Procurement and Supply in Managing Expenditures Essay

Executive Summary

The following paper is an integrative assessment of procurement and supply. The assessment is divided into five key areas of procurement. The first section entailed the analysis of the practical roles of stakeholders in the process of procurement. This was about procurement and supply in the management of expenditures. The second section entailed exploring the techniques that can be applied to the area of expenditure to enhance the creation of value.

The PESTLE model was used to aid the analysis. The third section explored the factors that make a contract to be legally binding and inclusions that can be made with a key focus on the technological and environmental requirements in the seismic acquisition survey. In section four, Kraljic’s Supplier model was used as the basis for selecting the best supplier. The final section entailed the application of the 5-R model to examine the aspects of the purchase that call for negotiation.

This is about the negotiation between the purchaser and the suppliers. The main findings from the sections were that effective supply management creates value for organizations by ensuring that there is a beneficial business relationship between an organization and the external suppliers. ADCO should apply Key Performance Indicators (KPIs) to streamline the supply and procurement process by putting in place measures to ensure that suppliers are evaluated regularly to ensure that services and products are delivered to the company as required.

Role of Procurement and Supply in Managing Expenditures

Introduction

Procurement and supply play a strategic role in helping businesses accomplish their operations and gain a competitive edge. Effective procurement is integral in lowering the expenditures of a business. Effective procurement ensures that there is timely delivery of materials to ensure the continuity of a project. In modern times, procurement is considered as a factor in the creation of value in an organization. Erridge and McIlroy noted that the function of procurement has become a department of managing external resources (54). This section covers the role of procurement and supply in managing expenditures about expenditures in the seismic acquisition survey; the section underlines the inputs that should be made by the key stakeholders in the onshore seismic drilling survey.

Seismic Acquisition Survey

Seismic surveying is a process of exploring gas and oil by the production of detailed images of the rocks and their location on the earth’s surface to establish the reservoirs for oil and gas. The onshore exploration entails the use of specialized equipment and trucks that are vibrated to produce a seismic signal. The Abu Dhabi Company for Onshore Petroleum Operations Ltd. (ADCO) caries out onshore seismic surveys by employing the best industry practices. To achieve the mission, the company has to ensure that the procurement and supply process is carried out effectively to enhance efficiency. The efficiency entails a systematic assessment of the entire supply chain to ensure that the most qualified bidder is contracted. The contract is reviewed regularly to make sure that ADCO creates value for its shareholders.

Effective Procurement in the Onshore Seismic Survey

Efficiency in procurement is established in terms of the price of the material or service, the quality and quantity affect the overall expenses. Holm pointed out that the effectiveness of procurement is a foundation for sustainable success (11). For instance, procurement imbibes the savings that are delivered in an organization. Erridge and McIlroy stated that organizations need to devise measures that ensure sustainability in the core areas of operations such as procurement to manage expenditures (59). ADCO procurement process is multifaceted; this means that it is based on the type of equipment or service being sought.

For example, in the procurement of key seismic equipment, the ADCO strategy is to rely on trusted providers that have provided the service before. On the other hand, some services are based on competitive tendering in which the lowest bidder is given priority. This is normally in cases of services and equipment that complement ADCO seismic surveying such as transport and stationery needs. The award of contract in the company entails evaluation of the value in terms of the strategic importance against the risks based on the contribution to the overall performance. Shareholders are involved in the entire sourcing process.

Assessment of a Service Provision Contract for the Survey

The procurement process employed by ADCO is based on strategic importance which calls for close collaboration with the key stakeholders. The result is an established relationship with suppliers to avoid compromising the quality of work. There is great consideration of the efficiency and effectiveness of the services being acquired. Therefore, the core considerations before the award of any contract include:

• Definition of the requirement: This is based on the scope of the contract based on the quality, specifications, quantity and time required.
• Pre-qualification: The various suppliers are appraised based on their past performance and the overall business relationship with the company.
• Invitation of the most qualified service providers: The most qualified suppliers are invited to submit their bids as per the specified requirements.
• Evaluation: The bids are evaluated and the most efficient and cost-effective supplier is listed.
• Negotiation: The procurement department then engages in negotiations with the identified supplier to agree on key terms of the contract. The negotiations include the legal and business obligations of the parties, i.e. ADCO and the identified supplier.
• Contract awarding: If the parties agree on the terms and conditions, the contract is signed and thereafter implementation starts. ADCO supervises the process to ensure that the interests of all stakeholders are met.

A case in point, ADCO procured services of RPS Energy Ltd to enhance the efficiency of the seismic processes. ADCO required strategic services to enhance safety and cost-effectiveness. The identification of the RPS Energy was based on the prior business relationship and lower bidding upon the invitation for the bids. The contract added value to ADCO by reducing exploration costs by increasing computer power and software capability in the development of real-time data.

The contract was awarded by putting into consideration that effectiveness without efficiency does not lead to the ultimate required goals (Borgström 6). Figure 1 is a representation of the role of effective procurement in the creation of value for the stakeholders. Thus, incorporation of the RPS Energy in the seismic survey enhanced efficiency that in turn resulted in cost-saving mechanisms that created value for stakeholders.

Inputs of Stakeholders

The inputs of stakeholders determine the outcome of the project. The key stakeholders for the ADCO’s seismic surveys include:

• UNEP.
• Government.
• Public.
• Suppliers.
• Shareholders.

The main areas of concern of the stakeholders relate to the prevention of environmental pollution in the process of survey and the management of natural resources. Stakeholders have expectations that must be met in the implementation of a project. The seismic surveys have a great impact on the environment; thus, one of the key stakeholders for the onshore seismic acquisition surveys has been UNEP, which represents the global community on matters related to environmental safety. The role of the body in the seismic survey has been to ensure that the ethical concepts of the environment are followed. This is not carried out in a supervisory manner, but on a consultancy and advisory basis to ensure the integrity of the project. Even

though the UNEP role is directly aligned to environmental impact, it has an indirect effect on the financial integrity in ensuring that exploration techniques are tested and proven for environmental safety; which in turn leads to efficiency and effectiveness.

The government as a stakeholder is concerned with ensuring that seismic surveys do not interfere with the ecological system. For a contract to be effective and acceptable, the parties have to outline measures that will ensure the balance of the ecosystem is maintained. Suppliers determine the efficiency and cost-effectiveness of the overall process. In ADCO, they are treated as business partners and create value for the organization by ensuring that the supply chain is not disrupted. The shareholders for ADCO are ADNOC, Total, JODCO, and GSE. The shareholders are represented in the key management departments of the organizations. They approve the budget for the survey projects, they review and approve the bidder’s list. Also, if a project is to be extended they are involved in approving the additional budget. In the selection of the right supplier in terms of the pricing, the following steps are crucial.

To sum up, it important to note the responsibility charting is through the application of the RACI framework. This entails identification of functional areas of the surveys, the main activities, dealing with ambiguities and problem solving through team effort; i.e. selecting the person (R) responsible for the work, gauging the (A) accountability, (C) Consulting and (I) informing. The shareholders act as the owners of the project; hence, they establish ‘consults’ and ‘informs’ other stakeholders to streamline the communication and execution of the project. It is worth noting that the main goal is not only to save money but to attain value in the process of procurement.

Techniques that can be applied to the Area of Expenditure to Improve Added Value

Introduction

ADCO’s seismic surveys are based on practical excavation, which requires precision to avoid the accumulation of costs. Due to the comprehensive nature of the surveys, they are influenced by different factors that affect the procurement process. To uphold value, the PESTLE technique is one of the main techniques that can be used in the area of expenditure to improve added value.

PESTLE analysis

PESTLE analysis is a strategic planning tool that deals with macro-environmental factors that affect the operation of a business by offering an overview of the external factors that affect the operation of any business (Vrontis and Pavlou 291). This is about social, technological, economic, environmental, political and legal factors (Peng and Nunes 7). Table 1 is a general overview of the factors. However, in the context of ADCO’s seismic surveys, the main area of concern is the economic and environmental elements.

Table 1: A summary of the factors to consider when carrying out a PESTLE analysis.

Political

Most of the processes that relate to the exploration of natural resources are closely monitored by the governments. ADCO’s seismic processes have to be cleared by the government regulatory bodies before they are executed. Hence, ADCO invests a lot of resources to ensure that all service providers comply with the government requirements on the use of equipment and chemicals.

Economic Implications

Economic changes have a direct effect on the operations of ADCO.

For instance, the changes in the prices of the materials and tools used in the ADCO’s seismic acquisition survey such as the exchange rates, the taxes, and the prevailing growth trends affect the outcome of the project. In a seismic survey, ADCO requires a lot of energy from fossil fuels for geophysical acquisition techniques. Changes in the cost of fuel have had a great impact on the cost of the survey. The main challenge has been the fluctuation of the fuel costs in the international market; hence, the need to keep on renegotiating contracts based on the prevailing fuel prices. In the first two quarters of 2016, ADCO has had to renegotiate contracts awarded to the oil supplier RPS Energy to ensure quarterly review of prices. The adoption of the measures has resulted in the creation of value for the stakeholders as the prices are adjusted based on the market trends. The main gain has been about the cost of oil, which accounts for 30% of the costs for seismic operations.

Technology

The procurement of service providers for the seismic acquisition survey is dictated by the technological requirements. For example, the contract between ADCO and RPS Energy Ltd for the provision of the computerized services was influenced by the technological requirement and the capacity of the supplier to provide the software applications required for the seismic processes. About technology, only technically acceptable suppliers are considered. To select the right supplier, shareholders participate in the assessment of the bidders in terms of technological capacity and their prices. Priority is given to the lowest bidder who meets the specified technological requirements.

Legal factors

The relationship between ADCO and the suppliers is guided by different legal factors. The legal factors entail the general terms of contracting as laid out in the constitution. Further, the partners are bound by contractual terms for the agreement. For example, ADCO has to negotiate and agree with the suppliers by following the legal framework that relates to the specified contracts. This includes the tax obligation, safety, and terms for terminating the contract.

Environmental factors

The onshore seismic surveys affect the marine and terrestrial lives near the operational areas. This is about noise emitted by the equipment being used, vibrations, and gas and liquid discharged during the project. Due to the implications, there are a lot of regulations both at the local and international levels. As a result, ADCO has had to partner with key stakeholders in drawing the contracts with various suppliers to ensure compliance with set standards. All the service contracts are signed based on the government policy on environmental conservation. ADCO has been compelled to procure services of UNEP to provide consultancy on a review of equipment used for the surveys. For example, assessments of the environmental impact for the special trucks that are vibrated to produce a seismic signal.

Inclusions that should be made in Contracts

Introduction

Contracts play a great role in establishing a measure of certainty. To carry out its functions effectively, ADCO procurement and supply is mainly done based on the prior business relationship between ADCO and the suppliers. However, the selection of the suppliers is guided by the need to ensure cost-effectiveness. Hence, each contract is drafted to ensure that important inclusions are put into consideration to guarantee the mutual benefit of the parties.

Inclusions in a Contract

The best approach practices in the design and management of contracts ensure that a contract is clearly defined. A contract should have specifications and a clear outline of the terms of engagement. The main reason for procurement is to reduce commercial risks and enhance the value for stakeholders. In general, it is expected that the personnel in the procurement department should draw contracts to control the expenditures that are made with suppliers. One of the core inclusions in any contract should be the statement of willingness. The statement should be specific in defining the terms of engagements (Bausman, Chowdhury, and Tupper 9).

About ADCO’s survey, the terms should relate to the materials and equipment needed, their quality, and the agreed price. The terms are negotiated based on market standards. Also, the specifications are drawn to ensure that they are in line with legal requirements and set out environmental standards. The inclusions guarantee better value by the integration of various factors that include a reduction in the risks, right prices, agreed timescales and reduction in the commercial risks.

For example, in the contract between ADCO and RPS Energy for the oil supply for the trucks, the main inclusions included clear specification of the oils required for the survey. The inclusions for the contract between the RPS Energy and ADCO are captured in the various sections of the contract template which include:

• The agreement.
• Commercial section.
• Technical section.

The Agreement

For a contract to be legally binding, one of the key elements is a mutuality of obligation. This denotes that parties should agree on the terms. Based on the current emphasis on environmental sustainability, all ADCO contracts are assessed by an environmental regulatory body before being actualized. This is guided by ADCO’s policy that environmental sustainability processes are part of the sub-elements in the mutuality of any obligation.

Commercial Section

This is an important inclusion for ADCO as it dictates the value shareholders realize from the business relationship with the suppliers. The section contains the gist of the business relations between the supplier and the buyer. ADCO outlines the key parties to the contract in this section and its mandate. In this case, ADCO is defined as the buyer. On the other hand, the supplier is defined in terms of the services or goods to provide, the general conditions, special conditions, and the payment terms.

For example, in the procurement of the fuel, ADCO was defined as the buyer with the sole obligation of paying for the services. RPS Energy was defined as the supplier for fuel products and the terms for contracts including the payment terms were outlined and signed by both parties. It is important to note that, RPS was also involved in the provision of software services; therefore, there were two contracts between ADCO and RPS Energy.

General Conditions

The general conditions included the definitions and interpretation of the contract terms. Also, it included the contract duration and termination. For example, a special inclusion about duration was that durations and extensions shall be provided in the special conditions. For extension of the supply or early termination, the initiator should give written notice under the general agreement. This includes the right to cancellation in case a party does not deliver its mandate.

Special Conditions and Compensation

Under the commercial section, the contract included special conditions upon which the contract should be executed. It entailed the operational acquaintance, standard of performance and the work progress. On the other hand, the compensation included the terms of payment for the services rendered. The key areas captured are the pricing schedule agreed upon by the parties and terms of review. As noted earlier, with the fluctuation in oil prices, there were great cost implications on the annual review; thus, one of the inclusions in the revised contract was the quarterly review. The payment included the process of invoicing, time and mode of payment.

Technical Section

The inclusions in this section included the technical specifications of the oils that are to be supplied for the survey purpose. In the context, this mainly centered on the fuels that are supposed to be provided by the supplier, delivery terms, storage and the cost for the product and the related services. For example fuels for the jet, drilling machinery fuels and those for the special trucks used for the seismic acquisition survey. The other technical specification included the quality management systems to ensure that the fuels are not polluted with impurities in the process of transportations and storage. This included aspects of safety training for employees to avoid contamination of the stored oils.

Measures that can be taken to select Effective Suppliers

Introduction

Effective suppliers ensure that the terms of contracts are met without coercion. Also, effective suppliers are critical in the completion of a project. Just like in other business operations, positioning of suppliers is critical in achieving a competitive advantage. To understand the supplier position, the critical questions to ask include which supplier? Where to focus on effort? The type of relationship to cultivate during the supply process, and the issues that might arise in the supply process? In the context of the present seismic survey, the questions are integral in ensuring that the supplier chosen has the capability and complies with the technical requirements. One of the best ways to select effective suppliers is by use of the Kraljic’s Matrix as the basis for assessing the suppliers.

Selection of the Effective Supplier

The process of sourcing for the supplier should be based on the knowledge level of the technical and financial capability of the supplier. The selection should be comprehensive to establish the added value of the purchase, the priorities of the internal stakeholders, management of all stakeholders to avoid conflicts, and clear knowledge of the laws and procedures governing the selection process. According to Bausman, Chowdhury, and Tupper, the prequalification for suppliers should be based on financial stability, the technical abilities, experience in the field of the supply, a track record of the suppliers, the employment policies of the suppliers, compliance with the various regulations and the environmental sustainability capabilities (8).

Concerning the selection of the supplier by application of the Kraljic’s Supplier Model, the main factor to be considered is normally the type of the product to be purchased. The nature of the product helps in the setting out of the general terms of doing business with the identified suppliers. In the seismic surveys, the key requirement to enhance efficiency is by ensuring that the right services and products are procured based on the technical requirements. For example, the services of RPS Energy were to ensure that data acquisition is simplified for the survey.

Kraljic’s Supplier Model

This model is based on four quadrants that are used to rate the products to decide on the supplier who can best deliver the product. They include classification of the product, analysis of the market, strategic positioning, and action planning (Glöckner, Pieters, and de Rooij 5). Figure 3 is an outline of the model. It is based on planned risk management and it helps buyers in the selection of the most effective supplier based on the product classification. The result is the maximization of caution in choosing the right supplier based on the type of product being procured. Thus, the identification of the supplier becomes a strategic undertaking.

In the strategic application of the model in the seismic survey, the quadrant which was more applicable than the others was the ‘strategic items’. This was because most of the equipment required for the acquisition processes are specific; hence, a limited number of suppliers who can provide the products. In essence, the selection of the supplier becomes more of a strategic process rather than transactional activity. The model is key in helping ADCO to maximize supply security; hence, the multifaceted approach in the identification and award of contracts. Strategic items such as oils, seismic mapping, and analysis services are given to suppliers who have proven capacity based on their work relationship with ADCO.

Strategic Items

The strategic items have a high-profit impact and high supply risk. For example, the machinery required, data acquisition systems, and the general technological requirements can be provided by people who specialize in the field of geological surveys. A case example, in the selection of the RPS Energy for the supply of oil and computer software for the seismic acquisition survey, consideration was based on the knowledge, expertise in the field, financial capability and past performance of the suppliers. Therefore, the efficiency of the suppliers was the preference; therefore, the rationale for single sourcing instead of the tendering process.

The rationale was anchored on the facts provided in Kraljic’s model that in dealing with items that have a great influence on the project, attention should be paid to ensure that only the suppliers with the capability to deliver are contracted. As a result, a single-sourcing framework became more applicable. It is worth noting that in the seismic survey, data acquisition is crucial in determining the outcome; thus, the necessity to source for excellent service providers tested before. On the other hand, the environmental implications, and time required to complete the project called for a known oil dealer. Besides, fuel accounts for substantial cost in the whole project; therefore, making the product a strategic product.

Aspects of the Purchase/Supply that may require Negotiation

Introduction

Negotiations in the procurement and supply process play a critical role in ensuring value for either party. This is attributed to the contribution of the function in the cost reduction and improvement of quality in organizations (Driedonks, Gevers, and van Weele 288). To ensure value, negotiations become part of the sourcing process. This section analyses the aspects of negotiations that could be raised with contracted suppliers to enhance performance in their performance.

Aspects of purchasing that may require Negotiation

According to Driedonks, Gevers and van Weele, negotiation is a matter of taking and give (299). Several factors influence the commercial negotiation process. Negotiations are carried out based on the understanding that purchasing is a function that has a high potential to influence the long-term performance of an organization. This denotes that negotiation requires an in-depth review of the entire purchase process to ascertain the points of value addition which are subject to negotiation. For example, ADCO has had a close business relationship with RPS Energy. The company provides services and supplies fuel to ADCO. About the supply of the fuels, there are recorded cases of delays, shortages and price issues that have been recorded over the past year. Therefore, to enhance performance, the key areas of negotiations with RPS Energy include the time, price, quantity, and quality of the fuels supplied. Therefore, to enhance the execution of the contracts, the negotiations should be analyzed by use of the 5-R model, which is based right quality, right quantity, right time, right source, and right price as outlined in figure 4.

Negotiations Based on 5-R model

Right Quality

The right quality designates the use of the standard specifications, efficiency and environmental considerations. Having been a long term supplier, cases of quality compromise have been reported. As a result, ADCO has to renegotiate the quality terms with RPS Energy to ensure that value of money is realized. In this case, ADCO has the bargaining power as a continued breach of the contractual term can lead to termination of the contract which RPS has enjoyed for the past two-three years.

Right Time

The right time is a critical factor in the purchase process. Many disputes arise due to late suppliers. There is a need for consensus between ADCO and the suppliers on timescales for delivery or commencement of products. For instance, a point of negotiation between ADCO and RPS Energy would be the delivery time. In many past instances, RPS Energy has cited logistical hurdles that have resulted in delayed supplies. Therefore, the point of negotiation would be to readjust the contract terms for the supplier to come up with mitigation measures in case of delayed supply. One area of negotiation is to agree on special supplies for each delivery which will be reconciled and compensated every quarter. Agreement on the extra supplies will avoid the unforeseen instances of fuel shortages due to the logistical hurdles that in many cases affect the efficiency of the seismic onshore survey.

Right Quantity

The right quantity entails an agreement with the supplier on the regular flow of the materials (Christopher 12). The value of money is realized by ensuring that the right quantities are delivered to the organization. Currently, the key contracts between ADCO and suppliers that have a direct effect on the performance include the data acquisition services and the supply of the fossil fuels for the seismic work. Therefore, the points of the negotiations between the suppliers should center on the points of improvement to ensure that quantity is delivered as agreed on the contract. Also, a point of negotiation would be in areas where there is a need for a reduction of the agreed quantity. For example, as the work progresses, many activities have been completed and the demand for the fuels has been reducing. As a result, ADCO needs to renegotiate the quantities of fuel in the context of the projected works to avoid cases of surplus.

Right Source

As pointed out, seismic surveys have a high potential of interfering with the existing ecosystems. Therefore, the products used by ADCO for the process should be from certified producers who have been approved to be compliant with sustainable environmental practices. For example, in the case of oil suppliers, negotiations should center on ensuring that RPS Energy obtains its oils from trusted international dealers for the supply of clean oils.

Right Price

After the changes in the oil prices experienced in 2015, the point of negotiation between ADCO and RPS Energy should be on adjustment of the cost of the oils to reflect the prevailing international market prices. Also, another point of negotiation about the fuel supply is for ADCO to request at least 10% discount on all fuel supplies made between February and August to compensate the oil drops recorded at close of 2015 in which RPS Energy did not adjust the prices on the fuels it supplied to ADCO. Agreement on the proposals will enhance business between the two companies and create value for ADCO’s shareholders.

Conclusions and Recommendations

Conclusion

Supply management plays a critical role in the creation of value for organizations. Proper assessment of the entire procurement process can lead to understanding the gaps that arise in the process and hence, put in place measures to bridge the gaps. This was evidenced in the areas of managing expenditures, development of contracts, sourcing the right suppliers, and negotiation in the procurement process.

A key finding in these sections was that in-depth analysis of the supply management can lead to the incorporation of processes that make the supply of the products and services for the seismic survey more specific; thus, impacting on the efficiency and cost-effectiveness. Therefore, it is true to draw generalizations that supply management is a strategic process that should be undertaken by people with the right expertise to deliver the required value for all stakeholders.

Recommendations

Therefore, one key recommendation for ADCO is to adopt Key Performance Indicators. The KPIs must form the basis for evaluation to set indicators for drafting comprehensive contracts and negotiations. In this respect, the KPIs should be incorporated to:

1. Improve performance in the procurement process. This should entail putting in place indicators for measuring the performance of suppliers. This can be achieved by capturing data on performance overtime to draw comparisons. The KPIs should be specific, measurable, attainable, realistic, and time-based for value to be realized.
2. Improve quality: about the quality, first, KPIs should be designed to measure the defect rate of the supplier in terms of complying with the laid down technical requirements. For example, quantifying whether the technical provisions in the contract have been met as agreed. Secondly, quality should be measured in the context of the procurement cycle time. The procurement cycle time is classified based on the length of turnover that is recorded between the requisition and delivery time. Thirdly, the KPIs should evaluate the suppliers’ compliance with the provisions provided in the contract. The compliance relates to the agreement during negotiations, ensuring that prices are negotiated based on the international market trends, sticking on the general contractual terms, and the delivery times.
3. Improve the rate of return on the procurement, the KPIs should also be used to analyze the cost to ensure cost savings, cost avoidance and measure cost-effectiveness for the process.

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