Best Practices For Procurement In Construction Company

Understanding Procurement in Management and Acquisition of Resources

Procurement can be explained as management and acquisition (not limited to) of resources that includes buildings, materials, land, food, water, energy, equipments, transport, outsourced services, tools, software, machineries and waste (Drucker, 2012). Its major activity is called as sourcing. It helps in creating value for customers, identifying new products and market possibilities, brings innovation for organizations. Sourcing in the procurement is a systematic process which directs supply and purchasing managers to develop, plan, and manage the supply base in alignment with the strategic objectives of the organization (Ball, 2005).

Traditionally companies treat procurement as the process of fulfilling supplying needs of required services and goods. But it is more detailed process and involves management of spending categories, and relationship with key suppliers. Procurement even helps in development of enhanced capabilities, cost management, and hence maintain and directs overall competitive advantage of the organization. A new approach is required in this process for supplying and building skills. Training programs should focus more upon polishing these skills so as to hone advanced capabilities that involve strategic value of spending areas that are critical (Tevelson et al., 2013).

In general, the purchasing function and the task of managing the whole process of purchasing the required resources and materials has become majorly important for all big, medium, and small organizations because of the fact that competitive is increasing day by day in the business (Furlotti, 2014).

Following procurement best practices is a rapid and continuous movement and also acts as a benchmark. It involves organization to measure itself against other organizations which are best in class (Kilonzo, 2012). In order to manage supplies a lot of best practices categories are identified across many organizations which are high performing. A lot of such characteristics are there like commitment to TQM (Total Quality Management), commitment to Total Cycle Time Reduction, commitment to JIT (Just in Time), supplier relationships, long range strategic plans, training and professional development, service excellence, leadership and management, strategic cost management, learning, and corporate social responsibility (Agus, 2011).

I am writing this report as first Chief Procurement Officer of my company that is a medium sized construction company. Currently there are no policies or procedure is there for procurement in the company. Each employee is ordering and procuring the resources as and when required as per their understanding. In this report the need and way of introducing best practices for procurement in the organization is discussed. Importance of introducing best practices procurement in Construction Company and best practice in Construction Company is explained. Major best practices required to be followed in construction company is been explained in detail along with the factor affecting these practices. Some key performance indicators are also explained.

Most of the time it has been seen traditionally, that the top management of medium and small-sized companies fail to notice the critical need to incorporate best practices in procurement into their operations, because they think that they have inadequate resources for this kind of deployment in the organization (O’Reilly, 2008). Although there may be some limitations in relation to such kind resources like budgets, staffing, and systems, there should never be any lacking when it is related to the strategic planning in order to make purchasing organization of a company the best it could be. Best practices in procurement are equally important to be deployed in medium sized organization as that of large organizations (Navas-Alemán & Guerrero, 2016).

The Importance of Best Practices in Procurement for Construction Companies

While discussing about best practices in procurement, there is a critically essential factor needed to be discussed. This factor explains that no two organizations are exactly same and no approach is available like a simple cookie cutter, for best practices in procurement. It can be explained by an example that says there is one company that is involved in manufacturing a basic product of commodity and another company that is involved in making high technology products (AT Kearney, 2012).

Best procurement practice for first company is to employ a strategy for supply management that focuses on low cost, and for second company such supply strategy will be introduced that focuses speed to market and development of the technology (Molenaar et al., 2015). When it is about supply, every organization has their unique set of weaknesses and strengths. Every organization captures different places while they are serving same market. Best supply strategy is determined by the management of the organization, it will direct the best areas to be targeted in order to develop and use best procurement practices effectively (KPMG, 2016).

It is also important to understand that the strategies cannot be just simple copied by the organization always. Best procurement practices majorly depend on suppliers, processes, people or other elements of the business that are particular to some specific situation. All these facts should be kept in mind by the organization during the research, which are assessing the best procurement practices of other organizations (ETI, 2010).

At the time of assessing the differences which are always present from one organization to another, some factors are there that always or usually exist while the successful deployment or development of one or more best procurement practices by an organization. Following are those factors:

• Active support from company’s top management
• Deep cost driver understanding
• Cooperative supplier relations
• Culture of continuous improvement
• Cross-functional approach
• Advanced Communications Technology Appreciation
• Investment in procurement/supply management

It should not be considered that these factors will act as elements that automatically will result in best practices development in procurement/supply management. But it is very much difficult for anyone to find a company that has attained best procurement practices but lacks in exhibiting all of the above mentioned characteristics. If there is involvement of CEO in all the daily management and operations in procurement, it cannot be understood as support (Fitzgerald, 2015).

For the owners of small and medium sized firms, a lot of other responsibilities like financing, staffing, marketing, inventory management, customer support etc. consume most of their time and efforts. This is the reason the procurement and supply management processes take a back seat instead of planning it strategically. Approximately 65% to 45% of the sales revenue is spent on procurement of the inputs by small and medium sized companies. This makes it a necessity to consider procurement and its management as an important approach to improve efficiency and reduce costs (Ott, 2016).

There exist some strategies of procurement that must be followed by the medium and small sized companies to improve their procurement efforts and help in their businesses at any level of procurement. These strategies can be named as leveraging the technology and technological innovations, maintaining and building strategic partnerships to achieve strong and improved supplier relations, improving internal process of procurement by change in internal structure, organizing with other in order to increase buying behaviour, and outsourcing of procurement needs of the organization (Ott, 2016).

Major Best Practices in Procurement for Construction Companies

Reliable best procurement practices to be followed by a construction company includes automating the organization’s bid levelling work flow, triple bidding the project in a consistent manner, ensuring easy visibility of the whole procurement process, centralizing all the messages and documents, and harnessing past statistics to  inform current decisions (NEE, 2018).

Best practice can be considered as a procedure, a system, or a process that can have a positive long term noticeable impact on the objectives and choice of the purchasing organization.

Following are some best practice in procurement that can be introduced in the construction company for streamlining the procurement process:-

Some or the other kind of strategic plan is always followed while initiation of every successful endeavour or project. Same is the case when developing a method to implement and identify best procurement practices for the supply and procurement department of the organization. Small and medium sized organizations require prioritizing their time management (Fallhubert, 2010).

These stakeholders include staff, suppliers, senior management, and customers. SWOT analysis is one of the important parts of the strategic planning. (NIGP, 2012).

Sometime the methods for doing business improvement is neglected or overlooked, due to busy schedule of the management (Villasenor, 2016).

Some of the effective methods of identifying potential enhancements of the process are:

• Staff meetings
• Brainstorming
• Networking with other purchasing companies
• Customer councils
• Supplier councils

The excellent methods of creating customer and supplier councils not only encourage feedback on how well the company is doing at a specific stage, but also in ideas creating as how to make improvements in the current systems, procedures, and processes (Villasenor, 2016).

It is important for the purchasing department of the organization to save. This is an important part of the purchasing professionals’ job. Re-evaluation of all the reporting methods and saving identification is required to be done every so-often. (Engel, 2011).

Spend analysis should be used in order to help in the process of forecasting not just the current potential savings, but also the additional savings in different new areas. Achieving savings is one of the excellent methods of showing and proving the capabilities of the organization’s procurement department to the senior management. (Engel, 2011).

Importance of the unit can be strengthened by a strong program of savings, as per the corporation objectives, as well as a signboard is provided to new strategic opportunities (Engel, 2011).

Manifestation of this best practice can be done in many ways, like it can use with RFQs and RFPs, and also in the key suppliers’ periodic evaluation. There is no requirement of an involved process in case of scorecard development in conjunction with RFQs and RFPS. At the time of weights and factors determination required to be used in the selection process of supplier, inputs from strategic customers should be received. These strategic customers should be a major part of the process of decision making. The purchasing supplier concept is minimized while corporate suppliers’ deed is reinforced (O’Reilly, 2008).

It has been found over the years that, use of scorecards while evaluating the strategic suppliers’ annual performance, prove as an effective tool for helping the bottom line of the corporate and improving the overall productivity of the organization’s procurement. (O’Reilly, 2008).

Factors Affecting Best Practices in Procurement

It is required to identify and note who are the important stakeholders of the organization can be before starting to increase the stakeholder’s role that they play in the organizational operations. Probable stakeholders can be:

• Senior management
• Support personnel and department like IT, finance, legal, etc.
• Suppliers
• Customers
• Staff

There are more chances of the failure of purchasing organization in case, it is operating in vacuum. (Ali, 2009).

Following are some methods of broadening the interaction with company’s stakeholders:

• Customer councils
• Supplier councils
• Planning session of purchasing
• Planning sessions of support and customer department
• Luncheons and business sessions with personals of financial management

With experience, stakeholders have become more receptive to improved understanding on how the spending of their money is being done and how they are provided with the help to make their budgets more productive (Ali, 2009).

What is the perception of senior management for the purchasing department and the purchasing professionals? It should also be asked, that how does executive council of the firm view the role of the purchasing department played in the corporate objectives achievement? These questions can only be answered properly when purchasing department is updated with details of what all technologies it is using and what all procedures are being applied for the procurement process in the organization (O’Reilly, 2008).

Winning over senior management is regarded as a best practice in procurement because it is a great method of letting the major decision makers of the firm know that a dynamic entity is there and it has achieved some great results in terms of corporate. Purchasing officer should begin this best procurement practice making sure that the senior management has the exact knowledge of the responsibilities of the procurement unit or procurement department. Senior management should be invited to the sessions of purchasing planning and monthly reports should be sent to them about the proceedings of the procurement department by the procurement officer of the organization. It should never be just assumed that senior management has all the information about what is going on in the purchasing unit. They must be reached and all the detailed work should be demonstrated well in advance to win over them (O’Reilly, 2008).

It takes time to adapt the changes in the culture by the organization and the employees. Switching from a culture to a different culture is difficult. It is important for the organization to guide, support and trains the employees so that they can adapt the new culture of the organization in an effective manner. The understanding related to the new culture can help the employees to perform the activities, carry out the procurement process of the organization in effective and efficient manner (Rowlinson et al., 2016). It can be a complex and difficult process for an organization to bring and adapt the changes. In order to make sure that all the activities related to the procurement of the goods and the services can be performed in an effective and systematic manner, it is important for bring the changes in the processes and the culture of the organization for experiencing the improvement (Mohammad & Price, 2006). Adopting the best practices of procurement is important in order to lead in the competition and control, record and manage the procurements activities in a good manner. Transforming the procurement department can help in the improvement of the department. The employees should be informed and provided with the proper training related to the practices of procurement that can help in maintaining the processes of procurement. Along with this, the inclusion of the employees from the diverse culture provides the ability to organization to increase the productivity and establish competitive advantage in comparison to other organizations in the marketplace (Smith, 2016). The effective understanding related to the changed culture to the employees can help in effective procurement management. In order to establish the effective understanding among the employees related to the changed processes of procurement (AT Kearny, 2011). The training is the foremost need in order to enhance the ability of the employees to perform as per the new culture (NC State University, 2005). The employees belonging to the different countries may not be familiar with the activities, systems and the process followed in the organization hence, the organization highly emphasize upon providing the effective training to them. This will help them to select the right supplier as per the procurement needs and the objectives of the organization. Culturally diverse team in the organization is one of the effective ways that can help the organization to attain the competitive advantage as the talented employees from the different regions and knowledge can help in enhancing the performance of the procurements department. They can also provide with the innovative ideas for implementation in the department.   

Key Performance Indicators

Procurement function purchases the goods and the products from vendors or the suppliers in order to satisfy the internal demands of the organization. It is the responsibility of the Procurement department to identify and analyse the potential suppliers, choosing the best supplier, negotiate the terms of payment and organizing the logistical concerns. The people associated with the procurement department have to monitor the performance of the suppliers and maintain the relationship with the suppliers in an effective manner (Ops Dog, 2018). Procurement department organizational structure generally does not demonstrates the organizational structure of the organization. The structure of the procurement department is influenced by the degree of centralization, communication patterns and the size of procurements department. It is important for the organization to delegate the roles and the responsibility of the managers and the employees of the procurement department so that all the activities and the processes related to the procurement of the goods and the services can be carried out in an effective and smoother manner (Ericksen, 2016). The development of the organizational structure of the procurement department is important so that all the information, responsibilities that the employees of the procurement department are assigned with can be accomplished in a systematic manner. There is a high probability of confusion among the employees when there is no such formal organization structure of the procurement department. The distribution of the responsibilities in an effective can help in maintaining the procurement process in a more effective manner. The large organizations have less flat organizational structure in comparison to the small enterprises. It is not important for the growing organizations to keep the separate purchase manager. Some responsible employees in the procurement department can perform the administrative assistant work. This type of structure demonstrates a high degree of centralization in the department. The information mainly flows in top to down fashion in the growing businesses (Ohlmann, 2016). The hierarchy or the flow of information goes like from business owner to purchasing manager and lastly to the employees of the department. The responsibilities are defined clearly to the employees. Less formal organizational structure and centralized purchasing departments can effectively help in increasing the degree of control internally and also help in enhancing the efficiency of the purchasing process (Lohrey, 2018).  

The effectiveness of the implemented procurement practices can be identified with the help of the key performance indicators that are:

Savings: when the procurement practices are able to save the cost and able to keep the upper management happy demonstrates that the practices are effective and the performance of procurement department has enhanced. This can be done by switching the suppliers to get the better prices.

Cost reduction: the negotiation ability of the company can help in getting the products and the goods at better prices and can help in cost reduction. The increase in optimization of the processes and tracking the workers can help in reducing the cost. The reduction in the need of the new employees can help in the same. The overall reduction in the cost will represent the effectiveness of the implemented practices of procurement (Datapine, 2018).

Introduction of Best Practices in a Medium-Sized Construction Company

Cost avoidance: when the company is able to avoid unnecessary expenditures by sourcing the good quality of goods and products from the right supplier that means the implemented practices is good for the organization and can enhance the performance of the organization (U.S. Agency for International Development, 2013). 

Purchase order cycle time: the ability of the company to place the order quickly indicates that the practices implemented are effective and agile for the company highly (Purchasing & Procurement Centre, 2017).  

Procurement ROI: the rate of return for procurement investment can help in clarifying whether the practices implemented in the organization for procurement are able to add value to the company or not. High rate of return means that the practices are effective for the organization (Litjen, 2017).   

This procurement process follows NWS structured approach for procurement. The process consists of useful tools that assist in planning and checking of the activities of procurement, against the recommended best practices for procurement. The process is majorly divided into planning, sourcing, and managing (NSW Goverment, 2014).

Detailed steps involved in the procurement process are explained as follows:-

1. Analysis of business needs:In this step, criticality of spend is analysed in terms of business, by assessing the risk and value both. Internal stakeholders are identified and assessed, are engaged into the planning process and hence their commitment is won. Different opinions are gathered regarding requirements and needs of the business from the specific project, by brainstorming sessions. Different alternative options are thought upon, which can deliver similar output but, in a different and better manner. Finally major needs of the business are agreed upon and determined. Resources used in this step of procurement process includes risk assessment tool, stakeholder analysis tool, supply positioning tool, desired outcome statement tool, and needs assessment tool (NSW Goverment, 2014).
2. Market analysis and engagement:The purpose of this step of the process is to design a comprehensive profile of the supply market dynamics. This is required to be done so as to decide the level of interaction with the market. Any kind of government level arrangements (for example, panels and schemes of the government which are pre-qualified) or agency arrangements are first identified and then used. Supply market’s thorough analysis is undertaken. With proper compliance with the probity rules, engagement and interaction with the supply market is done. Resources that can be used in this step includes supply preferencing toolkit, balance of power toolkit, market summary tool, porter’s five force assessment guide, and engagement guide for procurement board industry of NSW (NSW Goverment, 2014).
3. Procurement strategy finalization:in this step, market interaction strategy is developed on the basis of the analysis and understanding of supply market dynamics, demand-related opportunities and needs of the business, & spend-related opportunities and risks. All the three bases are summarised and criticality level of the project’s business is determined. Different strategic options are understood in order to get the best from the supply market. Strategies are identified in order to achieve the realised benefits. Appropriate strategy is selected and a plan is developed for its implementation. Support is ensured for the selected strategy and is signed by the appropriate authority. Resources for this step include template of procurement strategy, framework of benefits realization, and opportunity analysis toolkit (NSW Goverment, 2014).
4. Approach the market:The aim of this step is to engage the market place. An assessment panel with correct technical experts and business users is set up. Assessment plan is defined highlighting the procurement strategy’s key priorities. Documentation of bid should be clear, comprehensive, and concise and must include relevant templates. Visibility of the information to all the suppliers is ensured. Fair and open management of the responses should be done. If needed, a probity officer can be appointed. Resources include invitation to bid template, template for evaluation plan, supplier/industry information plan, etc. (NSW Goverment, 2014).
5. Select:The purpose of this step is to select the best supplier within the fair dealing and probity framework, for business needs. Transparency and fairness needs to be ensured for supplier interaction management and supplier selection process. Before going through the process of evaluation, it is ensured that selection committee has signed confidentiality agreements and code of conduct. Development of a systematic and structured development process must be ensured before tender responses opening. Resources include evaluation report guide, and evaluation spreadsheet (NSW Goverment, 2014).
6. Negotiate and award:the purpose is to have the best supplier and final arrangements along with ensuring needs around fair dealing and probity. With complete accountability and transparency, negotiation is made in compliance with the invitation document’s process. Planning and preparing the negotiation must be carefully done, and then, should proceed for execution of the plans. Arrangements’ finalization with the winning candidates and unsuccessful candidate should be debriefed. Record and appropriately disclose the arrangement. Resources include negotiation output guide, negotiation plan guide, recommendation to awards, procurement guide for direct negotiation of NSW, letters to suppliers in the form of unsuccessful/successful samples, risk management and direct negotiation guidelines of ICAC (NSW Goverment, 2014).
7. Arrangement implementation:The purpose is to lay a successful arrangement’s foundation. This is the duration of time between the time when arrangement is signed and the time when the delivery of the product or service is started. The correct level of resources and management level is defined on the basis of the complexity and criticality of the business arrangement. Smooth services transition is ensured in case there is a new supplier. Compliance is ensured by jointly establishing the processes and systems of the supplier’s teams and determination of the responsibility, for the key activities and tasks on the side of the supplier and agency. Key stakeholders are engaged and new arrangement is communicated to them. Resources include exit plan, contract management plan, communication plan, and transition plan (NSW Goverment, 2014).
8. Arrangement Management:The purpose of this step is driving the best from the supplier relationship and delivering value for money. As per the complexity and business criticality of the arrangement, correct level of resources and governance is maintained. In coordination with the key stakeholders and suppliers, innovation is encouraged, continuous improvement is managed, and performance is managed. Evidence is shown for delivered value for money by reporting and tracking the benefits properly. Resources included in this step are supplier relationship framework, benefits realisation plan, framework of eQuote supplier endorsement, Supplier action plan and meeting plan, and report tool of supplier performance (NSW Goverment, 2014).
9. Renew:the purpose of this step is renewal of an arrangement. In this, step next arrangement’s strategy is being prepared. During the stage of management, renewal planning should be constant. This stage does not define the end of the process; instead it is a continuous exercise of improvement and assessment. The best possible outputs for the next arrangement will be provided by this exercise. Before the expiry of contract, discussion in context of weaknesses and strengths of the contract commences with both internals stakeholders and supplier. In anticipation of procurement strategy development, market analysis and demand analysis is put to start (NSW Goverment, 2014).

Conclusion 

It can be concluded that the proper management of the procurement department is important in order to enhance the performance and the abilities of the department through the implementation of the best procurement practices. It is important for the organization to ensure that the organizational structure of the procurement department is established in order to delegate the roles and the responsibilities related to the procurement processes and activities. It helps in maintaining the processes and the activities of the procurement department in a smoother manner. It important for the organization to provide the training to the existing employees related to change in the culture of the procurement department. It is also important to provide training to culturally diverse staff so that they can effectively adapt the new culture. Thus, the effective implementation of the procurement practices can help in providing the benefits to the organization in managing the purchases and the other related activities of procurement.  

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