Value by Outsourcing in Project and Business - Essay Example

Contents Introduction and Definition of Procurement 2 Project procurement process 2 The added contribution of Project Procurement in the Likely Difficult Economic Climate for Business in 2012 3 Added Value by Outsourcing in Project and Business 4 Added Value through Building Effective Customer – Supplier Relationship 5 Value Addition through Types of Contracts 7 Conclusion 9 References 10 Introduction and Definition of Procurement Project procurement refers to the process of selecting and procuring the goods, services or results required within the project. Project procurement is a function of the project manager but these duties can also be handled by other people other than the project manager who have been selected by an organization to do so(Wysocki et al, 2000). According to Fleming (2003), the management of project procurement begins when the new project is started and detailed decisions about what percentage of the project that will be performed with the organization’s staff and the percentage that will be assigned to another company for performance begin to be made. The Project Management Institute (2004, 269) defines this as the process of acquiring or purchasing the results, products or services required from outside the team members of the project to perform the work. The essay will discuss the added value that project procurement may bring in the volatile and diffi9cult 2012 business environment. Project procurement process In order to understanding the added value that comes with project procurement, one needs to properly understanding the project procurement process. The first steps involved in the process include planning, acquisitions and purchases (Walker and Rowlinson, 2008). In this stage, the needs of the project that require outsourcing are identified after which the sources for obtaining the required results, goods or services are differentiated by conducting a market analysis.The next step is planning the procurement as noted by Walker and Rowlinson (2008). Here, the objectives of the project are reviewed to ensure that the acquisition activities do not differ from the objectives of the project. Wysocki et al. (2000) explain that the completion of this step includes pointing out the resources required for the acquisition to take place, the determination of the type of contract to be engaged in so as to secure the acquisition, and finally, procurement management plan preparation. The other three steps that need to be completed before project procurement is conducted are requesting seller responses, selecting sellers, and contract planning according to Wysocki et al (2000). In contract planning, the products or services required are described in detail. Vendors are then identified and the best is chosen based on their ability to provide the results, goods or services required (Cheung et al, 2001).After successful vendor selection, the contract is negotiated. This is the forth step, also known as contract administration. This is when the performance goals, obligations and responsibilities are clearly outlined as noted by Cheung et al (2001). When the contact has been completed, the final step in the project procurement process is contract closure. The performance of the vendor is evaluated and the contract is audited to ensure that all the contract terms were fulfilled (Crawford, 2012). The added contribution of Project Procurement in the Likely Difficult Economic Climate for Business in 2012 Procurement is often the root of the success or failure of a project and the existing tough economic climate requires that projects deliver more and more value (Fleming, 2003). By getting the procurement right, a project team or organization are likely to experience the added contribution of project procurement even in the likely difficult economic climate for business. The added contribution of project procurement mainly manifests as reduced costs, increased profitability and a strengthened competitive edge. With good project procurement practices, time may also be conserved to the advantage of the organization as discussed in the following section. Added Value by Outsourcing in Project and Business The current business environment is subject to rapid changes which could see prices shoot up abruptly and without warning. Furthermore, such changes may cause unavoidable delays. The current business environment is subject to rapid changes which could see prices shoot up abruptly and without warning. For example, the price of crude oil may sharply rise over a short span of time when the political environment of the oil producing countries is upset. Yet again, the unavailability of oil in a country due to such changes could mean that the project stalls for a given period. When a project is underway, timely completion is important considering that small abrupt changes could lead to delays as exemplified above. Many projects are initiated as a response to business opportunities, and timely completion of projects ensures that the project is able to tap into these business opportunities (Cheung et al. 2001).Project procurement enables an organization to outsource the project activities that are not core and those that are time consuming while it accomplishes the core project activities through its own staff (Project Management Institute, 2004). In this way, the project will be completed within a short time than it could have been completed exclusively by the project staff. In support of this, Homer (1998) states that procurement plays a role in maintaining timeliness, low costs and high quality in big projects. Onosakponome et al (2011, 181) and Best and Valence (2002)also agree to this by pointing out that procurement is important in achieving project objectives of cost, time and quality. This is also important for cost saving because the more the project takes to complete the more the costs it is likely to incur and the higher the chances that it is become inefficient. Added Value through Building Effective Customer – Supplier Relationship All activities of procurement of goods and services for a project are based on the value for money (Walker andRowlinson, 2008). This is based on priority and regularity. Generally, value for money does not necessarily have to mean the lowest available cost of goods and services in the market. Instead, it defines the whole aspect of cost and overall quality of the productachieved. Kulawik (2004) explains thatgood procurement practice can help in reducing the fixed cost base for its project. Basically, this strategy reduces the overhead costs attached to the supply and purchasing functions of the business. Some of the results, goods or services could be obtained at a lower cost by an outside vendor compared to the organization obtaining them or working to obtain them directly (Barrar and Gervais, 2006). The end result of this kind of collaboration is significant cost reduction. In the current economic situation, every business is hard pressed to make profit, breakeven of keep afloat. What this means that organizations are hard pressed to reduce costs or somehow maximize profit in a highly uncertain business environment. One way through which profit is maximised is by increasing output. According to Huber (2009), by having a structured supplier relationship, an organization can be able to increase the output obtained from its project and this translates to an adequate supply of the target output to the end-users. This means that project procurement in ensuring that a business successfully meets its demands and responds adequately to increasing customer demands. Cost savings as a result of obtaining results, goods or services of high quality at lower prices generally translate to increased business profitability (Kushner, 2011). By applying the Kraljic portfolio purchasing model, the procurement department can take appropriate action in ensuring that the correct procurement decisions are made as noted by Enarsson (2006). Based on the profit impact and supply risks associated with the decision and market situation, the procurement department can focus on a purchasing strategy that will ensure overall success of the project (Enarsson, 2006). When the procurement faculty of the organization engages reliable and efficient vendors, the relationship between the organization and the vendors is bound to grow stronger (Fleming, 2003). The good relationship between supplier and customer can see the customer benefit in future in the form of better service and reduced costs of supplies. This is good for the business in the long run considering that these suppliers could be future customers. Furthermore, suppliers who establish good relationships with their customers may bring customers in the way of the latter making them achieve more successful (Fleming, 2003) even as they engage in a symbiotic relationship. What this means is that the business can achieve added value through building effective customer – supplier relationships. Past events such as 9/11 show the kind of risks businesses face today. Other risks include sudden rise in costs of specific items which may see a sharp rise in project budget. One way of minimizing such risks is by contracting reliable vendors. The identified vendors provide a good way through which project can spread its risks as noted by Walker and Rowlinson (2008). This is because they provide a channel through which a project spreads the acquisition of its services, goods and results and this reduces its direct involvement in these project aspects. In case of anything, the project team or organisation will be directly liable to the part it was conducting using its staff. Anything outside this will be compensated by the external vendor working with the vendor providing results, goods or services for the project, but only within the limits of their involvement (Walker and Rowlinson, 2008). Generally, these service providers or suppliers offer disaster recovery solutions and mature technology hosting and, this reduces the amount of risk that a business gets into. Added Value by Outsourcing in Project and Business Outsourcing also ensures that there are a wide range of products and services to choose fromas a result of the many competing vendors and this increases the level of quality of the results, goods or services is offered at the same price (Barrar and Gervais, 2006). This in turn guarantees quality and good worth for project finances. At the same time, vendors fight hard to maintain their competitiveness and because of this, they make every effort to deliver the best project quality (Barrar and Gervais, 2006).However, this can be the opposite if the contractor comes to realise or feels that the quotationprice offered wasunder-priced during the process of quotation. In this way, the contractor might tend to stage cost reduction strategies in order to maximise profit and this could compromise with project quality (Walker and Rowlinson, 2008). Value Addition through Types of Contracts Different types of contracts govern the activities of service providers and their customers both in the private and public sectors according to Kerzner(2009). Several factors affect the type of contract that an organization chooses to engage with a vendor or service provider. Some of the factors in this respect include the level of associated risks, details of the work involved, and the project team’s capability (Kerzner, 2009). The vendor is chosen by the buyer after being subjected to a rigorous screening process. Although there are many contract types in existence, the most commonly used are cost plus and fixed price contracts (Kerzner, 2009). One major advantage of the fixed price contract is its flexibility in terms of allowing changes and reduction of cost. The disadvantage of this kind of contract however lies in the fact that renegotiating the deal could be costly. On the other hand, the advantage of cost plus contact type lies in the fact that little chance is left for disputes to occur. A review of the procurement contract types show that each has its unique advantages and disadvantages in terms risk control, and pre-contract and post-contract activities. Both parties to a contract type will benefit from each other depending on the relationship that exists between them as regards cost, quality and completion time (Kerzner, 2009). Some contract types offer the opportunity for both parties to benefit in terms of lower costs and higher achievement. Incentive contracting for example will ensure that future partnership is a possibility as each party enjoys one or more incentives from the other. Conclusion Project procurement mainly involves asystematic of selecting and procuring the goods, services or results required by a project from external vendors. These goods, services or results are acquired through purchase or acquisition. Project procurement plays a vital function in maintaining low cost, high quality and timelines of big projects. Generally, project procurement improves the overall performance and profitability of business. This is primarily obtained becauseof the resultant cost reduction, proper resource alignment, concentration on core project activities and ensuring that there is maximum productivity from the overall project inputs. A realisation of these benefits requires that a project manager and their team are conversant with the various project procurement systems. This will allow them to select wisely the one that will offer cost, time and quality benefits or two of these benefits but without compromising severely on the other. References Albert, P. Scott, D, and Chan, P. (2004). “Factors affecting the success of a construction Project”, Journal of Construction Engineering and Management. (1) pp 153-155. Barrar P. and Gervais R. 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