- Executive Summary
- Risks and opportunities in the current system
- Recommendations for priorities
- Contract formation process
- Recommendations for the appropriate steps in supplier selection
- Recommendations for the appropriate procurement procedure
After a long struggle with substandard deliveries, failed deliveries, and cost overruns by suppliers, ENOC L.L.C has decided to look for a long-term solution to the issues. The current contracting system is the underlying issue with the problems facing the company. The company needs to review its supplier selection and procurement procedure to minimise the risks associated with poor contracting strategies. This paper highlights the recommended changes that the company must implement to minimise the risks established by its procurement and supply department.
The Emirate National Oil Company Ltd. (ENOC) L.L.C has been struggling with the development of an efficient supply chain regarding the delivery of products and services of the contracted companies. The basis of the issue has its core embedded in the substandard procurement contracting process, and the lack of a comprehensive plan to manage the underlying risks within the current system.
Over the past two fiscal years, the company has engaged in procurement deals with numerous companies, and some have been a success, whereas others have led to huge losses for the company. One of the prevailing issues in the procurement processes is the increase in cost overruns because of under-quoting by the suppliers. Under-bidding is a major financial risk for the company because it leads to cost overruns in the supply chain.
There is also a prevailing issue in the untimely delivery of supplies, as well as the delivery of supplies that do not comply with the requirements of the company. ENOC needs to develop a better contracting system in the department of procurement, and it also is required to identify the best suppliers to deliver the required supplies. This report looks into the underlying issues in the company while focusing on developing the appropriate recommendations to alleviate the company from its current procurement issues.
Risks and opportunities in the current system
ENOC faces three categories of risks in its supplier selection system. These categories include strategic, financial, and operational risks. Under each category of risks, there are smaller groups of specific risks that the system has highlighted. To understand these risks, it is important to look at the individual categories. Within the operative risks category, the identified risks include partnering risks, contract commitment, channel effectiveness risks and business interruption risks.
Partnering risks are caused by the inability of the procurement department to invite the right suppliers to supply products. This failure leads to the development of a supply chain of companies that do not guarantee the delivery of the required supplies. Contracting commitment risks involve the risks of getting into contracts with suppliers offering limited bargaining power for ENOC. Suppliers monopolising the market pose a big challenge in terms of the pricing of their supplies. Business interruptions are unforeseen risks in the company that may involve legal issues. ENOC also faces risks in channel effectiveness, which entails delays in supplies.
Financial risks in the company involve the pricing of supplies. Some suppliers are fond of overpricing their products and services if they are the single suppliers in an industry. ENOC has experienced cost overruns from various suppliers in the past, and the risk is all too real in the current setting. The strategic risks facing the company include leadership and alignment risks. Alignment risks are the risks associated with developing contracts that yield the supply of products that do not meet the requirements of ENOC. Leadership risks, on the other hand, encapsulate the risks of compromise in the quality of the products supplied to the company (Heptinstall, 2014).
ENOC has the opportunity to eliminate the underlying risks in the procurement and contracting department through the development of an effective supply management strategy. The effective management of the supply chain enables companies to develop a competitive edge against their competitors. It is clear that every supplier in the market usually has some benefits that would help a company improve its competitiveness.
This opportunity means that companies must select their suppliers strategically to ensure that the supply chain minimises the financial liabilities for the company. While it is almost impossible to contract the best suppliers in the market, a company can ensure its suppliers provide the best services by engaging in active post-contracting management. This kind of management involves regular contact with the suppliers to ensure the contracts are still valid. Post-contract management also ensures that the procured products attain parallelism with the requirements of the company.
The process of post-contract management also works as a motivating factor for the supplier to ensure the products delivered to the procuring company are standard in terms of quality. The lack of supervision by the procuring company can be translated as a sign that the contracting company is satisfied with the performance of the suppliers. This may lead to the loss of suppliers because it is perceived as a lack of concern about the suppliers and their business processes (Heptinstall, 2014).
Recommendations for priorities
Leadership, financial, and channel effectiveness at ENOC should be given the highest priority. The risk of compromise on the performance of the suppliers and the quality of their supplies is very high in the company. This risk is closely related to the procurement management function because the management in the department is charged with the responsibility of ensuring the suppliers meet the required standards for the company.
Procurement should not stop once the deal is done between a company and its suppliers. The procurement function at ENOC should promote the culture of following up with the suppliers after the contracting process to ensure that the products delivered do not compel the company to compromise on the quality. Planning and governance should be the priority of the procurement department at ENOC to enhance the quality of the products and services delivered by the suppliers.
Reducing financial risks at ENOC can be achieved if the procurement department enhances transparency in the contracting process. The top management of the company also needs to be actively involved with the financial activities in the procurement and contracting departments. There is an evident gap in the contract management process concerning the human assets required for the process.
ENOC should invest in an increase in the number of human resources available in the procurement and contracting department. The human assets in the department should also be taken through training and development programs to acquaint them with skills and knowledge in contract management. There is a need for the operational contract management teams in the company to increase their coordination with the finance department to eliminate cost overruns in the company’s procurement processes.
ENOC should also refrain from using data and information supplied by the contractors to determine their performance during the process of identifying the best suppliers. The company should focus on collecting data and information about the suppliers independently through pre-contract and post-contract management processes. This approach will strengthen the contractual performance indicators for the company.
The procurement department should regularly review the risk registers to ensure the team members are aware of their managing tasks (Are you addressing problems with contract management? 2014). ENOC has a lengthy pre-qualification questionnaire, but it is not as helpful as desired in the identification of the best suppliers. The company needs to start relying on the information collected independently of the potential suppliers.
Eliminating the risk of channel effectiveness at ENOC is as easy as ensuring that the contracts are regularly reviewed to highlight the required changes in terms of the delivery of the contracts. The company needs to develop an efficient electronic system that will guarantee timely delivery of contracts to the suppliers. The procurement department also needs to develop better cohesion with the regular suppliers of the company so that it can foster better communication in relationships (Are you addressing problems with contract management? 2014). Taking account of the processes associated with the delivery of supplies from the contractors to the company enables the company to make the necessary arrangements to avoid time and cost overruns.
Contract formation process
In the most recent issue in the procurement and contracting system, the company contracted to supply specialised cladding for ENOC failed to deliver the products on time, and it invoiced the company for an additional payment. The original value of the contract was 75% less than the company was demanding. Further investigations indicated that the company’s contact information has many loopholes, and there is a need for the company to review its contract information.
The contract formation process entails four elements. The establishment of a need is the essential element of the process, which is followed by the identification of a viable source. In the last stage, the supplier delivers the required products. ENOC has recurring needs for different products, and the process of establishing the needs is quite efficient, but the sourcing and delivering processes are quite challenging for the company. In the sourcing stage, companies should approach the supplying companies and invite them to make bids for the supplies. After the various companies have placed their bids, the company involved should look into identifying the most feasible company to engage in the contract.
Once the deal is sealed with a contractor the process shifts to the final stage. The delivery of supplies depends on the terms developed between the company and its supplier. The company must look into collecting data and information about the progress in the supplier’s preparations of the required products to ensure everything falls into place within the required deadlines. After the supplier hands over the products, the company should review the quality of the products before paying up and closing the deal, if they are satisfied (Supplier Selection Process, 2014).
The pre-qualification questionnaire in a company should be instrumental in the identification of the best supplier in a group of bidders. The questionnaire should be objective in its questions, and it should concentrate on retrieving information like the approaches preferred by the contractor concerning cooperation with the company. It should also highlight the consistency across the contractor’s organisation in delivering standard products and services.
The level of trust in the contractor should also be featured in the questionnaire. It is equally important to highlight the payment practices expected by the contractor so that the company can evaluate the terms and decide if they are parallel to its payment terms. The company may also choose to review the contractor’s brand and evaluate the added opportunities that the respective contractors may bring to the relationship (Heptinstall, 2014).
After a company has identified its potential supplier, the first step should be to make a call to the supplier to find out if the contractor is still interested in signing a deal. Once a mutual interest is developed between the company and the selected supplier, the next step is to send a tender file to the supplier. A tender file contains several documents that are used in the development of the contract. A cover letter must be attached to the tender. It should highlight the needs of the company and provide contact details of the relevant parties in the company. There should also be a document detailing the requirements of the company, and it should be very specific to the needs of the company.
There should also be a document highlighting the terms and conditions of the procurement and contracting process of the company. It is important to provide the suppliers with the general terms and conditions of the company as well as the specified terms of the specific tender. The tender should provide the deadline dates and highlight some rules that apply to the deadlines. There should also be a document for administrative purposes. The document should cover the administrative process expected in the contract, as well as any important details that the contractor must consider before signing the deal.
Recommendations for the appropriate steps in supplier selection
The process of selecting a supplier should be handled carefully to eliminate the associated risks. The risks faced by the procurement and contracting department at ENOC can be minimised by conducting a comprehensive supplier selection process. One of the biggest challenges in selecting suppliers is that even the best suppliers from a group of bidders can fail to deliver the desired products and services.
Factors like cost, added value, and the terms and conditions provided by the contractors must be considered in the selection process (Procurement Procedures & Best Practices, 2014). ENOC has engaged in numerous contracts with incapable suppliers, and it needs to rectify this trend by comparing its aims with the capabilities of the suppliers. The biggest suppliers in the market do not always deliver the required products and services; hence, ENOC should look into identifying the risks associated with every supplier before signing contracts.
Selecting a supplier should be planned by the procurement and contracting department in the company. The selection criteria should be based on a risk-reduction basis. When the company identifies its needs, it should prepare the necessary documentation to advertise to the potential suppliers. The documentation should be prepared in a motivational approach to foster interest in some of the most efficient suppliers in the market. After the interested parties send their proposals, the procurement and contracting department should review the proposals to establish the assumptions held by the suppliers and the risks they might propagate.
Terms of negotiation should also be reviewed from the proposals. The proposals also reveal the added value that the respective suppliers offer to their clients (Procurement Procedures & Best Practices, 2014). Awarding the contract to a supplier must be based on low-risk levels and high added value from the supplier. Performance appraisals indicate the capabilities of the suppliers, but the company should not always rely on the appraisals of the supplier because the data and information provided in the proposals have not always been accurate.
The selection process for suppliers at ENOC should either follow a step-wise selection approach or the integrated selection method. With the step-wise selection method, ENOC is supposed to assess different elements of the suppliers separately. The first consideration should be the technical aspects of the supply. This includes the capabilities to supply the required products. The company should also look at the contractual aspects of the supply about the terms and conditions provided in their proposals. This should be followed by an evaluation of the cost of the supplies and other financial obligations incurred by the supplier in ENOC.
The added value associated with the supplier should also be considered (Best Practice Checklist, 2012). The suppliers involved in the selection process fail or pass this selection process based on their ability to attain parallelism with the requirements of the company. From this point, the procurement and contracting management should review the potential proposals and decide which of the selected suppliers offers the best proposal. The integrated selection process focuses on the technical capabilities of the supplier, and their costs. This selection strategy is best suited for the elimination of the financial risks for ENOC.
Recommendations for the appropriate procurement procedure
The appropriate procurement procedure for ENOC should involve the establishment of collaborative governance of the supply chain. The procurement and supply department should collaborate with the finance department and other associated teams to improve the parallelism between the supply chain and the organisational strategy. ENOC should also employ supply chain management experts to manage the suppliers effectively.
The current challenges in the company are present because the company lacks professionals in diverse areas of procurement and supply management. There should be independent teams in charge of placing procurement, dealing with supply logistics, managing the contracts, and a forecasting team to deal with the probable time and cost overruns (Best Practice Checklist, 2012). These teams should integrate their competencies to ensure that ENOC eliminates the prevailing risks in the procurement and supply department. ENOC should also invest in developing an information system to enhance the efficiency of the procurement and supply department. The system should enable the teams in the department to retrieve suppliers’ data and information in the selection process, and also enable the company to communicate efficiently with the contractors.
ENOC should also look into strengthening alliances with its key suppliers. The relationships should be based on creating a platform for contract management and ensuring there is continuity in value addition for both parties. Alliances should also be instrumental in ensuring ENOC is actively involved in the performance evaluation processes with its suppliers. ENOC should also develop a collaborative strategic sourcing approach. This approach is best suited for companies looking to create a healthy relationship with their key suppliers because it entails getting recommendations from trusted suppliers on the best contractors for different products.
Key suppliers can help ENOC collect data and information about other suppliers before their submission of the pre-qualification questionnaires. This strategy would be instrumental in the elimination of some risks because it helps in highlighting the integrity of the potential suppliers. ENOC seems to be concentrating primarily on the prices of the products and services offered by the suppliers. The company needs to shift its attention to the total cost of owning the key suppliers. The added value of the products and services should provide an incentive for the company, and it should weigh the added value based on a long-term relationship with the suppliers (Engel, 2011).
The purchasing and procurement team at ENOC should review the current contracts and develop comprehensive documents that highlight the terms and conditions of the company. This strategy will help in the contract management process to compel the suppliers to comply with the rules when they sign a deal with the company. The department charged with the responsibility of developing legal documents for the company should be involved in the development of change in the current contracts because they have many loopholes. The procurement management function at ENOC should develop policies that maximise control over the selected suppliers while minimising the risks associated with the contractors (Engel, 2011).
ENOC has been experiencing challenges in its procurement and supply department regarding the failure of some strategic suppliers. There is evidence that the company’s procurement and contracting practices leave loopholes that the suppliers can use to incur cost and time overruns. The company needs to change its supplier selection and contracting processes, as well as its procurement procedure.
ENOC should focus on minimising the risks by improving contract management strategies. The procurement and supply department in the company should cooperate with the legal, financial, and top management functions to develop a comprehensive procurement procedure that is free of loopholes. ENOC should implement the recommended changes to strengthen its control over the key suppliers and minimise the risks associated with procurement and supply.
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