Procurement and Supply Chain Management: Emerging Concepts, Strategies and Challenges

By Ernest Ochonma Ph.D

This book clearly presents emerging concepts and strategies for managing a modern procurement and supply chain function in both public and private sector organizations in a competent and professional manner.

• Language: English
• Publisher: AuthorHouse UK
• Release date: Feb 25, 2015
• ISBN: 9781496995445

Ernest Ochonma Ph.D

Ernest Ochonma is a supply chain practitioner with over twenty-four years post-MBA degree experience in various aspects of procurement, management consulting, and supply chain management across private and public sector organizations. He is presently on the management staff of Nigerian National Petroleum Corporation (NNPC). His wide experience cuts across various subsectors including manufacturing, consultancy, oil, and gas. He has held various managerial positions in various multinational and local organizations and has also been a part-time lecturer in corporate strategy, purchasing and supply management, and marketing management. He has a Bachelor of Science (Bsc) in biochemistry, an MBA in marketing management, a Master of Science (Msc) in finance, and a PhD in supply chain management. He is also a member of various professional bodies including the Chartered Institute of Purchasing and Supply Management in Nigeria, the Chartered Institute of Purchasing and Supply in London, and the Nigerian Institute of Management.

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© 2015 Ernest Ochonma, Ph.D. All rights reserved.

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Published by AuthorHouse 02/13/2015

ISBN: 978-1-4969-9544-5 (e)

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Contents

PAPER 1 A 7C MODEL FOR IMPLEMENTING PROCUREMENT REFORMS IN DEVELOPING NATIONS

PAPER 2 OPTIMIZING SUPPLY CHAIN VALUE BY USING MODERN SUPPLIER SELECTION TOOLS AND TECHNIQUES

PAPER 3 IMPROVING SUPPLY CHAIN PERFORMANCE THROUGH THE APPLICATION OF SUPPLY CHAIN METRICS

PAPER 4 INVENTORY CONTROL SYSTEMS AND STRATEGIES AND EFFECTS ON ORGANIZATIONAL PERFORMANCE

PAPER 5 EMERGING TECHNIQUES FOR IMPROVING SUPPLY CHAIN LOGISTICS OPERATIONS

PAPER 6 UNDERSTANDING THE APPLICATION OF VARIOUS CONCEPTS IN PROCUREMENT AND SUPPLY CHAIN MANAGEMENT

PAPER 7 IMPROVING SUPPLY CHAIN COST SAVINGS THROUGH STRATEGIC COST MANAGEMENT

PAPER 8 CREATING VALUE FOR THE PROCUREMENT FUNCTION THROUGH STRATEGIC SOURCING

PAPER 9 IMPROVING CONTRACTING AND PROCUREMENT VALUE THROUGH CATEGORY MANAGEMENT PROGRAMS

PAPER 10 EMERGING LEGAL AND REGULATORY STRATEGIES IN PROCUREMENT AND CONTRACTING

PAPER 11 ETHICAL STRATEGIES IN PROCUREMENT AND CONTRACTING

PAPER 12 INCREASING SUPPLY CHAIN COST SAVINGS THROUGH LOW COST COUNTRY STRATEGY

PAPER 13 STRATEGIES, ISSUES AND TERMINOLOGIES IN INTERNATIONAL PROCUREMENT AND LOGISTICS

PAPER 14 EMERGING SYSTEMS AND STRATEGIES IN TENDERING, CONTRACTING AND CONTRACT MANAGEMENT

PAPER 15 MANAGING THE PROCUREMENT AND SUPPLY CHAIN FUNCTION AS A PROFIT CENTRE

PAPER 1

A 7C MODEL FOR IMPLEMENTING

PROCUREMENT REFORMS IN

DEVELOPING NATIONS

1.1 EXECUTIVE SUMMARY

Every developing nation desirous of reforming her public sector procurement should start by reviewing its national procurement objectives to determine if these objectives are being fully achieved and identify gaps. The nation should then draw up a public procurement reform plan or agenda to be supervised by a public procurement reform supervisory committee. The implementation plan should be a phased program consisting of at least 7 stages.

The first step in the implementation program of a successful procurement reform agenda is to conduct a detailed national procurement spend analysis. The last stage is to create structures and institutions for continuous modernization and capacity development.

Effective implementation of public procurement reforms using a phased 7C approach is expected to eliminate or minimize gaps identified in the present reform implementation agenda of many developing nations in Africa and other parts of the world.

This paper therefore recommends a 7C model for the implementation of procurement reforms in developing nations as a means of enhancing the capacity of a nation to deliver affordable and efficient social services to her citizens.

1.2 INTRODUCTION

Procurement reforms involve the development, deployment and upgrading of procurement resources, systems, processes, procedures, laws, rules and regulations necessary for improved efficiency, effectiveness and value creation in the management of procurement expenditure within a nation or an organization.

In most developing countries there is a growing tendency towards effective monitoring of government expenditure to ensure that such expenditure is optimally allocated and utilised for the provision of accessible and affordable social services to the people. This is probably the greatest challenge of every democratic government in Africa today.

In various countries of Africa such as South Africa, Ghana, Sierra Leone and Nigeria which are desirous of providing affordable and accessible utilities and social services such as water, electricity, transportation, education and health services to the people in line with the United Nations Millennium Development Goals (MDGs), Public Procurement reforms have reached advanced stages. However the rapid implementation of these reforms is still faced with huge challenges in most of these nations after several years of embarking on procurement reforms.

For example the procurement law in South Africa has been amended several times to reflect challenges noticed during the implementation phase. The procurement law in Nigeria which was enacted in 2007 has already been amended once and some stakeholders are still calling for more amendments. The bureau for public procurement in Nigeria which has been operating without a board has been slow in implementing the remaining aspects of the reform agenda. Hence capital budgets are partially implemented and social infrastructural projects are delayed. Most significantly, only few states and local government areas that derive their budgets from the national resource base have commenced any form of procurement reforms at all.

Most of the problems associated with public procurement reforms in Africa are traceable to poor conceptualization and implementation of the procurement reform agenda. It is therefore necessary to come up with a model for implementing procurement reforms in developing nations of Africa and other parts of the world with similar historical and developmental antecedents.

1.3 JUSTIFICATION FOR EFFECTIVE PROCUREMENT REFORMS IN DEVELOPING NATIONS—A HISTORICAL BACKGROUND FROM NIGERIA

In 2003 the Nigerian government made the first attempt at procurement reforms by establishing a budget monitoring and price intelligence unit {BMPIU} in the Presidency. The major functions of BMPIU were to monitor and control the expenditure side of government business and to ensure that Nigeria obtains value for money for public sector expenditure on capital projects. Before BMPIU became active in 2003, government contracts in Nigeria at federal, state and local government levels were generally perceived as ‘drainpipes’ through which public officers squandered government money with their cronies through highly inflated contracts for projects which were hardly completed before being abandoned.

Through the efforts of BMPIU, a level of sanity was brought into the expenditure side of government business and this resulted in significant cost savings approaching one and half billion dollars by the end of 2004. (EZEKWESILI, 2004). In spite of the efforts of BMPIU at controlling the cost of contracts and ensuring that extra budgetary financial commitments are curtailed, the activities of BMPIU was criticized by various stakeholders. They were accused of operating without an enabling law and therefore had no legal rights to issue due process certificates for verified and certified government contracts. They were also accused of delaying the award of contracts by attempting to benchmark the cost of proposed government contracts using various bench marking criteria. Furthermore they were operating without a full complement of trained and qualified procurement personnel forcing them to depend heavily on the use of external consultants which was generally perceived by some stakeholders as another drainpipe for public resources.

The above issues led to the drafting a public procurement bill which was presented to the two houses of Nigeria’s national assembly in 2005. This bill suffered a lot of setbacks as most of the provisions of the bill were heavily criticized by some stakeholders who benefitted immensely from the old ways of conducting government procurement business.

The public procurement bill was eventually passed into law in 2007, two years after being presented to the national assembly. One of the provisions of the law makes it applicable to all agencies and institutions deriving at least 35% of their revenue from the federation share of the consolidated revenue fund. This implies that states and local governments which derive over 80% of their budget from the same consolidated revenue fund which is essentially public money were excluded from the Act. Consequently the other tiers of government have not shown much interest in either implementing the provisions of the public procurement act or enacting similar acts as at December 2009. Some of the states willing to leverage on the provisions of the procurement law to reform their procurement activities are hindered by lack of capacity and political will.

Furthermore the bureau for public procurement which is expected to implement the remaining aspects of the procurement reform agenda is bogged down by governance and capacity problems. The various ministries and agencies which are charged with the responsibility of implementing government programs are also grappling with governance and capacity development issues thereby hindering the effective implementation of capital budgets between 2007 and 2009.

These problems could have been largely prevented if the implementation strategy was properly conceived and broken down into actionable stages or phases that are adequately resourced.

The above scenario provides the historical background for this practical paper on implementing procurement reforms in developing nations drawing from my over 24 years experience in the field of procurement, contracting and supply chain management across the public and private sectors of the economy and the experience of similar challenges faced by other African countries which are already at advanced stages of consolidating the gains of procurement reforms.

1.4 KEY OBJECTIVES OF PROCUREMENT REFORMS

Ideally a well-conceived and packaged procurement reform program should have the following objectives:

• Value for money for all transaction

• Efficiency and effectiveness

• Fairness

• Transparency

• Accountability

• Human capacity development, motivation and deployment

• Local content and capacity development

• Attainment of national and international development goals

• Establishment of internationally accepted standards of business practice and ethics

• Modernisation and optimisation of key procurement systems, tools, processes and strategies.

Value for money for all transactions ensures that all financial expenditure is optimally spent on goods and services that are not only available but affordable. In some developing nations, key social services are available but not affordable whereas in some others they are affordable but not available. However accessibility to social services by the commonest people in a nation should ideally include availability and affordability (OCHONMA,2001).

Efficiency and effectiveness ensures that procurement services are delivered in a timely fashion on a consistent basis such that the procurement process is seen as a facilitator of development objectives and not a spanner in the wheel of progress.

Fairness means that most stakeholders and participants in the procurement process agree that supplier selection and contract award procedures encourage inclusiveness and are not geared towards the elimination of certain groups of people and interested parties.

Transparency in procurement reforms implies that all contracting activities are communicated and conducted openly and visibly in a timely manner. It also implies that all present and potential suppliers are given the opportunity to participate in the contracting process.

Accountability in procurement reforms requires the development of appropriate controls, policies and strategies which enhance performance reporting, monitoring and continuous improvement. Information related to procurement performance metrics should not only be credible and verifiable but accessible to the public who are the true owners of national resources.

The quality of the human capital of any nation determines to a great extent her ability to achieve national development objectives. Procurement reforms should include training and development of procurement professionals to enhance their capacity to conceive and implement best procurement practices aimed at achieving national development objectives.

Procurement reforms should aim at enhancing the development of local technical and entrepreneurial skills necessary for value added exploitation of a nation’s natural and mineral resources. A developing economy needs indigenous technical and managerial expertise to create and manage wealth and productivity in various sectors of the economy through an incentive system that is part of a nation’s contracting and procurement objective or policy.

Globalization and market based reforms has enhanced the role of multilateral development and donor organisations in the attainment of national development goals especially in developing countries. This has also enlarged the scope of procurement reforms in many nations. Indeed many developing and emerging economies have been induced to carry out procurement reforms because of the activities of such well-known Multilateral Development Agencies (MDAs) as the World Bank and United Nations Development Agency (UNDP). Procurement reforms in developing economies should therefore be packaged in such a manner as to attract foreign interest, resources and investments.

Modern business transactions are based on locally and internationally accepted moral and ethical standards including societal values, norms and preferences. Procurement reforms should aim at achieving a national standard of business ethics that is acceptable to both local and international investors. It should also ensure that business transactions are conducted in a manner that consistently adds value to the nation’s external image among the comity of nations.

Procurement reforms should aim at entrenching and institutionalizing a culture of continuous improvement and optimization of key procurement tools, systems, processes and strategies. This is to ensure that the gains of procurement reforms are not reversed in future as a result of lack of capacity development and improvement.

1.5 CONDITIONS PRECEDING THE IMPLEMENTATION OF THE 7C MODEL

Successful procurement reforms can only be carried out under certain conditions, enablers or success factors. This is because such reforms usually involve a paradigm shift in mindsets, value orientations and entrenched perceptions on the part of the leadership and followership of a developing nation.

Comparative studies on the success rate of various procurement reform efforts in Sierra Leone, Ghana, South Africa and Nigeria indicate that the following factors are necessary for successful implementation of procurement reforms;

1 MASSIVE AWARENESS OF THE NEED FOR PROCUREMENT REFORMS

There must be an agreement by various stakeholders in an economy that there is an urgent need to reform the way and manner in which government business is done with respect to procurement of public goods, works and services. This must be preceded by a massive campaign for improved efficiency and prudence in the management of public resources by the leaders of a nation. This could be done through media campaigns, social and political re-engineering of public values and perceptions; stakeholder conferences, workshops, seminars and town hall meetings.

2 A STRONG COMMITMENT TOWARDS CREDIBLE AND TRANSPARENT LEADERSHIP AT ALL LEVELS

All participants in the procurement reform process at leadership levels must demonstrate high commitment to credible and honest implementation of procurement reforms as a means attracting stakeholder confidence and accelerating the pace of economic development and enhancement of the quality of life for the average citizen.

3 STRONG INSTITUTIONAL CAPACITIES

The strength of the institutions set up to implement procurement reforms is a key factor in determining the success rate of such reforms.

Procurement reforms must be driven by institutions that are backed by law, enjoy a high level of independence from external interference, Top leadership support and have the required level of human, financial and technical capacity for implementing procurement reforms.

4 EQUITABLE ENFORCEMENT OF THE RULE OF LAW

The country must put in place strong anti fraud and anti corruption laws to serve as deterrents to those who may want to sabotage the Procurement reform implementation process. These laws must be equitably enforced across the various social strata of a nation’s populace for it to make meaningful impact on the outcome of procurement reforms.

5 A SUPPORTIVE CONSTITUTIONAL FRAMEWORK

A developing nation desirous of adopting the 7C model for its procurement reforms agenda must have a constitutional framework that supports the simultaneous implementation of procurement reforms at the national, regional and other levels of government to ensure that the average citizen at whatever level of governance benefits from procurement reforms. Alternatively the nation’s leaders at all levels of governance must come together to agree on a common procurement reform agenda before commencement of implementation.

1.6 PROCUREMENT REFORM IMPLEMENTATION STRATEGY-THE 7C MODEL

A standard national procurement reform strategy should involve the following key steps:

1. Conduct a national procurement spends analysis.

2. Carry out national procurement human resource audit.

3. Conduct an assessment of national procurement capabilities.

4. Compare national procurement practices with international best practices.

5. Carry out gap identification and analysis.

6. Create legal, regulatory and governance frameworks and structures.

7. Create institutions for continuous capacity development.

1. CONDUCT A NATIONAL PROCUREMENT SPEND ANALYSIS

A spend analysis is a detailed statistical research on the historical expenditure pattern of a nation or an organisation. The objective of carrying out a spend analysis is to establish a historical and statistical database for future procurement decisions and actions by identifying gaps and deficiencies in existing spend data. It involves the categorisation of contracts for works, goods and services and the determination of the cost, timing, quality, quantity and distribution pattern of contracts, contractors and suppliers within an established time frame usually between five and ten years depending on the business cycle of a nation or an organisation. A good spend analysis enables procurement policy formulators to avoid the pitfalls of the past while deciding on new policy options for the future. This task should be carried out by specialised consultants appointed and supervised by the Procurement reform supervisory committee.

2. CARRY OUT NATIONAL PROCUREMENT HUMAN RESOURCE AUDIT

A national procurement human resource audit is a national inventory of all human resources currently engaged in the procurement of works, goods and services at all levels within the public sector. This can be done in stages depending on the various levels of public sector governance within the system. For example the first stage could be an audit of all procurement human resource practicing procurement at the level of the federal or national government. The second stage should include all states or regional governments while the third stage may be extended to the local or native government.

The objective of a human resource audit is to assess the quantity, quality, availability and distribution pattern of procurement professionals within the public sector. Data generated from this exercise is used to formulate policies for attracting, retaining, training and development of human capacity for the effective implementation and sustenance of national procurement reforms. It is also used in developing nationally acceptable standards of professional practice including entry qualifications, career levels and career paths for Public Procurement Practitioners. This exercise should be conducted by specialised external development partners such as the World Bank acting as consultants to the reform implementation supervisory committee. This is to avoid local influence and bias in the collation and analysis of competent and professional human resource data.

3. CONDUCT AN ASSESSMENT OF NATIONAL PROCUREMENT CAPABILITIES

Another important step in procurement reform strategy is to carry out an unbiased qualitative assessment or review of present national procurement structures, policies, procedures, tools, systems and processes etc. This review enables procurement reformers to establish benchmarks for comparing present procurement practices and infrastructure with international best practices and identifying areas requiring capability upgrade. This should be carried out by specialized international consultants working in collaboration with local consultants appointed and supervised by the Procurement reform supervisory committee.

4. COMPARE NATIONAL PROCUREMENT PRACTICES WITH INTERNATIONAL BEST PRACTICES

International best practices in procurement consist of a an optimal mix of systems, strategies and processes which have been significantly tested and proven to produce the best results towards the achievement of internationally accepted key procurement objectives. Key public procurement objectives include value for money, transparency, accountability, efficiency and effectiveness. However procurement objectives may vary significantly from nation to nation depending on peculiar needs and circumstances. For example a developing nation may desire to increase local technological capacity through her public procurement practices whereas another nation may desire to empower indigenous contractors by giving them a stake in all national contracts for goods, works and services.

Procurement objectives may also vary significantly from sector to sector especially private and public sectors. Some profit oriented private sector organizations may be more concerned with value for money than transparency and accountability. Similarly most public sector institutions are very concerned about transparency and accountability sometimes to the detriment of value for money. This is because public money belongs to the ordinary people and must be spent in a very transparent and accountable manner. This is one of the greatest challenges in implementing public procurement reforms.

Consequently in order to retain the confidence of international and local stakeholders in public procurement reforms, the objectives of a procurement reform program must not only conform to international best practices, it must identify with peculiar needs and aspirations of the majority of the people that constitutes a nation. Hence it is highly recommended that reformers should choose a few nations who share similar socio economic, political, cultural and developmental antecedents as well as future national aspirations as peers for the purpose of bench marking best procurement practices among nations. Similarly it is recommended that such nations should have at least attained advanced stages of procurement reforms. In addition such procurement reforms must have been internationally adjudged to have produced tangible and verifiable results in line with a nation’s economic vision and developmental aspirations. This is because procurement reforms must not be seen as an end in itself but a means of achieving an end. This end must be seen as tangible results for the social and economic benefit of the majority of the people. Hence international best practices in this context consists of an optimal mix of policies, strategies, structures, systems, processes and tools that have been proved over time to produce desired results in peer developing nations.

This phase should be implemented by international development partners such as World Bank or UNDP leveraging on experience and statistical data generated by such bodies over the years working on procurement issues across various developing nations. An international development organization should work in collaboration with specialised local Non Governmental organizations appointed and supervised by the Procurement reform supervisory committee.

5. CARRY OUT GAP IDENTIFICATION AND OPPORTUNITY ANALYSIS

Identification of gaps involves an evaluation of present national procurement objectives and a comparison of present levels of achievement with desired levels of achievement based on a set of criteria, targets and benchmarks. Another aspect of gap identification is to compare the ‘has been’ level of achievement of national procurement objectives with ‘should be’ levels using similar figures obtained from peer nation review exercises as a benchmark. In this method a nation may decide to compare her level of achievement with those of her peers.

The next step is to compare present procurement practices in terms policies, strategies, structures, people, resources, processes, tools etc with what is obtainable in peer developing nations. The gaps identified from the various self versus peer review comparison exercises should be used to analyse lost value derivable from procurement and forecast future opportunities. Future opportunities may include the ability to achieve significant cost savings, develop new approaches for enhancing value for money, develop new strategies for reducing procurement cycle and ensuring that annual national budgets are fully implemented within the budget period, etc.

Forecasting opportunities may involve the use of various procurement strategy analytical techniques such as the SWOT, (strengths, weaknesses, opportunities and threats) PEST (political, economic, social, technological) and KRALJIC matrices. Basically results obtained from the use of procurement strategy tools and