2005).
Supplier relationship management notes that different relationships will be require for different
suppliers. For products with a lot of suppliers, it is not sequential to utilize a lot of resources
establishing a key relationship since a functional relationship can do, Conversely for the ones
will few suppliers it is critical to establish a full partnership or relationship which needs to be
constantly checked via efficient communication in order for such a relationship to realize its full
potential (Nantege, 2011).
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