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SABIC: Supplier Selection and Procurement Processes Case Study

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Updated: May 1st, 2020

Executive Summary

SABIC develops the supplier selection process while focusing on criteria associated with the idea of sustainability, but more improvements are necessary in this area. In this context, it is also important to focus on the possible risks associated with the supplier selection. The identification of risks is important to prevent them in the future and to develop the effective risk mitigation strategy. The risk analysis for SABIC resulted in identifying such risks to take into account as delivery barriers, cost barriers, quality and management barriers. The effective actions to overcome the risks include improvements in monitoring, controlling, and contracting. In addition, the focus on sustainability is important to change the supplier selection process in SABIC.

Risk-Based Review of the Supplier Selection Process

Currently, SABIC organizes the supplier selection process depending on the analysis of business requirements, vendor search, formulation of Request for Proposal (RFP) and Request for Quotation (RFQ), further evaluation, and contract. Suppliers are chosen depending on the defined business and technical requirements, and vendor requirements. The management team analyzes the available pool of vendors and decides on whom it is necessary to get more information. The evaluation of responses to Request for Information influences other steps in writing a Request for Proposal or Request for Quotation. Final evaluation and vendor selection are based on assigning an importance and performance value to requirements and evaluation according to these requirements (Golinska 54). The contract is signed as a result of negotiations to state all terms and conditions.

Identification of Risks

A review of the current supplier selection process revealed potential risks in several stages of the procurement cycle. Thus, risks related to needs definition are difficulties in satisfying the demand and inventory management; operational risks are technological and IT backwardness among others; risks related to value and performance are delivery mistakes; risks related to fraud are problems with contracts; there are also risks related to specification, selection process, and supplier appraisal. Twenty-two risks are identified as influential to affect the selection process (Table 1).

Table 1. Potential Risks

# Potential Risks
1 Delivery mistakes
2 Delivery delays
3 Conflict relationships
4 Suppliers that are linked contractually to other customers
5 Low quality
6 Cost increases
7 Difficulties in satisfying the demand
8 Technological backwardness
9 Supply Discontinuity
10 Under capacity
11 Poor environmental performance
12 Financial Stability
13 IT backwardness
14 IT incompatibility
15 Inadequate transport
16 Inadequate inventory management
17 Inability to implement IT changes quickly
18 Inability to implement product changes quickly
19 Poor mix/volume flexibility
20 Supplier Appraisal
21 Selection process
22 Specification of supply

Analysis of Risks

The identified potential risks were prioritized according to the risk scorecard to see how different levels of probability and impact can affect the priority (Figure 1).

Risk Scorecard

Figure 1. Risk Scorecard

All the risks were prioritized, and actions for higher and lower risks were determined according to the effect these risks can have on the selection process and on the company’s activities. The prioritized risk list is provided in Table 2. The actions that are important to be taken to address and mitigate high priority risks are also presented in the table. To address the risks of low quality, it is important for SABIC to conduct annual assessments of suppliers or refer to their certifications. In this case, certifications are more credible sources of information. Difficulties in satisfying the demand should be addressed with the focus on improving the strategy of selecting a supplier instead of proposing additional penalties for suppliers. Delivery delays and mistakes can be addressed with contacting the supplier on problems, but it is more efficient to improve the strategies followed by SABIC to control delivery. To address the inventory management problems and increases in costs, it is relevant to use multistep strategies because of the necessity to respond to all the aspects of the problem (Frenkel et al. 32). The detailed recommended actions are provided in Table 2.

Table 2. Prioritized Risk List

Priority Risks Probability Impact/Damage Actions
Actions for Higher Priority Risks
4 Low quality M H All suppliers are expected to be certified by local, government, and international certification boards. Only suppliers with full compliance are contracted by SABIC.
4 Difficulties in satisfying the demand M H In the case where the supplier has high-quality products or services, a second and equally good supplier is sourced to meet the demand difference created by the first supplier.
Delivery mistakes H M Use Intranet to respond rapidly to any disaster, address requirements of record keeping and improve information management. A supplier is given a warning of contract termination if the delays become a persistent problem.
4 Delivery delays H M SABIC has a company policy that automatically deducts the sale price from the supplier based on the time wasted. The longer the supplier takes to deliver, the higher the penalty that SABIC charges it.
4 Cost increases H M Control measures such as a third party logistics and other necessary out-sourcing services are employed in greater degree to reduce costs of supply. Green management is also a part of the supply chain where suppliers that can recycle raw materials are selected.
4 Inadequate inventory management M H The system is regularly updated to ensure efficiency and minimize fraud. Regular training is conducted for all employees to ensure that they can utilize the system as expected and also to curb any losses or damages.
3 Under capacity M M Suppliers are expected to avail their complete company profile as well as state their production capacity. SABIC confirms the information prior to awarding contracts. The selection team is responsible for physically visiting the supplier.
3 Financial Stability M M Suppliers are expected to avail their financial statements and annual forecasts prior to being awarded contracts with SABIC
3 Inability to implement product changes quickly M M Suppliers need to demonstrate their ability to implement product changes quickly. Past performance with other leading companies is a prerequisite to having a supplier start business with SABIC.
3 Poor mix/ volume flexibility M M SABIC is strict on quality and value. A supplier who does not meet the criteria does not get to be paid for services or products. Additionally, the costs incurred by SABIC for sub-standard supplier products and services are paid by the supplier.
3 Specification of supply M M Suppliers should meet the specifications and performance criteria for all products or services. Any supplier that does not supply as per requirement has their contracts terminated. An in-house quality assessment team with an externally contracted auditor counter-checks quality of the crucial products.
Actions for Lower Priority Risks
2 Conflict relationships L M Personnel at the procurement division are thoroughly vetted to ensure no conflict relationship exists between them and the supplier.
2 Technological backwardness L M Contracts made with suppliers include a clause that allows SABIC to terminate business relations in the event that the supplier’s equipment is outdated to the point that it negatively impacts SABIC
2 Fraud: suppliers that are linked contractually to other customers L M These are given the lowest priority in supply of products and services to SABIC.
2 IT backwardness L M Any supplier that is technologically backward is given a time frame in which they are to update their systems, failure to which their contracts with SABIC are terminated
2 Poor environmental performance M L Suppliers that do not have environmental sustainability programs in place are not awarded contracts.
2 IT incompatibility L M Similar to IT backwardness, suppliers are given a time frame in which they are to update their systems, failure to which their contracts with SABIC are terminated
2 Inadequate transport M L SABIC has agreements with leading car manufacturers who supply and service the vehicles on a contractual basis
2 Inability to implement IT changes quickly L M A supplier is required to have a robust IT department that can quickly implement changes within its organization. SABIC selects suppliers that are tech savvy.
2 Inadequate supplier appraisal L M All necessary documentation required by SABIC during the selection process MUST be presented failure to which another suitable candidate is selected
1 Possible supply discontinuity L L SABIC has a standby list of suppliers that it can use as a backup in case a contracted supplier discontinues business.
1 Inadequate selection process L L All contracts are secured via a tendering process.

Sustainability

Consideration of Sustainability in Selection

Sustainability is an approach that is associated with creating the value for business while using provided opportunities and monitoring potential risks without compromising such aspects as the people’s welfare, economic progress, and environmental protection. Thus, these social, economic, and environmental pillars are three pillars of sustainability (Figure 2). A firm needs to develop effective social, economic, and environmental policies to become sustainable and focus on environmentally and socially friendly practices to save the planet for future generations. In the selection process, sustainability means the choice of suppliers who follow efficient policies regarding the society, who have the environmental policies and effective waste management, and who follow appropriate economic policies.

Three Pillars of Sustainability

Figure 2. Three Pillars of Sustainability

Brief for the Head of Procurement on Sustainable Procurement

In SABIC procurement process, sustainable procurement means ensuring that products and services purchased by an organization achieve their value for money while simultaneously generating benefits for the organization, environment, and society (Brose and Millett 12). SABIC can utilize sustainable procurement to ensure that its purchasing strategy reflects the company’s goals associated with addressing climate change, resource efficiency, economic resilience, and social responsibility. Through the sustainable procurement, SABIC can use its buying power to analyze the market in terms of sustainability and work to improve social, economic, and environmental areas. It is possible to improve the effect of purchasing decisions on such social issues as human rights, international equity in resource distribution, poverty eradication, and labor conditions. Furthermore, it is possible to address environmental issues and guarantee the green procurement while contributing to energy optimization, improving waste management, and ordering recyclable materials. In addition, to reduce the negative economic impact, it is possible to address such issues as price, best value for money, quality, functionality, and availability.

Recommendations

In order to achieve the sustainable development, it is necessary to select sustainable suppliers. The process of selection will include the evaluation of suppliers regarding their sustainability. The approaches that are good to be used in SABIC also include the changes regarding the development of the sustainable procurement process.

  1. The first step is identification of the company’s priorities for the sustainable procurement process and development of a framework for reporting and updating the process.
  2. The second step is improvements regarding the regular monitoring of the process based on entire firm’s targets, highlighting sustainable procurement achievements in delivered savings.
  3. The third step is focus on innovation to increase the sustinability of services and products. This will be done by segmenting and distributing services.

The additional important changes should be made in the sphere of selecting suppliers.

  1. SABIC management needs to focus on choosing suppliers regarding their certifications. Managers should ask suppliers about their Social or Environmental certifications and compliance of operations or provision of goods and services with them. These can be ISO certifications such as SA8000 or 14001.
  2. Suppliers should be requested to fill in a questionnaire (see Appendix 1 for a sample questionnaire). This will enable SABIC to assess supplier’s sustainability for tender submission as well as to ensure that they meet the minimum requirements for performance and management (Van Weele 81). The questionnaires can also be administered to existing suppliers for purposes of contract management, and this can be done annually with under-performance addressed through developing a plan for supplier improvement.
  3. It is important to ensure that areas currently not addressed in the SABIC flexible framework tool are addressed (Appendix 2).
  4. Contracts can be drafted stating requirements for suppliers to report on social and environmental performance. Suppliers are to present reports on the main social and environmental performance indicators at the time the contract is in force.

Summary

SABIC uses a forward-looking approach to supply chain risk management. Market trends as well as economic patterns are used in assessing supplier risks. In addition, current operations and past financial results are also used in the assessment. SABIC can also estimate expected costs and prevent a breakdown in the supply chain caused by suppliers. Provided recommendations contribute to the effective identification of risks and selection of suppliers according to their value. It is important for SABIC to develop efefctive relationships with suppliers in order to add to the business sustainable development.

Appendix 1. Questionnaire

Supplier Details
Date
Organisation
Name:
Address:
Contact person
Name:
Position:
Phone:
Email:
Type of service/product(s) supplied
Policy and management systems
1a Do you have a current statement or policy that commits you to sustainability and/or reducing environmental impact?
1b If yes, is your policy/statement publicly available?
Please attach a copy or provide a URL link to statement or policy
2a Do you have processes or systems implemented to manage your environmental impact?
If yes, are your processes or systems certified to ISO 14001 or equivalent?
If no, please provide a brief description of your processes or systems implemented
2b Do you have processes or systems implemented to manage socially responsible employmentpractices?
If yes, are your processes or systems certified to the SA8000 standard for socially responsible employment practices, or equivalent?
If no, please provide a brief description of your processes or systems implemented
3a Do you regularly review/audit your processes or systems internally?
If yes, please indicate when the last two internal reviews/audits were undertaken
3b Do you regularly review/audit your processes or systems externally?
If yes, please indicate when the last two reviews/audits were undertaken
4 Have you published an environmental, sustainability or triple bottom line report?
If yes, please indicate when the last two reports were issued, whether they were completed in accordance with reporting schemes such as the Global Reporting Initiative (GRI) or Carbon Disclosure Project (CDP), and attach the latest report or provide a URL

Measurement and reduction of impact

Please tick the boxes in the table to indicate which types of environmental and social outcomes are relevant to your organization and state improvement targets where applicable.

5 Measurement and reduction of impact: a. Energy use b. Water use c. Waste to landfill d. Transport e. Biodiversity impacts f. Labour practices g. Community benefit h. Other (please specify)
Our sustainability policy covers:
We measure:
We have set targets:
Where applicable, please state target(s), including units of measure and timeframe:
We have an action plan to reach our target(s):
We publicly report our progress:
None of the above:
Where improvement targets have been set, please list 2 or 3 actions your organisation has implemented to achieve targets:
5 Measurement and reduction of impact: a. Energy use b. Water use c. Waste to landfill d. Transport e. Biodiversity impacts f. Labour practices g. Community benefit h. Other (please specify)
Our sustainability policy covers:
We measure:
We have set targets:
Where applicable, please state target(s), including units of measure and timeframe:
We have an action plan to reach our target(s):
We publicly report our progress:
None of the above:
Where improvement targets have been set, please list 2 or 3 actions your organisation has implemented to achieve targets:
Compliance
10 Has your organization ever received a penalty or notice from the Environmental Protection Authority or been in breach of any other environmental legislation or regulation?
If yes, please provide details and corrective action taken:
11 Has your organization ever received a penalty or notice from the Fair Work Ombudsman or been in breach of the SA8000 standard for socially responsible employment practices, or similar?
If yes, please provide details and corrective action taken:

Appendix 2. Summary of Flexible Framework Tool Recommendations

  1. People
    SABIC will need to publicize its achievements in order to attract professionals. Incentives need to be given to internal and external achievers with the focus being on the benefits attained.
  2. Procurement Policy, Strategy and Organizational Communications
    SABIC needs to include new technologies in enforcing its procurement sustainability. The strategy should also be linked to EMS and the procurement strategy communicated to all stakeholders.
  3. Procurement Process
    Any hindrances to the sustainable procurement process need to be removed and all relevant staff trained in this area.
  4. Supplier Engagement
    All major suppliers need to be actively engaged in the procurement sustainability program to ensure that all parties are compliant and on the same page.
  5. Performance indicators and Results
    Progress on procurement sustainability should be recorded for the public domain and also for benchmarking purposes with peer organizations.

Works Cited

Brose, Dominic, and Lynette Millett. Sustainability Considerations for Procurement Tools and Capabilities. New York: National Academies Press, 2012. Print.

Frenkel, Michael, Gunter Dufey, Ulrich Hommel, and Markus Rudolf. Risk Management: Challenge and Opportunity. New York: Springer Science & Business Media, 2005. Print.

Golinska, Paulina. Logistics Operations, Supply Chain Management and Sustainability. New York: Springer, 2014. Print.

Van Weele, Arjan. Purchasing & Supply Chain Management: Analysis, Strategy, Planning and Practice. New York: Cengage Learning, 2005. Print.

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