Procurement and Purchasing Strategies - Case Study Example

Procurement and Purchasing Strategies By Name Course Instructor Institution City/State Date Table of Contents Procurement and Purchasing Strategies 1 Table of Contents 2 Executive Summary 3 Project Plan 4 ‘Make or Buy’ or ‘Outsourcing’ Strategy 8 Supply Relationship Management (SRM) 11 Recommendations 12 References 13 Procurement and Purchasing Strategies - Case Study Report (Rosewood Limited) Executive Summary Corporation procurement strategies would help Rosewood Limited to achieve its strategic goals by helping the staff to perform their tasks more efficiently. The procurement strategy selection would offer Rosewood Limited the best value for their money. Some of the important factors that would influence the company’s procurement system include the changing business landscape, the increasing effect of technologies, different limitations associated with the economic downturn, and the increasing awareness of issues associated with socio-environment. The electronic procurement (e-procurement) is not just a system for online purchasing but also for achieving considerable benefits like increased efficiency and cost savings. By adopting the e-procurement system, Rosewood Limited would experience higher transparency and faster procurement process than traditional tendering and procurement methods. Kraljic’s purchasing portfolio is clearly a suitable tool for visualising, discussing, as well as demonstrating the likelihoods of differentiated supplier and purchasing strategies. Determining whether to ‘make or buy’ or outsources, the company must consider both the quantitative and qualitative factors. The quantitative factors are concerned with cost; that is to say, the make-or-buy decision has to be personalised in order to fit the outsourcing situation. On the other hand, the qualitative considerations involve not only service quality and also the need for long-term relationships between the subcontractors and business. Outsourcing would enable Rosewood Limited to effectively move into the new flexible organisational models resulting in a virtual corporation that influences empirical and conceptualisation analysis. Various e-procurement applications influence the relationship with suppliers differently but depend on the transaction stage in the procurement process and rely on the nature of service or product being procured. It has been recommended that for the company’s e-procurement and Supply Relationship Management (SRM) to be successful, the top management should offer active support, the cost drivers should be understood deeply, ensure cooperative supplier relations, and facilitate continuous improvement culture. Project Plan Procurement Strategy A procurement strategy, according to Oyuke and Shale (2014), can generally be defined how a service or product would be procured and involves determining how to competitively or non-competitively proceed. The procurement strategy can be somehow simple, like the decision to utilise a standing offer, or may be detailed, which could be utilised for major projects. The Strategy Basically, the procurement strategy, together with the procurement policy, outlines the company’s strategic approach towards procurement. The strategy’s Action Plan element would translate the desired outcomes as well as strategic objectives into the comprehensive processes and actions needed for realisation of cost-effective and sustainable procurement operation. The emphasis would be on engaging every person involved in purchasing products and services for the company. Procurement Mission Rosewood Limited is dedicated to achieving value for money in every transaction. While performing its day after day business, the procurement team must always take into account the company’s broad responsibilities based on environmental, moral, economic and social impact. Efficient procurement would support the key company’s strategic procurement objectives across such crucial dimensions of operations. Strategic Procurement Objectives As mentioned by Rimkuniene (2013), the modern-day procurement also focuses on the acquisition cost management; that is to say, the emphasis is placed on all related costs incurred during the life-time of owning and using a certain product, instead of merely the upfront price. The company’s strategic goals are supported by the procurement objectives as follows: 1. To become the world leading shipbuilding company: To collaborate with the internal company’s budget holders and suppliers with the aim of delivering best value and innovation to the company by developing a coordinated and effective purchasing effort across the organisation. To develop useful as well as sound information for procurement management with the aim of improving and measuring supplier and procurement performance all for corporate planning, performed through a transparent and fair process. To facilitate the value for money delivery by means of improved procurement practice as well as improved utilisation of procurement collaboration opportunities. 2. To create a knowledge exchange that is beneficial to all people in the company: To look for professional development opportunities that would improve and enrich procurement practitioners’ capability as well as experience. To facilitate effective communication with suppliers with the aim of ensuring continued value and reduction of risk all through contracts’ life for the sake of company and customers. 3. To achieve sustainable development: To integrate sound environmental, social and ethical policies in the company’s procurement function and adhere to the relevant Australian legislation. To sustain and develop more partnerships with suppliers and professional bodies that would yield innovation, intelligence and deliver value to the company’s customers. Procurement Leadership and Governance Snider (2006) posits that procurement can only become strategic of the procurement professionals are recognised as having legitimate roles of leadership in the determination of the organisational ends. Provided that the procurement is mainly focused on means instead of ends, it will naturally remain reactive. The ‘Leadership and Governance’ would make sure that the company has a clear support and direction from the top management in delivering best value by means of procurement. Therefore, a steering committee consisting of the Chief Executive officer and other senior managers will support the procurement to deliver the reform program. It will be the responsibility of the steering committee to ensure that the Procurement Strategy has been adopted by the company. The Supply Need Rosewood Limited will apply a well-planned and prudent approach with the goal of defining the needs of the supply chain and making sure that the company’s activities are performed according to existing laws such as the contract law and Commonwealth Procurement Rules (CPRs). While defining the company’s supply chain needs: the company will be straightforward on what are its requirements and it will take into account all cost avoidance options. Furthermore, the company will take into account the wider purchasing activity context to make sure that all important requirements have been recognised so that the true cost and the maximum benefit to the company are determined and accounted for. Annual Report Rosewood Limited will generate an annual report to demonstrate the progress against the identified strategic objectives and it will be published in the company’s website. The report would demonstrate how the company has carried out its obligations and will include a summary of the procurements completed in the year before the publishing of the report. Purchasing Systems Electronic procurement (The e-procurement), according to Nawi et al. (2016) is the process of automating the company’s procurement processes through internet-enabled applications. Rosewood Limited can utilise e-procurement to obtain contracts and achieve benefits like improved efficiency and cost saving by getting cheaper and faster services and goods. More importantly, it would enable Rosewood Limited to reduce dishonesty and improve transparency in procurement services. There are different types of e-procurement technologies that would benefit Rosewood Limited; E-auction is the process through which the products bidding is performed over the Internet and are normally traded in real time. E-auction would enable the company to buy goods or services from suppliers offering the lowest price. Another type of types of e-procurement is e-tendering where web-based technology is used to send requests to and receive responses from suppliers. E-tendering will enable the company and suppliers to manage their interactions securely at the time of tendering process. Other types of e-procurement that would benefit the company include e-informing, e-sourcing, and e-catalogue (Kamarulzaman & Mohamed, 2013). Application of e-Procurement would enable the company to improve and streamline routine purchasing processes leading to improved productivity as well as process efficiency. The Team Procurement Team will include various members such as Director of the Contracting Authority who would be responsible for ensuring there is money for the procurement process. The team will also comprise of evaluation Committee that would be tasked with examining the submitted tenders while the Tender committee would be responsible for the contract awarding. The procurement Officers would be tasked with ensuring that the procurement process is completed successfully by preparing, publishing and communicating the tender documents. ‘Make or Buy’ or ‘Outsourcing’ Strategy Outsourcing, according to Sena and Sena (2010) is a choice that lies not only in the business strategy, but also within the corporate policy. Outsourcing would modify the company’s boundaries and normally involves decision makers from top management. Outsourcing would affect the company’s asset management practices and policies on resource allocation. Some of the factors that lead to outsourcing include increased risk, rapid technological change, globalisation, seeking out flexibility, improved focus on core corporate competencies. The key to making the outsourcing decision rests squarely on the elements distinguishing the organisation, particularly in the areas of quality as well as value. In Akewushola and Elegbede (2013) study, they outline some of the shortcoming associated with outsourcing; for instance, it results in increased company’s dependence on suppliers. This dependence could lead to challenges in sustaining the company’s long-term competitive advantage devoid of involving the developmental activities of the engineering and design technologies that are constantly evolving design. Although outsourcing is considered as a suitable way of increasing quality, reducing costs, and improving the company’s overall competitive position, Akewushola and Elegbede (2013) posits that outsourcing has management and performance implications and if a company outsource does not outsource intelligently, its cost structures could be affected negatively. For Rosewood Limited to maximise outsourcing-related benefits, it must implement a review of the make-or-buy decision. As pointed out by Vrat (2014), the make-or-buy decision can be described as an act of strategically deciding between buying a product or service externally or producing it internally. Without a doubt, Rosewood Limited can sustain a competitive advantage by making the right choice. The make or buy decision should not be made in terms of economic considerations, given that loss or acquisition of core com­petencies could as well be involved. Outsourcing would offer the company with a freedom to focus its energies on crucial activities which are important for sustaining the competitive edge. This would lead to improved labour productivity and industrial relations. The best make-or-buy de­cision can be made when the company determines how the decision would influence the quality of the final product as well as the company’s adopted technologies like Enterprise Business System (EBS). To make a successful make-or-buy decision, the company should analyse costs/performance, explore strategic implications, build outsourcing incentive, and choose suitable providers. The ‘Make or Buy’ decision should go through several stages; the first stage is planning, where the procurement team examines the resources and the risk and management as well as information skills required to miti­gate such risks. The subsequent stage is the evaluation stage, where the outsourcing idea is evaluated after passing the initial screenings. At this stage, the implication of outsourcing onto the organisational structure and vision is examined. Furthermore, core competencies are determined and outsourcing objective, as well as scope, have to be known (Bajec & Jakomin, 2010). After evaluation, the company should analyse the internal performance and costs with the aim of developing a comprehensive target function’s cost analysis. Then the company should select the service provider by preparing as well as delivering request of proposal (RFP). This needs effective interplay of internal evaluation, together with a practical and improved interaction with the potential providers. After reviewing all the information gathered, the top management can decide whether the products and services should be out­sourced or made internally. In this case, to continue increasing quantities and reduce the purchase prices at Rosewood Limited the company should outsource rather than making the products internally. Given that the proprietary nature of the materials needed for shipbuilding is low and their commonality is high, it is wise for the company to outsource. According to (Vrat (2014), when the materials are high on proprietary nature and low in commonality index, they should be made internally instead of outsourcing them. Kraljic’s Procurement Portfolio Model Kraljic (1983), as cited by Mello et al. (2017), introduced an all-inclusive procurement portfolio model. Kraljic emphasised that managers should protect their companies from catastrophic supply interruptions and how to manage to change technological and economic dynamics. Kraljic’s (1983) created a suitable portfolio model for determining a comprehensive supply strategy. Kraljic’s model involves the formation of a portfolio matrix where products and services are classified based on two dimensions: supply risk and profit impact. This led to a matrix with four categories: leverage, noncritical, bottleneck as well as strategic items. All the four categories need a different approach toward management of suppliers. For instance, the leverage items enable the procuring company to take advantage of its full purchasing power by target pricing, tendering, as well as product substitution. Given that the value of routine items is low they are ordered often leading to high costs of the transaction. For that reason, strategies are intended for cutting the transaction costs through e-procurement solutions. The Bottleneck items lead to considerable risks and problems which have to be managed through vendor supplier control, volume insurance, backup plans as well as safety stock. Lastly, the Strategic items need a strategy between the buyer and the supplier that is more collaborative. Clearly, the Kraljic’s model general idea is reducing the supply risk and capitalising on the buying power. The abovementioned categories facilitate differentiated supplier strategies according to the product’s position in the portfolio. According to Knight et al. (2014), Kraljic's purchasing portfolio model demonstrates that different forms of purchasing require different sourcing strategies, strengthened by different sets of practices and sources. Without a doubt, Kraljic’s portfolio approach is a diagnostic as well as a prescriptive tool that Rosewood Limited can use manage procurement. This purchasing portfolio model would enable Rosewood Limited to coordinate the sourcing patterns of somewhat self-sufficient strategic business in the company, leading to a synergy and leverage. The model will help the company to differentiate the overall purchasing strategy using various strategies for various supplier groups. Furthermore, the portfolio model offers a framework for focusing on the supply strategy of the company. Long-term and close relationships with suppliers are undoubtedly vital, not just at the logistical level, but also at strategical and technological level. Therefore, it is imperative that the company writes the contracts properly in order to steer clear of conflicts in the strategic items strategy considering that switching cost is exceedingly high. Given that few products in the shipbuilding are categorised as bottleneck items, the company should avoid having suppliers in this group. Supply Relationship Management (SRM) The Supplier Relationship Management (SRM) is undoubtedly the main source of the effective procurement system. Depending on the up-to-date, reliable and comprehensive information makes to improve how the company communicates with the suppliers and also optimise risks management and procurement process. When the SRM system is coupled with the e-Procurement’s spending analysis functions, it becomes possible to achieve an accurate view of the data connecting many supplier accounts’ at procurement category level, individual supplier level, or at supplier community level. As a result, the procurement department will achieve reliable consolidated data which collected from various information systems and making it possible to identify and explore several supplier negotiation levers. The e-Procurement SRM tool facilitates the centralisation of information from external sources in one supplier file. Such information can be added in instantaneously to the data accessible to the procurement community. According to Wagner and Essig (2006), since the electronic markets are open the buyers can easily and inexpensively search for alternate suppliers. When the buyers show less commitment to certain suppliers it could lead to adverse supplier relationships. Wagner and Essig (2006) emphasise that developing a relationship with the suppliers takes a lot of time; therefore, e-procurement reduces the likelihood of a buyer going through various evolutionary relationship phases with the suppliers. E-procurement facilitates the suppliers and buyers relationships and could lead to an authentic win-win situation for the company together with the suppliers. As mentioned by Wagner and Essig (2006), a number of companies adopt e- procurement without a clear idea of how it would affect supplier relationships and also supplier portfolios. In the view of this, Rosewood Limited should consider the interdependencies with traditional supplier relationship management practices and should not neglect the critical need for restructuring its supplier portfolios. Understanding such correlations and integrating them into the company’s strategic decisions would lead to business success. Recommendations When the company decides to outsource, it should continually monitor the contractor’s activities by establishing constant communication in order to reduce liability exposure. More importantly, the company should ensure that the workers have embraced the outsourcing strategy in order to alley the fear of losing their jobs. E-procurement will streamline the company’s processes by offering timely information as well as enhancing collaboration and coordination. This will consequently lead to economies of time and cost savings. Without a doubt, e-procurement would enable the company to make accurate and more informed decisions by offering easy access as well as important information regarding all competitors and bids. More importantly, e-procurement would make the awarding process extremely precise and organised since the decision makers would effectively understand the bids and get the better pricing that would eventually lead to cost savings. To ensure that the e-procurement system functions smoothly, the company should ensure there is only one online point of entry and make sure that all suppliers are registered. Besides that, the company should utilise a centralised bidders' list and ensure that there is active support from the senior management. At a minimum, high-ranking executives such as CEO should completely understand the supply value and ensure the company has good relations with the supplier companies. The company should establish a culture of continuous improvement and should integrate strategic suppliers into all programs involving supply, like cost reduction, new product development, as well as logistics operations. Consultation would benefit the Rosewood Limited’s procurement strategy through generating exposure to both external as well as internal scrutiny. As a result, this would strengthen the comprehension of the strategy and the likelihood of achieving its objectives, aims and policies. The strategy success would rely on balancing Rosewood Limited’s reputational and business needs with different Australia’s regulatory compliance. 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The Benefits and Challenges of E-procurement Implementation: A Case Study of Malaysian Company. International Journal of Economics and Financial Issues, vol. 6, no. 57, pp.329-32. Oyuke, H.O. & Shale, N., 2014. Role of Strategic Procurement Practices on Organisational Performance; A Case Study of Kenya National Audit Office. European Journal of Business Management, vol. 2, no. 1, pp.1-14. Rimkuniene, D., 2013. Modern Procurement: Strategic Role and Competitive Advantage. Innovative Infotechnologies for Science, Business and Education, vol. 2, no. 15, pp.14-18. Sena, M. & Sena, J., 2010. Make or Buy: A comparative assessment of organisations that develop software internally versus those that purchase software. In Conference on Information Systems Applied Research. Nashville Tennessee, USA, 2010. Snider, K.F., 2006. Procurement Leadership: From Means to Ends. Journal of Public Procurement, vol. 6, no. 3, pp.274-94. Vrat, P., 2014. Make or Buy Decisions: Outsourcing Strategy. In Materials Management An Integrated Systems Approach. New Delhi: Springer. pp.303-16. Wagner, S.M. & Essig, M., 2006. Electronic procurement applications and their impact on supplier relationship management. Int. J. Services Technology and Management, vol. 7, no. 5, pp.439-46. Read More