Supply chain management is very broad and made up of four major elements which includes integration, operations, procurement and distribution. It is a demanding function requiring more than just a qualification but a clear-cut mindset and attitude to provide the capacity to navigate through the market dynamics for a favourable outcome. The complex variables consistent with this field require an open minded individual to enable drawing conclusions and decisions from large amounts of data. The crux of my article today will be premised on one of the four elements which is procurement.
About a month ago, the local media was awash with public procurement scandals taking a toll in parastatals. It is during this very time when Zimbabwe Institute of Procurement and Supply (ZIPS) was hosting its maiden annual conference at Msasa Training Bureau in Harare, that I had the pleasure to address the stakeholders in the said industry about Managing Risks in Supply Chain.
Firstly, it is important that we properly define procurement, which is the act of sourcing, purchasing goods, raw materials, works and services for a business from suppliers. The whole process may suffer disruptions posing as risks. So, question is how do we circumvent this possibility? Risks come in many forms and can actually be categorized as geopolitical, compliance, supplier market, operational, economic, environmental and technological (cyber-attacks). For instance, in the environmental category where the world suffered a COVID-19 disruption, the blow was devastating as many companies depended on China for raw materials and products. Taking another category as an example, the supplier market may withhold or charge higher than expected prices as a hedge from unstable exchange rates thereby incurring more operational costs as a buyer than initially anticipated. If its public procurement which is governed by the Public Procurement & Disposal of Assets Act, it then raises alarms and a call for scrutiny from the regulatory authorities or treasury. In the case of Zimbabwe, Procurement Regulatory Authority of Zimbabwe (PRAZ) may then intervene in the scare of corruption. United Nations states that $3.6 trillion is lost globally due to bribery and corrupt procurement practices. Step by step I will outline the risk management process and risk reduction tools of the above supply chain disruptions. The procurement management unit will need to create a risk management plan, entailing a detailed overall risk management strategy, the risk reduction plan and action plan.
The risk management plan’s first step and its consecutive steps are risk identification, risk analysis, risk management and finally risk control and monitoring. Risk identification is made throughout the whole procurement cycle and use a risk register to record any spotted disruptions. Analytics are then used to assess the company’s exposure to particular risks and relative impact of each risk to the company at each procurement stage. With all this information at hand, at this stage it becomes imperative for the Procurement Management Unit to create a risk response plan with clear description of risk reduction action plan, responsibilities, resources and a timeframe to achieve the laid down goal. Since risk management is a systematic process, continuous risk control and monitoring is a stern requirement. Tracking risks that may become more critical, while updating the risk register & risk response status and also making the data accessible to all stakeholders ensures that negative effects of risks on the institution’s service delivery capacity is mitigated.
Risk exposure is inherent at each stage of the procurement cycle and the common areas are dealt with in detail herewith.
During the procurement planning and analysis stage the risks do exist around failure to secure ongoing supplies that are critical to the organization’s plans; resultantly, this impacts adversely on the achievement of the business’s strategic objectives. Timeous analysis of the procurement portfolio function and undertaking robust strategic procurement planning is of paramount importance here. Another phase fraught with risks is the requirements definition stage because of biased specifications, terms of works (TOW) or scope of works (SOW) information submitted or shared by various business users with the procurement department. The risk consequences here are higher total acquisition costs, inability to attain economies of scale and challenges of unethical dealings. Shrewd procurement personnel should be well versed with the requirements of the specifications and make use of allowable industry standards. The use of expertise assistance should be sort on complex requirements. At the sourcing phase, problems around incorrect approaches to the market, use of outdated information and insufficient potential suppliers’ data base are encountered. The major imminent risks are breach of contracts, extremely higher prices and artificialized market reach constrictions. To alleviate these risks, a proactive-continuous market supply analysis and maintenance of up-to-date supplier roasters should be a continuous practice within the procurement units.
Incorrect procurement strategy selection creates immense supply chain risks centered on delayed requisitions which creates false emergencies situation on requirements. As a result the business fails to obtain value for money due to rushed purchases and poor contracts worsened by client disgruntlements. The early involvement of procurement officers in all projects planning ensures alignment of the various stakeholders on each departmental contributions to the project risk failure alleviation. The ability to follow regulated procurement processes and agreement on desired business objectives is encouraged. A huge risk exposure is embedded at the level of solicitation of documents because of the usage of inappropriate evaluation criteria, incomprehensible-non practical commercials and terms of trade and conditions not acceptable by the vendors. The result is too few suppliers will respond to the bids, too many qualification requirements to the flighted tenders, legal haggling, missed project timelines and political interventions will occur. The joint development of a well balance evaluation criteria by internal stakeholders is a mandatory, same applies with acceptable commercial conditions and the assistance from legal specialists on approval of contractual conditions is emphasized to manage risks mentioned here. Handling of bids receipts and opening is another risk point in SCM due to real or perceived breach of confidentiality and as such suppliers’ complaints, mistrust and apathy becomes more pronounced. The establishment of formalized security systems, more transparent processes, suppliers’ feedback and regular bidding handling audits and reviews help in reduction of the identified risks. Undertaking the actual effective evaluation requires well trained personnel to handle it guided by due diligence checks on proper financial and technical status as failure to do so could torch potential ethical dilemmas, suppliers’ failures to fulfill contractual obligations and value for money is lost.
Procurement contract reviewing and awarding requires meticulous verifications so that final contracts are not rejected by prospective suppliers causing longer delays in contract awarding and project completion risks. On the same note, contract finalization bears risks on undue concession to suppliers’ demands, masking by apparent agreement of different expectations of buyers and supplier. These pose risks of contract disputes, re-running of the whole procurement bidding process and incurrence of legal costs. The tail end of the same process is myriad of risks found within the contract management segment and primary headaches are price and foreign currency variations, failure by either party to fulfill the contractual commitments, delivery delays, protracted contract disputes and huge cost overruns. To safeguard against these risks, review of past performance, agreement on price and basis of computation of any variations should be clearly stated in the bidding documents. Intellectual property rights, transfer of ownership and exit clauses must be fully dealt with prior to contract conclusion and sign as to manage the associated risks. Having handled the various stages of the procurement successful does not eliminate the last huddle of risks associated with the logistics of the sourced products, goods, services and works. The procurement team must fully understand the most appropriate INCORTEMS applicable to the inbound consignments. Suppliers must not be given a free way to choose the freight forwarding companies. Various imports permits or licenses are required depending on each country of origin, destination and category of goods being shipped. Failure to observe the stated points leads to risks centered around multi-freight handling of cargo, lack of control of the contract performance of the forwarding agents , lack of clarity will result in goods being barred at the port of entry , same goods get subjected to deterioration , long lead times, extra shipping costs and client dissatisfaction.
In summary risks are abound in the whole spectrum of the procurement and these can be mitigated by ensuring that lack of transparency encounters, black swan events and issues of proprietary data restrictions are dealt with prudently. As a continuous processes of risk improvements, corporates and practitioners are implored to develop strategic risk awareness culture by empowerment of their teams, establishing effective communication lines, stakeholders should have high level of responsiveness to risks red flagging and respect via alignment of employee risk appetite to the organization’s procurement strategy.
