Project Risk and Procurement Management

Project Risk and Procurement Management

Name

Institution

Course

Date

Abstract

Greater global competition continues to confront organizations. This is in addition to changing business models, raw materials scarcity, and pressure to reduce cost. To respond to the challenges companies are focusing on reducing the cost base. Procurement is a key functional area in helping companies to reduce the cost base. This paper evaluates the sourcing methods and supplier base of TreeHouse Foods, Inc. The paper then provides a strategic sourcing framework useful in leading to procurement excellence and value growth. The structure of the paper is as follows; introduction, literature review, theoretical perspective, company overview, company sourcing methods, and strategic sourcing framework. Finally, the paper provides a summary of the content.

Table of Contents

  1. Introduction

The increasing need for raw materials has increased the importance of the supply chain. This requires companies to explore sourcing activities keenly to determine what it is needed to be excellent and competent in sourcing. For many years companies have looked at procurement function as a function that only requires to have required materials delivered to the company. TreeHouse Foods, Inc is one of the companies that have tried creating closer relationships with suppliers especially by helping growers in the agricultural practices creating long-term contracts for sufficient supply. However, such companies can achieve procurement excellence and value growth by adopting strategic sourcing. Through strategic sourcing companies will reduce the costs of the purchasing department becoming more profitable. This paper provides a strategic sourcing framework comprising of five stages that is internal analysis, formulation of expenditure category strategy, supplier strategy, negotiation strategy, and implementation of the new agreement. Strategic sourcing promotes procurement excellence and value growth.

  • Literature Review

            Profits improvement

The purpose of every investor is to gain more from their investment. This is why every business function focuses on improving profitability. For example, in 2016 annual report Ericson company adopted new strategies to improve its profitability. The company focused on reducing working capital to restore its profitability (Erickson, 2016, p8). According to the CEO, by reducing the operating expenses, the company would be able to enhance its profitability. The company planned on focusing on three areas that is technology, monetizing networks, and efficiency improvement in efforts to improve profits. Areas such as the use of technology skills have been supported by various studies on their important role in driving profitability. For example, according to Pollack & Adler, (2016, p836), IT skills play a key role in driving sales which eventually enhances profits. The study links improved business performance with IT skills. However, the improvement is not large enough to drive the desired profitability.

            Marketing function

According to Porto et al (2017), marketing activities determine the profitability of a business. The activities include planning product price, promotions, and their distributions. The activities focus on meeting the demands of the consumers. Studies show that marketing activities are effective in improving sales. However, some of the activities have a small effect on the product sales. Generally, the marketing activities increase productivity. However, for companies to experience this increase, they must invest in marketing activities that are more productive. This means that there are marketing activities that are effective in enhancing profits while others are not. Businesses thus have to be keen in choosing the activities to enhance their profits (Porto et al., 2017, pp446). Based on these findings, businesses must pay attention to other functions apart from marketing to boost their profits.

            Use of procurement function to improve profitability

According to Assiamah (2005, pp1), businesses have for a long time treated purchasing and supply as a second function. However, based on the ever-changing market, for companies to remain competitive and profitable, they have to integrate material management, engaging suppliers, together with production, and distribution practices. According to the author, companies that have their procurement process wrong, cannot be competitive. The purchasing function contributes equally to a company’s success just as functions like accounting, operations, marketing, and finance (Assiamah (2005, p1). According to the author, the procurement department is involved in spending the resources of a company and therefore, it offers a chance of reducing expenses which eventually increases profits. Aspects such as price, quality, agreement terms, performance, and delivery which leads to savings are as a result of the effective procurement process.

Assiamah (2005, p1) argues that in the 1990s, material costs took over 60% of the total costs of the products sold in the US. This raised concerns over the purchasing function of motivating purchasing managers to be more active. Investors recognised the important role played by the procurement function. This led to increased involvement of the department in sourcing, nurturing supplier relationships, and issuance of contracts with key suppliers. Through effective procurement process, companies benefit from obtaining quantity discount, negotiation of reduction of prices, control of price increase, and more purchasing opportunities from other potential sources (Assiamah (2005, p1). The author explains that the purchasing function has direct impacts on the profitability of any organization. However, many organizations think that what is important is materials coming into the organization when required.

  • Theoretical perspective

3.1 Transactional cost analysis

According to transactional cost analysis, companies can reduce transactional cost through cooperation with other partners. For example, if a company reduces supplier base by entering long-term contracts with specific suppliers, then transaction cost will reduce in that costs of negotiating and writing various contracts is reduced, the cost in the collection of suppliers information is reduced, and cost in contract enforcement is also reduced.   This cooperation has potential risks which included subject to opportunistic behaviors (Wellenbrock, 2013, p9). To avoid such risks, commitments such as long-term contracts and the penalty for certain failures are effective. Through transactional cost analysis, investors determine whether, low prices were offered for purchases and high prices for sales. 

3.2 Network Theory

The network theory emphasizes the importance of personal relationships between partners, and promoting trust through long-term relationships. With such relations, direct communication leads to uniqueness which results in the customized supply chain that helps in meeting the requirements of individual customers (Wellenbrock, 2013, p9). Through the network, mutual trust is build up between partners which occurs between the exchange process and adaptation processes. The theory has been applied over time in developing long-term relationships between members of the supply chain especially in developing a buyer-supplier relationship. For example, companies can apply network theory in negotiating awards to improve productivity. Through a network, a close relationship is established between the company and supplier. This means that trust has been developed supporting long-term contracts (Wellenbrock, 2013, p9). Such contracts make up a supply base that is characterized by few but suppliers who are reliable. This ensures that the current and future needs of the company are met associated with increased productivity.

3.3 Game Theory

Through game theory, companies are able to make effective decisions in relation to procurement practices including sourcing activities, and price negotiations. The theory involves interactions between two parties who seek to pursue different interests. Through the theory, investors design a playing field in which participating parties work towards the achievement of best outcomes. In procurement, the theory guides the purchaser to set negotiation rules governing contractual relationships (Halldorsson et al. 2007, p287). Through the theory, buyers can understand the psyche of the supplier especially after knowing the supplier base and understanding their cost structure. Gaining this knowledge helps in making the most appropriate decision.

  • TreeHouse Foods, Inc overview

TreeHouse Foods, Inc. manufactures consumer food and beverage that are packaged. The company was incorporated in 2005. It has a network of manufacturing facilities in the US, Italy, and Canada. The network focuses mainly on label products that are private for food away and retail grocery for its customers (TreeHouse Foods Inc., 2018). The company manufactures products that are fresh, frozen, refrigerated, and for shelf table. The products include meals such as pasta, cheese, cereal, side dishes, and macarani. The beverages include coffee, smoothies, creamers, teas, powdered beverages, and single serve beverages. The baked products include cookies, crackers, and dough (TreeHouse Foods Inc., 2018). Condiments include sauces, dressing, pickles, and dips. The company offers a comprehensive flavour format in addition to packaging formats. It also offers preservative, organic, and natural free ingredients in various categories. The company’s strategy is to lead in the supply of food and beverage products of private label. This is to be achieved through the provision of affordable and quality products to the customers.

  • Sourcing methods and supplier base

Sourcing refers to business practices that are needed to buy goods and services. TreeHouse Foods Inc. requires various raw materials from suppliers for running its operations. The materials include packaging materials and ingredients. The main ingredients include nuts such as almonds, cashews, pecans, and peanuts, wheat, oats, eggs, coffee, peppers, tomatoes, fruits, coconut oil, cheese, processed meat, palm oil, cucumbers, and sugar among others. The company uses forward buying, short-term, and long-term contracts as the sourcing methods (TreeHouse Foods, Inc., 2005, p6). Buying forward involves certain raw materials in anticipation of higher demand or increased price. The company engages in forward-buying when the strategy is deemed to be of advantage.

The company has reduced the number of its suppliers from which it obtains the raw materials. For the pickle operations cucumbers are largely needed by the company. The company sources them through contracts with seasonal growers. Various potential suppliers are strategically located to supply the product to the production facilities. The company selects seeds and then advises growers on planting techniques. It also monitors the agricultural practices and gives directions on harvesting (TreeHouse Foods, Inc., 2005, p6). This creates a favourable relationship between the company and the growers which promotes a flow in the supply process. The company has created long-standing relationships with the growers created a wider supply base.

Sometimes bad weather and diseases can affect the raw materials of the growers who are in contract with the company, and this requires that the raw materials are bought from other growers in the US or from foreign sources. This increases production costs for the company. Apart from cucumbers, other raw materials are also procured through supply contracts. Packaging materials such as cardboard, metal cans, and metal closures are sourced through long-term contracts. The long-term contracts are used to guarantee the company of the supply and as a means of buying the products at a lower cost (TreeHouse Foods, Inc., 2005, p6). The company establishes a relationship with suppliers so that it can be provided with discounts on the raw materials. These relationships ensure that through the supply contracts, the company enjoys discounted pricing as well as other benefits such as continuous supply for the agreed time.

In terms of the supply base, the single sourcing strategy enables the company to reduce the supplier base for an active management. The company focuses on managing the current suppliers as well as the potential suppliers for effective businesses relationships.  By managing the supply network the company aims at reducing the production costs which has impacts on company productivity (TreeHouse Foods, Inc., 2005, p6). Through long-term contracts, the purchasing strategy promotes trust and commitment which reduces functional conflicts. This way, the company is able to make decisions easily even when faced with uncertainty.

  • Strategic sourcing

TreeHouse Foods Inc. has been able to source for the raw materials enabling the company to continue with its operations. The company has used various functions to attract more consumers, increasing the sales and eventually increase profitability. However, due to globalization, competition has increased requiring companies to review all the function in an attempt to remain competitive and competitive. Procurement function has largely been ignored by companies on its important role in reducing expenses (Cuomo & Destito, 2013, p2). Most companies assume that the only role of the function is to have the raw materials delivered when required. With strategic sourcing, companies can experience procurement excellence and value growth. Strategic sourcing is the process of optimizing the supply base and improving the value proposition. Sourcing refers to the process of finding suppliers of required goods and services. There are various tasks that are involved in the sourcing process before procurement (Cuomo & Destito, 2013, p2). The following figure illustrates the supply chain circle.

The supply chain involves conducting research on the need for a product. Here a company establishes whether it needs a product or not. After establishing the need for sourcing, the sourcing process starts after which procurement takes leading to the manufacturing of product and selling. Strategic sourcing is advantageous for companies in various including cost savings, standardized pricing, access to new suppliers, higher quality, development of a partnership with suppliers, as well as improved operational efficiency (Cuomo & Destito, 2013, p2). The objectives of strategic sourcing include examining the relationship with suppliers, enhancing value to price relations which involve obtaining cost reductions but maintaining higher quality, developing and implementing long-term contracts on standardized contracts, leveraging spending, and sharing best practices within the organization.

  •  Strategic sourcing framework

The purpose of the procurement function is sustaining the competitive advantage of a company. Therefore, any strategic practice must seek to promote profit growth. The following strategic sourcing framework is proposed to achieve procurement excellence and promote value growth. Adoption of strategic sourcing helps companies to develop standardized processes of procurement (Cuomo & Destito, 2013, p6). Employing a supply chain manager or a procurement manager is the first step towards the implementation of strategic sourcing. For a company to control the supply chain, it should adopt strategic sourcing.  Understanding the relationship between a company and suppliers improves the procurement process. The framework involves five stages:

7.1 Internal analysis

Before conducting an internal analysis, companies should establish a project team whose function is strategic sourcing. Companies should take this function just as they consider other functions. This way, through the function, companies can experience value growth.  After identifying the team, the internal analysis should be conducted (Klausen, 2015, p90). In this stage, companies should seek to understand the roles that every purchased category plays towards the achievement of the set objectives. When conducted properly, this stage indicates opportunities for saving costs.

7.2 Formulation of expenditure category strategy

This stage involves determining the strategic importance of a product or a service. This is determined by evaluating the impact of the products or services on the core business and competitiveness. The stage involves assessing how important a product is to its competitive position. Strategic sourcing of essential products impacts the position of a company in the market place. For example, cucumber is an important product for TreeHouse Foods, Inc as it helps in adding value. The product is thus important to the product value and to the future of the company (Rosier et al., 2012, p3). If something happens to the supply of the product then the supply chain of the company is affected indicating the strategic importance of the product.

7.3 Supplier strategy

In this stage, companies should assess supplier market. This involves seeking alternative suppliers to the existing incumbents. Then the incumbent and the potential suppliers should be surveyed (Parniangtong, 2016, p14). The survey will involve evaluating the capabilities of the suppliers in relation to meeting the company’s requirements. Companies should then develop sourcing strategy which could include analyzing best price, improving the process, and strategic relationship. Through total supply cost, companies will be able to make a cost-effective choice. By calculating total supply cost, when making a selection decision, companies are guided on how to make decisions on potential suppliers (Parniangtong, 2016, p14). Using TSC helps in focusing on quality, total value, understanding technical issues beyond price, helps in supplier development, and reduces subjectivity. The calculation helps in selecting the right supplier.

7.4 Negotiating strategy

The success of strategic sourcing depends on negotiation strategy. The purpose of this stage is achieving reduced total system cost. This process requires negotiating team with required information to reach the desired outcome (Parniangtong, 2016, p14). Through game theory, participants engage in a levelled playing field that allows each one to achieve their desired results. In this stage negotiators should apply game theory to understand the other side to be able to make beneficial decisions. For example, the purchasers should use game theory to understand the mind of the supplier especially after knowing the supplier base and understanding their cost structure. Gaining this knowledge helps in making the most appropriate decision in the negotiation process (Parniangtong, 2016, p14). After responding to the supplier, actual negotiations are conducted. The request for quotations is made which provides essential information for negotiations. The last step is evaluating and selecting a supplier. A full understanding of the value received from purchasing products helps to complete the process.

7.5 Implementing the new agreement

After selecting the best supplier, companies should develop category savings summary. This involves tabling spend projection, and new agreement pricing to determine the savings of the project. Then an implementation plan is developed which contract signing. According to transactional cost analysis, by entering long-term contracts with specific suppliers, transaction cost reduces. Therefore, in this stage, purchasers should consider long-term contracts to reduce expenses. Based on network theory, such contracts make up a supply base that is characterized by a few suppliers who are reliable (Parniangtong, 2016, p14). This ensures that the current and future needs of the company are met associated with increased productivity.

Through strategic planning, companies will have an excellence procurement which will be characterized by value growth. Strategic sourcing involves cutting costs, looking for more vale with the cost, reduction of operations cost, and an increase in operation speed (Parniangtong, 2016, p14). This indicates after the implementation of the strategy, the value will be added. The strategy also offers other opportunities that can help bring value to a company. Other benefits of the strategy include management of supply risks by either avoiding or mitigating them and increasing profits considering that any savings made is reflected on the bottom-line of a company (Parniangtong, 2016, p14).

  • Conclusion

It is clear that with the current very competitive nature, companies need to re-examine their supply chain to enhance their profitability. This is only possible through strategic sourcing. The traditional view of procurement as just a spending function cannot improve the procurement process or even add value to any business. Companies like TreeHouse Foods, Inc that have started the journey of using procurement function to add value should focus on strategic sourcing to gain more benefits from supply chain including saving costs, creating closer relations with suppliers, improving profitability, and adding value. The first step towards procurement excellence is hiring a procurement or supply chain manager. This paper has provided a strategic sourcing framework that can help companies to achieve procurement excellence and add value to their business. The framework involves five stages including internal analysis, formulation of expenditure category strategy, supplier strategy, negotiation strategy, and implementation of the new agreement. By effectively implementing these steps, companies will benefit from strategic sourcing leading to improved profitability and value growth.

References

Assiammah, A. (2005). The Impact of Strategic Purchasing on An Organization’s            Profitability, pp.1-55.

Cuomo, A. & Destito, R. (2013). Strategic Sourcing in Seven Steps, pp.1-20.

Erickson (2016). Annual Report, pp. 1-188.

Halldorsson, A., Kotzab, H., Mikkola, J., & Skjott-Larsen, T. (2007). Complementary          theories to supply chain management. An International Journal of Supply Chain           Management, Vol. 12. No.4, pp. 284-296.

Klausen, M. (2015). Sourcing excellence: A strategic framework of understanding. Danish            Journal of Management & Business, no. 1, pp. 71- 93.

Parniangtong, S. (2016). Chap.2 Strategic Sourcing: Concepts, Principles and Methodology. Springer Science+Business Media Singapore, pp. 5-14. 

Pollack, J. & Adler, D. (2016). Skills that improve profitability: The relationship between   project management, IT skills, and small to medium enterprise profitability.         International Journal of Project Management, Vol. 34, pp.831–838.

Porto, R., Costa, R., & Watanabe, E. (2017). The multilevel effect of marketing activities on           sales, revenue and profitability in a micro-enterprise. Review of Business            Management, São Paulo, Vol. 19, No. 65, pp. 432-452.

Rosier, M., Buysse, T. & Verweij, H. (2012). Procurement Transformation: Towards       Sourcing & Procurement Excellence, pp. 1-16.

TreeHouse Foods Inc. (2018). Company Overview. Available at https://treehousefoods.gcs-     web.com/node/5806

TreeHouse Foods, Inc. (2005). Annual Report Pursuant To Section 13 or 15(D) Of the   Securities and Exchange Act of 1934 for the Fiscal Year Ended December 31, 2005,    pp. 1-83.

Wellenbrock, M. (2013). Theoretical Basis of Supply Management: The Network Theory in     Supply Management. University of Twente, Thesis, pp. 1-12.