How the Commercial Management Creates Competitive Advantage in Procurement - Case Study Example

HOW THE COMMERCIAL MANAGEMENT CREATES COMPETITIVE ADVANTAGE IN PROCUREMENT

(the role of commercial management in the management of projects.)

Introduction

Commercial management is defined as the identification and development of an enterprise’s business opportunities and the profitable management of both contracts and projects from the inception phase to completion (Huemann, 2012). Though scholars emphasize on the identification of new business opportunities as its major role, the nature of commercial management functions are multifaceted and broad. Commercial practitioners, thus, engage in a wide range of activities which may include supply chain management, contract negotiations and formulation, cost and risk management, dispute resolution and value management. In recent times, the function of procurement has been receiving a substantial level of attention and regarded as an integral component in the overall strategic performance of a business. The following essay will thus aim to highlight how the functions of commercial management succeed in creating competitive advantage for a selling organisation in a project commercial exchange.

How does the work of commercial management create competitive advantage for a selling organisation in a project commercial exchange?

In the modern world, the business world has experienced dramatic transitions due to factors such as the globalization of demand and supply curve, short product lifecycles, emphasis on costs and corporate social responsibility. Consequently, the process of outsourcing has transitioned the landscape of procurement and supplier management, which now forms a crucial aspect for strategic business management (Salter & Gann, 2009). In facilitating a project commercial exchange involving a selling company, a report tabled by the PricewaterhouseCoopers revealed that there are three key objectives that govern a project’s success, which include leveraging on suppliers’ capabilities, cost-cutting and security of supply (PwC, 2015). In any commercial exchange activity, organisations are aware that they do not possess the capacity and mean to finance all their operations independently. Therefore, outsourcing gives access to distinct resources, ideas and knowledge of other enterprises, which thus creates competitive advantage.

One of the mechanisms through which the commercial management creates a competitive advantage is ensuring efficiency in service delivery and performance through developing strong management practices. Historically, procurement has been perceived as a tactical process that is aimed at reducing costs. As such, most businesses fail to realize the enormous growth potential and benefits that commercial management has that may include efficiency in service delivery and risk reduction (Maylor, Brady & Cooke, 2013). Developing a management team to oversee a procurement project encourages harmony among partnerships, business processes and other supporting tools. In the long run, this cross-functional team allows the development of partnerships that are in line with their financial projections and business objectives. The team may also integrate the finance department in the operation, which provides support in assessing the impact of the procurement activity in the balance sheet.

According to the resource dependence theory (RTD), organizations are dependent on other external factors, and thus the procurement process forms a crucial aspect of their operations. Borrowing from the RTD theory, Cox et el. model reiterates that the level of dependence of one business over the other governs the procurement process and existing relationships between corporations (2003). The management unit of a project aids in evaluating the nature of power structures existing between partnerships and how much choice the parties have beyond one partner (Lindkvist, Sydow & DeFillippi, 2014; Davies & Westerveld, 2010). In addition, the unit also promotes collaboration between partnerships and thus enhancing service delivery and innovation. Providing a rigorous and dedicated management guarantees the successful implementation of projects that are in line with the goals and objectives of the business. Competitive advantage is thus gained through leveraging the power of collaborative efforts and innovation, which ensures efficiency in service delivery.

My participation in the Stewartston University High Performance Computing Cluster Project allowed me to witness the value of effective governance in ensuring efficiency in service delivery. While the project required partnerships with other firms, strong management structures allowed us to develop a standard working mechanism and ensure harmony prevailed amongst entities. This further resulted into a far greater cost effective project that encouraged collaborations and knowledge sharing.

The second way that the commercial management creates a competitive advantage in a selling organization is through reducing costs in a project. In the past, procurement was essentially expected to allow that products and services were available at the required time and that transactions could be processed accurately (Mannion, Sanderson & Lonsdale, 2011). The period between 1980 and 1990 led companies to identify cost-cutting as yet another element of procurement. This was accomplished through undertaking strategic sourcing initiatives, which then consolidated volumes and consequently reducing prices. Procurement thus developed into a price-oriented function, though it did not align with other organizational functions. The Total Cost of Ownership (TOC) model made it possible for organizations to develop cross-functional collaborations that reduced costs and optimized lifecycle costs. For commodity products like computer hardware components, adopting effective procurement strategies plays a key role in reducing costs and risks (Salter & Gann, 2009). Though cost reduction is paramount in creating value, giving too much focus on it may be harmful due to its short time orientation. Using costs as KPIs may discourage building on innovation and sustainability, which are long term value drivers that conflict with short term KPIs.

Another mechanism that costs can be optimized by the commercial management to create a competitive advantage is via the formation of strategic partnerships with other suppliers. Organizational buying behaviour frameworks suggest that for contractors offering proven products and services, supply chain mangers tend to considered them during high-risk situations (Westerveld, 2013; Lowe, 2013). Supply chain leaders are thus mandated to create value through joint collaborations with a limited number of suppliers that are based on trust and open communication. Businesses are aware that they cannot finance and operate all operations independently. According to Turner and Keegan (2011), collaborating allows both entities to gain access to distinct talents, ideas and resources that are unique to each party, thus maximizing the output commodity or service. In the long run, this leads to increased supplier competencies, which are the processes and resources that the buying farms can be provided with to promote partnerships.

Building and inspiring cultural change is also another way that a project management team can enhance the competitive advantage of a business. According to organizational theory, culture is one of the most defining characteristics of an organization that is also hard to alter (Turner & Keegan, 2011). It is thus comprised of the meaning that employees have attached to their actions and their collective behaviour. Of paramount importance is ensuring the development of organizational frameworks that promote behavioural changes. To achieve this, Westerveld (2010) recommends that enterprises should train and develop skills in people that complement the dynamic nature of supply chains. Further, the workforce should be trained to incline towards relationship-oriented approach to procurement and from a traditional selling-oriented entity. Developing appropriate cultural transformation programmes ensures a cultural and social change, which allows businesses to leverage opportunities fully.

During my involvement in the Stewartston University High Performance Computing Cluster Project, collaborations allowed our team to interact with a multitude of firms. From sharing knowledge and developing strong communication skills, we were able to trust each other more and thus facilitating transparency. In retrospect, trust allowed time and precise exchange of information between supply chain managements and capacity building through adopting a continuous improvement strategy. Leveraging technology innovations allowed our project members to improve communication and knowledge sharing amongst ourselves. In collaborating with our clients, IT systems were also crucial in sharing data and providing up to date reviews to measure progress.

Collaborations with complementary businesses allow leveraging resources that complement each other, thus creating a competitive advantage through developing new strategies and products from combined effort. According to Sanderson, Lonsdale and Mannion (2013), forming collaborations with large networks of businesses guarantees availability of products to customers. Due to recent globalisation of supply chains, scarcity in materials and constant fluctuations, businesses are unable to guarantee the availability of a commodity during a specific time. Ensuring that there is a security of supply can only be maximized by forming complementing partnerships which enables projects to be completed within the correct time frame and within the specified budget.

Lastly, competitive advantage is gained when a selling organisation’s procurement management is able to develop risk mitigating frameworks (Mannion, Sanderson & Lonsdale, 2011). For a long time, research has evidenced that supply chain disruptions significantly impact on the associated performance of a business. The most common sources of risks to a business include technological, geopolitical and environmental related. While most risks are unprecedented, the first process in tackling risks should be grounded on identifying all potential sources of risks by carrying out a high risk profile.

In the discipline of portfolio analysis and supply chain management (P&SCM), Kraljic is recognized as the pioneer of theories related to procurement through his seminal contributions (Davies & Westerveld, 2010). According to Kraljic model of portfolio analysis, the commercial management should categorize its purchase according to its associated risks and to provide valuable information on how to best manage them. The theory also argues that supply chain managers experience four distinct types of purchase risks, which include Low risks, Medium risks, High risks and Very high risks (Lindkvist, Sydow & DeFillippi, 2014). These risks are assessed based on the probability of the buying entity experiencing challenges in the supply chain market and any associated challenges that may develop from inability to successfully deliver its services.

The model further offers suggestions on how the procurement process should be approached and managed to avoid experiencing significant risks. His major underpinning is that each distinctive category requires a unique and purchasing approach, with a level of complexity that parallels its strategic implications (Westerveld, 2010). In order to mitigate risks associated with purchasing products, he suggests that challenges should be combated using detailed market data, gathering competitive intelligence and assessing industry cost curves. Consequently, management is able to use costs as the major selection criterion to create competitive advantage in the midst of stiff competition. Developing mature structures, systems and processes that effectively address risks reduces vulnerability and the exposure to disruptions (Lindkvist, Sydow & DeFillippi, 2014). Therefore, enterprises need to adopt a two-dimensioned approach to risk management that includes assessment of complexity of a process and levels of risks involved.

During our project implementation process, one of our main areas of concentration was on developing risk management strategies. This involved rigorous segmentation and prioritization of supply risks and defining their estimated business impacts. Among the factors that strengthened our risk mitigation approach to the project included risk governance and the flexibility in selecting suppliers. Further, we also applied data analytics to identify any associated supply risk that could jeopardize our operations and reducing complexities in supply chains.

Recommendations

The strategic importance of suppliers in the supply chain management is evidenced in the Porters five forces model. Its seminal presentation identified buyers and sellers among the most critical factors that shape the competitive nature of the industry (Mannion, Sanderson & Lonsdale, 2011). The organization’s ability to integrate the supply chain, technology and coordinate all processes is regarded as the basis for creating competitive advantage. However, selling organisations can harness procurement to increase profits and create sustainable supply chain systems.

To drive procurement to higher levels, a business must become more innovative. Innovation-driven enterprises are able to ensure they record profitable growth and create value in service delivery. This is achieved through increasing competitive pressures and a strong desire to deliver new products that are more efficient and cheaper. Excellence in innovation can further be cemented by forming partnerships with other complementary entities, as they are aware they cannot sponsor R&D activities independently.

Another strategy that would reinforce existing procurement process is designing and implementing long-term sustainable metrics into the general corporate goals. It has been reiterated that sustainability is among the most significant axioms in the growth and development of a business (PwC, 2015). By combining decisive and long-term goals with a corporate’s objectives, the management seeks to finally ensure sustainable operational and financial efficiency simultaneously. As procurement accounts for an estimated 50-80 per cent of total costs incurred by companies, it becomes vital for them to develop relationships with suppliers that promote sustainable collaborations.

Another step that the supply chain management can take to boost the procurement process is through the adoption of a balanced evaluation metric that applies various value drivers as the basis for managing performance. Previous scorecards have only covered on the operating indicators that only consider costs and quality related metrics. This focuses the attention of enterprise on reducing costs at the expense of other long term values that go beyond cutting costs as an initiative. Businesses should adopt a balanced evaluation metric that uses myriad metrics to measure performance and other areas that require improvements. The first step should be value mapping, which connects execution and direction into a common set. Another metric that should be included in the scorecard is the quality of relationships between the supplier and the customers as a performance indicator. However, as Maylor, Brady and Cooke (2014) note, performance scorecards are labour intensive, error prone and can consume a lot of time, consequently bringing along the challenges of data integrity and accuracy levels. The scholars however suggest that business intelligence software can aid in multiple data analysis and automatic generation of results. However, data security and confidentiality form among the most predominant issues when it comes to automation of performance.

The last component that businesses can leverage to boost performance of the procurement, is establishing strong customer relationships with contracting clients. Competitive advantage can only be created when a company is able to develop and sustain relationships with customers of all levels (Salter & Gann, 2009). This is because customers provide useful information that can be used to enhance service delivery and project implementation processes. Business are thus able thus able to reduce demand uncertainties, perfectly predict customer needs and obtain intelligence on how to improve relationships with clients. Continuously developing systems to maintain these operations put businesses ahead of competition as they are able to predict future market trends, thus developing innovative service delivery methods.

Conclusions

Contract management is a process that allows parties in a contract to fulfil their required obligations in order to deliver objectives necessary that are listed in the contract agreement. In addition, it is involves building strong working relationships between the providers of a service and customers and responding rapidly to arising situations. Value creation is regarded as the usefulness or worth that something is held, which may include economic or material worth. To create competitive advantage, organizations can exploit opportunities and neutralize threats over their competitors (Maylor, Brady & Cooke, 2013). Among the various ways that procurement management are creating value in supply chain management to enhance efficiency is via establishing long lasting relationships with external businesses, sharing knowledge and harnessing the use of technology. However, supply chain management fails to leverage the full opportunities that project commercial exchange has the potential to. By integrating long-term sustainable metrics into the general corporate goals, supply mangers can create synergy inside the business capable of propelling the firm even further. Lastly, businesses should develop balanced value drivers to measure the level of performance and allow consistent improvements.