Category: Procurement

Executive Summary

The procurement process is an essential activity that enables an organization to obtain the required goods and services for its operations. In the UK, the Department of Foreign Commonwealth Development Office (FCDO) is responsible for conducting commercial services to provide development resources to various agencies within and outside the country. To operate effectively, the organization has formed various partnerships with different suppliers that provide it with the required products. Since FCDO is expected to produce maximum development results, it is aiming to acquire the services at a relatively lower price in the market. In the process of trying to achieve its goals, the corporation is encountering varied risks that hinder the success of the applied strategies. For instance, delays by vendors and non-compliance are common threats. To overcome the situation and remain competitive, FCDO has adopted sourcing methods that enable it to receive quality goods and services as per the budget constraint and time frame.

Introduction

In the UK, FCDO is tasked with several mandates that involve supporting diplomacy and securing defense services across the country. FCDO undertakes most programs operating commercially in conjunction with other partners to deliver products and services. The organization’s roles make it engage in a number of procurement activities with different suppliers by formulating different contracts that meet the needs of the relationship. In order to remain effective and operate efficiently, the office is concerned with securing services and goods from strategic sources that ensure the needs of the organization are met. However, despite the focus and commitment to improving supply transparency and accountability, there are several risks that are likely to be encountered that can easily temper the purchasing of commodities by the FCDO. The uncertainty, when neglected, has the potential to derail the development processes of the organization by causing delays, increasing costs, and even ruining FCDO’s reputation. Therefore, it is necessary for the procurement department to identify the possible risks that might impact the organization’s operational activities negatively and engage the partners, including sub-contractors, to mitigate them.

Procurement

The term procurement refers to the activities involved in securing products and services that an organization requires to facilitate its operational programs. The processes engaged include sourcing the supplier, agreeing on the terms of service, buying the products, receiving the commodities, inspecting if the supplied goods meet the order placed, and finally, keeping the records of the dealings. FCDO is tasked with all the procedures to ensure it provides reliable services to the country’s various departments and other nations that demand its support (Leeds & Palaia, 2022). Following the complexity of the procurement process, FCDO has to apply strategic sourcing to enable effective coordination of various activities with the aim of enhancing proactive planning for the long term. FCDO has been using a collaborative approach whereby it connects with potential suppliers and develops relationships that ensure the needed goods and services are attained at a friendly cost while the value is maintained. However, as the organization focuses on maximizing the possible opportunities in the process, it is more likely to encounter a number of risks that must be mitigated by all means to improve efficiency.

Key Risks Faced by FCDO in the Procurement Process

During the purchasing of goods and services, FCDO is exposed to a number of uncertainties that interfere with its procurement processes. Some of the risks are internal, while others are associated with the behavior of the partners. They include improper analysis of the FCDO needs, poor supplier selection, futile contract management, non-compliance, delays in the procurement process, reputational risks, and operational hazards (Nyamah et al., 2022). These threats have the potential to prevent an organization from meeting the set objective based on strategic planning, especially if the management fails to counter them with effective proactive measures.

Improper Analysis of FCDO Internal Needs

The procurement department of the FCDO organization must identify the need for a given product before commencing the securing process. During this phase, the likely hazards include understatement or overstatement of the required goods, inadequate budget, and poor timescale for the requirements. Once these risks have occurred in the beginning, the entity will use more money to correct and manage the situation, leading to increased costs in the supply chain. For instance, assuming FCDO requires 15 vehicles but the team quoted the wrong number excess by 25 cars, it will mean that the organization has to purchase the processed items, making it spend more. Similarly, FCDO might choose a supplier that offers the commodities at a high price due to the failure to acquire more details (Hong et al., 2018). Such experiences will impact the procurement process, causing massive inconveniences for the office.

In order for the FCDO to overcome the hazard, the procurement managers should ensure they ask the respective customers, partners, suppliers, and even other stakeholders the relevant questions during the need analysis stage. They should make sure they check the already existing contracts to confirm if there are similar activities that can provide insightful information about the requirement. By undertaking such measures, the organization will be ensuring that its needs are accurately stated, considering the budget constraints and available time frame.

Poor Supplier Selection Risk

The selection of a supplier is a critical challenge facing FCDO in the procurement process. The market is full of potential vendors posing as the best partners. If the organization chooses the wrong seller, the whole process becomes disrupted, causing inefficiencies in the intended activities. Some of the outcomes associated with having a poor vendor include securing products of low quality, late delivery of goods and services, inability to maintain the required ethical conduct, and even failing to comply with the agreement (Kohler & Dimancesco, 2020). For instance, hiring a web designer to develop a webpage used by the organization for operational services and the programmer providing a platform that does not contain the features needed for the project.

To avert such threats, the procuring department must select the right supplier based on the available reviews of their products and services. It is necessary to consider their ratings and other stories surrounding their provision of services. By incorporating such practices, FCDO will be in a position to minimize the chances of encountering such inefficiencies as a result of poor selection of vendors in the market.

Futile Contract Management Risk

Contract management has become a common threat in the supply chain industry. FCDO is facing the uncertainties of poor relationships and communication with most of its suppliers due to their failure to respond accordingly. The lack of harmony is making the organization incur further costs in the procurement process because the vendors sometimes ignore the stated requirements. The approach acts as a barrier to the success of the procurement process (Dixit, 2022). In order to rectify the state of disorderliness, FCDO has been applying digital and automating techniques to enable it to streamline the purchasing procedure. It is aimed at limiting possible errors following accurate record-keeping between the parties.

Non-Compliance Risk

FCDO is dealing with several suppliers in the market, both public and private, to secure respective goods and services. However, some of the vendors do not meet the demands of the organization according to the stated agreement. It becomes a significant threat to the entity, especially when the seller has failed to attain the legal requirements as promised (Dixit, 2022). Currently, FCDO has been ensuring all its contract management entails and covers possible risks that are connected to incomplete or incorrect service provision. This technique allows the office to reduce the spectrum of non-compliance it faces in the industry.

Delay Risks

Delay threat is common in the procurement processes following various mistakes in the system. In most cases, the FCDO securing team spends a significant amount of time rectifying the underlying issues hindering the procuring instead of facilitating the progress (Dixit, 2022). The activities make the operation tiresome and time-consuming. FCDO management has implemented software that enables the professionals to update changes and make approval of the purchases. The system has made the organization counter the possible causes of interruption in the procurement involvement.

Reputational Risk

An organization strives to maintain a good reputation in the supply chain process. However, a number of factors, such as delays in delivery and low-quality products, are some of the hazards attributed to the aspect of this type of threat. It is common for vendors who fail to formulate a proper structure to facilitate the management of procuring activities (Dias et al., 2019). To overcome the situation, suppliers should ensure they create an effective collaborative relationship that will enable them to identify potential issues that can lead to disruption. This will allow them to rectify the conditions before the impacts are recorded.

Procurement Risk Assessment

To ensure the process of procuring is managed effectively to minimize the likelihood of threats, the organization should ensure they conduct a thorough risk assessment to identify various categories of uncertainties, including their chances of occurring. When such a practice is implemented, it becomes easier to mitigate the impact of such events in procurement operations. Upon valuation, the entity will be able to formulate management actions that ensure they are mitigated effectively for efficient business services. Appendix A depicts some key elements of risk evaluation that can be employed by the organization.

Procurement Functions

Generally, the procurement process is an essential aspect of the FCDO organization. In the entity, the department is responsible for serving the customers by engaging in a number of practices, such as negotiating costs. The procuring activities are fundamental in enabling FCDO to maintain proper financial health. The key functions of securing goods and services are categorized into three main groups: direct, service, and indirect procurement. When an organization undertakes an effective approach to obtain the required products, it will be able to reduce the prices of the commodities, identify better suppliers, and streamline the whole procedure, hence making the operations efficient. Some of the critical functions involved in procurement are sourcing, contracting, negotiation, compliance with procedures, overseeing vendors’ performance, and collaborating with the organization’s departments (Kakwezi & Nyeko, 2019). When the roles are performed accordingly, the organization will enhance the customers’ experience.

Sourcing

Sourcing is a fundamental function of procurement in any business organization. It is concerned with purchasing goods and services from external suppliers. This step is critical for FCDO because it requires a properly formulated business strategy that will enable the organization to secure the items at a relatively low cost. The team is tasked with procuring quality products from a reliable source at the appropriate time (Meyer et al., 2021). The process allows the corporation to establish whether the prospective supplier meets the policies of the organization. It enables the entity to select a qualified vendor to provide the necessary commodities. However, sometimes vendors issue misleading information, resulting in choosing incompetent sellers, therefore inconveniencing the whole operation.

Contracting

Procurement allows organizations to save on the cost of acquiring items from suppliers. In order to achieve this, the professionals evaluate the bids presented by different vendors based on prices, value, and quality before selecting the right supplier to provide the products. FCDO has been using the technique to enable it to deliver effective goods to government departments. The strength of this technique is that it allows individuals to consider the needs of the corporation that match the unique standards (Kakwezi & Nyeko, 2019). However, in some cases, the management makes irrational decisions, leading to awarding the contract to an unqualified supplier. In such situations, the likelihood of incurring various risks in the procurement process is increased.

Negotiation

It is essential for an organization to pursue better deals for products in the market. It is upon procurement officials to apply their negotiation skills to persuade vendors to provide needed items at a lower price. When seeking to have goods at a reduced cost, the individuals must ensure the quality and quantity match the securing details. The function is important for a corporation because it facilitates the ability of the entity to make more profit. Despite the effectiveness of the negotiation role, the organization can blow its cost-saving mechanism, especially if the officials have poor capabilities of influencing suppliers.

Compliance with Procedures

The procurement process entails an array of protocols and requirements that an organization must satisfy to ensure the efficient acquisition of goods and services. It is necessary for the respective department to ensure the practices comply with the objectives of the entity. For instance, before engaging in procuring any item, such as a vehicle, the professionals must confirm whether the procedures of purchasing the product are met and whether the given budget is approved (Kakwezi & Nyeko, 2019). The advantage of this function is that it allows the corporation to streamline its processes to avoid possible conflict. Its weakness is denying the organization the ability to engage in a quick process since all the steps and necessities have to be evaluated and verified.

Overseeing Vendors’ Performance

To maintain a proper channel of supply and effective contracts, procurement professionals must monitor closely whether the suppliers deliver the right products at a good price. Checking the performance encompasses quality, value, and time for delivery. The team follows the purchase orders to verify their approval to facilitate efficiency in the procurement process (Gajjar et al., 2018). The function allows the corporation to keep clear track records of the operation, hence making it easier to evaluate and compare various suppliers’ commitments. The weakness of this role is the possible negligence of the responsible staff that can create room for other malpractices that enable vendors to provide poor services that destroy the reputation of the organization.

Sourcing Methods in the Procurement Process

In order for an organization to remain proactive and competitive in the industry, it is necessary for the management to utilize sourcing strategies that will generate the best outcome for the entity. As stated earlier, sourcing is the phase of procuring whereby the professionals evaluate the connections with different suppliers in the process of purchasing goods and services. It aims at enabling the organization to establish effective and reliable business partners. This is to make sure the corporation achieves its goals in the market. Some of the approaches include global sourcing, conventional agreements, low-cost country sourcing, and integrative methods. Each of the named methods provides a unique utility for the entity.

Integrative Method

FCDO is applying the integrative method to enable it to source goods and services from different supplies. The technique enables the organization to evaluate the various business developments and link them to the technical expertise required. In other words, the professional team matches the needs of the entity with resources from external vendors (Montgomery et al., 2018). The advantage of this technique is promoting the utility of the sourcing, which enhances efficiency. Appendix B illustrates the Kraljic Portfolio Matrix that depicts the considerations undertaken by the organization to evaluate the procuring involvement.

Global Sourcing

The need to acquire quality and cheap products and services prompts the organization to acquire suppliers from international markets. Global sourcing is a common strategy that most corporations use to evade the effects of competition on the domestic markets. The strengths of this technique include allowing the entity to access new technologies and relevant skills lacking in the home nation (Francioni et al., 2019). Its critical weakness is the business laws that differ, making it difficult to comply with and transact business effectively.

Conventional Agreements

Generally, the conventional agreement approach is a system whereby an organization outsources parts of its operation. This method requires two entities to formulate an arrangement that allows them to utilize their economies of scale to facilitate cost reduction. For example, FCDO makes a formal agreement with another corporation to purchase the products in bulk from the suppliers, thus lowering prices (Jing et al., 2021). The side effect of this method is losing control over the procurement process and the need to have a high level of trust.

Low-Cost Country

This method is a procurement strategy that organizations employ to reduce the cost of securing goods and services. For instance, a corporation may opt to source labor from a given country that pays lower wages than the home country. It enables the entity to effectively lower the operating expenses, thus improving profit margin. The weakness associated with the approach is the possibility of obtaining poor-quality services due to limited skills.

Conclusion

The procurement process is an essential business operation that plays a significant role in determining the success of an organization. Strategic procuring of goods and services from vendors allows an organization to remain proactive in the market while obtaining quality goods and services. However, the complexity of the engagement makes the practice bear several risks that have the potential to negatively impact business activities. Some of the hazards FCDO faces include delays, poor selection of vendors, and futile contract management. Despite the challenges, procurement performs significant functions such as sourcing, negotiation, and overseeing suppliers’ performance. The methods used by FCDO to source products and services are integrative, global sourcing, and conventional agreements.

Reference List

Dias Galuchi, T.P., Rosales, F.P. and Batalha, M.O. (2019) ‘Management of socioenvironmental factors of reputational risk in the beef supply chain in the Brazilian Amazon region,’ International Food and Agribusiness Management Review, 22(1030-2019-623), pp.155-172.

Dixit, V. (2022) ‘Risk assessment of different sourcing contract scenarios in project procurement,’ International Journal of Construction Management, 22(8), pp.1537-1549.

Francioni, B., Curina, I., Masili, G. and Viganò, E. (2019) ‘Global sourcing processes in the Italian agricultural breweries,’ British Food Journal.

Gajjar, D., Smithwick, J. and Sullivan, K. (2018) ‘Improving janitorial contract performance with facility management performance scorecards,’ Journal of Facility Management Education and Research, 2(1), pp.26-34.

Hong, Z., Lee, C.K. and Zhang, L. (2018) ‘Procurement risk management under uncertainty: a review,’ Industrial Management & Data Systems.

Jing, S., Hou, K., Yan, J., Ho, Z.P. and Han, L. (2021) ‘Investigating the effect of value stream mapping on procurement effectiveness: A case study,’ Journal of Intelligent Manufacturing, 32(4), pp.935-946.

Kakwezi, P. and Nyeko, S. (2019) ‘Procurement processes and performance: Efficiency and effectiveness of the procurement function,’ International Journal of Social Sciences Management and Entrepreneurship (IJSSME), 3(1).

Kohler, J.C. and Dimancesco, D. (2020) ‘The risk of corruption in public pharmaceutical procurement: How anti-corruption, transparency and accountability measures may reduce this risk,’ Global Health Action, 13(sup1), p.1694745.

Leeds, R. and Palaia, A. (2022) ‘Managing international development adaptively–a cultural shift,’ Development in Practice, 32(2), pp.245-251.

Meyer, M.M., Glas, A.H. and Ebig, M. (2021) ‘Systematic review of sourcing and 3D printing: Make-or-buy decisions in industrial buyer–supplier relationships,’ Management Review Quarterly, 71(4), pp.723-752.

Montgomery, R.T., Ogden, J.A. and Boehmke, B.C. (2018) ‘A quantified Kraljic Portfolio Matrix: Using decision analysis for strategic purchasing,’ Journal of Purchasing and Supply Management, 24(3), pp.192-203.

Nyamah, E.Y., Feng, Y., Nyamah, E.Y., Opoku, R.K. and Ewusi, M. (2022) ‘Procurement process risk and performance: Empirical evidence from manufacturing firms,’ Benchmarking: An International Journal.

Introduction

Strategic purchasing entails planning, implementation, evaluation, and controlling of strategic and operating purchasing decisions for directing all activities of the purchasing function toward opportunities consistent with the firm’s ability to achieve its long-term goals. Three properties together form strategic purchasing as a holistic and a broader concept. These concepts are; strategic focus, strategic involvement, and strategic visibility (Monczka et al., 2019). Strategic focus defines the long-term perspective of procurement. Strategic involvement defines the level of involvement of purchasing in strategic decisions. Strategic visibility defines how purchasing is perceived to be critical to the corporate strategy.

Risk management is very vital in strategic purchasing to ensure that there is no disruption in the supply chain. An applicable case is during the Covid-19 pandemic that brought the world to a standstill. The supply chain was heavily disrupted by restrictions on importation and exportation. Trade restrictions intensified. Companies shut down the entire production process due to lockdown and logistical reasons. The Contemporary Amperex Technology Co. Limited (CATL) is a classic example of a firm that struggled during the pandemic. It is a China-based company CATL is a global leader in lithium-ion related batteries because they patched a plan which enabled them to acquire raw materials within China. The way CATL sourced their commodities enabled them to be more resilient to supply risks which is desirable. Today strategic procurement is more than just buying goods for a good price. It entails all processes from internal customer to supplier. This paper describes strategic purchasing, its elements, and the role of the procurement department in strategic management.

Procurement Department Goals and Objectives

The procurement department is mandated with purchasing all goods, equipment, materials, and services a firm requires to run its businesses at a reasonable price (Richards, 2022). It is a vital role because any delay in purchases could stop the production process and result in empty shelves for consumers. Other critical roles of the procurement department include:

1. Negotiating prices and delivery terms;
2. Finding trustworthy and valuable suppliers;
3. Organizing deliveries with the retailers and logistic team;
4. Mining the best value from contractors;
5. Evaluating the quality and quantity of items the business needs to thrive.

Cost efficiency is one of the leading objectives of the procurement team. It is fulfilled by checking out all the suppliers in the market and comparing them in terms of quality, reputation, service delivery, capacity, and cost. The business must evaluate what happens when it relies on one supplier and come up with a contingency plan to ensure that the production process is not faltered. In the context of risk mitigation, the procurement team should analyze the pros and cons of hiring for instance, domestic versus foreign suppliers, and decide whether the firm should produce goods itself or purchase goods from external suppliers (Monczka et al., 2019). From an operational context, the procurement team is mandated with ordering goods and services, receiving inventory, administration of supplier contracts, and handling quality control issues. These issues include the management of complaints and returns from suppliers and contractors. The aim is to keep a constant flow of supplies and avail enough resources for people to perform their jobs.

The procurement team requires high-level organization, evaluation, and budgeting skills.

1. Organization – The procurement team needs to know when to order a product so that it is delivered in time. If the order is not placed in time or the shipment is delayed then a crisis might arise when that item is unavailable.
2. Evaluation – The frequency with which one orders an item depends on its projected demand and customer’s preference. The procurement team must know what to order and when to order it. At times one item may not be efficient and therefore a different brand may serve the business well (Lysons & Gillingham, 2018). The procurement department makes this analysis and seeks advice from other departments about what they require to perform their duties.
3. Budgeting – The procurement team like any other department operates on a budget each fiscal year. They must approximate the quantity required so that the stock does not last for long.

Elements of a Strategic Purchasing Plan

The elements of a strategic purchasing plan include; a properly defined goal that is aligned with the firm’s mission, measurable objectives, strategies, and tactics that are aligned with internal and external factors, and a measurable plan to ensure that the desired results are achieved. These elements are explained as follows:

1. A properly defined goal – The initial step in the development of a strategic purchasing plan is to come up with a clearly defined goal that is in line with the firm’s mission, vision, and values (Richards, 2022). A goal is an abroad statement of intent. For example, the goal could be to optimize profit. The mission, vision, and values emerge when selecting the appropriate sub-goals. If the firm’s mission is to avail the best quality goods and services to consumers, a sub-goal of cutting back the cost of raw materials that go into the production of goods and services would not be appropriate.
2. Measurable objectives – Goals are backed by measurable aims. Measurable objectives should be concise and specific enough so that after implementation two independent observers could agree as to whether the objectives were met or not. In the corporate world, the acronym SMART is used to guide the development of objectives. SMART stands for specific, measurable, actionable, realistic, and timebound. For example, if the goal is to optimize profit through reduction of supply expenses. This goal may be supported by an objective that seeks to reduce the supply cost by 15% for one year.
3. Strategies and tactics – Strategies are developed to attain certain aims and objectives. Strategies generally indicate how a firm will meet its procurement goals and therefore should be designed to maximize strengths and opportunities or overcome weaknesses and threats. Tactics refer to actions for certain tasks that will be performed in favor of the identified strategy (Richards, 2022). A strategy for minimizing the supply cost may be locating a business enterprise close to the source of raw materials.
4. The measurement plan – It shows the progress being made towards the realization of strategies and tactics that back the firm’s goals and objectives. A viable action plan should have mechanisms for monitoring progress and success. Good progress may indicate an opportunity to strengthen or improve focus on certain strategies and tactics.

Conclusion

The basic responsibility of a procurement agent is to ensure enough supply and quality of required products at the right prices. The primary aim should be on quality, product availability, pricing, and inventory investment. In establishing goals, the procurement agent should be focused on activities that improve performance in these four areas. Strategic management objectives are either financial or strategic. When planning an organization’s strategy, it is important to comprehend whether the objectives are short-term or long-term.

References

Lysons, K., & Gillingham, M. (2018). Purchasing and supply chain management. Harlow Prentice Hall.

Monczka, R. M., Handfield, R. B., Giunipero, L. C., & Patterson, J. L. (2019). Purchasing and supply chain management. Cengage Learning.

Richards, L. (2022). Elements of a Strategic Purchasing Plan. bizfluent.com. Web.

The aircraft manufacturing and the aviation transportation sector comprise the aviation industry. The aerospace sector has been making some critical news during the last decade due to the ongoing competition between Airbus and Boeing. Mobility patterns have changed as a result of improvements in technology and rising affordability in the transportation of goods and people. The aerospace industry is under increasing pressure to lower costs, re-engineer and simplify manufacturing and procurement management processes and improve product and service quality without sacrificing safety. This paper aims to analyze the development and functioning of the procurement process in the example of Airbus.

The objectives of purchasing are a highly complicated hierarchical process. The general buying goals may include any of the following features: supply movement, competent and effective sourcing strategy management, supply base organization, balancing destinations to internal partners, and developing coordinated buying strategies that support hierarchical objectives and goals. The first stage includes assessing the need. For instance, through an 80% Buy Procurement Process, over one million components for the A380-800 aircraft were sourced. The airplane required 1.25 million parts, with the remaining 0.25 million coming from a 20% procurement policy (Sopra Steria, 2019). However, on average, Airbus receives 9.33 million or 485 million pieces from its suppliers every week or every year at its multiple sites around Europe. A Four-Pillar model electronic platform named AirSupply oversees the company’s procurement (Weber, 2019).

Submitting a Request for Quotation (RFQ) to potential suppliers includes information on the product or service requirements, such as quantity and certification requirements. For instance, direct and indirect procurement are the two methods Airbus company uses in its procurement push strategy (Airbus, 2021). All parts used in their aircraft manufacturing are sourced through direct procurement. Contrarily, indirect procurement includes sourcing every component utilized in the production of Airbus aircraft. The five major direct procurement categories are aerostructures, equipment, systems, propulsion, materials, details, and specialized IT and services (Altundag, 2022). In contrast, indirect procurement covers general operational and corporate procurement categories like machines and tools, consulting, engineering services, IT and office equipment, and buildings.

The aeronautic industry utilizes a specific strategy regarding its choice of suppliers. Mazaud (2020) states that the procurement method has two key components: sourcing and transversality. These components allow Airbus to control the information flow to and from its suppliers and to choose the best supplier for each corporate and product demand. Long-term, it also aids the company in enhancing technological and operational effectiveness (Airbus, 2021). According to Airbus (2021), the supplier selection procedure entails supplier registration, registration evaluation, and invitation to tender following the identification of partnership capabilities.

The next stage is purchasing itself. Purchase orders are the signed contract a buyer makes to a seller, specifying the goods or services to be bought, their number, precise descriptions, price, date of purchase, and payment terms (Fajie et al., 2018). Orders must use some crucial elements to ensure that expenditure stays within budget. Without purchase orders, keeping track of expenses becomes more complex, susceptible to errors, and problematic when authorizing conveyance reports.

The third stage of the actual process is delivering the products and putting them in the warehouse. To guarantee that the delivery is made as agreed and sent for inspection, the warehouse employees must create the product receipt note with a packing list by comparing the number of aeronautical components to the purchase order and invoices. The company will strictly enforce the warehouse personnel to examine and ensure the parts come in good condition before being taken into the inventory stock, up to the quantity accepted based on the business inspection process. According to their purchase terms, Airbus realizes the stage: “The transfer of title and risk does not constitute acceptance of an Item by the Buyer. All Items are subject to Buyer’s right of inspection, count, testing, acceptance, and rejection arising under the Specific Terms or at law” (Airbus, 2018, p. 4). Thus, since the company’s supply network is interconnected, inventory is kept at the suppliers’ warehouse by the company, and parts required at each Airbus assembling factory arrive just in time.

However, numerous engineering and technological challenges are addressed during the procurement process. These include weight-lifting, fuel management and efficiency issues, aerodynamics, landing and braking systems, avionics, and obstacles faced during electrical power generation. At the same time the A380-800 was being developed, Airbus collaborated with its first- and second-tier suppliers, including Stork Aerospace (Baxter, Srisaeng and Wild, 2018). To further overcome problems in aircraft manufacturing, Airbus also collaborated with the suppliers of its wing components to create a more complex composite rib structure that used its own High-Lift Design and an innovative Active Load Management System. It was done to address the weight and lift issue.

Another challenge is closely connected with the last stage of procurement, which is delivery. Deliveries of aircraft may be delayed due to late component deliveries that cause downtime. These may lead to customers’ cancelation of orders, which would reduce income. Delivery errors and other operational issues can result in high costs, decreased profitability, and impaired cash flow, not to mention negative effects on the company’s brand, reputation, and stock price. For example, Airbus Group was affected by delays in aircraft deliveries and canceled orders due to the late component shipment. Consequently, its shares fell by 6% (Ahmada et al., 2021). Aerospace firms cannot afford such procurement mistakes because they negatively impact their profitability in the current competitive environment. Therefore, techniques were modified to lay aerofoil skins on the aircraft’s vertical and horizontal stabilizers, decreasing laying time and improving manufacturing efficiency. It is one of the developed solutions to issues (Stamatelos and Labeas, 2020). These actions significantly enhanced the aircraft’s capability, manufacturing, maintenance costs, operational effectiveness, and long-haul capability drive.

In modern industry, to optimize the purchasing strategy and reduce overall costs, contractors hand over financial responsibility for creating subsets to suppliers. As a result, more risks emerge managed by the bespoke procurement process. “Non-Recurring Costs” (NRC) are the most typical type of risk sharing; this is where the physical interface contributes financially to the growth and industrialization of the module that is under its control (Li et al., 2018). Although they are based on anticipated sales, these charges are included in the module’s price. The intermediary is responsible for any losses from sales.

Based on the Airbus case study, the risk-sharing agreements moderate the obstacles. They state that the suppliers would be responsible for essential parts are the costs associated with developing each component or module for which they submitted a bid or were contracted. At the same time, these expenses would only be recouped during the aircraft’s sales management (Mazaud, 2020). This risk-sharing arrangement effectively allowed Airbus to shift most of the costs associated with research and development to its suppliers (Mazaud, 2020). Thus, it increased both its immediate and long-term profits.

The specific detail that requires attention is the purchasing process and its management in terms of the aerospace industry. The complexity of the supply chain requires diverse approaches to achieve the most productive indicators of further stages in procurement. The example of Airbus presents a specific method of successful management of the list of suppliers based on multimodal control. The strategy involves segmenting direct vendors following various difficulties due to the diversion of its purchasing.

The list of suppliers includes the first-tier suppliers that are synchronized based on the strategic nature of the materials. This relationship will be more of a partnership in the degree to which this expertise supplements Airbus’ core skills. The first-tier suppliers handle the coordination of the relationship with the second-tier suppliers, which are the next level in the segmentation. Nearly all of the factors that determine this association are financial. However, the second-tier provider may occasionally search for particular competencies in second-tier suppliers. Engineering service providers hold another level of the list, directly communicating with Airbus or top suppliers. They are frequently organized based on budgetary considerations, which forces them to outsource all or some of their services.

This process detail is essential and sufficient because of the hierarchical structure of the supply chain, which increases visibility. A modular approach can ensure enough expertise in the coordination methods—the inherent strategic dimension in purchasing leads to exemplary, more differentiated supply chain management. Due to the location of suppliers and the nature of their production, the movement of international subcontracting has become increasingly important. Major companies working in single or maximum dual sources reduce the number of first-tier suppliers but increase their size. However, the growth provides a more efficient purchase and production process.

The choice of contractor and collaboration forms is specific for each field because it highly depends on the requirements and production process. The aerospace industry uses two types, which are different by nature but are necessary for fulfilling the modern needs of the companies. The primary forms of the previously proposed methods are prime or general contractors and sub-contractors. The aerospace industry, where focus on reducing cost has made the sustainability of delivery schedules problematic, has recently drawn the attention of researchers who have recognized a specific relevance to modern approaches in that sector (Ruiz-Benitez, López and Real, 2017). At the same time, the most relevant forms of collaboration are defined by the contractors and include strategic alliance and cross-departmental cooperation.

Whereas a general contractor is in charge of the entire project’s work, they continuously concentrate their total focus on it. At the same time, subcontractors work as required according to their expertise and are more specialized. The first type employs and manages other professionals; however, they are not superior to subcontractors. The letter form is not a fixed profession because any specialist can work as a subcontractor if hired to execute a project by another contractor. If the project owner needs someone with more qualifications than a project manager, they may hire a prime contractor to handle the project’s leadership and coordination. They perform some tasks that a project manager might handle, such as maintaining schedules.

Prime contractors, generally referred to as “Primes,” are vital to supply chain management in the aerospace industry because they ultimately control the whole project on behalf of their client. They are responsible for the organization of all the levels of subcontractors (Manville, Papadopoulos and Garengo, 2021). Although such contractors’ divisions have been supported in the literature, putting the system into action presents significant difficulties. According to a German aerospace sector study investigating the human aspects of subcontractor categorization, there is a shortage of empirical research in this field. Pešalj, Pavlov, and Micheli (2018) have demonstrated that the classification primarily focuses on quality improvement, claiming that eliminating the current work package challenges will increase efficiency and result in an overall business benefit. In addition, some academics emphasize that there must be additional research to support the development of measurement for both forms at the same time as adjusting a strategic baseline and assessing the diversity of systems, despite the acknowledged improved performance through prime contractors.

The forms of contractors determine the choice of collaboration methods implement throughout the work package of the Airbus production process. The primary type is determined by the contractors and is a strategic alliance involving external collaboration based on work toward a shared goal. Another form of cross-departmental cooperation focuses on internal work, which various specialists require to finish the aerospace project. For instance, the form of the alliance was implemented by Airbus in 2019 (Duvelleroy and Benquet, 2019). To work together on the deployment of collaborative 3D design, engineering, manufacturing, simulation, and intelligence applications, Airbus and Dassault Systèmes have signed a five-year alliance agreement. It allowed Airbus to advance its digital transformation significantly.

At the same time, cross-departmental collaboration work during the work packages. In most cases, it is used when one of the partners contributes the materials or expertise that the other department lacks. Hence, the prime and sub-contractors operate this system, making various companies contribute to the final product (Airbus, n.d.). For instance, Airbus utilizes one strategy called AirSupply, which unites the supply chain and all manufacturers into one system of companies. They follow the same scheme, “order – shipment – payment – quality,” contributing to the cooperation’s final result (Airbus, n.d.). Thus, the different types of contractors and collaboration benefit the finished product success in aerospace industry management.

The other issue the aerospace industry faces is the possible breach of contracts. Four types of violations can appear minor, material breach, actual, and anticipatory breach of contract. The last type implies that although there has not yet been a formal breach, one of the parties explicitly stated that they would not carry out their part of the contract. An example of such a case can be found in the case of Leki Aviation against Airbus. Leki is a danish leader in providing and distributing aircraft interiors, parts, and other supplies to the global aviation sector. During their cooperation with Airbus, the problems occurred when Leki stated that Airbus Group refused to fulfill their part of the contract.

Leki claims that Airbus improperly repudiated the Distributor Agreement when it sent the termination letter on May 17, 2012, intending to skip fulfilling all of its duties under the contract. Leki is required to sell items to Airbus per the terms and conditions stated in the Distributor Agreement’s Articles. According to the contract, the rights and responsibilities are to survive any expiration or termination of this agreement (Sherwood, 2017). Airbus preemptively revoked the contract and declared its intention not to fulfill its contractual commitments by mailing its letter on May 17, 2012. Thus, the anticipatory breach of the contract appeared through the Airbus announcement of refusal to fulfill the agreement.

Another type of breach – material – occurs when one party faces severe consequences if another breaks the agreement. Or it may appear due to the completely different results of the cooperation than those stated in the contract. For instance, in the aerospace industry, the delivery delay without addressed reasons may cause a significant decrease in aircraft manufacturing, interfering with the complex supply and factory chain. No public cases of material breaches with Airbus Group can be analyzed. Nevertheless, there is a specific description of such cases in their terms and conditions of supply. For instance, it says, “Seller shall be entitled to terminate the Supply Agreement and without incurring any liability if Customer is in material breach of any of its obligations under the Supply Agreement” (Airbus, 2020, p. 10). Therefore, the consequence of the breach includes termination of the contract and empowering sellers to operate according to their policies.

Minor breaches of contracts are more frequent than the other types, but it still indicates a severe violation of the agreement. The minor breach involves the fulfillment of the contract but partially or consists of substituting some parts. The airbus case study includes minor breaches in terms of supply chain functionality. For instance, if Stork Aerospace as a supplier constitutes the delivery from one factory in Europe to another factory or delivers the stated components and material from the United States. The final result is the same as stated in the contract, but minor changes may influence the shipment process or the cost of the components.

The final type of contract breach is actual, meaning the failure has already occurred. Such form can be minor or material, but the main feature is that there was no prior notification of the refusal to cooperate. The example for this case may be the latest public argument between Qatar Air and Airbus. The breach appeared as Qatar refused to accept two airplanes, A350s, due to surface paint issues (Ryan and Gemmell, 2022). Planes were already delivered, and consequently, the material breach occurred. However, Qatar Air states that the surface issue is a safety measures violation secured under the acceptance section of products of the agreement. Thus, if the safety measures are proven secure, the actual breach of contract for the refusal will be relevant.

Therefore, the aerospace industry follows a specifically determined procurement process, which involves a complex supply chain of various stages. The companies utilize methods and strategies to help improve the whole system’s success indicators. Airbus’s case study showed that they include sourcing and transversality, interconnection of the network, and segmentation of the lists of suppliers. There are also significant challenges and risks that the company may face during the procurement, involving technological problems of manufacturing or delivery issues, which can alter the final result. Prime and sub-contractors are also important in aerospace, determining the collaboration types relevant to the manufacturer. The final aspect of breaches of contract is crucial to detect and resolve the weak link of the chain. Thus, each element contributes to the final result of aircraft manufacture.

Reference List

Ahmada, R. W. et al. (2021) Blockchain for aerospace and defense: Opportunities and open research challenges. Computers & Industrial Engineering, 151. Web.

Airbus (2018) Airbus Americas general terms of purchase. Web.

Stamatelos, D. and Labeas, G. (2020) Towards the design of a multispar composite wing. Computation 8(2), pp. 1-14. Web.

Airbus (2020) Airbus’ General Terms and Conditions of Supply (GTCS) Web.

Airbus (2021) Supplier code of conduct. Web.

Airbus (n.d.) AirSupply: A collaborative hub for ordering and invoicing management. Web.

Altundag, A. (2022) ‘A new model for the digital transformation of the strategic procurement function: A case study from the aviation industry’ Handbook of research on digital transformation, industry use cases, and the impact of disruptive technologies. Hershey: Business Science Reference, pp. 92-117

Baalbergen, E. et al. (2022) Advancing Cross-Organizational Collaboration in Aircraft Development. Session: Aeroelastic and Aerostructural Optimization II. Web.

Baxter, G., Srisaeng, P. and Wild, G. (2018) The role of the airbus A380-800 aircraft in a full-service network airline’s commercial operations and route network design: The case of Thai airways international. Aeronautics and Aerospace Open Access Journal, 2(4), pp. 223‒236. Web.

Duvelleroy, M. and Benquet L. (2019) Airbus and Dassault Systèmes embark on a strategic partnership to create the European aerospace industry of tomorrow. Airbus: Innovation, Web.

Fajie, W. et al. (2018) ‘Prediction of Material Procurement Delays in Delivery for Multi-variety and Small Batch Manufacturing.’ Journal of Beijing University of Aeronautics And Astronautics, 31(3), pp. 78-83.

Li, N. et al. (2018) The effect of non-recurring items on analysts’ earnings forecasts. China Journal of Accounting Research, 11(1), pp. 21-31. Web.

Manville, G., Papadopoulos, T. and Garengo, P. (2021) Twenty-first century supply chain management: A multiple case study analysis within the UK aerospace industry. Total Quality Management & Business Excellence, 32(7), pp. 869-885, Web.

Mazaud, F. (2020) Purchasing strategy, and supply chain management, the airbus productive system case. RAIRO-Operations Research, 54, pp. 933–948. Web.

Ruiz-Benitez, R., López, C. and Real, J. C. (2017) Environmental benefits of lean, green and resilient supply chain management: The case of the aerospace sector. Journal of Cleaner Production, 167, pp. 850–862. Web.

Ryan, C. and Gemmell, K. (2022) Qatar Air Denies Owing Airbus $220 Million for Rejected A350s. Bloomberg: Business, Web.

Sherwood, O. P. (2017) Leki Aviation A/S v. B/E Aerospace, Inc. Smarter Legal Research, 653625/2012.

Sopra Steria (2019) ‘Airbus – Measuring suppliers’ performance towards industrial excellence.’ Sopra Steria, Web.

Weber, A. (2019) ‘Airbus harmonizes its global procurement processes with AirSupply,’ Supplyon, Web.

Introduction

Procurement is the process of acquiring goods and services for a particular project. This process aims at promoting fair and open competition from among the vendors while minimizing cost and meeting the buyer’s needs.

A procurement management plan is essential in the procurement process as it outlines requirements for the project, documentation and completion of the project. The plan plays a major role in directing the process of procurement. This ensures successful completion of the project because the necessary changes made at the right time.

The plan identifies the products and services needed for the project, the types of contracts to be used for the entire project or in parts of the project, the approval of the contact, coordination of procurement processes by various individuals involved, and the metrics used in measuring activities in the procurement process.

Background of the Study

On 21^st august 2007, Mirage Resort (MGM) and Dubai World entered into a contact for the construction of a grand gaming center CityCenter in Las Vegas. The details of the contract were drawn up as agreed by the two companies, in preparation for the construction process.

However, as is in line with construction requirements, procurement of the goods and services required for construction has to be done to guide the construction process. Procurement is in turn guided by a procurement plan that includes details of items and services required for the construction.

Purpose of the Study

This study outlines the procurement plan that contains all items and services required for the construction of the building in the agreement contract between the two companies. Such a study is necessary to guide the purchasing process so that all required items are obtained in the right manner that is cost effective.

The study specifies the bidding process so that appropriate vendors are selected and awarded tenders for supplying the required items, which measure up to the quality standards as intended by the purchaser.

Methodology

Information for this study was gathered from documented sources about the procurement process. These include journal articles and books on procurement. Information about the required items and services was obtained from the project manager, the lead engineer, and design technician through interviews and analysis of past projects.

Literature Review

The Role of the Project Manager

The project manager is a key figure in the procurement process. He should ensure that the plan is comprehensive enough to facilitate the entire project and see it to completion. He liaises with the project team, the purchasing department, project owners, and other players involved in coordinating procurement activities and process (Gido & Clements, 2006).

He leads the project team in identifying all items and services needed for the project. His office then scrutinizes the procurement list to ensure it is accurate before handing it to the purchasing department that evaluates the viability of purchasing the items of producing them internally. This evaluation is largely based on cost effectiveness, quality required and efficiency of the process (Gido & Clements, 2006).

Parts of a Procurement Plan

Identification Details

This is the initial section of the plan which contains the name of client, the title of the project, a brief description of the project itself, the period of the project and the estimated cost of the project. These are used for basic identification and for legal purposes in cases of dispute or conflict of ownership between the two owning companies (Egeland, 2009).

List of Items to be procured

The plan should give a list of items that must be procured and the reasons as to why they cannot be generated internally. Deadline for the provision of these items is also included in the plan so as to meet the project schedule for timely completion of the project.

Technical information or detailed specifications for the items is given to ensure that the right items are procured. Individuals in the relevant fields who should approve the procurement are also listed in this section. These may include the project manager or design technician (Gido & Clements, 2006).

Type of Contract to be Used

Different types of contracts for procurement include firm-fixed price contracts, time and materials (T&M) contracts, cost reimbursable contracts, and many others. The type of contract used depends on the nature of items or services in the procurement list.

In other cases, a single type of contract can be used for the entire project. This will require the project team and purchasing department to specify and define all items in terms of quantities and dates of delivery (Benslimane, Plaisent & Bernard, 2005).

Contract Approval and Decision Criteria

This section gives directions concerning the steps that must be followed before contracts are approved. The processes vary according to various companies.

Large organizations follow formal tendering procedures and selection of successful bidders. The decision maker in such a case is usually a tendering committee as chosen by the company. The process should be transparent and competent bidders in terms of cost and quality reputation are awarded the tenders (Egeland, 2009).

Vendor Management

Those awarded tenders for the provision of items and services need to be managed and supervised so that they deliver them in good quality, quantity, and time as agreed in the tendering agreement. This role is done by the project manager and purchasing department (Egeland, 2009).

Performance Metrics for Procurement Activities

Metrics is used to ensure the project goes on as scheduled and records progress of various vendors and their performance to point out inconsistency and inefficiency. This information can be used later in future procurement for selection suitable vendors (Egeland, 2009).

The Procurement Plan

Identification details

The clients in this project are Mirage Resort (MGM) and Dubai World. The title of the project is CityCenter and the project involves construction of a gaming center in Las Vegas. The project will begin on 1^st of November 2007 and last to 31^st of December 2008. This project is estimated to cost $5 billion (Gido & Clements, 2006).

Items to be procured

The project team, through its project manager, has presented the following procurement items that they determined as necessary for the project. The list has been reviewed by the office of the project management and approved as correct. They, therefore, should be submitted to the contracts and purchasing department for purchasing (Benslimane, Plaisent & Bernard, 2005).

Roofing tiles needed for constructing the roof. We can not make this item and will have to be purchased externally. Deadline for its delivery is on 23^rd august 2008. Electrical appliances are needed for supplying electricity throughout the building.

We could provide these internally, but the cost would be higher compared to that of procuring them. These should be delivered by 1^st of July 2008.

Drainage facilities are needed for draining sewage from the building. We could also provide these, but we can not meet the deadline as stated on the 1^st of January 2008. In order to restrict the project to the scheduled timeframe, it is recommendable that they are purchased externally (Hachmi, Moslemi & Campbell, 1990).

Sand/gravel is needed for the construction of the floor and walls. While we are able to manufacture blocks, we will have to procure gravel as we are not able to provide. These should be delivered by 1^st of December 2007. Wood is needed for constructing the roof.

We cannot provide wooden and has to be delivered by 15^th May 2008. Electric wiring services are required for connecting the entire building with electricity. We do not have experts for this service, so we shall have to procure. The services should be availed by 10^th July 2008 (Hachmi, Moslemi & Campbell, 1990).

Plumbers are required to install water systems and gas in the building. Although we have our own internal plumbers, they are not experts and familiar with handling large buildings. The quality of their services may be lower, thus risking the entire operation. We, therefore, have to procure these services from experts (Egeland, 2009).

The above list has been reviewed and approved by:

1. Paul Watkins, project manager.
2. Rick Meyers, head project management office.
3. Isabel O’Brien, design technician.

Type of Contract to be used

The entire procurement process will use the Fixed-Price with Economic Price Adjustment contract. We preferred this type of contract as it protects the contractor from economic fluctuation that is likely to affect prices of items and labour during the period of performing the contract.

Economic fluctuations have been and continue to be experienced in the USA and the world at large. Besides, this is a big project that will take a long time to complete. Within the length of time, more fluctuations are likely to occur as the global economy continues to dive lower (Egeland, 2009).

The Economic Price Adjustments (EPAs) are calculated based on actual costs incurred, current market prices, and or cost indices of the materials and labour. At the completion of the project, a report on EPA will be submitted by the contractor, who together with the contracting firms will negotiate a reasonable price (Egeland, 2009).

Contract Approval and Decision Criteria.

A cost analysis on the items to be procured will be carried out. The cost of producing Items internally will be compared with that or purchasing them from outside. Besides cost, quality of the items will also be compared and the time frame for their delivery.

The process of approving the contracts will try as much as possible to cut costs, ensure good quality and schedule for the project. Items that can be provided internally but on a longer duration of time will be purchased so that the project is not derailed. Bearing all these considerations, the contracts committee will approve the procurement proposal (Gido & Clements, 2006).

The purchasing and contract departments will then send solicitations to vendors to bid for the provision of the items. Vendors will return their proposals to the same committee with all required quotations and specifications as outlined in the solicitations.

The committee will then embark on the process approving the proposals. It will also determine which proposal will meet the criteria as required by the project team and purchasing and contracts departments (Gido & Clements, 2006).

The approval process is categorized by the costs involved. Items costing less than $500,000 will be approved by the project manager alone. Those costing above this figure will have to be approved by the Contract Review Board. This board comprises the project manager, purchasing and contract departments, the finance department, and the project management office.

Representatives from each department as stated will sit on the board. Because of the high cost, approval will have to be carefully done so as to ensure that the items merit the cost by quality and quantity. This will also reduce incidents of fraud and corruption (Benslimane, Plaisent & Bernard, 2005).

The Criteria in selecting and awarding contracts will be guided the need to cut costs, work within the provided time frame, and ensure the quality of the project. Selecting suitable vendors will be based on the capability of the vendor to deliver items by the dates specified, thereby beating the deadline.

The chosen vendor should be able to provide goods and services of high quality, the costs should be reasonable; not too high, the items to be delivered by the vendor should not be those that can be produced internally, and the vendor’s reputation will be used to determine their suitability (Gido & Clements, 2006).

Depending on the costs involved, as stated above, the criteria used will be reviewed by either the contracts review board or the project manager.

In cases of contracts for items and services that are relatively few, procurement agents shall be combined to share the services amongst them to create a centralized procurement system. This will create economies of scale, which will in turn lower operating costs (Gido & Clements, 2006).

Vendor Management

After suitable vendors have been selected, the team manager will be fully responsible for managing and supervising the vendors. In order to ensure vendors meet their delivery deadlines, the project manager and purchasing and contract department will schedule for weekly meetings with the vendors to assess the progress in plans to avail procured items (Benslimane, Plaisent & Bernard, 2005).

In these meetings, tender specifications will be run through by both vendors and the project manager to ensure that all details as specified are met.

The purchasing and contract departments can also perform quality tests on the items to ensure that they meet desired standards. Assessment of how far the vendors are in delivering the items will also ensure that the items all will be delivered in good time (Benslimane, Plaisent & Bernard, 2005).

These meetings will also be used by both vendors and the involved departments to make necessary alterations and modifications to the procured items.

Deadlines can be adjusted as will be necessary and possible, quantity can be increased or decreased depending on new developments in the project such as adjustments in cost, or new vendors sought in good time if existing ones apologize for not being able to deliver the items as required (Egeland, 2009).

These meetings are very important to keep track of the delivery of items and services so. Adjustments are made early into the project so that the schedule for the project is maintained.

Items will be delivered according to the just-in-time system of delivery. In this case, once the quality and quantity of items has been certified through the meetings, vendors will deliver the items in a span of one to three days prior to the deadline.

This is in an effort to reduce the risk of the items getting destroyed during storage, lowering storage costs and security risks, and avoiding inventory costs (Benslimane, Plaisent & Bernard, 2005).

Assumptions

This project is based two major assumptions:

1. The summer period will last until July next year as is always the case.
2. The US Dollar will maintain its current value. However, if it surges, its depreciation rate will be less than 5%.
3. The rules and regulations concerning construction in the state of Nevada shall stay consistent as they are today for the entire period of the project.

Performance Metrics for Procurement Activities

The project manager will design performance metrics that will assess vendor performance. The metrics will be rated on a scale of 1-4 and will feature the following details:

• Vendor.
• Quality of product.
• Timely delivery.
• Cost of development.
• Time used in the development.
• Cost per unit.
• Efficiency of transaction.

1. Excellent efficiency.
2. Good efficiency.
3. Unsatisfactory.
4. Very poor efficiency.

Besides the rating, actual values will be indicated for each vendor so that they can bear future reference when selecting them for more procurement.

Conclusion

This procurement management plan provides a comprehensive step-by-step process that will be followed in the CityCenter project. A formal procurement plan as this may seem too bureaucratic and cumbersome to many, but the benefits of adhering to the plan surpass the hectic in following the plan.

The plan is intended to achieve three major things. It is to guide the contractor to spend the right amounts of money for the products and services. This need not be the lowest cost, but the most appropriate in proportion to the services and products given.

The plan will also ensure that the project is done and completed within the specified time period. It organizes delivery processes so that delay of items does not cause the project to delay in completion also.

Lastly, the plan is useful to help the contractor not to overlook important steps that may cause the project to stall or some bit of work to be undone. If these steps are not accomplished, the quality of the entire project might be compromised. This could also be costly to the project owner.

Reference List

Benslimane, Y., Plaisent, M., & Bernard, P. (2005). Investigating Search Costs and Coordination Costs in Electronic Markets: A Transaction Costs Economics Perspective. Electronic Markets, Vol.15 (3): pp.213-224.

Egeland, B. (2009). The Project Procurement Plan. Retrieved from https://pmtips.net/

Gido, J., & Clements, J. (2006). Successful Project Management. KY: Thompson South-Western.

Hachmi, M., Moslemi, A. A., & Campbell, A. G. (1990). A New Technique to Classify the Compatibility of Wood with Cement. Wood Science Technology, Vol. 24(4): pp.345-354.

Introduction

Currently, the Mayo Clinic is looking for human resource services to aid them in the selection of laboratory equipment and other products from various providers. In order to determine if outsourcing will be advantageous or damaging to the organization, they must first determine whether it will be beneficial to the organization. The result is the completion of a cost analysis, which allows the company to choose the most cost-effective method of acquiring laboratory equipment vendors. It will be assessed in this situation whether or not outsourcing the service would be more cost-effective than undertaking direct supplier recruitment. Once the cost analysis has been done, the company can pick which method of costing will be employed in the future for the company. Aiming for cost savings for the company in issue, the supplier selection service that will be outsourced should result in cost savings for the company in question. If a company decides to outsource, the cost should be lower than the cost of direct hiring; otherwise, the supplier selection should be done within the company.

Targets of Preliminary Performance

Goals may not follow each other temporally, as suggested on the slide. They can be parallel if the sourcing team is large. Then suppliers will be found faster, however, fast communication is needed in the team.

Preliminary Performance

The company should be reliable to ensure that the items required in the clinic are delivered on time. This will prevent the clinic from incurring delays which may affect the quality of services provided to the patients. Delays may make the hospital to incur losses when patient seek medical services to another organization due to insufficient laboratory items. In addition, the outsourced company should have a follow up plan to allow the hospital to track where the supplier has reached. This will help in establishing a strong relationship between the hospital and the outsourced company. Regular communication with company will be crucial in ensuring the success of business-to-business relationship. The clinic will save on costs because after a long-term relationship the outsourced company may offer discounts for goods supplied. The clinic should also ensure that the company selected is within its budget. This is to avoid outsourcing a company that will charge high costs for the services. The delivery of high-quality equipment will improve the level of services provided in the hospital. In return, more patients will be referred to the clinic which will increase its revenue.

Levels of Services

The main three levels of service that will be required from vendors looks like this. The fundamental level, without which further work is impossible, is high-quality communication. This level is followed by a careful attitude towards clients and staff, colleagues. Only after reaching the first two levels it will be possible to consider the vendor and its service in terms of price-quality ratio, in general.

Type of Contract

The type of contract that will be employed is fixed price contracts. A fixed-price contract is one in which the payment amount is not contingent on the contractor’s usage of resources or time (An et al., 2020). In this instance, Mayo Clinic will award the contract to the outsourced company, which will then select the best supplier for laboratory supplies. This is in contrast to a cost-plus contract, which is meant to cover the contractor’s costs plus a profit margin. By using this type of contract, Mayo Clinic will not incur the risks of cost overruns. The extra costs will charged to the outsourced company. Fixed prices can necessitate retailers determining the price of each item in advance (An et al., 2020). While fixed-price products can be purchased more quickly, bargaining can be used to set the price for an entire set of things being purchased, thereby shortening the time required for bulk purchases. The fixed rates will assist the hospital in budgeting for the necessary laboratory items. Additionally, fixed-price items can be used to estimate the worth of an inventory in advance, such as for insurance estimates.

Evaluation Criteria: The List

When evaluating the best company to outsource the services for supplier selection, a financial proposal will be provided to companies that offer supplier selection services. The proposal will include how much the clinic is willing to pay. This will help in selecting a cost effective company to avoid outsourcing a company with high rates. The financial proposal should as well be transparent to that the company being outsourced is aware of the budget of the clinic. The company should have the supplier information and databases to track them incase the clinic has a complain. For example, if a supplier delivers faulty items, the clinic should have means of reaching out to them through the outsourced company to replace the items. This will prevent the clinic from incurring losses. Different criteria will be applied to different business units as they have different tasks, responsibilities and areas of activity. These units are associated with completely different areas of business, and somewhere constant communication is needed, and somewhere it can be minimized thanks to technology. It is impossible to fit all units under the same criteria.

Number of Vendors

Mayo Clinic will outsource only one vendor. In addition, the organization will identify the appropriate vendors to deliver the laboratory supplies necessary by the clinic. One business will enough, as the hospital’s objective is to save money by cutting its expenses. As a result, if a single firm is capable of providing all essential services, there is no need for two or more enterprises to select suppliers. The outsourced organization will bear the cost of searching for and selecting the best suppliers. The clinic will only pay the amount agreed upon when the contract is signed.

Comparison of Cost Analysis

When comparing the cost effectiveness and the cost benefit, the cost measure for both is expressed in terms of financial resources. When comparing cost effectiveness and cost benefit, the cost effectiveness benefit is assessed in units of effectiveness to the organization, while the cost benefit is measured in the monetary value benefits the company receives (Aamer, 2018). This because it provides the benefits in monetary terms, the cost benefit analysis is used to determine the value of a contract. The benefits would amount $120,000 in total. Using the benefit-cost ratio formula, BCR = $120,000/$89,000, or 1.348. Given that the value is positive (and the overall benefits exceed the whole expenses), the cost benefit analysis implies that hiring a supplier with the above expenses demands would be a good option for the organization.

Timeline

The activities to be included in the contract between the Mayo Clinic and the company to which they will outsource their services determine the timeline for completion of the contract. Purchases will be planned for 1-2 months, this is one of the initial stages in the timeline, followed by the rest, no less important. The total period of acquisition through select sellers is more than four months, which will need to be reduced to three months in the future. This period includes a request for a response from the seller, vendor selection, communication, and the drafting of the contract.

Communication Details

In general, it is always important to pay attention to the speed of the project flow. Business is entirely based on human needs, is created by human hands, but it is communications that can slow down the process and achieve results. It is also very important to work on conflict management.

Recommendation

The cost analysis is to help Mayo Clinic to determine whether outsourcing for supplier selection helps in saving on costs or not. Based on the findings, I would recommend outsourcing for the organization. This is because it reduce the costs and time incurred when looking for reliable suppliers. Cost benefit analysis is data-driven as it enables evaluation of the contract free of personal biases and opinions. Organizations can utilize cost benefit analysis because they can determine the money value when they decide to outsource their services.

Usefulness of Outsourcing

The use of outsourcing platforms will allow Mayo Clinic to be accessible to more patients, as well as to keep abreast of changes in large areas. This is due to the fact that outsourcing workers can cover very large areas with an information grid.

Conclusion

Advancing forward has resulted in numerous changes for organizations who opt to contract. They have shifted their emphasis in a variety of ways. The primary change has been in how firms see outsourcing and its benefits. When we look back at the origins of partnering with third-party organizations and individuals, we can see that financial considerations contributed a crucial influence. For some organizations, offshoring was solely for the aim of saving money and decreasing costs thus the need for carrying out a cost analysis. Only a few organizations considered outsourcing as a convenience for them to focus on the major issues even though the outsourcing would be more costly. Advancement in technology has enabled most companies to carry out these services internally by digitizing using the latest technologies. Nowadays, significant progress has been made on this front, and organizations are motivated by a variety of factors to advance while delegating some functions to external teams. Based on all of the above, it is considered very rational to use outsourcing in the framework of the discussed medical business. The decision was made to buy from third party outsourcing vendors until the clinic can afford independent and self-sustaining outsourcing.

References

Aamer, A. M. (2018). Outsourcing in non-developed supplier markets: a lean thinking approach. International Journal of Production Research, 56(18), 6048-6065. Web.

An, Q., Wang, P., Emrouznejad, A., & Hu, J. (2020). Fixed cost allocation based on the principle of efficiency invariance in two-stage systems. European Journal of Operational Research, 283(2), 662-675. Web.

Dekker, H. C., Kawai, T., & Sakaguchi, J. (2018). Contracting abroad: A comparative analysis of contract design in host and home country outsourcing relations. Management Accounting Research, 40(1), 47-61. Web.

Introduction

All international organizations have or tend to engage in complex procurement and operational processes. Saudi Aramco, which is an international organization, uses a rigid procurement process that inhibits expeditious operations and functioning. Due to the broad customer base and wide geographical distribution, procurement practice in Saudi Aramco is complicated even further. The lengthy procurement procedure details slow down product production, distribution, sales, and it reduces the actual production potential of the organization.

Saudi Aramco Procurement process

Generally, Aramco materials are imported from several countries depending on the cost of raw materials, ease of accessibility, and availability of transportation facilities to the nearest manufacturing site. Respective logistics managers evaluate all these variables. It is the work of respective managers, who are required to assess the viability of the procedure before recommending the appropriate action to the department.

Along the bureaucratic hierarchy, the reports by logistics managers are sent to regional managers who deliberate on the issues and come up with concrete procurement decisions within. The procurement departments are located in Europe, the US, Japan, and other locations. The regional managers in the different locations decide on design specifications and required materials. Once the development design is prepared, it is usually sent to the shortlisted manufacturers for additional instructions and product specifications.

The construction division acquires raw materials and merchandise from production zones such as the UK and Saudi Arabia. The purchasing division under the procurement department takes care of purchases, apparatus service, and inspections. In addition, the procurement department oversees the general surveillance and general transportation of materials and apparatus from factories to the worksite. Concerning the procurement process, the procurement department makes bid lists according to contract agreements. On the other hand, the purchasing department follows up the entire processes, which include tendering, awarding, and governing of purchase orders. It is also the role of this department to check the quality as well as organizing for shipment and other related processes.

The long, complex, and detailed procurement process that is exercised by the organization is a source of unnecessary delays that lead to production stagnation. Thus, the organization needs to restructure the entire process to allow speedy operations and overall production. An overhaul of the complex system will enable the organization to increase its profit margins and enhance customer loyalty through the superior and speedy delivery process. Based on the complex nature of the problem, I undertook to address it using the Soft System Method (SSM). This approach best fits the scenario and the organization since it will be possible to reduce the long procedure and lengthy details involved.

Analysis

Saudi Aramco’s procurement process requires to be addressed speedily as a measure to overcome inherent bottlenecks. Lack of proper and effective procurement procedures have cost the organization a lot of income due to delays that slow operations. However, this problem can be resolved by the use of Software System Method. The approach is effective since its implementation helps to solve the very nature of the problem. Furthermore, the approach is able to meet the needs of managers, customers, managers, international regulators, and other stakeholders in the organization with ease. The essence of using the soft system method is its ability to accommodate several stakeholders without any complexities.

CATWOE Analysis

Root Definition

Root definition is a statement that provides element functions in the system. Forbes (1995, p. 8) explains the root definition as the activity and the reason why it is perceived high in the system. The intended system aims at integrating the organization’s goals, objectives, and strategic plan in a simplified manner to provide solutions to the organization’s procurement department. Moreover, the system also addresses the shortcomings that were experienced by the initial system. Similarly, the new system is developed in a way that makes it applicable in other similar organizations with minimal customization.

Ethicality statement

The intended system will help in simplifying the compound procurement process that is being used by the Saudi Aramco. The simplification will be achieved because the new system will help in hastening decision making process as well as enhancing all the stakeholders’ access to the organization’s information online. Furthermore, the system demands the incorporation of all stakeholders in its development and therefore it is an all-inclusive system.

Decide With Stakeholders Approach

The criterion that is used when deploying this design is decided with and for other stakeholders. Thus, I was compelled to involve other stakeholders in decision-making. The first thing that was expected of us was to engage in a brainstorming session to give an in-depth appraisal of the current situation. After the brainstorming session, the stakeholders and I came up with criteria of simplifying complex problems. Later the group decided to organize the assembled information into a rich picture diagram and eventually into a conceptual model that shows how the entire process will be aggregated. The entire process is represented as shown in the table below.

Solution Formulation Process: Soft System Method (SSM)

Hitchson (1997, p. 26), highlights that the detailed methodology used in developing SSM needs not to be fixed or rigid. It is desirable that the methodology is flexible, which allows for repetition and alteration of previous phases. These processes are intermittent in nature and the preceding step depends on the previous stage.

Problem Situation

This is the preliminary stage, which requires the stakeholders to articulate the underlying problem. The management needs to gather all the information that is relevant or pertaining to the existing problem. At this stage all the information related to procurement procedure from various sources such as the internet, Library, organizations journals and management guidebooks is gathered. Some information was also obtained form reports of previous benchmarking sessions that were done by the organization. The information was retrieved from the organization website and other web related sources.

Data Gathering Interface

This stage allowed me to come up with the rich picture diagram that included both the hard aspect as well as the soft aspects. The hard aspect entailed detailed information about the organization structure, facts and statures that is adopted by the organization while the soft aspect include the managers opinions, guesses, judgment and social roles. The wide approach assumed help in generating solution that is well informed and all-inclusive.

Conceptual Model

At this stage, a diagrammatical representation of the system was drawn to reflect how the system would help to incorporate all the stakeholders. All the operations were linked with the operations that were to be undertaken by each group. The system is designed to provide automated feedback to the other stakeholders to allow congruence and speedy information transmission. For instance, all the contractors are able to update their profiles online while the suppliers are able to view the quotation of other suppliers. With this online system the organization will be able manage all the current orders and project the new level of operation. Other agents in distant parts of the world are also in a position to update into the system about price changes and availability of raw material for timely arrangement of purchases.

Lack of automation in the previous system has not only affected the organizational productivity but it has also denied the customers and other stakeholders’ right to access products at the right time. Furthermore, the organization has also struggled to obtain up to date market information in terms of opportunities and strategically positioning for competition. However, the new system will require advance information technologies skills that will enable employee to operate the system.

Examination

Delivery mechanism

All the processes and procedures identified in the conceptual model are assessed to develop a series of sequences and that fit the real world situations. At this stage, the processes identified are appraised against the rigid procurement that has been used. The firm’s procedures that have been in use are replaced by dynamic operations that include connecting regional branches using a vibrant telecommunication system to reduce time taken during the decision-making process.

A diagram showing automation manual processes

Comparison

Generally, most conceptual frameworks seem effective theoretically but are rarely operational. To overcome this predicament, the new system has been designed in way that makes it practical in real life. Each activity is organized in a manner applicable to the real world operation. For instance, all bids received are queried against the offer presented by various contractors to obtain the best bids. The option to provide instantaneous feedback to all stakeholders meets the needs of each person who require ready instantaneous response. However, providing an ideal system is a cumbersome activity and keen interest is required to avoid inclusion of unwarranted flaws. To obtain contractors information the organization gathers all the available information, sort, and update the database.

Discussion

Once the system is developed, all the stakeholders that will be affected by the system are invited to give their input about the organization to ensure the system meets their expectation. Some of the members that were involved include the procurement representatives, management, customers, contractors, suppliers and distributors. The ensuing discussion allows inclusion of omitted details and restructuring of some process to generate a perfect system that can reduce the burden shouldered by the procurement department. The discussion should also encompass the organization values; belief and culture are protected by the system. Enhancement of these allows the organization to generate a good rapport will the community and the environment in which the organization operates.

Implementation

This is the final step in system development and it consists in the system being applied. The implementation process should be done systematically to avoid operation disruption. The management can either implement the system partially to allow the staff to adjust themselves with the new system. The success of the system is vested on the ability of the management to connect the new system with the existing system. Since the new system is simpler, the management should combine the length details to fit into the new system. Checkland and Scholes (1990, p. 313) assert that Software System Method helps organizations to continue reflecting aspiration by evaluating its information strategy.

Illustration

This is a demonstration of how the organization can deal with the complex procurement process. In the diagram below, the procurement department organizes to meet all the distributors of various products who in turn provide their quotations for the products that they supply. The supplies’ lists are kept in a database that is queried to provide information both to the department and the stakeholders. On the other side, the contractors are also allowed to connect with the organization through online by completing their profile and they are expected to continue updating from time to time. These databases (consisting information on Suppliers, contractors and other stakeholders) are queried to provide the procurement department with up to date information, which they use to make decisions.

Criteria for Generation Contractors’ Information

A Rich Picture Diagram Showing the Situation at Saudi Aramco

A Diagram Showing Conceptual Framework

Relationship between the Rich Picture Diagram and the Conceptual Model

The rich picture diagram presents the challenges that are being faced by the organization from several actors. The procurement department needs to link up with other branches that are located on various parts of the world. At the same time, both the contractors and distributors are seeking for the best deals for their services. Similarly, raw material producers strive to obtain manufacturers who are willing to pay higher prices for their material. As the complex scenario reveals, all agents seek to benefit from the services or the producers that they provide. Thus, the procurement has to acquaint with all the details that are available in the market before making any decision. Gathering all the relevant information is a laborious exercises that that cannot be done easily. Therefore, there is need to provide a system that can integrate all the information that is necessary.

Conversely, the conceptual model reflects the way the new system solves the problem presented by the big picture. The conceptual model automates some processes that allow both the raw material to update their quotation online and the department will just choose the best deal. On the same note, the contractors have a duty to create their online profiles, which the department is at liberty to consult and obtain the right specification for the available job. The computer when queried for a particular outcome processes all these databases. With the Software System Method, the organization will be able to meet the needs for its stakeholders without much ado. Furthermore, rather than relying on the procurement department, managers and shareholders are also in a position to observe the performance of the organization online. This system therefore will enhance speedy operation and organization growth will be boosted.

Values, Beliefs and Circumstances

Saudi Aramco is an organization that was found and continues to run on firm values that have formed an integral part of the firm’s culture. Implementation of this system will enhance the organization values both internally and externally. Since the organization appeals to a global market, development of strong values will enhance the organization reputation as well as its brand name. Similarly as the organization procurement process need to be streamlined so that operations and customers’ needs will be met with ease and more comfortably. The satisfaction that is experienced by the organization staff from the satisfaction of job will trickle down to the shareholders who will enjoy increased production due to increased transaction velocity. Moreover, stakeholders such as the government, suppliers and distributors will also benefit from the steady and reliable schedule.

Challenges

During the development of the system many challenges were experienced which hindered a smooth and expedite completion of the project. The main challenge that was experienced is the inability to access the internal information of the organization (all information used was retrieved from the internet). In addition, a time constraint hindered thorough investigation and analysis of the problem as well as carrying out benchmarks survey to understand how other organizations that have faced similar problems have managed to solve it. This problem made it difficult for me to design an operational system without having prior practical experience. Finally, there was also a challenge in integrating the theoretical skills acquired in class into a practical business atmosphere.

Personal Reflection

After a successful completion of the system, my personal understanding of developing systems to solve complex problems has improved a great deal. The experience has enabled me to transform the knowledge and skills obtained in the classroom into actual capacity develop systems that add value in an organization. Similarly, I have also become more enlightened on the need to incorporate all stakeholders and other parties, who are bound to be affected by developments in an organization as a strategy towards better results. Finally, apart from enhancing my self-belief, the project has motivated me to think of ways through which I can better my problem solving skills.

Report to the Client

After keen evaluation and analysis of the procurement process in the organization, I was moved to develop a system that would simplify the process. The system will help the organization to reduce the intricate processes that are applied by the organization. Additionally, to deal with the issue of a long bureaucracy, the new system will help reduce the number of persons required in decision-making. Thus, the new system is not only expected to expedite the entire procurement processes, it will also enhance the organization’s revenues due to increased operation velocity. Revenues are likely to grow because the organization will be able to increase the production process; bottlenecks in the procurement processes will be eliminated. On the same note, ability of the system to allow suppliers to update their quotation will save the organization the time wasted while struggling to obtain suppliers’ information.

The system designed has incorporated all the stakeholders of the organization i.e. the employees, suppliers, contractors, and management. The system, additionally, pays adequate attention to the environment that the organization operates. The aim of incorporating all these actors is to ensure the system is acceptable and all-inclusive. Since these people will be affected directly by the system, their involvement reduces chances of rejection and blatant defiance when system is implemented. Furthermore, their inclusion allows room for them to provide their input as well as diversifying the scope of the designer.

Lack of an online-based system in the existing procurement processes inhibits the organization to have up-to-date information about raw material availability and contractors’ details. However, this problem is addressed by the new system that endeavors to provide all relevant information concerning the suppliers to enhance smooth operations in the organization. Apart from enhancing information availability of relevant information, the new system will improve communication within the organization, especially among its international branches. The internet interface will connect all branches to the head office. Consequently, regional branches will be able to obtain timely information and transmit immediate feedback to the headquarters. As the communication is improved, the organization will benefit from good interpersonal skills that will be generated within the organization.

Since the main aim of developing the new system is to simplify the procurement process, the top management will have to work closely with the procurement department to facilitate a flawless implementation of the system. Although, this seems less necessary, joint incorporation of the organization in implementation of the system will boost its success. However, the incorporation of the organization goals and the strategic plan will help employees to internalize the organization’s mission, goals and strategic plan. A repetition of this exercise makes it possible for the organization to generate a working culture that is anchored on organizational values such as hard work and accountability.

Despite the good tidings presented by the system, the organization needs to remain vigilant to tackle issues arising due to implementation of the new system. Moreover, effort has to be put into upgrading the system and providing regular maintenance services. Moreover, since the organization is expanding drastically, the management should organize for follow up research to understand the effectiveness of the system. There is need to understand any gaps that exist in the system to allow timely amendments. As the organization expands, there is need for the organization to develop another administration system that will work jointly with the proposed system to improve the management of the organization (Hutchinson, 1997, p. 59). Finally, due to the swift change in the technological world, the management should strive to offer education facilities to their employees to keep them abreast and to enhance their ability of using new systems (Hutchinson, 1997, p. 125).

The Project Log

Week 1-4: Problem Reflection

After understanding the existing problem, I took time to reflect on the problem to provide a well thought out solution. As I thought, I developed a rich picture that formed a broad base for my reasoning and interpretation of the entire scenario and how well I could simplify the complex situation. Then I strived to evaluate all the stakeholders who will be affected by the system. It was also prudent to assess how each individual would be affected by the systems; the system has impacts to both the insiders and the outsiders. The broad perspective assumed enabled development of an all-inclusive system that accommodates all the shareholders of the firm.

Before embarking on the development of the system, I also endeavored to reflect on the existing knowledge level in the organization. This included assessing the impact the system would have on the stakeholders in the organization. A new system often tends to arouse confusion, prejudices, and skills deficits. In some other occasions, introduction of a new system renders redundant the existing operational proficiency. This analysis helped in developing a system that was acceptable and devoid of major hitches or that would cause organizational unrest. After conceptualizing everything, I devised various measures that would help to improve the procurement process, system outcome and overall organization production. Finally, I attempted to invoke organizational participation to anticipate and overcome rejection of the system when it is implemented.

Week 5-8: Organization Values and Human Characteristics

Since many people will utilize the system, it was important to assess the human behavior, related attitudes and polarities. The essence of including this is to foster a viable environment through which people can interact and relate freely. In this case, I opted to use the extrovert approach that would help in soliciting ideas, opinions and energy from the people. Apart from diversifying the scope, the extrovert approach enhances good interpersonal skills and therefore it was more useful in developing the system. Moreover, the approach improves self-identification, value, and fosters self-esteem.

The second thing that was done in the week is to look for ways of incorporating the various temperaments in the system as well as enhancing mutual understanding. From a wide the perspective, I strived to invoke the need to think about the other stakeholders and actors who are outside the organization. Incorporating stakeholders boosted my ability to develop the big picture and contextual framework. The remaining task was to develop a sketch of the plan that would allow fine-tuning and readjustment to best suit the organizational structure and scope of operation. The developed sketch served as a benchmark to compare current organization’s operations against the expected performance and thus it was possible to condense some processes

Week 9-12: Development of the Final System

After developing the sketch, the remaining task was to transform the draft system into an operational system. The main task at this point was to replace the hypothetical images with real life situations to depict the exact situation on the ground to foster system acceptability. Similarly, the rich picture diagram developed is tuned to meet the finer details that might have been omitted during the development of the sketch. This task was cumbersome since it prompted wide consideration and evaluation of all aspects that would affects the organization at large.

After development of the rich picture diagram, there was need to develop a conceptual model. The model illustrates the flow of activities from the procurement department to the system and finally to other actors such as the contractors, clients, international suppliers, and other international branches held by the firm. The model also works a manual of how the system operates and generates the feedback that is utilized by the operators and the managers. This conceptual model also reveals the processes, which are automated by the system and the input that is required to generate the expected outcome.

Finally, a linkage was developed between the big picture and the conceptual model to augment comprehension. This process was done systematically to avoid any misrepresentation of facts and operation sequences. Substantial effort was extended to provide recommendations for future changes and the adjustments that need to be effected. The future inclusion allows the organization to develop a system that would enhance future growth and expansion.

Overall Summary

The intricate nature of operations has often made many organizations to face challenges in dealing with the very nature of their operations. Similarly, inabilities for many organizations to contain these complexities not only slow down the organizational operations but they also limit the organization’s potential in the market. Therefore, any organization aspiring to increase its market command is compelled to engage in simplifying some of its compound processes. This may require combination or truncation of some activities to avoid redundancies and slow decision-making process. Although there are several methods of solving complex organization problem, just a few of them provide the required outcome. Thus, the management and the system designers should assess all the outcomes to select the best option.

The Saudi Aramco procurement department has been using a compound system that has really affected the output of the organization in general. However, after a thorough analysis of the problem, stringent measures and a workable organizational structure has been developed to revitalize the organization as a whole. The Soft System Method (SSM) has been identified as one of the best approaches for simplification of complex problems that face organizations. SSM allows the designer to engage all the stakeholders in the development of the organization’s operational system. An all-inclusive development processes is ideal given it fosters easier adoption of system; all the actors feel valued and incorporated in the system. The SSM combines several activities, which were initially done manually, to be processed by an automated system to generate a cohesive feedback.

During system development, understanding of the organizations objectives comes is critical. Additionally, since the organization works with people, considering the organizational culture becomes inevitable; it is only by considering it that one will be able to promote employee focus and ability to meet the present goals. For that reason, the system developer needs to integrate the two during the development of the big picture diagram and equally in the conceptual model. After developing the conceptual model, the system needs to be implemented to serve the intended purpose. However, care should be borne during implementation to avoid operation interruption and loss of historical data that defines the organization’s operations.

The experience gained during this system development has increased my ability to conceptualize a broad problem and design the appropriate measures to allow formulation of simplified solutions. The challenges encountered have built my capacity to tackle complex problems. In addition, this challenge has provided an insight to me that have allowed me to discover complex issues in an organization and provide viable solutions. In addition, the successful design has increased my impetus to indulge in problem simplification. The experience has motivated me to increase my problem solving skills for the sake of better performance in the future.

Although the Software System Method has been hailed for its ability to provide solution to most of the complex problems, it has also received its fair share of criticism. Jackson (1992, p. 168) argues that the SSM mainly works in favor of the existing power rather catering for the needs of all actors in the organization. Despite these complaints, effective design and implementation of the system provides one of the best solutions to any complex problem.

References

Checkland, P., & Scholes, J., 1990. Soft Systems Methodology in Action. Biddles Ltd: Salisbury.

Forbes, P. 1995. Strategic Thinking: A Role for Soft Systems Methodology.

Hutchinson, W., E., 1997. Systems Thinking and Associated Methodologies. Praxis Educational: Quins Rock, Australia.

Jackson, M., C., 1982. “The Nature Of “Soft” Systems Thinking: The Work of Churchman, Ackoff and Checkland”, Journal of Applied Systems Analysis, 9 (2) pp.17-29.

Executive Summary

The aim of this paper was to analyze the strategic and operational roles of procurement at DHL. The company’s procurement function was analyzed using various procurement tools and concepts. Furthermore, secondary data was collected from a variety of sources that included the company’s website, peer reviewed journals and textbooks to complete the analysis.

The results of the analysis indicate that DHL uses a centralized procurement system to reduce costs. Its subsidiaries in overseas markets also participate in the procurement process by implementing the decisions made by the headquarters. The company has also embarked on implementing supply base optimization initiatives in order to reduce operating costs.

DHL’s Procurement System

DHL is the largest mail and logistics company in the world. The company was founded in German where its headquarters are located. Since its inception, DHL focused on rapid expansion by joining different markets in every continent. As a result, the company currently operates in over 200 countries and employs nearly four hundred thousand employees.

DHL’s vision is to “remain the postal provider for Germany and become the logistics company for the world” (DHL 2013). In order to achieve this vision, the company focuses on providing excellent services. These include “dialogue marketing, press distribution, and corporate communications solutions” (DHL 2013). Moreover, the company provides mail delivery, transport/ logistics, and supply chain management services.

Organizational Structure

As a multinational company, DHL relies heavily on the effectiveness of its procurement department to access all the supplies that it requires to meet the needs of its customers. Currently, the company is organized into four divisions that have semi-autonomous divisional headquarters (DHL 2013). However, procurement and other functions such as finance and personnel are centralized.

Procurement plays a vital role at DHL by facilitating effective and efficient sourcing of products/ services, supporting functions such as marketing and reducing operating costs. For instance, the procurement unit often assists the company’s sales team to perform activities such as reviewing response to requests for proposals (RFP) (DHL 2013).

In order to leverage the capabilities of its procurement unit, the company has embarked on innovation and use of advanced technology. Furthermore, the company is collaborating with its suppliers to help them to achieve innovation, which in turn improves efficiency in its supply chain.

Business Conduct and Operational Activities

DHL has strategically chosen to simplify its procurement system in order to achieve efficiency and effectiveness in its business and operational processes. The company’s procurement strategy focuses on the use of advanced information and communication technologies (ICT) and partnering with only a few certified suppliers. ICT is important to DHL’s procurement unit because it facilitates efficient flow of the information that is required to complete transactions such as placing orders.

DHL’s business strategy is to streamline its operations in the markets it operates in by working with selected suppliers who are able to help it to reach customers in different geographical areas (DHL 2013). The company expects to reduce its direct and indirect costs by working with a limited number of suppliers.

In particular, purchasing various supplies in large quantities from a single or a few suppliers is likely to reduce costs through discounts (Pooler, Pooler & Farney 2004, p. 47). Working with a few suppliers also helps in centralizing procurement functions (Benton 2006, p.92). DHL has centralized its procurement functions in order to avoid duplication of roles in processes such as selection of suppliers and supplier relationship management.

This leads to reduction of indirect costs associated with duplicating procurement activities (Weele 2009, p. 89). Although DHL’s global procurement decision–making processes are centralized, the company encourages the participation of its overseas subsidiaries in strategy formulation (DHL 2013). In most cases, the company’s purchase decisions are made at its headquarters.

However, the subsidiaries in various regions are responsible for implementing the decisions. For instance, the company has worldwide contracts with providers of services such as printing and labeling to enable its subsidiaries to purchase their supplies easily (DHL 2013). This strategy also reduces the costs associated with shipping materials from a centralized purchasing unit to the overseas subsidiaries (Ogden & Carter 2008, pp. 5-28).

Analysis of DHL’s Procurement Function

The effectiveness of the procurement unit is partly determined by its position in the organizational structure (Yin & Khoo 2007, pp. 7-24). The organization of the procurement unit illustrates the extent to which it is integrated into the business strategy (Yin & Khoo 2007, pp. 7-24). In addition, the organization of procurement function determines its relationship with other departments, which in turn affects its effectiveness (Ashenbaum, Maltz, & Barratt 2009, pp. 169-186).

Figure 1 shows that DHL’s procurement function is a department under the global business services unit. In this regard, the head of procurement unit has limited ability to influence procurement strategies and policies since he or she reports to the head of global business services, who in turn forwards his concerns of the CEO. Generally, DHL’s procurement function plays a facilitation role since its involvement in various business processes is moderate.

In particular, the procurement team is mainly concerned with the purchase of goods and services that facilitate the operation of other departments. (DHL 2013) These include printed materials such as envelops, as well as, maintenance, repair, and operational (MRO) services (DHL 2013).

The effectiveness of the facilitation model that has been adopted by DHL’s procurement unit can be evaluated based on its effect on supplier selection, supplier relationship management, and purchase decisions. An ideal “procurement organization must balance the desire to leverage purchasing power through complete ownership with the need to maintain the flexibility of individual business units” (Noor, Khalfan & Maqsood 2013, pp. 802-826).

This balance can be achieved by adopting an appropriate organizational structure that aligns procurement processes to the company’s needs (Noor, Khalfan & Maqsood 2013, pp. 802-826). Moreover, procurement roles, responsibilities, and decision rights must be distributed in a manner that prevents tensions among business units (Pushmann & Alt 2005, pp. 34-51).

The facilitation model adopted by DHL is effective since it leads to distribution of decision rights according to what is being purchased. The limited involvement of the procurement unit enables the functional units to participate actively in the purchase of complex equipment such as aircrafts (DHL 2013). In this case, the executives in the air freight division are allowed to perform duties such as product specification and most of the sourcing activities.

The rationale of this strategy is that the functional units have good knowledge of each of the complex equipment that they use (Stolle 2008, p. 67). Thus, their involvement in the purchase process helps in avoiding the mistakes that might occur due to the limited knowledge of the procurement team (Stolle 2008, p. 68).

For products or services that are “less business specific such as repair and maintenance, the facilitation model promotes cooperation between the procurement team and the business units” (Stolle 2008, p. 69). For instance, DHL’s procurement team often provides technical assistance such as evaluation of requests for proposals, whereas the business units identify the product’s specifications.

At the corporate level, DHL’s procurement team manages the entire process of purchasing standardized products and services such as office supplies. The advantage of this strategy is that it helps in reducing procurement cycle time and costs (Nicosia & Moore 2006, p. 91). However, it can lead to tensions between the procurement team and other business units since the later is hardly involved in the purchase of standardized products.

Centralization versus Decentralization

The choice between a centralized and a decentralized procurement system is often difficult to make because each system has its advantages and disadvantages (Farmer, Crocker & Jessop 2008, p. 123). DHL uses a centralized procurement system where most of the purchase decisions are made at its headquarters. The subsidiaries and each division participate in the procurement process by identifying their supply chain needs and making purchase requests to the head office (DHL 2013).

Moreover, they participate in product or service specification and make recommendations to the procurement team. The centralized approach has the following advantages. Apart from reducing procurement costs, centralization facilitates control of contracting terms and practices (Farmer, Crocker & Jessop 2008, p. 123). This helps in maintaining good relationships with the suppliers and sealing the loopholes that can lead to fraud.

In addition, centralization leads to specialization and development of skills such as negotiation among procurement staff (Zaman 2011, p. 78). This has enabled DHL to secure the best deals for its supplies throughout the world (DHL 2013). Despite its benefits, the centralized system is likely to create the following problems.

To begin with, it leads to delays when the company’s subsidiaries are making ad hoc purchases since requisitions have to be processed by the headquarters (Wincel 2004, p. 93). This can adversely affect operations if the goods are needed urgently. DHL has responded to this challenge by providing its subsidiaries with purchasing cards that allow them to spend a limited amount of money to make ad hoc purchases.

This has enabled the company to reduce its purchasing costs by 50% and to acquire its supplies in time (DHL 2013). Nonetheless, a decentralized system would enable the company to achieve faster approval of ad hoc purchases (Cherif & Maira 2011, pp. 860-877).

Involvement of the Procurement Team

According to Anderson and Katz (1998, pp. 1-13), the procurement team should be strategically involved in the purchase process at an early stage. Early and strategic involvement enables the procurement team to improve efficiency and reduce costs in processes such as planning and negotiation (Seshadri 2005, p. 98). Thus, DHL focuses on promoting cooperation and effective coordination of the activities of its procurement unit and other departments.

This includes using advanced information technologies to share transaction information between departments (DHL 2013). In addition, the company has introduced training programs to improve its procurement team’s managerial skills. The training programs are expected to improve the procurement managers’ ability to work strategically with the functional leadership teams of the company’s suppliers.

Apart from improving efficiency, early and strategic involvement creates clarity of the procurement objective that has to be achieved (Moser 2007, p. 145). Furthermore, it enables the procurement team to make accurate product or service specifications, which in turn leads to development of the best technical solutions (Sollish & Semanik 2011, p. 117).

However, pursuing strategic objectives in procurement is likely to eliminate the possibilities of cost reduction at DHL. Since the company works with a few certified suppliers, the difference between the prices quoted by the highest and the lowest bidders is likely to be very small (Sollish & Semanik 2011, p. 119). In this case, the company will not be able to save on procurement costs.

In addition, failure to achieve high savings is likely to have negative effects on the motivation of the procurement team since their effort is often measured in terms of cost performance. The procurement team will not be rewarded if they are not able to realize meaningful savings. Thus, they will have little or no incentive to participate in strategy formulation at the corporate level.

Supply Base Optimization

Supply base optimization refers to the process “of determining the right mix and number of suppliers to maintain” (Ogden & Cater 2008, pp. 2-28). The objective of supply base optimization is to identify the ideal number of suppliers who are able to deliver the required goods in a timely and cost-effective manner (Ogden & Cater 2008, pp. 2-28).

DHL’s approach to supply base optimization involves switching suppliers and reducing the number of tier one suppliers (DHL 2013). In order to select the right mix of suppliers, DHL incorporates supplier development functions in its supply base optimization process. The process begins with identification of the company’s strategic supply chain needs.

Once the needs are identified, the company recruits competitive suppliers and sets performance metrics to assess their achievements. The company uses a problem-solving approach to develop its suppliers. This approach involves cultivating open relationships with suppliers through feedback and sharing of information (DHL 2013).

Supply base optimization initiatives can only be effective if they are supported by an appropriate supplier evaluation system (Chang, Tsai & Hsu 2013, pp. 34-51). In addition, the company must be able to reward its suppliers by awarding them long-term contracts. This is likely to be a challenge to DHL since it lacks a clear guideline for rewarding its suppliers.

In addition, DHL is likely to lose its competitive advantage by entering into long-term contracts with suppliers of commodities such as oil whose prices keep fluctuating (Vagstad 2000, pp. 949-963). For instance, the company might not be able to benefit from price reductions in the market after entering a contract for the supply of a particular commodity at a specific price.

Recommendations

DHL should consider the following recommendations to enhance the effectiveness of its procurement unit. To begin with, the procurement unit should be allowed to play a strategic role in the organization (Ukalkar 2000, p.78). The company should reorganize the procurement function by allowing it to operate as an independent unit that reports directly to the CEO.

This will improve the process of making strategic decisions by enabling the head of procurement unit to participate in strategy formulation at the corporate level. The company should also rethink its supply base optimization objectives because reducing the number of suppliers does not necessarily lead to a reduction in costs. Specifically, the company should have an optimal number of suppliers in order to reduce costs (Weber & Ellram 1993, pp. 3-14).

The gist of this perspective is that the competition between suppliers will be minimal if their number is very small. Consequently, the possibility of reducing costs through low bids will be diminished. On the other hand, having a large number of suppliers will increase the cost of supplier relationship management. Apart from identifying the right number of suppliers, DHL should establish a better reward system for its procurement team.

Cost performance should be used in conjunction with other metrics to evaluate the achievements of the procurement team (Benton 2006, p. 137). This will motivate them to participate in strategy formulation in order to improve the company’s efficiency. DHL should also improve its supplier development approach by adopting advanced technologies such as e-learning.

Currently, the suppliers are supported through periodic training programs and incentives to innovate. However, better performance can be achieved if advanced information technologies are used to enable supplier to access the company’s knowledge base to improve their performance (Doherty, McConnell & Chadwick 2013, pp. 495-515).

In addition, the company should establish a proper supplier reward system that recognizes performance and innovation. This will enable the company to benefit from its supply base optimization initiatives.

Implementation Plan

The company should begin its restructuring process by identifying its procurement needs and setting appropriate objectives. Once the procurement objectives are clearly specified, the company should redefine its organizational structure by establishing the procurement function as an independent unit that reports directly to the CEO. The Unit should be allowed to shape policy and to set guidelines for procurement functions such as purchasing and evaluating suppliers.

Adopting advanced information technologies to support the suppliers should be considered as a strategic spend and a long-term corporate objective (Murray, Rentall & Geere 2008, pp. 540-555). The company should focus on incremental improvement of its supplier development model through systematic acquisition and implementation of user-friendly information systems. The incremental approach will help in alleviating the resistance that is likely to be experienced if the improvements are implemented as a revolutionary change.

Conclusion

The procurement function is central to the success of DHL since it enables it to access key supplies that determine the quality of its services. However, the procurement function has not been given adequate recognition by being allowed to operate independently.

The company has adopted a centralized procurement system to reduce its operating costs. Similarly, it has embarked on supply base optimization to reduce the costs associated with managing suppliers. However, these initiatives might not lead to cost reduction if they are not implemented effectively.

For instance, a significant reduction in the number of suppliers will eliminate the opportunities for cost reduction through competitive bidding. Thus, the company should rethink its supply base optimization objectives and improve its supplier development model in order to achieve a competitive advantage in procurement.

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Reasons for Procuring to be More Expensive by 2% for BBC Technology Compared to Other Companies

The reasons for procurement to be more expensive for the BBC Company than for the rest of the organizations can be explained by its size. With a range of affiliates all over the world, the organization required a large sum of money to carry out the procurement.

Reasons for Outsourcing to the Third Party Being Cheaper than to the BBC Technology

While collaborating with the BBC Technology in order to enhance the quality of the services provided by the organization seemed an obvious solution to the company’s concerns, the decision to be made was fraught with a range of serious financial consequences. By selling BBC Technology, the organization could save the money required for outsourcing from the third party and at the same time increase its revenues, which would have been impossible with BBC Technology around.

Reasons for Choosing Privatisations

The reasons for the company to resort to privatizations are, in fact, quite basic – by carrying out the specified actions, the company invested into the staff, who would have faced the threat of losing their jobs otherwise. While considered unreasonable at first due to major losses taken in the process, the given step helped BBC gain the credibility and reputation that it had been striving to attain.

In addition to the above-mentioned advantage, the approach designed by the organization helped BBC improve the quality of its services.

Finally, the process of knowledge sharing, which the outsourcing approach launched in the BBC Company, can be viewed as a major breakthrough. This addition to the information management strategy, which the organization used to follow previously, will clearly help coordinate the work of the staff in a more adequate manner. As a result, the company’s performance and overall competitiveness have been increased.

BBC and Porter’s Competitive Forces Model

From the perspective of Porter’s Five Forces Model, the choice made by BBC in terms of using outsourcing as the basis for its procurement strategy and the further expansion into the global market can be considered rather reasonable. Seeing that the threat of new entrants is rather high in the specified industry, the necessity for the company to increase its performance by acquiring new experience and increasing its staff’s competence is rather obvious. The threat of substitutes, however, can be deemed as average, seeing that there are very few alternatives to news media in the realm of the 21^st century.

The bargaining power of buyers, in its turn, is rather high, as the latter is capable of identifying the quality of the news by comparing the information provided by the BBC Company to the actual facts. With the help of modern media, the data concerning inaccuracies or false evidence will be transferred from one potential customer to another, thus, launching the chain reaction of the company’s demise. The bargaining power of suppliers, in its turn, can be considered average.

Risks and Advantages of Outsourcing before the Deal

For the BBC Company, outsourcing presupposed benefiting financially in an otherwise unfavorable scenario. In addition, the company upgraded the skills of its staff and the quality of its services. However, BBC risked failing to meet the demands of the target audience by betting on the wrong company for outsourcing; in the worst-case scenario, the organization would have lost a large number of its viewers.