Sourcing in Procurement and Supply - Literature review Example

Sourcing in Procurement and Supply Introduction SABIC is a petrochemical firm. SABIC stands for Saudi Arabia Basic Industries Corporation and is oneof the six world’s largest petrochemical companies, headquartered in Riyadh (About SABIC, 2015). The firm is comprised of six business units including performance chemicals, chemicals, fertilizers, polymers, innovative plastics and metals; the company is a joint venture of both public and private ownership in which the private sector and the Saudi government own 30 per cent and 70 per cent shares respectively in the company; additionally, the internal structure is composed of four strategic corporate departments: Research and Technology, Corporate Finance, Corporate Control and Corporate Human Resource (Our Company, 2015). And SABIC has worldwide presence and particularly the firm operates in more than 35 countries almost in all continents by employing more than 9,000 employees (SABIC worldwide, 2015). In 2013, the firm reported a total of $6.7 billion net profit along with $90.4 billion of total assets, reflecting the investment magnitude in the petrochemical industry (Facts and Figures, 2015). Based on this investment structure, the firm deals with a range of suppliers provide basic raw material and other supporting elements for manufacturing the petrochemical products. Current supplier selection policy SABIC uses ethical, legal and fair practices for evaluating and selecting suppliers (Code of Ethics, 2013). It is mentioned that SABIC has put in place a strong policy towards evaluating and selecting suppliers through evaluating suppliers by assessing that whether they have initially complied with the applicable regulatory and applicable corporate law practices in which suppliers’ annual reports and their legal matters reported in the annual reports and available in media are critically considered and are taken into account; after this step, their compliance with employment, health, and environmental and safety laws are also considered; and for this purpose, due diligence process is carried out in which screening of suppliers is rigorously carried out (Code of Ethics, 2013). Additionally, Code of Ethics (2013) also highlights that SABIC also takes into account the environmental compliance of the suppliers before entering into a contractual relationship with them; at the same time, it is also vital to mention that SABIC also checks back ground of suppliers; for this objective, the firm interacts with the existing clients of the suppliers and ask for the relevant information relating to the suppliers. Subsequently, SABIC uses competitive bidding strategy for giving a fair chance to suppliers to provide a reasonable and accurate bidding amount (Code of Ethics, 2013). Risks in supplier selection process Still, SABIC faces numerous risks in the supplier selection process. For example, the firm has only mentioned that it uses regulatory compliance of suppliers while screening or shortlisting them for entering into a business relationship. Based on this description it can be deduced that the firm has not highlighted the type of regulatory compliance that it takes into account while carrying out the process of supplier selection. At the same time, the firm has not mentioned about the practical assessment methodology that is required for assessing the compliance level with the regulatory requirements. In other words, providing only a few lines concerning the supplier selection does not take away the chances of the effects of subsequent risks relating to the supplier selection process and their effect on overall creditability and performance of the firms. No description about due diligence SABIC has only highlighted that it uses due diligence for carrying out the supplier selection process. In this regard, it is important to mention that due diligence includes financial and legal background check in which historical information and track record of other party is investigated for ascertaining whether the party has reasonable and sound financial stability or legal integrity essential for taking the risk of entering business relationship. However, when the claim of SABIC’s code of conduct is taken into account, it can be highlighted that the firm has not further explained and detailed about the due diligence process relating to assessing credibility, integrity and financial stability of suppliers. Consequently, this vague supplier selection process has following potential risks which could affect overall financial, operational and legal aspects of SABIC. Risk of receiving low quality raw material The chances of providing sub-standard raw material are higher in case the supplier has a bad reputation. The supplier selection is highly important screening mechanism which is devised for shortlisting only those suppliers having stable creditability by providing quality raw material besides ensuring on time supply of products. However, if the supplier selection process is weak and unable to disallow suppliers having low market creditability, this could increase chances of receiving low raw quality material because the supplier has earned reputation not providing a quality raw material but poor raw quality material. And this step has subsequent implications for SABIC as it would not be process and manufacture high quality petrochemical products essential for retaining the market creditability attached with the products. Risk of Reputation loss Risk of reputation loss cannot be avoided. Reputation is gained when a firm constantly retains strong commitment to the professional standards, such as on time delivery of products, high quality products and on time payment to suppliers. In this situation, if SABIC does not provide quality products and fails to retain and practise the quality practices, there would be higher chances that the firm may lose reputation which have been earned over a period of last three decades. This would only when the newly selected suppliers do not provide on time supply of raw materials and do not supply the required type of raw material quality. In this regard, it is vital to mention that petrochemical industry works like a chain in which a continuous and interrupted flow of supplies from suppliers to producers and from producers to consumers is heart of the industry. Under this situation, if the newly selected suppliers of SABIC are not sending the required type and quantity of raw material supplies, the firm would not be able to further process the material into the finished goods; consequently, the consumers would not receive the consignment from SABIC and this would turn the good image into a bad one and that is and that would not be good for the company. Risk of financial loss Buying and selling move simultaneously as they generate financial income. SABIC purchases and receives the basic raw material from suppliers and it plans whole manufacturing activity on which the subsequent orders from the customers or demand for such products in the market is satisfied through forwarding the supplies either to the customers or in the local or international market. Overall, this works like a cycle in which every step relies on the supplies from the previous step. As a result, this whole activity generate revenue in the financial income for SABIC. Under this situation, if the suppliers delay the supplies of raw material and SABIC is required to dispatch consignment to an international customer who has already made an advancement payment for receiving products, under this situation, the newly selected suppliers have failed to forward raw material supplies on time, consequently, SABIC would not be able to forward products to the international customer. As a result, this would risk the loss of financial income which would be mainly caused by the suppliers’ delay supply of raw material. And the situation gets worse if the international customer sues SABIC for not providing products on time. Risk of customer loss Risk of customer loss would not be a remote reality. In the mentioned situation, this risk can be expected as the newly selected suppliers have failed to send raw material on time. Under this situation, the international customer may find it hard to continue doing business with SABIC and may decide to look for any other seller of petrochemical products in the international market. Risk of market loss Risk of market loss cannot be undermined. If SABIC fails to take into account the untimely supply of suppliers and frequent violations of terms of engagement besides providing low quality raw material, then there would a risk of market loss in which SABIC may not be able to continue doing business in the industry as it has failed to terminate the agreements with those suppliers who do not supply raw material timely. More clearly, this type of risk grows slowly and gradually and if it remains undetected and unmanaged, SABIC would find it very difficult to regain its market reputation and recommence business with the unsatisfied local and international customers. Recommendations on priority Regular screening SABIC should ensure regular screening of the current suppliers. This regular screening should be carried out bi-annually in which certain benchmarks should be set and the screening should be conducted by keeping in view the benchmarks by ascertaining that whether a particular supplier has complied with the pre-determined benchmarks. If screening process highlights that the particular supplier has failed to meet certain benchmarks, such as on time delivery of raw material, in that case, it is highly essential that a warning along with the recommended steps should be sent to the particular supplier. In the subsequent screening if the particular does not change the previous course by not fully complying with the suggested recommendations, SABIC strategic management should not delay by taking strict against such suppliers and actions, such as withdrawal of receiving consignments from the suppliers must not be avoided. Integrity and financial stability of supplier On priority risks analysis and management, SABIC management should ensure to check integrity and financial stability of suppliers. Both aspects are highly important indicators for assessing creditability of suppliers. For example, evaluating the financial stability will highlight the current financial dealings, debt, assets, liabilities and other financial indicators and their trend analysis will indicate whether they are increasing or decreasing. Similarly, integrity of suppliers should also be evaluated and this can be verified through assessing their supplied material quality, verbal and actual commitments. For example, if a supplier verbally confirms that the next supply of certain quality and quantity would reach within fifteen days and the record indicates that the highlighted consignment has reached within the stipulated time period, this would indicate stable integrity of supplier. Recommendations for risk management Raw material quality audit SABIC should regularly conduct material quality audit. This type of risk management relating to the raw material supplied by suppliers is highly significant as this would enable the firm to assess whether the consigned material meets with the quality standards made by the firm. In this regard, it is important to mention that SABIC should develop and implement quality standards relating to the raw material supplied by the suppliers. Moreover, as SABIC has six strategic business units and each is receiving and producing different types of raw materials from a number of suppliers, it is highly essential that each unit should develop its own raw material quality standards and they should be supervised and administrated by a team of related experts. This team should be authorised and mandated to inspect regularly the material quality as soon as a shipment is received by the storage and warehouse department. Their work would be to check the material quality and maintain a proper record of quality. In the records, name of supplier, type, quantity, quality and time of receiving shipment should be noted. Advice on sustainable suppliers SABIC should have zero tolerance for those suppliers who are unfriendly towards environment. Globally, environmental issues have gained more attention from business community and from governments as they are related to human life on this planet. Many believe that the global warming, rising sea levels, abrupt increase in the floods are some the environmental issues that have caused by the human activity as well. And customers including firms have developed their own sustainability standards in which prime significance has been given to the environmental compliance by minimising and controlling those reasons that increase of cause pollution and damage to the geographical environment. Keeping this view in mind, it is highly essential that SABIC should ensure that it enter into business relationship only with those suppliers who have reasonable understanding concerning environment and especially that they comply with the environmental local and international laws. At the same time, it should also be investigated that the suppliers reduce toxicity in their raw material by taking all those appropriate measures that are locally and internationally followed by the sustainable suppliers. Within this context, SABIC should make it as its highest environmental benchmark that all suppliers have a policy towards reducing carbon footprint. Current environmental policies For assessing the sustainability policy of suppliers, it is highly essential that to know what kind of environmental policy they have applied to the raw material. In this regard, it is important to mention that some suppliers only mention sustainability policy on their official website in which tall claims are made to attract buyers and firms. Keeping this view in mind, it is necessary for SABIC to verify the authenticity of such claims either through conducting independent investigation or cross-verifying their claims by checking them in their supplies. On the other hand, if the suppliers have no environmental policy understanding, in that case, SABIC should not enter into business relationship with such suppliers. Future strategies for sustainability For sustainable suppliers, future sustainability strategies are also vital. SABIC must ensure that the suppliers have unambiguous future sustainability strategies. By knowing and applying sustainability strategies, the suppliers would highlight that they are not thinking differently when it comes to comply with the environmental local and international regulations. For example, if a supplier indicates that it plans to reduce carbon footprint by 20 per cent in coming 3 years. This would indicate that the supplier understands the environmental significance and the effect of its business operations to the climate. Sustainable procurement CIPS definition and application Sustainable procurement is a comprehensive process. “Sustainable procurement considers the environmental, social and economic consequences of design, materials used, manufacturing methods, logistics and disposal” (Chartered Institute of Purchasing and Supply, 2013, p.3). This definition of sustainable procurement highlights that the sustainable procurement is not only restricted to the economic aspect of this commercial activity but it has subsequent and consequent implications for environment and society as well. more specifically, this definition also highlights that only final product and its consignment through transportation is not the only matter that is considered in the sustainable procurement instead it is much more wider and broader by encompassing design, manufacturing techniques, and their disposal as well. In other words, sustainable procurement is also related to the human dimension in which community-related issues and their welfare is also considered. For instance, if employees are working and they receive congenial workplace environment, this would indicate that the firm has also complied with the social dimension of sustainable procurement in which welfare of employee has also been considered. Figure 01: SABIC’s Sustainability Graph Source: (Sustainability Report, 2013). The figure 01 reflects the sustainability approach of SABIC. In this graph, it is clearly highlighted that SABIC has taken into account financial capital, social capital, natural capital and human capital issues. For appropriately adjusting and developing policy and strategies for them, SABIC has put them under the caption of ‘material issues’ so as to highlight that they are highly relevant and important considerations for the firm and the whole strategic and tactical methods cannot be carried out separately or independently instead they collectively form a well-coordinated strategic policy in which all these factors should be merged and considered altogether. Based on this information, it can be deduced that SABIC has given some importance to typical non-procurement issues and that highlights that the firm is not only to consider their financial and operational benefits but also take into account human and environmental issues. However, in this regard, it is important to mention that the reported findings and figures have been taken from the sustainability reports uploaded by SABIC. Under this situation, it is very difficult to reply on the full authenticity of such claims as it has been observed that many firms use these tall claims to attract and retain customers besides attempting to show softer image of their company which may not be always in cognisance with the ground reality. Figure 2: SABIC Sustainability Continuous Evolution Process Source: (Sustainability Report, 2013). This graph also depicts the procurement sustainability of SABIC and its policy towards this issue. In this graph, the firm has tried to merge all those factors that directly or indirectly contribute to the procurement sustainability; and the factors include compliance, social responsibility, eco-efficiency, innovation, inspired culture and so on. In this regard, it is important to mention that SABIC has not further clarified that how these processes are inter-related and what kind of strategy is there that combine them together. Changes for sustainable procurement process across the procurement cycle Raw material handling SABIC must put in place additional measures for ensuring compliance with sustainable procurement. For example, it should ensure that toxicity of raw materials must not affect employees and the nearby communities. More importantly, when disposing off the waste, it is highly essential that minimum loss to the nearby community and environment should be ensured. Raw material storage Chemicals are highly toxic. Under this situation, SABIC should always bring additional control measures that enable the employees to avoid any such damage. For example, for storing the chemical raw material, SABIC should use the modern technology and techniques that enable the storage employees to handle chemicals in a professional manner. Raw material processing and transportation to customers This is most important activity for SABIC. While processing material into finished products, SABIC should only use those standards that are followed internationally as it will enable the company to understand the significance of its products and their market creditability. More importantly, while sending consignments to the customers, SABIC should ensure that the products have complied with all those safety standards that are well-established and commonly followed by all firms working in the petrochemical industry. References About SABIC, (2015). Welcome to SABIC Middle East and Africa. Available: https://www.sabic.com/me/en/ Accessed: 15 January, 2015 Chartered Institute of Purchasing and Supply, (2013). Ethical and Sustainable Procurement. Available: http://www.cips.org/Documents/About%20CIPS/CIPS_Ethics_Guide_WEB.pdf Accessed: 16 January, 2015. Code of Ethics, (2013). Code of Ethics: Performance with Integrity. Available: http://www.sabic.com/corporate/en/images/Code_of%20Ethics_%20August_2013_tcm12-495.pdf Accessed: 15 January, 2015 Our Company, (2015). SABIC: Our Company. Available: https://www.sabic.com/me/en/ourcompany/ Accessed: 15 January, 2015 SABIC Worldwide, (2015). SABIC Worldwide: Global Reach. Available: http://www.sabic.com/me/en/ourcompany/sabic-worldwide Accessed: 15 January, 2015 Sustainability Report, (2013). Creating Lasting Value: Sustainability Report 2013. Available: http://www.sabic.com/me/en/sustainability/sustainability_report Accessed: 15 January, 2015 Read More