Procurement risk management strategies in modern projects

Managing Project Procurement Risk: Research Proposal
Introduction
Background
Procurement processes present significant risks that could hinder success in not only procurement but also the overall project (Lee &Xie, 2013). In procurement activities, risks are inescapable and pervasive. Events such as poor selection of a vendor, bankruptcy on the part of the vendor, fraud, delays in the delivery of the procured goods or services, and loss of confidential information may occur underscoring the need for diverse strategies in procurement risk management. The different types of risks in procurement depend on items or services being purchased, the vendor history, the contract type, as well as the uncertainties of the projects schedule, budget, or scope.
Procurement activity without a doubt comprises a substantial portion of the total project work. Risks have a significant impact on the project performance regarding quality, time, and cost. They are quite diverse and need proper planning to mitigate on them. Hence, effective procurement risk management may lead to material cost savings (Nagali et al., 2008). For instance, if a company held a close relationship with a vendor who, unfortunately, would not supply the anymore, the project management officer must find a way to manage the risk that the company is exposed to in such a situation.
Furthermore, the modern projects’ nature bolsters proper management of risks. All procurement projects involve risks, and of most them are intrinsically complex regarding resource, technology, and structure demands as well as their organizational and financial demands(Serpella, Ferrada, Howard, & Rubio, 2014). In the modern world, projects have become more demanding as they are expected to deliver greater benefits and in a quicker manner. Furthermore, each stakeholder in procurement projects has different needs and expectation as well as the level and nature of risks faced.
According to Accenture’s study in 2009, seven out of ten companies in the 21st century acknowledge that the business risk has significantly grown because of the financial stresses. In the recent years, conversations about risk management have notoriously included the procurement processes. Key pointers from these conversations have identified the importance of aptly addressing the price and supplier volatility risks when formulating the procurement strategies (Serpella et al., 2014). It is equally important that project leaders integrate risk management into their business strategies, develop innovative methods of monitoring risks, and implement tools and practices that mitigate risks. Nonetheless, this can easily be achieved through the implementing risk-sharing initiatives in anticipation of supplier quality risks. Applying supplier negotiations and dual sourcing is also a good example of how leaders can anticipate supplier bankruptcy risks.
In the current procurement world, there is a need for pro-activity regarding supply chain risks management. As a result, various approaches and tools for controlling procurement risks such as historical and forecast analyses, supplier process failure mode and effects analyses, supplier scorecards, supplier audits, current supplier portfolio analysis, and logical and transportation risk analyses should be adopted (Serpella et al., 2014). Procurement project leaders should anticipate, monitor, and mitigate risks to avoid the daunting impacts that they percent. There are high chances that procurement risks will continue to grow and companies should be well equipped to handle them. This study aims at advancing the body of knowledge on project procurement risks management.
Problem Statement
The procurement project risks are dynamic as they keep changing the course of the project. Currently, project procurement officers have incessantly faced significant pressure, as the society has significantly grown less tolerant to failure (Serpella et al., 2014). As such, it is prudent that all stakeholder involved in a project procurement process remain cognizant of the risks they are likely to face and define the best possible ways of managing them.
With the increasing complexity and size of the procurement projects, the capacity of managing risks through the course has become vital in stopping unsolicited outcomes. When allocating projects risks, most leaders choose a best-qualified individual to deal with a specific risk. However, challenges have been inevitable particularly when someone else is let into the supply chain. Various procurement alternatives signify different arrays of liabilities and responsibilities in the project. Therefore, the appropriate project procurement option should be selected. According to Zhao, Hwang &Phng (2013), procurement project risk management increases the comprehension of the risks, assists in the formulation of more realistic plans, and helps in the identification of the suitable actors to handle the risk. It also helps the decision makers and leaders to confront risks using a rational approach thus improving the decision-making process.
While there is a vast literature on project risk management, there is little attention to the area of procurement. Many studies on this topic (such as Banaitiene, Banaitis & Norkus, 2011; Doloi, 2012; Ryu, Lim & Suh, 2016) focus on project risk management in general. However, it is quite disturbing given the significance of procurement in project management. For instance, a study conducted in the Singapore construction industry established that contractors in Singapore were not willing to conduct procurement risks management because since they lacked a systematic approach and even considered the process protracted without significant tangible benefits(Zhao, Hwang &Phng, 2013). Few studies that have specifically focused on procurement risk management (such as Nagali et al., 2008; Lee &Xie, 2013) present methodological and generalization difficulties. The current research acknowledges the dearth of literature on project procurement risks management and delves into advancing the body of literature on the same.
Purpose Statement and Intended Outcomes of Study
The purpose of the present study is to examine risk management specifically within the context of procurement. Some of the common procurement risks include unrealistic schedule and costs expectations from the vendor, manufacturing volume incompetence of the vendors, potential delays in the shipping, which has an impact on schedules and the costs, and the final product failing to meet the required specification (Serpella et al., 2014). As such, the importance of leaders adopting project risk management should be underscored. Procurement officers should be able to promptly and systematically identify, analyze, and evaluate the risks and formulate their mitigation measures. They should also allocate the risk management responsibility to a suitable party and confirm that the incurred costs in managing risks are proportionate to the essentiality of the purchase.
This study seeks to determine the impact and efficacy of risk management in the procurement processes. It aims at providing valuable insights for project managers. More specifically, the study seeks to illustrate the importance of having a separate procurement risk management plan besides the overall project risk management plan. One of the primary responsibilities of a project manager is to manage risks of a project. Therefore, an efficient and effective risk management approach should be developed. This study aims at providing a knowledge-based approach, to model the risk management function in the procurement processes, as well as its evaluation and availability of best practices.
Research Questions
The study specifically seeks to answer the following questions:
1. Do project managers utilize risk management processes in procurement management?
2. What major challenges does procurement risk management present for project managers?
3. How can project managers overcome procurement risk management challenges?
Literature Review
This section presents a brief review of the literature on the topic. It is segmented into sub-topics including the concept of risk, procurement risks, risk management, procurement risk management, benefits or risk management, and supporting theories.
The Concept of Risk
Nowadays, uncertainty defines the existence and success of various projects and organizations. It indicates that businesses are under threat and underlines the importance of taking action. According to Serpella et al. (2014), a risk is a multilayered concept described as the possibility of a detrimental event happening in a project, thus upsetting its purposes but not necessarily associated with negative outcomes. In a few instances, risks present opportunities but since it mostly results in negative effects, literature has significantly focused on the same.
Procurement is the procedure of obtaining new services or products, and the process involves a certain degree of risk. There are different sources of risks from indirect and direct adverse consequences of events or outcomes that were ill prepared for or were not accounted for, and concern their effects on people, organizations or the society as a whole. Risks can be influenced internally or externally, but their effects are felt within the business. It is important to note that risk can result from misjudgments, failures, or uncontrollable events. Recognizing the source of the risk helps in formulating the risk management strategies.
Demand and supply have also been identified as the source of risks particularly in the procurement context. Supply risks include those that have the potential to delay or disrupt operations such as volatile labor market and political instability, insufficient quality, risk related to delays, and the competitor’s potential risks. The working definition of risk is the likelihood that something will happen which will jeopardize a project, increasing its duration and cost, and reducing its utility.
Procurement Risks
All activities during procurement have some probability of the risk that should be managed to guarantee the realization of the project’s objectives. The different types of risk depend on contract type, vendor history, items or services being purchased, or even the uncertainties of the projects schedule, scope or budget. Potential risks are quite diverse and need proper planning to mitigate on them. For instance, if a company held a close relationship with a vendor who, unfortunately, would not supply the anymore, the PMO must find a way to manage the risk that the company is exposed to in such a scenario.
Some of the potential procurement risks that a company is likely to encounter include:
(1) unrealistic cost and schedule expectations from vendors: the vendors might ending quoting very high costs for the services or even providing ridiculous schedules for them to meet the company’s needs
(2) Manufacturing volume competencies of the vendors: the vendor’s manufacturing capacity might do not be accommodative of the company’s requirements.
(3) Configuration management for improvements and upgrades of the purchased technology: with the ever-changing technology, it is possible to procure technology that will become obsolete in few years thus need for an upgrade.
(4) Potential delays in the shipping and impacts on cost and schedules: some delays are inevitable while others are fabricated.
(5) Questionable past performance for vendors: Since any other vendor is invited to bid, there is great possibility of getting some on board who cannot be trusted
(5) Potential that final product does not meet required specifications.
Risk Management
In project management, risk management forms an integral part, and one of the most challenging parts relates to identifying and managing risks. Risk management within the context of project management is a widely researched area. According to Doloi (2012), project managers must effectively identify, evaluate, and mitigate risks relating to time, cost, and operational aspects. Literature extensively demonstrates that effective risk management is a crucial ingredient of project success (Banaitiene, Banaitis & Norkus, 2011; Ryu, Lim & Suh, 2016). More specifically, effective project risk management can lead to improved quality and productivity, reduced costs, as well as greater stakeholder satisfaction.
As defined by Tohidi (2011), risk management is the identification and assessment of risk and mitigating it to an acceptable extent. Therefore, the primary purpose of projects risk management entails the identification, evaluation, and regulation of the risk to ensure that the project is successful. The main steps in risk management include planning, identifying the risk, quantitative and qualitative assessment, and analyzing the risk. The subsequent steps include responding to the risk, monitoring it and recording management process (Hwang, Zhao &Toh, 2014).
Various studies have been done on project risk management in the past few decades and especially in the construction sector. The concept of risk aversion in the procurement sector has also increasingly gained attention from scholars who acknowledge that it is important to remedy the situation to face the global competition challenge (Hwang, Zhao &Toh, 2014). One of the key facts pointed in literature is that allowing risk sharing and reducing risk aversion strengthens the process of project procurement. Risk management in procurement has been identified to be among the key focus zones of modern procurement management practices.
For a project development to succeed, the risk management strategies should be put in place. It must be appreciated that risk management reduces costs. For instance, in construction projects, private customers pay more than public ones depending on the risk management strategies. Overall, it indicates that the supplier assumes the risks that determine the price imposed on them by the procurer.
Procurement Risk Management
Most organizations regardless of their maturity, size or industry have key concerns regarding the management of the growing scrutiny and complexities around risk in their-party relationships. Each subcontracted relationship presents its unique set of risks with which companies are challenged to respond effectively depending on the standards of the specific industry (Amann, Roehrich, Eßig& Harland, 2014). Nowadays, businesses must provide a clear understanding of the inherent risks in their business relationship with outside parties. With appropriate techniques, framework, and tools, the procurement function can work effectively and closely with all areas of an organization to prove to the regulators and partners that third parties are properly vetted and scrutinized throughout the relationship.(Amann et al., 2014). For business leaders to reduce exposure to risk and establish stronger relationships with suppliers, service providers, and delivery party, they should recognize and actively address the third-party issues. Therefore, establishing strong risk management standards requires the involvement of all stakeholders before bringing on board any third party.
Benefits of Risk Management
According to Deng and Low (2013), construction companies should implement project risk management because most of these companies encounter diverse and complex risks. Some of the benefits of project risk management in procurement include that it helps in developing pragmatic strategies, increases comprehension of the risks involved in a project, evaluating eventualities that reflect the risks, increase advantages from a more rational risk-taking, and identifying the most appropriate party to handle the situation. With risk management strategies in place, decision makers can approach risks more realistically. Proper risk management also reduces programmatic and technical risks, averts risks at a minimum cost when identifies earlier enough, and removes unnecessary contingencies.
Subsequently, properly implemented project risk management reduces losses and maximizes benefits, but there should be a significant investment of resources. Once the benefits become convincing, the cost of project risk management can be justified (Zhao, Hwang & Phng, 2014). Failing to establish the risk management strategies results in a delayed decision-making process, and the decisions made based on costs are mostly detrimental to the schedule performance of the project. When a preventive procurement risk management is adopted, the project procurement team can see the risks that are not apparent. Some of the risks cannot be learnt from a textbook, and a comprehensive preventive risk management program provides an in-depth comprehension of any risk. Furthermore, many board members might find it challenging to identify risks beyond their experience and expertise level. However, they can easily discharge their duties when the relevant resources and advisory services are availed.
An effective risk management program during a procurement activity increases the transparency and understanding of the risks. Previous failures of procurement projects were due to the inadequate comprehension of the risk (Zhao, Hwang, & Phng, 2013).With this program, executives can easily learn about any procurement risk and focus on developing mechanisms of mitigating them. The process also enhances accountability regarding the management of the risks. The process also ensures better analysis and reporting of the risks. Previous risks should be well documented as a process of minimizing the possibility of re-occurrence of the same risk. With an emerging risk, the information is quickly gathered and disseminated to the suitable actors to manage the risk. Fundamentally, risk management optimizes the monitoring and control of the risks.
It is important to cultivate the culture of risk management within an organization, which can easily be achieved by formulating a risk management program. As such, all team players assume a consistent philosophy and language regarding risk (Deng & Low, 2013). Therefore, the risk management process would be uniform and effective as key players identify their roles. Ultimately, it enhances decision-making and strategic planning.
Supporting Theories
Risk management is based on the risk management framework. The framework identifies four steps in the risk management process: risk identification, risk assessment, risk mitigation, and risk monitoring (Banaitiene, Banaitis & Norkus, 2011). The model is widely used in diverse organizational settings. The model provides a rather straightforward framework for recognizing project risks and implementing risk mitigation measures.
Risk Identification
Risk identification is a significant stage in the risk management process. This process requires the project manager to think critically, discover the probable risks at every phase of the project. Risk identification requires imagination and creativity thus the experience and skills of others should be harnessed(Renuka, Umarani& Kamal, 2014). Some of the thinking approaches to be employed include brainstorming, interviewing groups, or individuals or check listing. The process should be carefully examined and the project managers should be able to identify the positive risk. Studies indicate that most seasoned project managers place a keen focus on poor quality, over expenditure and late delivery of the project products and but early delivery can also cause significant challenges.
Risk Assessment
The process involves evaluating the risks against risk indicators and establishing the acceptability of each one of them. It is followed by generating alternate routes of action for risks, which fail to meet the acceptability benchmarks (Renuka, Umarani& Kamal, 2014). Therefore, the project manager should classify risk and sort them in order of priority. This process improves the information on and the management of risk.
Risk Mitigation
It is the process of decreasing the extent of risk exposure or occurrence systematically. The ultimate purpose of identifying and analyzing risks is to prepare for the mitigation process. Mitigation entails reducing the possibility that a risk will occur or reduce the effect of the outcome once it occurs. Planning for risk management entails developing specific action plans and risk mitigation strategies in the project execution plan (Renuka, Umarani & Kamal, 2014). The process entails characterizing the causes of the risks, evaluating the risk interactions, identifying alternative mitigation tools, methods, and strategies, evaluating and prioritizing mitigation alternatives, selecting and committing the requisite resources, and communicating the planning results.
Risk Monitoring
Risk monitoring entails tracking and evaluating the risk levels in a firm. This process tracks and evaluates how effective the strategies of risk management are and helps in creating new and better strategies (Renuka, Umarani& Kamal, 2014). It is important to note that risk monitoring is a daily, ongoing process throughout the lifecycle of the procurement project. The project stakeholders and team members should be encouraged to remain attentive to identify the risk symptoms as well as possible new risks.
Research Methodology
Research Design
This study will employ a cross-sectional study design. This descriptive research design is the most suitable since it enables the researcher to gather data, which indicates a snapshot of project risk management at one point in time. Furthermore, the cross-sectional research will be perfect for giving out questionnaires and immediate data collection. The research objective requires detailed data on the process, impact, and effectiveness of the risk management plan during the procurement processes. In this case, employing quantitative descriptive design assists in analyzing the findings statistically and quantifying the phenomenon.
Data Collection Method
This section outlines the approach that will be used for data collection. Given the research questions, the survey design would be appropriate for collecting the required data. A survey enables the researcher to collect data from a large sample with relatively less cost and time (Bryman, 2008). Furthermore, analyzing data from a survey is easier compared to other data collection instruments. The survey can be administered to the selected sample using in-person delivery or mail.
In this descriptive study, a questionnaire will be the most appropriate. The researcher will draw a questionnaire with open-ended questions. The questionnaire will be comprised of various parts including the demographics part, the section on whether project managers utilize project procurement risk management strategies, the challenges they face, and how they mitigate them.
Population under Study
Project managers comprise the target population for this study. Virtually every organization undertakes a project that involves some form of procurement. Project managers in organizations, therefore, ought to have comprehensive knowledge of procurement risk management processes.
Sample Selection
Including such a broad population in the study would be practically impossible or excessively time-consuming (Bryman, 2008). Accordingly, participants for the study will be drawn from selected organizations. Simple random sampling will be used whereby the researcher will randomly select the final study subjects from the target population. Overall, it will reduce the level of bias and ensure that different population domains are represented appropriately.
Sample Size Determination
According to Christensen, Johnson& Turner (2011), the following formula was used to calculate the sample size.
n= Z2 p(1-p)
e2
1+ Z2p(1-p)
e2N
Formula components:
n: number of sample size
Z; desired 95% confidence, Z= 1.96
P: percentage project procurement risk management
E: margin of error
Data Collection
The obtained data will be fed into the SPSS software the data analysis process to quantify the findings. (Christensen, Johnson & Turner, 2011). In SPSS, various calculations will be employed to acquire the expected results comprising descriptive statistics (frequency, mode, median, mean and standard deviation).The SPSS will be a fit approach in analyzing the data since it can use a Likert scale to quantify the data.


Reflection
What did I learn about project procurement in this course?
Overall, the course has been an eye-opener for me in the field of procurement. Over than the definition of terms, I have learned that the project procurement process is grouped into five steps such as initiation, planning, selecting, contract writing, monitoring, and closing. These steps can be used in either the private or public sector. The course further went on to illustrate the differences between public and private sector project procurement operations. In the public sector, the process involves the meeting of government objectives as well as offering the general population with the provision of goods and services such as the construction of hospitals funded fully or partially by the government. Conversely, private sector project procurement refers to the project requirements that satisfy the organization at hand. Unlike public ones, these projects are done as profit-making ventures to the business shareholders.
The course has also taught me the importance making decisions regarding the purchase of goods and services in an organization. One needs to have a clear understanding of the requirements and specifications of an organization to come up with such a decision. The course also introduces one to the risk identification that organizations engage in during the procurement. These risks are later assessed, mitigated, and monitored.
What role does ethics play a role in procurement professions?
The role of ethics in the procurement of goods and services on behalf of an organization cannot be understated. In today’s contemporary world, companies should come up with sustainable practices leading to the production of goods and services ethically. Lastly, it helps in boosting the company’s public relations image.
Ethics helps in preventing immoral practices during the procurement process. For instance, bribes such as kickbacks, which may be offered by clients or officials in the workplace. The illegal sourcing of goods has also been highlighted as an ethical issue that should be avoided from the start. Moreover, traffic of influence, extortion, and favoritism have been highlighted as ethical issues, which future professionals in the field should avoid. These immoral practices are pitfalls that led to the underperformance of an organization.
Company leaders, particularly in the procurement department, should adhere to the code of ethics stipulated by the organization to set the precedence for good ethical behavior. An organization whereby all the employees and managers adhere to the strict ethical demands of an organization ensures that the workforce in place works with a high level of productivity.
What were three greatest challenges I faced during this course?
Like any other course, there are some challenges that I faced during the course. First and foremost, I had a time management problem. I was unable to attend to all my classes due to poor scheduling of my activities. As such, I missed out on several class presentations and group discussions. Secondly, I found it challenging to analyze and grasp all concepts presented. Part of the problem was differentiating between risk management, project procurement, and project management. While these three facets are interconnected, they are also independent topics that need to be understood separately. These concepts had similar content, which at times made it difficult to differentiate the theory. The final challenge that I faced during the course was the lack of self-motivation. During the coursework, I did not have a positive attitude towards the class, my tutor, and classmates. As a result, it hindered my ability to grasp simple concepts as well as detailed ones in the course. However, I was able to change my attitude and improve my performance as time progressed.
What have I learned about myself while doing this course?
Learning is a continuous curve that seems to have no end. I have learned several things about myself during the course. Firstly, I discovered that I am a poor timekeeper because id did not attend all my classes. There were also instances where I submitted my class work late. As such, I have taken several measures that will ensure that I become a good timekeeper. Secondly, I have learned that I exhibit leadership qualities. The few times that I attended the class discussions, I took charge of the proceedings and moderated everything. This indicated that I have the potential to become a leader in the future. However, as aforementioned, my biggest undoing is time keeping. Therefore, I have no option but to improve on that as leaders should lead by examples.
Thirdly, I have learned that I am an active team player. During the class discussions, I managed to communicate to my colleagues with ease and ensure that I had grasped everything that the tutor taught. Whenever I attended the classes or group discussions, I adapted to the classroom conditions with ease and blended with my classmates. I was also able to display a commitment to the class and my classmates. I felt that my time was productive during the course despite the few challenges that I faced my way.
How will I use the knowledge and skills I developed in this course as I pursue my doctoral studies?
The skills that I have gained from the course are invaluable. The course has been a detailed one focusing on many aspects of project management, risk management, and procurement. As such, it focuses on promoting ethical values in the workplace. I will use the knowledge that I have obtained in ethical issues to highlight further the challenges that employees face in the workplace. It may also include the correct procedures that have been used in the procurement process. In doing so, I will conduct a study that explicitly answers the current and future needs of the subject matter.
How will the course readings inform my dissertation research?
Lee and Xie (2013) highlighted that there are risks that could hinder the success of an organization. As such, the article explains why risks are inevitable, and organizations must classify risks for easy management. Therefore, it provides the dissertation with a bulk of information that needs to be addressed by the study.


References
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