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Procurement Planning in Companies Essay

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Updated: Jul 6th, 2021

Properly managing a business is a complicated task as it involves many processes that often co-occur. Procurement is among the essential aspects as it allows a company to receive the required goods or services from other organizations. Eatough (2014) states that executives often underestimate the importance of procurement, however, “69.9% of corporate revenue is directed toward externalized, supplier-driven costs” (para. 2). Thus, a procurement manager should understand the basic principals of this business aspect to help enhance the organization’s operations. This paper aims to examine the project procurement process, identify the most valuable output, study contract types, and develop a project monitoring process.

Project procurement involves acquiring the needed resources for a particular operation within a company. According to Wilson (2015), any company needs human capital, materials, equipment, and finances. Those are required as without them an establishment would not be able to perform its daily operations. Once a project manager has identified everything that will contribute to completing a task, he or she utilized the services of the procurement department. The primary objective of the employees from it is to ensure that everything is delivered on time and at the lowest price. Therefore, procurement contributes significantly to project completion within an organization.

It is essential to understand the course of project procurement to be able to utilize it in practice. Diagram 1 displays the five primary steps required for successfully initiating and completing the work. The project procurement planning process describes how a department makes decisions when fully filing a plan. The first step is to identify goods or services that will be purchased and request prices and terms from a contractor. For it, requests for proposal (RFP) and request for quotation (RFQ) are typically utilized (Wilson, 2015). Those are standardized approaches that help a manager locate an offer with the best price and the best conditions. The second step involves evaluating different proposals and selecting an appropriate one. Both companies have to sign a contract that would identify responsibilities, timeframe, and financial agreements. Next, the procurement department should ensure that the process is carried out correctly, thus monitoring is required. At times changes should be applied to previously signed contracts, which is the responsibility of the procurement manager. The final step once the previous requirements are fulfilled is closing the project.

Project Procurement Flow
Diagram 1. Project Procurement Flow (created by the author).

The most valuable output of the plan procurement process is selecting an appropriate contractor. The step involves risk management and proper calculations to ensure that the company receives what it needs to finalize a project. Thus, if a manager chooses an inadequate organization to work with, the rest of the process and project completion will be compromised. An employee should evaluate whether the chosen company is reliable as any delays or insufficient quality of items would set back the entire operation.

Acquiring a legal agreement that would identify each party’s responsibilities is necessary for procurement. According to Wilson, contracts are a “form of obtaining resources” that a company can use (p. 5). Clearly stating essential aspects of an agreement helps to minimize possible risks for both parties. Fixed-price contracts are aimed at receiving the products or services regardless of the time needed (Wilson, 2015). Thus, the client pays a set financial compensation, while the contractor may have to exert more efforts to deliver the order, which would not influence its price. Wilson (2015) states that a variation of this agreement can be in place, which is referred to as cost reimbursement. In this case, the customer pays for required items, and an additional fee for work is added. Finally, there is a time and materials contract, which includes a payment from the customer for both utilized materials and efforts that the contractor spent on completing the project (Wilson, 2015). Thus, a variety of options exists that one can choose from to ensure the best financial outcomes of operations.

Risks are associated with every type of contract; however, for each of them, a different party has more to lose. In fixed-price agreements, the seller has the most risk when unexpected issues occur during the fulfillment, as the company will not be able to receive financial compensation. A cost reimbursed agreement can be applied to mitigate this issue as it requires additional payment for the seller. Time and materials payment has the most risks for the buyer as in case the contractor needs extra time to complete the project the total price increases. To mitigate those risks, a manager should adequately evaluate the criteria for the products and services that are required, review RFP, and RFQ and choose an appropriate contract.

The project monitoring process helps track the procurement of orders for the project. According to Wilson (2015), the manager should oversee the contract, suppliers, and their performance. In general, the process should consist of planning, creating appropriate documentation, signing contracts, and approving changes to them is the beginning of the monitoring process. Additionally, the employee should monitor the performance reports and data to ensure that the task will be completed by a deadline (Wilson, 2015). Tools and control systems should be applied to fulfill this task.

Specific selection criteria that describe general requirements can be applied to each project. Project Management Institute (2017) states that a manager should review a company’s management approach, their understanding of need reflected in RFP response, time, cost, and quality of products. Additionally, a capability to fulfill an order with regards to human resources should be studied. Another important aspect is their risk response strategy, business type, and past performance (Project Management Institute, 2017). This is a basic checklist that helps identify whether a contractor is reliable and safe.

Ethical concerns should be considered when identifying source selection criteria for procurement, especially regarding human resources outsourcing. Firstly, it should be based on “fairness, integrity, and transparency” (United Nations, n.d., para. 4). A professional should adhere to the firm’s standards as well as generally accepted moral principles. Additionally, such work can be associated with ethical risks such as conflict of interest, corruption, collusion, coercion, and fraud (United Nations, n.d., para. 4). The objective of a procurement manager should be to avoid such issues and report them when necessary to the company’s executives.

Risk management should be applied to the procurement planning process to ensure the final result and minimize possible financial losses. Wilson (2015) states that risk is a “potential influence producing a positive or negative outcome” (p. 3). It can be argued that most of a company’s operations involve the aspect, thus, correctly understanding how to manage possible outcomes is necessary. The basic approach to the issue is monitoring the processes throughout order fulfillment (Wilson, 2015). Additionally, adequately chosen contract type and company that corresponds to selection criteria help ensure positive outcomes.

Overall, procurement management is among a company’s essential processes. The factor ensures that project managers receive the resources they require to complete a task. There are various risks associated with procurement, some of which can be mitigated through proper contracts. Additionally, adequate selection criteria should be applied to ensure positive outcomes. Finally, a procurement manager should monitor the process and comply with ethical standards in his or her work.

References

Eatough, M. (2014). Harvard Business Review. Web.

Project Management Institute. (2017). A Guide to the Project Management Body of Knowledge (PMBOK Guide) (6th ed.). Newtown Square, PA: Author.

United Nations. (n.d.). Web.

Wilson, R. (2015). mastering risk and procurement in project management: A guide to planning, controlling, and resolving unexpected problems. New Jersey, NY: FT Press.

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