Managing a procurement and the associated risks

To set the tone for the topic, let's ask ourselves an open-ended question. What does it take to acquire an item? Now, a variety of answers can be expected to such a question. Although the most common, and consultant specific answer would be a straight “It depends on the item among many other things” answer. And that is not a wrong answer. However, the point I want to drive is a common process that one follows or needs to follow to acquire such an item.

To further define the ‘acquire’ part of the question, an acquisition is the purchase of, gaining of, attainment of or acquirement of something. This ‘something’ is the item in reference which when translated into simple terms would be a ‘product’ or service' in a very general sense. When you make specific references the definition becomes a little more clear; ‘products’ such as hardware, construction, medical supplies, and heavy-duty machinery and ‘services’ such as health, business, travel, and information technology, maintenance et al.

Every product or service acquisition calls for an understanding of the procurement process. Based on this understanding one would make judgment calls for the level of detail in the implementation of the procurement process. A simple acquisition would no doubt pass a series of steps that are more informal. A complex acquisition must follow the formal procurement process that is already defined or it may call for defining a new one.

So, why is knowledge of procurement management necessary? Don't we do our simple and complex procurements without a formal process? What's new about this so-called process? What are the benefits? Is the process worth the cost of implementing it? Or is it? How does the process work? What are the challenges? Is this a risky process? Or is it a risk alleviation process?

The main reason behind following a formal process is, it increases the awareness of the environment and provokes a thought process in the direction of the work that lies ahead. In addition, a process also addresses any improvements and changes. Cost savings are realized with efficiency and effectiveness. Major risks are identified upfront and mitigation strategies are laid out to tackle when a known event occurs. Unknown events are accounted as contingencies. Awareness and identification of the chasm between procurement and the associated risks helps control cost, implementation milestones, scope and most importantly the relationship with the vendor.

Procurement has gone global and it is not new by any means. Historically, references to procurement were limited to automotive spare parts, oil, gas and construction. Government regulations were either restrictive or interpreted differently. Lately, it is a different story. With the advent of information technology and knowledge awareness, regulations have either been revised or interpreted accordingly. With procurement going global, outsourcing and off shoring are getting to be very familiar terms in the market.

Let's look at the risks involved thereof and how to identify them, analyse their impact, and calculate the probability of their occurrence and how to make a decision based on this analysis. Risks can be categorized into ‘objective’ and subjective' types. Depending on the nature of the project and the situation at hand, risk types can be classified accordingly.

Some known risks in the procurement process could be specialization, reliability, intellectual property, product integration, invention, architecture, confidentiality, regional stability et al. These risks among many others need to be analysed for their impact and their probability of occurrence. These risks are not only for the organization seeking procurement, but also for the organization performing the contracted work. When both sides weigh this equally, there are answers that have a solid basis to justify the risk mitigation strategies.

Objective risks can be established or described based on a mathematical calculation. For example, rolling a dice. Although outcomes are uncertain, the probability of occurrence of a chance or event is definite. Subjective risks on the other hand are not based on a quantitative approach. Describing a subjective risk is open-ended in the sense that you could always refine your assessment with new information, further study or by giving weight to the opinions of others. Risk analysis itself is a process that helps identify the uncertainty, develop a model, run the model through simulation using methods such as Monte Carlo to determine a range of probabilities and all possible outcomes of the result.

Bi-Nomial, Triangular, Normal distributions are helpful tools to determine the standard deviation of the results for making go, no-go decisions.

When all said and done, it is not necessary to be bogged down by a complex procurement and risk analysis process that will make a relatively less complex procurement unduly complicated. Doing just enough for a specific scope of work is the catch. There is room for improvement for the right course of action taken the first time rather then get entangled in a web of processes and doing things all over. That is where the cost effectiveness fails. That is when the efficiency of a process is put to question.

Carefully weighing the risks in a procurement endeavour will help smooth out ragged edges. The most important criteria are to review and validate the risks at different phases of the procurement life cycle.

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI or any listed author.

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