Procurement of Goods and Services Strategies

Procurement of Goods and Services Strategies Introduction Procurement is the acquisition of goods, works and services. The process covers a whole cycle from the identification of needs through the supply of the product and to the end of the service contact and even the end of the useful life of the asset procured. This chapter explains the background of this research work, the problem discussion and the overview of the structure adopted in this dissertation. Background The speed of technological advancement is so much now that no part of the global world can afford to be left behind especially now that the world has become a global village. Businesses all over the world are hence looking for strategies that will position them and make them have a competitive advantage whatever it takes. Such competitive advantage could be gotten from doing business at a low cost achieving lot of savings or having an effective work system. That is what a good procurement best practice strategy can deliver to any organisation. Many Organizations are now seen trying to focus on making their procurement strategies as efficient and cost effective as possible to ensure they have a competitive edge in their industries. According to source one management services, LLC, (2008) the advent of Best Practice Procurement Processes has suddenly seen a lot of companies realizing substantial cost reductions through: Having a proper understanding of the cost drivers used in determining total cost of ownership. Elimination of all non-value adding process thereby Increasing efficiency across the entire supply chain. Aggregation of demand, supplier rationalization, strategic sourcing, and enhanced supplier relationships resulting in improved cycle time. Electronically enabling the supply chain through the use of paperless e-Procurement tools and e-commerce portals. Reduction of carrying costs, warehousing, movement, obsolescence and shrinkage through the alternative inventory ownership agreements – retained consignment and vendor managed inventory. Problem discussion Different strategies are often used in achieving the best procurement processes in various industries. The need for developing countries especially Nigeria industries not to be left behind in utilizing these opportunity has necessitated this research work. For the purpose of this study, I will consider the extent to which procurement practices in Nigeria has adopted the three key strategies discussed in the work namely the lean supply, the e-procurement and the green supply strategies as it relates to environmental friendly policies adopted by various organisations in Nigeria. Kirk Zylstra (2007 p 10), argued that the main objective of all supply chain executives today is he to ensure that future business forecasts, ever changing customer demand, and other variations across the supply chain do not upset their carefully laid cost-reduction plans. Its however been discovered that the main obstacle to this vision is the ability to model budgets, accurately tie real costs to operations, and develop processes that execute these plans daily. This is where the application of lean principles to supply chain operations can help. According to Len Cooper, Senior Vice president of supply chain Halliburton, confirms that Halliburton is focusing mostly on Lean strategies with suppliers, and less so on Six Sigma because, as Cooper explains, Lean focuses on speed and throughput, which is easier for suppliers to apply and is in fact a goal for our suppliers. He went further to states that ‘’we would rather have our best suppliers grow with us, especially in these times, rather than go out and find more suppliers in order to gain access to additional capacity. We wanted to share our Creativity Over Capital ideas and experiences and benefits with them. In one of the report done by Andrea Ovans of Harvard Business report on E- procurement at Schlumberger Oilfield Services, (the worlds largest oil service company on is using the Web to revolutionize the way it buys equipment and supplies) on What they accomplished by moving to e-procurement?. The brain behind the strategy, Paris-based Alain-Michel Diamant Berger explains that ‘’We replaced a number of different systems some that were paper based, some that were automated with a single desktop system. Thats allowed us to streamline and speed up our entire purchasing operation. He further confirmed that buying supplies and equipment has often been very slow and complicated in the past, with lots and lots of papers and approval processes involved before executing a buy. However employees now act as their own purchasing agents, placing orders directly through their PCs and receiving the goods they need much more quickly. The advantage here is that the e procurement single system adopted by Schlumberger which help to consolidate purchases and gain greater volume discounts from our vendors. According to Derek Parker The ultimate aim is to achieve specific, measurable results that improve competitiveness across the supply chain by applying sustainable development practices.’’ Suppliers are often made to understand that sustainable practices improve the long term financial bottom line and in many cases the ‘greening’ of supply chain has a positive interaction with a move towards lean manufacturing, and sustainable processes which are ways of eliminating waste. From the aforementioned strategies adopted by Schlumberger, Halliburton and other organisations described as seen above, it is obvious that there is need to adopt a more aggressive strategy as that adopted by these organisations in order to remain competitive and relevant to their respective industry. The purpose of this research therefore is to evaluate the extent to which these all important strategies have been adopted by organisation in Nigeria, noting the implication and the key hindrance inhibiting these strategies. It is also critical to note that while Sustainable Procurement activities are common in many developed countries, the awareness and implementation is still relatively low in most developing countries. While I recognise the important role that procurement policies can play to support of sustainable development, this research is aims to contribute to the adoption of sustainable procurement strategy in developing countries especially Nigeria. Overview of the dissertation structure The whole dissertation is divided into six major chapters. This chapter which serves as the introduction gives the background and overview of the importance of the topic, the purpose of the research and finally the research questions then introduced. The second chapter provides the reader the opportunity to have an insight into the literature review on some the topics related to the research. This leads us to the third chapter giving the details of the methodology adopted in the carrying out the research. It explains the purpose, the approach and the strategy adopted for the research. It also shows the synopsis of how I arrived at the method I finally adopted for the research. Chapter four gives the highlight of the background of the companies used for this case study and all data gathered in the course of the research. These data were analysed in chapter five while a final conclusion and implications was drawn in chapter six based on the findings of the data analysis. 2.0 Literature Review With the global economic melt down across the nations, organisations are expected to seek a way out of this challenge, among others, looking for a way to reduce turn around time and cost through their procurement strategies. Competition therefore in today’s global market is not only between different companies but also between supply chains management systems. The evolvement in technological advancement and organizational improvements are important for effective supply chain management; however, the main cause of SCM improvements according to juril et al, (2006) is not the implementation of an information system itself, but rather a change and an integration of business processes. Over the years some changes have taken place in the development of innovative procurement strategies especially in sectors like manufacturing, retail, oil and Gas, construction and even service oriented industry. Jim Scotti, (2007) believes Procurement is now evolving into a far more strategic discipline, driven principally by a greater awareness of the financial implications of executing the function well. There are different procurement strategies adopted by organisations in the market place but using the best procurement practices would guaranty the desired success for any organisation. Based on different literatures written by authors the subject of procurement, some of the commonly adopted procurement best practices include: Creating an efficient system that would save time and money. Creating a pre-qualified and broad supplier base which enables all suppliers to be uniformly and objectively evaluated. Creating a comprehensive bid specification with full details before an invitation for bids is sent to the suppliers in the supplier pool.   Creating mutual acceptance of the process whereby every supplier in the pool knows that it can bid low on any supply.   Ensuring full transparency of bids through sending bid results to all suppliers that participated in the bid.   Monitoring every step of the workflow process to ensure clear communications, attention to every detail and a deliverable end product.   Ensuring that work is performed per specifications and on time.   Completing the project with accurate invoicing.   With the advent of Best Practice Procurement processes, a lot of companies have realized substantial cost reductions through understanding the cost drivers that determine the total cost of the supply chain and completely eliminating all non-value adding process in their supply chain line For the purpose of this report three strategies for achieving Procurement best practices will be considered and these include the adoption of the lean supply, e-procurement and adoption of the green supply strategies. While a lot of research has been done on the lean supply and e-procurement and their benefits if properly implemented, not much seems to be mentioned on the green supply principles and need to implement these strategies to achieve procurement best practices while considering the environmental friendly green supply chain management scheme in various organisations and how companies can benefit from this inevitable procurement procedure. Lean Supply Strategy Lean as described by Nigel (2006) is the process of achieving the flow of products and services to meet customers demand in the right quantity, right time, right place at the lowest price with no waste. The key principle focuses on maximizing customer value by producing goods and services with higher quality, fewer defects eliminating various forms of waste or any non-value adding activities through all possible continuous improvement processes. Womark (1996) described the five principles of lean, which includes: identify the value demanded by customer Identify the steps involved in the whole value stream Generate a flow in the value stream Produce only what is pulled by customer Strive for perfection through continuous improvement The adoption of these key principles in procurement activities in order to ensure that the organisation maximises the value of every good or service purchased explains the reason for lean supply or procurement as it applies to this research. R. Stratton (2003) believes Lean supply enables flow and the elimination of wasteful processes within the supply chain. Its focuses on continuous improvement strategies, through the elimination all non-value creating activities, reducing waste and effectively the cost of procurement. According to Lubben, (1998), lean supply aims at improving efficiency, quality and delivery performance of suppliers. It also focuses on removing all non value adding activities so as to reduce the cost of supply of material. For any procurement strategy to succeed the purchasing manager must be able to connect the strategy with the financial implication or performance. W.D. Presutti Jr. (2003) Benefit of adopting lean procurement Organizations within a lean supply chain are able to leverage their own lean journey more easily, delivering better customer value by responding more efficiently, quickly, and predictably to customer needs. That, in turn, facilitates the operation of the lean supply chain, creating a virtuous cycle that ultimately translates to superior financial performance for these organizations. In the article ‘Halliburton pushes Lean Six Sigma to its supply base’ (2009), the use of lean six sigma between 2004 and 2008, tripled their output from its manufacturing plants without any meaningful increase in the total capital footprint for those plants. The companys manufacturing cycle times were reduced, increasing their asset utilization out of all their equipment. According to Len Cooper, who is the Senior Vice president of supply chain management in Halliburton states that the lean process alleviated the need for more capital investment to support the type of output growth they experienced with the adoption of lean six sigma. Generally, the adoption of lean supply gives a lot of other benefits which includes achieving a minimal level of defects in supply, frequent deliveries.( Handfield, 1993) He further argued that because there are smaller number of suppliers, this could lead to developing a long term relationship between the buy and supplier which eventually leads reduced products price that would benefit the purchasing organisation. Strategies to adopt a lean supply system Inadequate management of the procurement process adds cost and adversely impacts customer service. In the current competitive environment such inefficiencies can no longer be tolerate. It is therefore necessary for organisations to focus more on their supply chain management system and adapt the concept of strategic lean supply chain management to their internal systems so as to eliminate all non value adding process. Sidney Hill Jr (2008) argued that the lean supply chain system cannot just happen. They emerge from strong working relationships between supply chain partners i.e the purchasing organisations, who are thoroughly committed to continuous improvement processes. Organisations especially the multinational expected to help their train their suppliers to fit into the required standard for supply. This could be organising training for their staff and help setting up some infrastructure that would encourage the lean practice. E-procurement Strategy E-procurement can be seen as a very valuable tool for organisations experiencing difficulties in their supply chain. If properly implemented, e-procurement can be used to connect a link between companies and their business processes with suppliers while managing all interactions between them. It encourages management of correspondence, bids, questions and answers, previous pricing, and multiple emails sent to multiple participants. Defined in different ways by many scholars. Presutti, ( 2002) describes electronic-procurement as the productive use of the internet to improve the effectiveness and efficiency of the supply end of the supply chain. Davila et al. (2002) describes it as any technology designed to facilitate the acquisition of goods over the internet. Most literatures written on e- procurement addressed various issues in their definition. While some such as Brunnelli, (1999), Carabello, 2001 and others limits the definition to acquisition of goods over the internet, Scott and Westbrook (1998); New and Payne, (1995) believes that it should have a broad definition which includes the entire value chain, including materials and supply chain management from the extraction of raw materials to its end of useful life. In most recent times, there has been a change of focus from the strategic view of market to an internal re engineering discovered in supply chain management. This is obvious because e-procurement provides a set of built-in monitoring tools to help control costs, maximum supplier performance and deliver value to the purchasing organisation if adequately maximized. Benefit of e- procurement strategy The use of e-Procurement system help managers make decisions through access to catalogues of many suppliers keeping track of all means of bids while leveraging on knowledge to obtain better pricing. It provides organised, standardized and track able information with the elimination of the use of paper work. Kalakota and Robinson, (2000) explains that the main objective of any company’s e-procurement strategy is to better manage the firm’s operational costs. Basically, the strategy of e-procurement could be seen under two broad umbrella: the effectiveness and the efficiency of use- Davila et al, (2002) and Presutti (2002). Dai and Kauffman, (2000) however argues the benefit in e-procurement in terms of the high returns on investment (ROI) achieved through reduced operating and search cost. A view of benefit of e-procurement adopted by Davila et al, (2002) and Presutti (2002) explains the efficiency and effectiveness of using e-procurement. This includes: a better managed inventory level, cost effectiveness and savings achieved, improved efficiency of the procurement process, reduced maverick spending and better flow of information between buyers and supplier. According to Davila et al (2002), the main reason for the investment on the technology platform used for e-procurement is to achieve cost saving. He confirms that the adoption of e-procurement technologies reported a savings of 42 per cent in purchasing transaction costs. A summary of the various benefits associated with e-procurement as seen in many of the literatures includes but not limited to; Better value for money. Its helps to reduce inventory level and therefore serves as a cost saving measure for the organisation. The managers often know the product, the bid prices and the supplier to contact whenever the product is needed. Completely reduces transaction cost such as requisition, ordering administration and storage cost. E-procurement solution helps firms to interact with a wider supplier base and gives firms the opportunity to reach the unknown but qualified source of suppliers. It also provides the spirit of fair play. There is reduced duplication leading to a more efficient purchasing. It increases the ability to track strategic information and data on procurement including purchasing patterns. E-Procurement systems also allow multiple access levels and permissions help managers organize administrative users by roles, groups, or tasks. Procurement managers do not need to be as highly trained or paid because such systems are standardized and easy to learn. The system also links together the company’s procurement unit/department around the world and allows them share information about their best suppliers According to (Presutti, 2002) , the e-procurement system enables firms to more efficiently and accurately capture and aggregate budget spending in various purchasing product area, allowing the firms to bring what may be significant buying power leverage to market. The online real time of e-procurement technology no doubt provides buyers and sellers with the opportunity to share information in building specification of products which add value to resulting product and build strong relation. The larger the base of participating suppliers, considering the benefits to both sides, the greater will be the business value of e-procurement solution. (Presutti, 2002) In conclusion, every organisation’s goal is to achieve a good return on investment. According to OSD (2001), e-procurement enables the reduction in cost of goods procured and procurement processing time and cost have direct impact on return on investment (ROI). E-procurement risk management As seen from the numerous literatures on e-procurement, the research on the adoption of e-procurement has been made tremendous impact in many organisation, unfortunately not much as done on the risk management of e- procurement, especially within the industries considered in Nigeria. Douglas Hubbard ( 2009) describes ‘Risk management as the identification, assessment, and prioritization of risk followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events’. Risk management is the finding out the possibility of ‘a wrong’ happening, how it can be avoided, fixed or reduced to the barest minimum whenever it occurs Davila et al (2002), agrees that new e-procurement technologies has become an vital part of supply chain management activities and that the rate of adoption will accelerate as aggressive users share their experiences and perceptions of low risk. He went further to argue that the actual benefits and risks of e-procurement technologies and manger’s evolving perceptions about the benefits and risks will determine the speed at which the technology moves from its developmental infancy to the adoption and the maturity stages. E-procurement is no doubt growing in most industry and this is due to the competitiveness in most industry and the ever changing nature of the demands of the customers. Some of the risk identified in different literature includes: External business risk: This happen when there’s no effective communication between the organisation’s e procurement system and the customers and suppliers. External parties such as suppliers need to be able to develop internal systems that facilitate the communication through electronic means (an issue that demands technology investments as well as incentives) connected to the e- procurement system. To achieve a successful e-procurement technology, suppliers must have an electronic access via the Internet and should provide sufficient catalogue choices to satisfy the requirements of their customers-purchasers. Although most suppliers, especially in low margin industries, may be undecided or even unable to meet such demands without guarantees of future revenue streams. And also since some of the business models associated with e-procurement technologies (e.g. auctions, consortia, and exchanges) may be thinking of using suppliers with whom the buyer has not previously transacted business, companies need to develop mechanisms that provide the buyer with assurances that the supplier meets or exceeds recognizable and industry enforced standards relating to supplier quality, service, and delivery capabilities. Reputation risk: This type of risk occurs when there’s a breach of data that can damage an organisation’s reputation. Reputation risk occurs for example, when there is duplication in the information on the system which jeopardizes the reliability of the information Implementing e-procurement strategy requires not only having a successful purchasing process in place but also the ability to integrate all existing infrastructures. Okah et al (2007) Technology risk: As the growth of e-procurement advances, most organisation fears the lack of a widely accepted standard and a clear understanding of which e-procurement technologies best suit the needs of each company. This lack of generally acceptable standard serves as a hindrance to the use of commonly integrated software across all e-procurement activities. This suggest that an acceptable and open standard would be required to fully integrate all facilitates among the various organization using the e-procurement technologies. Without widely accepted standards for coding, technical, and process specifications, the adoption of e-procurement technology will be slow and will fail to the desired benefits. Process risk: Frew (2005, p 397) explains that process risk are risk associated with the security and control of the e-procurement process itself. There is need to provide evidence to non users that this technology will not breach control or security or any privacy issue. Organizations must be confident, for example, that unauthorized actions will not disrupt production or other supply chain activities when committing to e-procurement technologies Internal Business risk: According to Davila, et al, (2002) certain risk that are linked with the adoption of e-procurement need to be addressed before these technologies are widely accepted. Although, e-procurement in itself reduces the risk of human factor, maybe due to loss of certain document or misappropriation of data, but there is still a human interface which can also result to a form of risk or error. Okah (2008) describes it as human error risks. In conclusions risk are sometimes unavoidable but adequate measure should be in place to mitigate any kind of such risk whenever it arises and that is the purpose of risk management as it applies to procurement. Davila et al, (2002) also described some risk associated with the integration of technologies with existing information systems, with the business models that these technologies impose on supplier-customer relations and with the security and control mechanisms required to insure their appropriate use. Avery, (2002) however believes that e-procurement are essentially global, many of its limitations come from the geographic, cultural and organizational limitation of the underlying businesses in which they are adopted. Green Sustainable Procurement Strategy There has been increased awareness in our environment as its affects global warming, production of non recyclable packages and some toxic substances. A lot of Organisations have been seen applying the green principle to their organisation activities including the supply chain activities. A Green Sustainable Supply Chain can be defined as the process of using environmentally friendly inputs and transforming these inputs through change agents whose by-products can improve or be recycled within the existing environment. This process develops outputs that can be reclaimed and re-used at the end of their life-cycle thus, creating a sustainable supply chain.- Patrick P (2007) According to Seuring, (2004), Green supply chain management, could be referred to as environmental supply chain management or sustainable supply chain management. This includes green purchasing, green manufacturing/materials management, green distribution/marketing and reverse logistics (Sarkis, 2005) The environmental sustainability according to Madu, et al., (2002) has gradually become part of the overall corporation culture and, in turn, has helped to restructure the strategies of corporations With this increasing awareness in environmental sustainability, companies are beginning to streamline their operations and look for means of reducing their excess inventory, determine the optimal right-shoring plan, and reduce fuel expenses and logistics costs while reducing overall carbon emissions. Purchasers are therefore faced with enormous task of focusing on the design and packages of the products supplied by their suppliers The act of purchasing activities that include the reduction, reuse and recycling of materials is therefore paramount to organisation competitive existence in the marketplace- Carter, et al. (1998) Procurement officers are now trained to go for product with less non recyclable bye products or packages. Study has shown that the cost of most goods are in the packaging, thus if the packaging can be reduced, perhaps made to be recycled, the cost of the product will eventually be low. According to Faith-Ell, et al., (2006) the environmental performance of products and services can improve if purchaser express environmental preferences through the so called green procurement Walton, et al., (1998); Zhu and Cote, (2004) confirms that organisations that adopt the green supply chain management system may generate environmental and business performances. Following various legislation by different Government, consumers are beginning to have preference for product or services produced by environmental friendly organisations. Purba, (2002) also confirm that the practise of a green supply chain, can result in an improved environmental performance through the reduction in waste and emissions as well as better environmental commitment while improving competitiveness (better product quality, increase in efficiency, enhancing productivity and cutting cost), resulting to a better economic performance (new marketing opportunities and increasing product price, profit margin, market share and sale volume). This was supported by Derek Parker who confirms that the ultimate aim of green supply is to achieve specific,measurable results that improve competitiveness across the supply chain by applying sustainable development practices. It is therefore clear based on all the stipulations from the various authors like Walton, et al. (1998), Zhu and Cote (2004) and Purba (2002), as well as other procurement experts, that organizational performance is considered to include environmental and financial performance. The pressure is therefore on all organisations to improve their environmental performances which is a result of the world’s globalization rather than localization (Sarkis and Tamarkin, 2005). Benefits of green supply The benefits of Green supply goes beyond the reduction in waste and emission to the environment but it also benefits the organisation in terms of cost savings. Stevels, (2002) categorised the benefits of green supply into three folds: the financial implication, the company reputation and the societal perception. The financial implication: The green supply chain management practice helps in lowering cost prices for supplier and in turn results to a lower cost for their customers Lower cost of ownership for customer. Better competitive advantage Result to more customers In terms of reputation: Less rejects for supplier Better compliance for societal values. Confirms technological and environment awareness in terms of societal perception: Green supply chain management helps motivation of stakeholder for environment better image for supplier and producer feel good and quality of life for customer Make industry on the right track for society. Green supply chain management helps in lowering the environmental load for environment Duber-Smith, (2005), also highlighted ten reasons why organisations should adopt the green supply strategy: target marketing, sustainability of resources, lowered costs/increased efficiency, product differentiation and competitive advantage, competitive and supply chain pressures, adapting to regulation and reducing risk, brand reputation, return on investment, employee morale, and the ethical imperative. Supplier Evaluation/Selection The responsibilities of buyers or purchasing Managers has changes significantly especially in this competitive environment from purchasing products and service to meet customers needs. It has become necessary for purchasers to provide quality products, delivered just in time by working with adequate numbers of suppliers. Suppliers therefore play a key p