Procurement is a necessary and a useful component for the local or multinational organizations. Moving in the present market, Procurement is playing a role of crucial importance in the success of globalization. This report discusses why the function of procurement has increased on such prominent basis in the present competitive global environment, as the risk of supplying critical commodities tighten. Risk factors of the procurement will be identified, and the planning and development required for the procurement will be studied. This report will also examine how organizations can form strategies to reduce these critical risk factors.
Procurement includes all the aspects of delivering of goods and services, whole contractual life cycle, identification of needs required for contractual life cycle, involving producing and servicing life cycle. There are certain requirements and aspects that need to be fulfilled to achieve strategic procurement. There is a formation of link between the strategic planning, financial planning, and operational planning of the procurement cycle. The most significant is to use a structured approach which defines procurement planning and results in effective objectivity. Procurement should be based on planning, objective defined and analysis, defining the methodology to be used, variable related to the organization and market competency for the achievement of optimal procurement outcomes. All these steps required time, money, and effective people, which should be effectively allocated and used successfully (Bask, and Juga, 2001).
There are two levels of procurement that can be identified. First, it should involve high-level strategic thinking and business planning and secondly, effectiveness in operational level when it comes to acquisitions. It also involves a variety of risk factors that are both external and internal.
There are different risks involved. It is important to analyze the probability of risk as well as how the risk will impact the outcome to make the procurement effective. Risk involved in different stages can damage the pillars of organization and thus, it is important to consider and assess it. The risk assessment function is used for the management and reducing of the risk involved. To realize and maximize the benefit of the risk assessment, it is better that it should be an integral part of the procurement department and organizational functions.
STRATEGIC VIEW OF PROCUREMENT
Procurement has taken a greater importance in strategic platform and will keep on gaining it, because not only it is increasing strategically in multinationals but also in the organizations of developing countries based on their growing economy. Organizations perform procuring in two forms either for re-selling or consumption or transformation. Procurement is either strategically or transactional. If the organization is using procurement on strategy basis then, it is a direct strategy, directly involving a mutual agreement of a long-term relationship between buyers and the suppliers (Gourdin, 2006). Usually, this strategy relationship exists when there is a dealing of some crucial components or commodities having distinctive competencies, and it includes components use for production creating distinctive core competencies for a resulted product. When it comes to using of procurement as a transactional approach then, it is termed as indirect involvement. Indirect approach involves dealing of commodities that are not strategically important, not having any impact on organization's core values or not creating any distinctive environment.
The procedure of procurement involves three things that have to be right if performing strategically and these are the product, the process, and the location. First, thinking is a product, either the product is of distinctive competence or its just right for the organization to sustain. It is significantly important because it clears out the buying activity is taking place keeping the need in view that it will be technically able to produce and practically capable of executing what is required. The second significant part in the procurement is having the right process of supply chain and the quality. From the strategic point of view, it is important to consider the cost. Organization has to make sure the costs used for procurement and supply chain should not be higher than the savings. Third, and the most significant and controversial importance, organizations have to find ways to protect the intellectual property while procuring. Organizations need to be explicit about the trade between the cost savings and risk of losing core competency which is an intellectual property (Chopra, Meindl, and Kalra, 2008).
Procurement is now served as the integral part of the organization, performing at corporate level. Therefore, procurement requires increased attention from senior management. Almost 15 to 20 years ago, procurement was fighting for significance in the organizations. However, now, there is no more high-level competitive challenge for procurement as has gained its acceptance as a strategic business partner in the organization. So, it is time to move forward in this significant strategic position in an organization. Procurement gained its significance because there is a continuous increase in share of material cost and share of purchased services.
It is the process of identification and analysis of risk, and the decision to either accept or reduce the exposure of process to risk when compared to the potential impact on the achievement of the organization's objective.
AREAS OF RISK
There are various kind of risk involved in procurement, either external or internal in nature, as well as strategic and operational. It is important to identify where the risk is located, consider the following:
- Risk that is considered to be in relation with the long-term objectives of the organization.
- Risk of political involvement, failure of serving with delivery of policy mentioned, or failure to meet administrative policies, changes in government policies.
- Risk of economical conditions, affecting the financial measures to be achieved, i.e. effects of inflation, recession, foreign exchange, etc.
- Risk related to socio-factors, effects of change in the social environment, i.e. change in demographics, residential and social economic trends, populations.
- Risk of technology is high and internal nature, and ability to deal with or meet the pace of changes occurring in technological areas. Risk is also involved in appropriate and efficient use of software, mainly in the failure of maintaining the security of financial terms and data.
- Risk of competitive level, which will be affecting the cost, quality, and competitiveness of the service being provided (Fleming, 2003).
- Risk that is encountered at the managerial and staff level:
- Risk regarding professionalism, it involves the practice procedure of procurement.
- Risk of financial terms, associating the failure to secure economical advantages of the outcome processed may lead to acquisition or outsourcing.
- Risk in physical terms, accidents, security of health and safety required.
MANAGEMENT OF RISK IN PROCUREMENT
Procurement now being the most crucial and significant part of the organization, demands the highest integrity. The error or an inconsistency in conducting procurement activities can lead to significant damage to the reputation of the entity. One important activity of the procurement department is the assessment of risk. Habitual of conducting a risk analysis enables the team to avoid the presence of deficiencies and avoidance of future elements of risk. Most of the organizations analyze risk by using the method of checklist, through this practice the working team can identify problems, possible irregularities, suspicious cases, or difficulties in the procurement process. It is developed to cover the major phases of the procurement cycle and identifying the risk associated with the concerned cycle (Nagali et al., 2008).
The process of Procurement Risk management involves the following:
The first step is to map the risk that may occur and having the probability of will help to find the risk associated.
Analysis of the function of procurement required to make sure the strategic use of procurement is legal and according to the policies of law. Moreover, the operations need to be set in a well-organized and documented manner applicable with the law and regulations. Financial means of procurement should be clearly stated, internal systems placed should ensure the compliance involvement.
Document for any special regulation regarding procurement is or will be applicable and should be prepared. Value of the contract should be correctly calculated and documented in the process. Moreover, goods and services being produced or purchased should be define in terms of quality and performance.
• Procedure of Procurement:
The process selected by the organization for procurement should be in accordance to the core competency of the organization. Any kind of alternation or changes which may occur in case of future projections should be evaluated and discussed.
Methods And Tools Involve In Identification Of Risk
- Brainstorming sessions for identification of risk
- Formation of cross-functional teams.
- Risk documenting registers.
- Risk profiles.
- SWOT analysis for the factors present.
- Balance sheet analysis before procurement or the past procurements.
- Close collaborations with contractual teams (Zwikael, & Sadeh, 2007).
INVOLVEMENT OF CORRUPTION IN PROCUREMENT
Although above mention precautions may lead to secure procurement, but there are the chances of transparency or integrity in the process, such conditions lead to involvement of corruption. The activity that will be of use is to search for the potential indicators of corruption and the measures that can prevent the involvement of corruption. According to the World Bank, corruption in procurement falls in three categories:
1. Payment Demand:
This factor occurs when the government officers demands a bribe in exchange of an approval policy.
The process of bidding ensures that the contract will be awarded to the bribed person.
It occurs, when it is the time to recover the cost of bribery, exploiting the corruption. This involves the corrupt officers who practice fraudulent activities.
Corruption can occur in any stage of the procurement process, either project development or the selection, evaluation process or the implementation of the contract (Cox, & Townsend, 2009).
Attributes Of Highest Degree
There are three attributes of procurement system that have been successfully working in effective business organizations:
- Fairness: All the buyers and suppliers working for a procurement department should be provided equal platform to work.
- Transparency: All the procedures involved should be documented, including the process and the criteria used for the contract when signed to ensure the correct medium of participants.
- Availability of resources: An open and independent environment should be created for the use of resources required.
The process of procurement involves a number of logical stages. If they all executed together, each will deliver the required results and generate positive business benefits. These positive benefits of each stage will lead to stronger overall outcome. This chain of continuous success results in an effective procurement cycle. A procurement cycle can apply all the above mention principles at all the phases of its cycle by making and ensuring the documentation and timely manner perspective. Doing so can avoid many problems and improve the confidence and respect in the procurement department of the organization.
An effective procurement process results in sustainable considerations that will play a significant role in overall procurement strategy and an organization's growth. It helps to set the standards of performance and measures the essential tools required. The procurement planning also supports to build and manage the existing business. It provides detailed planning for each approach in the market, assigning roles and responsibilities for the cross functional teams.
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