Procurement Risks and Contract Management

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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

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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.

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