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Procurement Risk And Contract Management

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Introduction - Procurement Risk And Contract Management

The concept of procurement has been identified as an important transactional segment of carrying out a business for most of the part business has existed. 

But due to the increase in the overall competition a lot of companies these days are providing an additional focal point on making their procurement process better so as to get the desired product and services to hold back the clients (Wagner, 2013). Thus from this, it can be understood that one of the main reasons behind conducting this research study is to shed light on the topic of the procurement process for which the selected company Zara’s overall procurement process will be analysed. The study will also highlight the risk Zara is facing whole procuring its materials from external sources. 

The company which has been selected for this study is known as Zara which is one of the biggest fashion retailers based in Spanish. The brand produces its labelled cloth, accessories, shoes, and perfumes and is identified to be one of the tough competitions for other fashion brands like H&M and Burberry. Considering the main topic that is related to the procurement process it can be seen that the procurement technique in Zara does not toil on the total of final clothes but instead on the mass of raw products required to produce the garments (Ferdows, 2003).

Part A: Different stages of the procurement process can help the organization to achieve competitive advantage

In this report, the Van Weele procurement process includes different purchasing patterns which consist of six phases. In addition to this, in the context of Zara clothing manufacturer, the use of Van Weele procurement by the company in terms of managing the decision of purchase and supply. Further, the six phases of the Van Weele procurement process which are used by Zara are given below:

Figure 1: Van Weele procurement process

Source: Google

Specification: In terms of specification, there is a fast and responsive with the powerful team of Zara for the core competencies. The company aspires to create some responsible passion for fashion with some of the huge customers across different countries and cultures.

Supplier Selection: Zara's Procurement department is concerned with the volume of raw resources required for manufacturing the clothing items rather than the multitude of the completed item. Further, the company took supply of materials from outsidefor managing the prices of products and delivering them to the customers. However, the team of procurement at Zara pre-commits for the production in advance which helps the company to offer their fashion trend on time.

Contracting: In this, there is an agreement made by Zara that helps to bind the buyer and seller where the seller mainly agrees to suppliers which are available to the buyer by meeting specifications and supplier selection.

Ordering: The purchase ordering of Zara mainly covers the process with an end to end activities from purchase order development to the approval, receipt, delivery as well as invoicing along with the payment.

Expediting: This process of Zara mainly facilities the process on time as well as sending a shipment of material along with the equipment which is based on the supplies of the order made by the company for their different clients. In the management of Zara directly related to the purchase order, it is awarded for the capacity to handle the process of procurement. In addition to this, the company also expedites the priority expedite requirement which is highly instructed by the management of the company (Bag, and et.al., 2020).

Follow-up and evaluation: This is the last phase of the procurement process for Zara as this step includes the supervision of each step that is involved in the procedure for the delivery of products. Further, the company keeps a record of the activities from the initial stage of the procurement process from ordering to expanding. It will help to analyze the process and follow up on each action that is the requirement for the department strategies of Zara.

In addition to this, there are some stages of the procurement process which involve some important elements with the determination of requirements along with the supplier research. There are seven stages of the Procurement process which are as follows:

  1. Needs Recognition
  2. Purchase Requisition
  3. Requisition Review
  4. Solicitation process
  5. Evaluation and contract
  6. Order Management
  7. Invoice approvals and disputes
  8. Record Keeping

As Zara is its manufacturer of their garment that’s why they do not follow the entire seven stages of the procurement process, they select based on their needs which are as follows:

Need Recognition: In this, the need for recognition of Zara in the procurement process enables the business to take material from China at a reasonable cost. The need to purchase is highly required for Zara as there is a wide range of customers all over the world (Gingerich, 2021).

Purchase Requisition- It is considered that Zara is extremely discerning about the suppliers because of some of the constant pressure from the market regarding the new clothes at a lower price. So that Zara procures the requirement of customers by offering appropriate quality clothes to the people. The team of procurement at Zara tries to fulfill the demand of customers based on the important internal users as well as the management of documents in a proper way.

Figure 2: Procurement stages in Zara

Source: Created

Solicitation Process: This stage is considered in Zara, as one of the important aspects for the procurement team as they develop a plan for managing the solicitation process. It helps the company to manage relationships with the vendors and after the budgeting they sent a quotation for receiving the supply of material.

Order Management: The different vendors of Zara deliver the products within a given period of a deadline. As the management receives the goods it is the responsibility of Zara to examine the appropriate orders and provide notification to the vendors regarding the issues in the items. Order management is one of the most important stages for Zara so that they can manage the system with proper receiving and sending of items (Sönnichsen, and Clement, 2020).

Invoice approval and disputes: Invoice approval and disputes in the procurement process is a process that is used to ensure the accuracy of invoices submitted by suppliers of Zara. The purpose of this process at Zara is to avoid over-invoicing and under-invoicing, so as to reduce the risk of fraud or corruption. The invoice approval at Zara includes the adoption of payment which is generated by the suppliers of material.

The procurement approach follows by the company to attain a competitive advantage

This part of the report helps to explain the sourcing decision of Zara as the process of supply of their material. In this, an appropriate procurement decision or approach helps Zara to make a selection from different suppliers and is beneficial for quick delivery with enhancement in the supply of products. The business strategy of Zara allows the company to sell more clothing items at a higher rate due to the aspect of scarcity and their exclusive products.

Zara adopted the centralized approach as the production of the company is always under the control of the major headquarters in the Span and the company makes sure to distribute the products every two weeks for offering fresh products around the world. The strategy of the company mainly includes the stocking of inventory and providing updates on the latest collection for delivering the newest fashion trend. It helps them to manage fast manufacturing along with fast shipment which leads to fast delivery where the turnover develops a sense of urgency. As an outcome of this, the employees involved in the process of procurement along with the production as well as distribution clearly have an idea about the timeline and impact of activities on other things (Harb, and et.al., 2019). It definitely applies to Zara shoppers who realize whether to go shopping for clothes. This centralized procurement approach of Zara helps to gain a competitive advantage in the marketplace. The procurement strategy mainly shows the purchasing and supply of Zara in their functional area with an appropriate inclusion of the corporate strategy which is related to the benefits of the company. Zara's procurement is centralized, which means that all the items are purchased by one entity. For example, if you want a new jacket from Zara and you're in New York City, chances are it will be bought in Europe and shipped to New York. This saves money because shipping costs can be expensive (especially for international orders). It also allows Zara to keep track of inventory across multiple stores so that when an item goes out of stock at one store it can be restocked quickly at another location.

Figure 3: Centralized Distribution process

Source: Google

The resource dependency theory of Zara, also known as the Zara principle, states that humans will buy the biggest, most obvious brand name first, and only later will they turn to the smaller, more premium brand. Zara has been able to achieve its supply chain goals by using a resource dependency theory of business approach. Zara, the world’s largest women’s fashion retailer, is a resource-hungry business that depends on working-class women for its revenue. The theory of Zara helps to gain a competitive advantage in the marketplace for the business. This has led to a situation in which Zara has no choice but to harvest the working class for maximum profit. This theory has been used by brands to defend their use of lower quality materials, lower quality production methods, and cheaper labor costs to generate profits, instead of investing in the best product. The theory helps Zara examines the relationship between Zara and its suppliers, and how this relationship impacts the supply chain of Zara products (Evans, 2018). The resource dependency theory of Zara argues that Zara’s supply chain is dependent on its suppliers in a number of ways. It helps the company to get an appropriate response from the customers by offering a variety of resources to them so that they are capable enough to take decisions for purchasing the products. Thus, it provides an idea regarding the decision of purchasing the product of the customer and they can make an interaction with the company as the brand is highly dependent on the success of their products. It will help to make an understanding of the relationship between the customer and the business which gives a strong priority to the customers for serving the products. The procurement process of the study helps in achieving the competitive advantage of the company and provides a better enhancement in the services (Bulgakov, and Makarenko, 2022).

Figure 4: Resource Dependency Theory

Source: Google

Part B: The key risks that the organisation faces at the different stages

It has already been identified in the above segment that as Zara manufactures its garments as a result they follow a tactical model of procurement where they select the procurement stages based on their needs. They follow five procurement stages in order to procure material from China. But in this process, they face a lot of challenges and risks which are discussed in detail below.

  1. Incorrect inner requirement evaluation: Considering the first stage of the procurement process in Zara it has been identified that they use to Need Recognition Stage. While using this stage the most noticeable risk that can be seen is the improper inner needs evaluation. This usually happens because of not comprehending the actual procurement needs and from where to get the material. Impractical time spans are again one important risk within this which can significantly affect merchant determination, provider connections, and consumer loyalty (Limited,Serai , 2022).
  2. Approving the spending: The second procurement process within Zara identified is the Purchase Requisition step. It has often been seen that due to over-order processing, absence of command, and ineffective cycles create risks for Zara. The spending endorsement cycle can be a blockage in the case of Zara. Frequently, the approver gets a paper structure demand or a fax note that rapidly becomes mixed up in the mix of everyday errands (Aghajanian, 2018).
  3. Pricing and quotation risks: The second procurement step identified in Zara is related to the solicitation process which is related to various pricing and quotation between the vendors. The main risk lies in this process is the risk of improper pricing and demandable quotation for the raw materials which they outsource from China. Also, a question arises in this part will the employee conduct an expected level of effort in finding the best item at the best cost? In many cases, it has been seen that junior-level employees of Zara many a time get confused in getting the correct quotation and pricing from the internal vendor due to which they sometimes have to pay a huge price (Seyedaliakbar, 2015).
  4. Issues concerning the ordering of products: The fourth step of the procurement process identified in Zara is related to the ordering of the product where some of the major risks have been identified as this step is considered one of the pivotal procurement process steps in Zara. Due to the on-going pandemic, it has been seen that the procurement team is not directly visiting the vendor due to the risk of Covid-19 infection as a result most of the orders are being placed either via call or email. In this case, it has been seen that due to rush employees many a time forget to take the proper referencing of the order number due to which tracking details get missing. As a result, when Zara is placing a duplicate order they are bearing additional costs which are a great threat to the company.
  5. Incorrect match of invoice: The last step identified in the procurement process of Zara is invoice receipt approval and payment. The fundamental threat, in this case, is identified in that the seller's receipt won't match the buy request's terms and valuing. It's essential to match the receipt to the request and receipt to try not to pay for things that the poor person has yet been gotten (Bank, 2021).

Risk assessment is the method of identifying the probability of occurrence of the risk based on its rank and using mitigating process to deal with those risks. The risk register for the identified risk in the above segment is given in the table below:

Likelihood

Consequences

Insignificant

Minor

Average

Major

Catastrophic

Certain

>90%

Incorrect inner requirement evaluation

Extreme

Likely

50% to 90%

Approving the spending

Moderate

Average 10% to 50%

Pricing and quotation risks

Extreme

Unlikely 3% to 10%

Issues concerning the ordering of products

Low

Rare

<3%

Incorrect match of invoice

Moderate

So, it can be identified from the above given risk register that the two most identified risks that can happen with Zara is identification of the incorrect assessment and getting proper pricing and quoiting from the vendors. The two moderate risks are approving the spending and incorrect match of invoice which might happen rarely. And the low risks are the risks concerning the ordering of the products. Overall from the risk matrix given above it can be identified that as Zara manufactures its product thus they can easily mitigate the mentioned risks by applying the proper mitigation techniques.

Risk mitigation in this case can be defined as the process to decrease the negative impacts of risks as well as calamity over the continuity of the business. Now for Zara in order to create risk mitigations steps it will initially be important for them to create the five phases of generating a mitigation plan.

Figure 5: Risk Mitigation Plan

Source: (Lutkevich, Ben , 2020)

Considering the mitigation plan it has been identified that the risk has already been identified and based on that risk assessment has already been done. Also based on the risk identified the prioritization of risk has also been done now a proper strategic plan will be provided to deal with the risks in the future.

  1. First and foremost it will be important for Zara to create a proper supply chain strategy through which they can get the supply of the products at right time with appropriate needs. Visualizing the supply chain will help in identifying the actual internal need assessment that will help in ordering the correct number of materials in the future.
  2. The introduction of automation within the procurement process of Zara will also help in mitigating the risk of fund approval. If the process becomes mechanized then the manual error will be reduced to a great extent and the company will get the accurate result too. 
  3. The third important step will be to create a vigorous supplier sourcing strategy that will help Zara in identifying what kind and within how much time the vendor will give supply of the order.
  4. The fourth step will be to develop metrics for calculating the vendor performance. Conclude what measurements are generally basic for Zara's acquisition groups to gauge the vendor, then, at that point, utilize the acquirement programming and other mechanization apparatuses to quantify it.
  5. Last but not least it will be important for the management of Zara to create a proper relationship with the client so that they can in the future also help with the supply of the material. In order to do so, they need to appoint a fixed vendor relationship who will be responsible for taking care of the entire procurement process while maintaining cordial relations with the client.

Conclusion

So, it can be concluded from the above done study that applying a proper procurement strategy plays a very important role in getting the supply of the desired product from the vendors. With the help of this study it has also been identified that Zara is properly focussing on its procurement process and also implementing the Van Weele procurement process with definite steps to get the supply from its vendors. Though in the process they are facing risks also and for the proper mitigation strategies have also been discussed in detail.

References

Aghajanian, S., 2018. An Empirical Procurement Risk Management Framework in Supply Chain Networks : A Hybrid Approach. Industrial Engineering & Management Systems, 17(4), pp.730-44.

Bank, A.D., 2021. PROCUREMENT RISK FRAMEWORK. Asian Development Bank.

Ferdows, K., 2003. Zara. Georgetown University.

Bag, S., Wood, L.C., Mangla, S.K. and Luthra, S., 2020. Procurement 4.0 and its implications on business process performance in a circular economy. Resources, conservation and recycling, 152, p.104502.

Bulgakov, S. and Makarenko, E., 2022. The Development of an Integrated External Environment Monitoring Framework Aimed at the Internal Control of the Procurement Process of Fat and Oil Companies. Journal of Risk and Financial Management, 15(2), p.50.

Limited,Serai , 2022. Top 5 examples of procurement risks and how to mitigate them.

Evans, J., 2018. A test of resource dependency theory using higher education institution behavioral changes after state based merit aid adoption (Doctoral dissertation, University of Missouri--Columbia).

Gingerich, M., 2021. What are the 7 Stages of Procurement? [Online] Available at: https://www.mikegingerich.com/blog/what-are-the-7-stages-of-procurement/ [Accessed 21-06-2021]

Harb, A., Antoun, R.A., Kassem, A. and Baena, C., 2019. Empirical classification and effect of procurement process on organisational performance outcomes. International Journal of Procurement Management, 12(1), pp.88-111.

Lutkevich, Ben , 2020. What is risk mitigation? [Online] Available at: https://www.techtarget.com/searchdisasterrecovery/definition/risk-mitigation [Accessed 22 June 2022].

Seyedaliakbar, M., 2015. An explanatory factor analysis on procurement risk and its multi-dimensional consequences. Uncertain Supply Chain Manageme, 3(1), pp.51-56.

Wagner, S.M., 2013. The procurement process. Financial Supply Chain.

Sönnichsen, S.D. and Clement, J., 2020. Review of green and sustainable public procurement: Towards circular public procurement. Journal of cleaner production, 245, p.118901.

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