What are the activities for identification of “sources” in procurement context?

   Typical proportion of costs

   External and internal costs

    Porter’s value chain

 

Risk identification is a systematic creative process that takes place within the established context. It is not an easy task and will require, at times, the identification and acknowledgement of risks that may be uncomfortable for an organisation to confront. It will generally require a team with a range of skills and knowledge. At the Strategic level, organisation s may also need the assistance of a skilled facilitator to do it well. It is important to consider all relevant risks whether or not they arise inside or outside the organisation, and whether or not they are under the control of the organisation. Risky Business: an introduction to procurement risk management - CIPS Australasia ©CIPS 2013 6 The approach to risk identification will vary significantly depending on which elements of procurement are being examined. Variables will include: t he time and effort required by the team; the range of knowledge and skills of participants; appropriate tools an d techniques to facilitate information capture; and, knowledge of sources of procurement risks, from prior assignments. Procurement activity of low complexity and value generally will not require an overly formal risk identification process. As the comple xity of the procurement context increases, the procurement professionals alone will rarely have the full range of skills and perspectives required. End users, professional advisers with specialised skills and other stakeholders will assist, not only in get ting a better understanding of the issues, but also through increasing the likelihood that the outcome will be understood, accepted and implemented. Risk identification undertaken at the strategic level will generally require participants who have been en gaged in the wider organisational planning process. The types of risks identified will be considerably different from those identified for an individual procurement activity. Similarly, risk identification for the procurement process will involve yet anoth er mix of participants who will identify a set of risks. This is why it is important to disaggregate the procurement function before embarking on risk identification. Separating risk identification for strategic procurement will facilitate engagement bet ween procurement professionals and top management, in respect to the organisation’s strategic agenda and outsourcing decisions. This approach will ensure that senior management resource is strategically focused with specific procurement activity, and proce ss partitioned for a different mix of management. It makes the risk identification relevant to the senior management’s role. Similarly the identification of risk at the procurement activity level will allow the focus to move from strategic to commercial as pects, where risk reduction both generally and within specific strategies such as outsourcing is undertaken. As the procurement professional begins to engage with senior management in respect to strategic procurement and complex procurement activities, co nsideration should be given, particularly as organisations are embarking on the risk journey, to the use of risk management professionals. A risk management professional should be skilled in application of the risk process, engagement with senior managemen t and facilitation of a risks identification and assessment. In order to procure there must be a: Buyer – the organisation undertaking the procurement, including its internal environment of organisational roles, values, procedures and systems Supplier(s) – the organisation(s) supplying what is required, including its relevant supply chain and sub - contractors Relationship – the relationship between the buyer and its suppliers (including all its rel e- vant legal, social and commercial dimensions whether or not they are set out in formal co n- tracts); and Environment – the environment within which procurement takes place, including for exa m- ple, its relevant social, political, economic, regulatory and physical dimensions (of which the physical infrastructure is an important part). Setting aside the risks inherent in whatever is being procured, these are the key sources of

procurement risk and are a convenient starting point for risk identification. It is necessary to

also consider the interrelationship and interaction between the sources, as they are not independent of each other, as shown in the following diagram. The diagram below 2 illustrates the framework recommended to scan for potential risks. The following is a list of possible sources to consider when looking for risks that may diminish the effectiveness of procurement strategy in supporting the delivery of corporate objectives. It is to be used as a “thought starter” only and should be developed to satisfy the particular objectives of an organisa tion. 1. Buyer a. Clarity, consistency and understanding of corporate strategic direction. b. Relative importance of procurement needs and costs to organisational success. c. Organisational capability to understand markets and to manage procurement. 2. Supplier a. Future supply and demand for product. b. Capacity for Innovation and change. c. Market power and position. 3. Relationship a. Extent of complementary or competitive interest. b. Collaborative or adversarial culture. c. Potential for supply to be disrupted by the activit ies of other buyers and suppliers in this market. 4. Environment a. Economic conditions and cycles, b. Maturity of markets c. Regulatory and compliance environments For procurement activities consideration should be given to identifying risks associated with: 1. Buyer a. Clarity of definition of requirements b. Presentation and approach to market c. Internal relationships and barriers to use particular suppliers 2. Supplier 2 This elaborates on a diagram that originally appeared in Commonwealth Procurement Guideline 8, Managing Risk in Procurement, Australian Office for Better Buying (AGPS Canberra 1992) Risky Business: an introduction to procurement risk management - CIPS Australasia ©CIPS 2013 8 a. Production process capacity & supply chains b. Competing demands from different buyers c. Commercial and financial capability 3. Relationship , including: a. Contractual allocation of risks, b. Cultural fit and associated skill sets on both sides to manage the relationship c. Performance management arrangements 4. External Business Environ ment a. Fluctuations in currency, interest rates, and raw materials costs. b. Freight and logistics in respect to the physical and natural environment.

c. Regulation & compliance

The following activities are necessary for identification of sources of suppliers and products in procurement context.

1.     Market research through information available in print media, visit to different trade fairs, trade directory of the chamber of Commerce and Industry etc.

2.     Request for information (RFI) to the suppliers for theirs product(s) as part of market research without any commitment to purchase

3.     Pre-qualification of suppliers based on legal documentation; technical, financial and manufacturing ability; and product lines

4.     Request for Expression of Interest (REOI) from the suppliers for their products; technical, financial and production capability of the company and their written willingness to supply the product through competitive bidding. Generally this is advertised through print media and written proposal is invited from the pre-qualified suppliers as well as from any prospective suppliers as expression of interest only without any commitment from the purchaser for purchase of goods.

5.     Shortlisting of suppliers based on REOI for solicitation of bids.

 For very large complex project, all the above five noted steps are recommended. However, for small /medium value procurement, only first three steps would be fine. 

Thank you for invitation

I will wait with you experts answer