Decision-Making in Logistics Procurement - Essay Example

Literature Review: Decision-Making in Logistics Procurement Background The annual cost of logistics acquisition for England’s national defense has been estimated to equal the yearly turnover at the London stock exchange which is quite an amount. Although the expense is believed necessary to keep the nation’s armed services “fully equipped and ready to act anytime in war or peace,” it was found that a huge cutback on the defense spending is possible with a more judicious procurement method and a studied decision-making process to go with it. For this reason, the Defense Logistics Organization was set up in year 2000 as command center for the acquisition of equipment and supplies of all the armed services – RAF, Navy and ground forces – representing a major restructuring in defense culture and processes. This major command was created precisely to improve logistics acquisition by moving from a functional to a project-based organizational structure. Under the DLO, a total of 144 Integrated Project Teams were organized, one for each type of military equipment and supplies. Each IPT has its own set of assembly staff, logisticians, engineers, contractors and financial team, operating much like a business organization. Lysons, K. and Farrington, B. (2006)note that the Purchasing and Supply Chain Management (PSCM) concept was started in February 2001 to reduce costs as soon as possible and improve overall performance by addressing the following concerns: - Current procurement processes do not meet the demand for agility in war fighting missions which require that costs be affordable. - The high cost of procuring weapons systems impedes modernization since funds that go to the supply chain could not be freed for the purpose. - There is increasing pressure from the top to reduce costs and improve the availability of weapons systems. - The time cycle for acquiring parts averages all of 660 days. This involves demand planning, purchase requisition, administrative lead time and production lead time, in that order. - Due to the long time cycle of procurement, $28.8 billion in inventory exists across the defense supply chain. - Because of the long production lead time, 25 to 28 per cent of all purchase requisitions also could not be delivered on time. - Reports of deficiencies from customers take an average of 60 days to resolve. - Opportunities for cost reduction and improved service are missed because suppliers are not considered strategic partners, including those contracted for repairs. - In the procurement process, 199 IT interfaces are used which result in extra cost aside from being susceptible to technical problems. - Set to retire within five years are 51 per cent of logistics personnel and 33.5 per cent of contracting professionals. Competition from external sources to provide the air force with supply chain management and parts support. One of the factors believed responsible for jacking up the costs of military supplies concerns consumable items or those equipment components that can be easily repaired. Even in the US Air Force, the difficulty of finding cheap consumable parts is blamed for 40 per cent of aircraft downtime. To handle this specific problem, the IPTs created the positions of supply Range Managers (RMs) under its wing to exclusively attend to the problem of high procurement costs. In effect, the Range Managers were handed the decision-making task of finding the methods of procurement and selection of suppliers that would translate into cost-efficient defense spending. As decision-makers, the Range Managers are expected to formulate measures that would cut costs and make their organization more efficient and viable. But the task of making decisions for an organization is not as easy as it seems. Decision-Making in Organizations Any organization is a technical instrument for mobilizing human energies and directing them toward set goals. Janczak, 2005. The main function of the organization is decision-making which entails planning, evaluating and implementing. These decision-making processes may be disrupted by petty politics and the individualism of an organization’s members. Janczak believes that decision-making in an organization is more a process of political bargaining and negotiation in which the exercise of power plays an important role. “With interdependence and a variety of groups incorporated in an organization, the potential for conflict in a decision-making process increases. To focus exclusively on the results of decision-making is also to risk one aspect of decisions in organizations – that there are links between problem solving and problem finding. Once one problem is solved, another will immediately present itself and once the new problem is solved, then more problems will arise, creating an endless cycle of problems and solutions.” Within organizations, decision-making is simplified but almost always, it has a political dimension. “Decisions are the product of organizational and political processes. The process is long, made at a specific point in time, and involves many people in different levels of the hierarchy balancing various power vectors. The behavioral interactions of the individuals, groups and organizational units are as important as the interface between the organization and its environment.” Thus, Butler exhorts managers to secure the involvement of all actors in the decision-making processes of the organization that constitute the political dimension Decision-making in some organizations is hierarchical by nature. In a hierarchical organization, decision-making is concentrated at the top and, invariably, the top becomes less and less accessible to people at the bottom who are usually the ones most affected by the decisions made at the top. In other organizations, decisions are made on a more desirable egalitarian structure, which means everyone has access to power or a share in decision-making, and every position of power is accessible to everyone. The leaders also share skills and information with the people below them. The ideal organization is one which does not tolerate dominating attitudes and controlling behaviors. Everyone is encouraged to participate and everyone is doing his best to help the organization reach decisions that would translate into the best interest of the group. Organizations as it were operate on the spirit of competition (Butler, C.T.L.) which is often harmful to the decision-making process. A fundamental change is needed to shift the basic organizational process from one of competition to cooperation. With cooperation as linchpin of the process, there will be more creativity, synthesis and open-mindedness to pave the way to trust-building, better communication and understanding which ultimately lead to a stronger, healthier and a more successful group. The best way is to avoid routine decision-making in favor of strategic or critical decision-making. In organizations using strategic decision-making, the focus is more on external issues and less on internal concerns. External matters likely to affect an organization’s decisions include market conditions, change of leadership in a corporate supplier, etc. Internal issues, on the other hand, are those related to the organization’s day-to-day operations, such as resource allocation, scheduling, monitoring of employees’ performance and marketing. Another distinction of strategic planning is that decisions are broad in scope with long-term effects in mind, and the organizational goals are so formulated that it would be difficult to reverse them. This contrasts with the other approach to decision-making which is tactical in nature, meaning the organizational goals are flexible and coverage of the decisions is done on a selective basis. In effect, tactical planning selects what is considered the most effective means of pursuing the goals set in the strategic plan. Both strategic and tactical planning are necessary to maximize the organization’s progress. All told, bunching up into an organization is one of the most promising solutions to problems on high procurement costs. “Organizations exist to lower the cost of transactions.” This is because an organization can conduct transactions more efficiently. Current Procurement Methods The objective of current procurement methods is basically to cut down on costs and time requirements (Ganeshan & Harrison). High procurement costs are detrimental while time is of the essence to any organization. For business organizations, runaway costs of supply acquisition and delayed deliveries translate into outright losses. Procurement costs could escalate at all stages of the supply chain – from purchasing, manufacturing, pipeline inventory and transport between production sites to duties and taxes. Manufacturing and transit take the time cycle from the placement of orders to actual delivery. In procurement, It is expected that business intelligence will be used to assess the strengths and weaknesses, opportunities and threats from the suppliers. Such intelligence must include the ability to analyze the purchasing environment and to make appropriate decisions and recommendations. The natural first step is to chart a supply chain, a network of facilities and distribution options on the procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these products to the intended customers. With the supply chain established, it becomes easier to identify the geographical location of the supplier’s production facilities, stocking and sourcing points, which is critical to such operational decisions. This enables the procuring organization to effectively and efficiently manage the product flow from supplier to customer, which knowledge will have a considerable impact on revenues, costs and level of service. Decisions on location, apart from their strategic importance, also impact on an operational level. This knowledge is complemented by carefully studied considerations on production costs, taxes, duties and drawbacks, tariffs, local content, distribution costs, production limitations, etc. In existing procurement systems, supplies are inventoried at every stage of the supply chain, from their origin as raw materials, then as semi-finished or finished products. This eats up 20 to 40 per cent of product value such that step-by-step inventory has been found outdated and unwise. Another critical factor is the choice of transport system, since transportation bites into 30 per cent of the logistic costs. Air shipment is fast and reliable but expensive as compared to delivery by rail or sea which is also fraught with dangers. Selection of suppliers may be done through a competitive or non-competitive bidding. In a competitive selection process, more than one supplier is allowed to take part in a contest as to which can make the lowest bid. Only one supplier is invited in a non-competitive bidding, which happens when there is only one credible supplier with a unique knowledge or product. The time-honored method in awarding supply contracts is through competitive bidding which seeks out the lowest price available. This has been the method of choice for government contracts that require transparency to preclude favoritism and collusion in the process. To assure the taxpayers that their money is being spent wisely, the procurement method employs an elaborate process of bid pre-qualification, qualification and award that starts with an obligatory announcement or advertisement in popular media. But the system is not efficient all the time. Complaints abound that projects completed by the lowest bidders through the competitive method were not fully responsive to the needs of the procuring organization. Facilities that were built through this selection method, for example, were found difficult to operate and expensive to maintain. In the case of public works projects, the traditional procurement method made it troublesome to control the escalating costs of construction, including change orders and claims. Project managers in many places have been allowed to depart from some elements of the standard procurement process. However, it is required that this resort to other options must be carefully justified and documented. Possible departures from the tried and tested ways include dialogue with the suppliers prior to preparing an invitation to bid, not insisting on sealed bids or fixed dates for the receipt of bids, discussing and modifying bids after submission, or involving more than three bidders in the process. For this reason, procurement teams put on the job are usually composed of experts and professionals from various fields – engineering, financial, legal and operational. Alternative Procurement Methods In the US, many states are following the examples set by the federal government in allowing and even encouraging alternative procurement methods. Some of these options are believed more cost-effective than the traditional method and even more conducive to creative problem-solving. One of the main objective in resorting to alternative methods is to increase flexibility in the process. One of the alternative techniques is the use of negotiated bidding which employs performance-based contracting. The lowest-bid method gives the procuring organization little room to balance quality and cost factors. In a negotiated contract, the organizations involved can make decisions based on qualifications, technical approach and price. They can also demand that the facility or supply contracted meet set standards even as they allow the contractor and its team members to develop the methods of achieving those standards. In a negotiated bid, the procuring organization is expected to choose the right companies and to be able to justify the choice of these companies. It also has to be explained why these companies were chosen over the others in a fully documented paper that is approved at an appropriate level of the organization. Otherwise, the companies excluded from the process may complain and sue. An example of a project awarded through negotiations is the $101-million water treatment plant in Seattle which was structured around performance standards that the contractor must meet throughout the lifespan of the contract. The project when completed enabled the state’s taxpayers to save $70 million. Another procurement method that does away with the selection process based solely on low construction cost is performance-based contracting. This defines the required performance standards of the project without dictating how the contractor should do the job as in competitive negotiation. The results are lower costs, better service and shorter delivery time, as Imperial city in California found when it used the method to double the capacity of its water facilities as well as let these comply with environmental regulations. Upon completion, the city did not start payment for the upgraded water project until it was on-line for six months. The rationale then for opting out of the traditional method is to find the best value for one’s money not the lowest cost. In many cases, the lowest bidder may not be the best supply source and is offering a low price just to snag the project only to hit you with change orders later that reflect the true cost of the project. A case in point is the upgrade of Tennessee’s Maxson waste water treatment plan which was awarded to a company whose bid was not the lowest but it had a creative alternative that was $350,000 less than the lowest base bid. Rather than expand a building to accommodate new machinery as specified in the contract, the contractor found a way to fit the machinery into the existing structure. There is another alternative method gaining popularity in government contracts called the limited-source bidding system. Under this process, procurement is limited to a number of sources that provide highly specialized goods or services. The end goal is to maintain optimum and uniform level of quality and performance. Another non-traditional procurement method is through best-value contracting which makes it possible for designers and contractors to work together as one contractual entity, held jointly responsible for deficiencies and delays. The method is considered effective for making schedules shorter, lowering costs and minimizing litigations. Alternative procurement methods offer opportunities for creativity and cost savings but they are less than perfect and with limitations of their own. Markus, E. (1997) The lowest bid in the traditional method is simple and unassailably objective and it seems foolish to contest a decision based on choosing the lowest number. But sometimes the lowest bid does not ensure quality and does not even result in the least expensive solution. Any of the above alternative methods of procurement could match the criteria set for the Range Managers in the UK defense establishment, which is mainly to align the procurement method with the requirements of the armed services and the IPT budget. This means finding the most cost-effective supplies at the shortest delivery time possible, at the same time giving the organization more flexibility. On top of the list is the limited-source bidding system since the defense logistics required in the process are often sourced from highly specialized suppliers which are few in number. This also responds to the need of the armed services for supplies with the same level of quality and performance. Alternative methods of procurement have been allowed in the government sector under special circumstances precisely to promote economy and efficiency. Procurement Watch Inc. lists additional procurement options that include the following: Limited source selection – this calls for a direct invitation to bid from a set of pre-selected suppliers with known experience and proven capability relative to the requirements of a particular contract. Direct contracting or single source procurement – doing away with elaborate bidding documents, this method simply asks the supplier to submit a price quotation or pro-forma invoice together with the conditions of sale, which offer may be accepted immediately or after some negotiations. This is especially recommended when the goods involved can be obtained only from a proprietary source; that is, when patents, trade secrets and copyrights prevent others from manufacturing the said items. Repeat order – involves the direct procurement of goods from the previous winning bidder whenever there is a need to replenish the goods procured under a contract previously awarded through a competitive bidding process. Shopping – this procurement method simply requests for the submission of a price quotation for readily available off-the-shelf goods or equipment from suppliers of known or established qualifications. The alternative procurement methods characterized by competitive, best-value negotiations and the performance-based selection criteria mentioned earlier can also be combined through what is called design-build process of project delivery which is another method suitable for the RM’s needs. Under this method, designers and contractors are contracted to work together instead of separately. By thus working together as one contractual entity, they are held jointly responsible for any deficiencies or delays in delivery. Consequently, the design-build process could steer the military’s procurement system away from deficiencies and delays that had saddled it in the past. References Burdick, L. (2001) Presentation given on 12 June 2001 at the US Naval Supply Systems Command (NAVSup) in Mechanicsburg, Pennsylvania. Ganeshan, R. & Harrison, T.P. An Introduction to Supply Chain Management, Dept. of Management Services and Information Systems, Penn State University, Pennsylvania, USA Janczak, Sergio (2005) The Strategic Decision-Making Process in Organizations. Problems and Perspectives in Management. 3/2005 58 Lawrence Butler, C.T. A Revolutionary Decision-Making Process. Food Not Bombs Publishing. 7304 Carroll Ave. #136 Takoma Park, MD 20912. Available from: Http://www.consensus. Net/revolutionary.html [Accessed on 6 April 2006] Lonegan, E. (2003) Legal and Procurement Processes Study Guide. Unit 4a, Supplier evaluation. Chartered Institute of Purchasing and Supply. Lysons, K & Farrington, B. (2006) Purchasing and Supply Chain Management (7th edition) Prentice Hall. London. Markus, E. Low Bid Alternatives. American City and Country. Available from: Http://www.americancityandcountry.com/mag/government/lowbidalternatives/index.html Morrison (2003) Director Logistics – Defence Logistic Organization. National Logistics Conference – 6 Mar 03. Purchasing Guide, National Audit Office, England. Procurement Watch Inc. http://www.procurementwatch.org.ph/rules_9184/ra9184.html Qualter, A. Questionnaire and survey methods. 12 Feb 06. Available from: Http://www.liv.ac/education. Saunders, M. Lewis, P & Thornhill, A. (2003) Research Methods for Business Students (3rd edition) Prentice Hall. London. Read More