The main criteria for the effectiveness of government procurement are the purchase price and the cost of subsequent ownership. The main task is to buy goods, works, or services of the required quality with minimum spending of budgetary funds. The activity, which consists in the implementation of procurement, is complex since it is associated both with the functional activities in the enterprise, which form a value chain, and with the external environment, for example, with suppliers, influencing obtaining a sustainable competitive advantage in the market. The development of the procurement function occurred in the direction of transactional operations to the complete integration of functions in the logistics system. This action is not limited to reducing costs or the quality of purchased goods, raw materials but may consist in the possibility of creating added value for customers in the supply chain. However, in non-profit organizations, the practice of procurement is unsystematic and is based on common sense management. Analysis of the presented case allows conducting the comparison of the features of procurement in the commercial sector and non-commercial organizations. Such analysis led to the justification of the rationality to introduce the principles of new public management in Red Cross, based on the application of best practices of procurement – Lean Agile.
Red Cross Canada
Procurement management makes a significant contribution to increasing product value by providing quality materials at the right time, in the right place, on the proper timeline, enabling a high level of service. In these conditions, the growing role of the process approach to the management of the organization as a whole and procurement management, in particular, is of significant importance. There is a need to identify existing processes, analyze and evaluate the effectiveness, revise and implement new processes, as well as manage their interaction in order to achieve the intended strategic goals and objectives of the organization. However, for non-profit organizations, whose goal is mainly based on incomplete principles and not always clear concepts, the internal organization of business processes, including procurement, is a complex procedure. However, it should be considered that non-profit organizations have ceased to define themselves as closed systems that implement their statutory goals through public funds; consumer orientation has become one of their main strategies. Thus, management issues of procurement in these organizations can be addressed according to the principle of new public management (NPM) – a modern model of reforming public administration.
Purchasing Environment between Husky and Red Cross
Many logistics professionals cite procurement as one of the key areas of logistics management and the largest area of cash control. In frames of the essence of logistics, one can say that the most accurate approach is in which procurement is considered as part of the strategic management of material and related flows, and procurement management is seen as one of the procurement functions. In turn, procurement management is the organization of the purchase of the required amount of goods and services of the necessary quality, with minimal costs in the optimal time frame.
For Husky Energy, the purchase was connected mainly with capital equipment from national suppliers, while in Red Cross, the purchase consists of mainly humanitarian aids from the suppliers in distinct countries (Case – Red Cross Canada). Nevertheless, general principles of Lean procurement should be applied for both organizations to achieve the best result. However, there are some differences which should be considered. Environment for Red Cross seems to be even more complex than for Husky Energy, as it involves a greater number of stakeholders, the interests of which should be balanced. If in Husky simple ‘technology’ of Lean procurement is used, in Red Cross, this approach is complicated by the presence of an Agile environment and the need for stakeholder management. Under their influence, the service function, traditional for purchasing departments, associated with securing orders of intra-company customers, is expanded and supplemented by a strategic function, which manifests itself both in procurement planning and in the dynamic establishment of strategic relationships with suppliers.
It is known that the main focus of the Lean production toolkit is to reduce various types of internal losses without attracting external funding sources. “Lean manufacturing,” in contrast to mass production, is aimed at producing customized products or services in small batches according to the individual requirements of customers. Ideally, a single flow of products different from each other should form the supply chain, and there should be a complete rejection of the division of the material flow into batches with the same characteristics, traditional for mass production (Jiang, 2017). According to the Lean concept, in the process of improving the production system, the takt time should continuously decrease – the time interval (frequency) with which the consumer receives the finished product or service. Takt time characterizes the speed and flexibility of the production system, which must fully meet the given demand in terms of quantity and quality.
The practical implementation of the Lean Manufacturing concept in logistics stimulates the transition to just-in-time (JIT) and just-in-sequence (JIS) supply systems with short takt times. At the same time, in the process of carrying out procurement activities in small batches, transactions become more frequent, which increases the number of documents required for registration (purchase orders, invoices, invoices), making the procurement process more time-consuming and expensive. However, at the same time, according to the Lean concept, the quality of the services provided plays the most important role, and this is a common point for both organizations considered in the presented case. The procurement function efficiency makes influence on other operating results evident. As a non-profit organization, the accounting system of the Red Cross may have some difficulties in revealing weaknesses that occurred as a result of poor decisions on purchasing. Therefore, the Lean concept for procurement seems to be the most optimal.
Needed Adjustments
First of all, John needs to understand that the analysis of the procurement process in the Red Cross should be carried out in accordance with the strategy, set goals, and objectives within the framework of the overall logistics system or supply chain. For the transition to Lean procurement, a balanced scorecard can be used, which is a scheme for translating the company’s overall strategy into terms of an operational process.
The presence of a large number of bureaucratic procedures and regulatory functions leads to a deterioration of the business climate in non-profit organizations. This makes it necessary to apply the principles of the above-mentioned new public management, which imply the introduction of the mechanisms of a governance system typical for the private sector into the non-commercial management system (Medury, 2018). However, the concept of new public management makes it possible to go directly to the most modern stage of procurement management – Lean Agile (Myerson, 2018). The application of this integrated technology, while providing operational resources and services, must include solutions aimed at reducing activities that do not add value and increase the speed of processes while enhancing the level of logistics services.
Lean’s goal is to create value by reducing production costs. This is not a methodology, thus, there is no set of ready-made practices in it. There are no specific rules either, but techniques that help to gain benefits. Sticking to Lean means always using a systematic approach, looking for and eliminating waste of resources, creating a flow. This is an ongoing process of ‘shaping’ value – not just any product, but exactly the one that is needed by the consumer, whether it is a commercial or non-profit organization. This is especially important for Red Cross due to the increased level of responsibility towards society, sponsors, and stakeholders.
Lean is part of the Agile philosophy, and Lean thinking is the foundation for any Agile methodology that has a set of principles and practices which intersect with Lean values. Lean allows speeding up processes while maintaining high quality for customers. John needs to grasp the key Lean guidelines (McKinsey&Company, 2020):
- Determine what the customer value is in the product and processes of the Red Cross.
- Eliminate the rest – these are losses, and they increase cost, duration of operations and reduce product quality.
- Visualize the value stream, implement error protection, and make any incorrect process state visually traceable.
- Cultivate leadership among employees, develop initiative, the culture of continuous improvement in the field.
In addition, within the framework of the Lean approach and the concept of sustainability, it seems appropriate to introduce standards for suppliers – a set of mandatory requirements that will allow, at the early stages, to cut off those of them that do not comply with the principles of Red Cross, cost preferences, quality, and other, thus allowing saving time and financial resources. Creating a quality product requires not only the selection and evaluation of a supplier but also supplier management – this is the creation and management of a supplier portfolio (Bouchery et al., 2016; Brandenburg et al., 2019). Qualitative and quantitative assessment of compliance with requirements is a process of evaluating suppliers, and the results of the assessment affect the process of choosing a company no less than the proposed price, and often more. Thus, successful companies with a worldwide reputation are ready to overpay for a product but get a reliable partner and not take risks on reputation. Evaluation criteria can be as follows:
- Supplier satisfaction – does the company have a process and procedure for assessing satisfaction. Supplier satisfaction assessment is important in order to understand how much they are involved in partnerships with lower-level suppliers and whether there is a risk of termination of their relationship because this will affect the supply for the Red Cross. Such procedures should be available and regularly applied, which should be established once a year. In any case, there will always be the opportunity to contact the supplier directly for a more accurate estimate.
- Customer satisfaction – the work with customers and their opinion about the company is assessed. In particular, the work of the sales department is evaluated – how they interact with potential and existing customers. Based on this, one can draw a conclusion about how the company will interact with this partner.
- Risk management – when assessing risk management, three points are important:
- How does the supplier assess the risks, is there a risk assessment procedure and assessment criteria, are there records of their assessment, what risks are assessed.
- Evaluation criteria – for example, the supplier uses evaluation criteria as in FMEA or has developed its own methods.
- Plans for responding to important risks should be defined, those responsible need to be spelled out.
- Quality system – using existing standards ISO 9001 or similar. If a supplier has a management system and obtained a certificate from one of the audit companies whose results can be trusted, then one can be sure that the supplier understands what they are doing and are already working to be better.
- Quality planning – it is assessed how the company works to understand its future needs for the development of its own production or scientific and technical base, as well as how it develops requirements for quality goals for current and future products.
- After-sales support.
- Environmental protection: has the supplier received a certificate of conformity to ISO 14001, are internal audits carried out in accordance with its requirements. This is extremely important for Red Cross since namely such organizations are key contributors to the achievement of the UN Sustainable Development Goals.
Recommendations
Any organization should always strive for further improvements, even if the current state seems to be excellent. However, any innovations must be introduced in a balanced way, with preliminary modeling and a thorough prediction of consequences. Even if there is a positive experience in the implementation of certain approaches at other enterprises, it is necessary to consider the peculiarities of the Red Cross. In any case, any structural and functional changes across the entire business process must be a carefully planned set of activities throughout the organization. The mission of the balanced crore card is to outline the range of strategic objectives of supply logistics, reflect them in performance indicators and promote their integration and harmonization through cross-functional logistics coordination – localization of cross-functional conflicts of goals – which is important for effective stakeholder management.
KPI represents a quantitatively measurable indicator of actually achieved results. There is an indirect relationship between the KPI and the BSC: in the latter, there is a “business processes” perspective, on which the goals related to business processes are located. The indicators of these business processes – KPIs – are often used as indicators of the achievement of these goals. The development of a universal methodology for organizing the management of supply processes in dynamics based on key performance indicators, the formation of an optimal architecture of indicators, the motivation of employees involved in supplying are topical for John in issues of logistics management.
It is necessary to develop a plan for implementing changes to Red Cross’ procurement system. Due to the specifics of the organization – fewer functional connections and interdependencies between departments – this can be Levin’s model of change: unfreezing, changing, and refreezing. This is a rationally simple, purely practical model for planning and conducting changes.
Justification of Recommendation for Purchasing the Truck Using the TCO Model
The total cost of ownership (TCO) is the total cost of ownership over the life of the equipment. When deciding whether to purchase a machine, upfront costs are only part of the equation. Understanding the TCO concept allows evaluating factors other than the original purchase price and analyze the value and profitability of the equipment that ultimately affect the bottom line or, in the case of Red Cross, cost optimization. There are many factors that affect the total cost of ownership, in addition to the initial purchase cost of the equipment. Upcoming costs such as insurance, taxes, warranty service, and other costs and expenses all affect the total cost of ownership.
In many non-profit organizations in the country, there are currently no approved methodologies, and operational accounting and control of TCO is not conducted; information on costs and incomes for procurement is rarely allocated to separate accounts and accounting registers. In the best case, within the framework of the organization, an action plan for the development of the unit for the next year is developed and implemented, indicating the approximate amounts of funding. John should certainly change this practice, based on the approaches described above. If the TCO is successful, the model will be successfully integrated into the Lean procurement within an Agile environment.
Conclusion
As the case showed, despite differences in objectives and procurement practices between Husky Energy and Red Cross, the best option allowing using best practices from commercial companies is new public management as a foundation, overall environment of organizing the process of procurement. With this in mind, the recommendations for John are based on Lean procurement in Agile environment, with careful examination of suppliers and balancing interests of stakeholders. At first glance, there is undoubtedly a difference between Lean and Agile. Lean is focused on building perfect lossless processes and continually improving them. Agile focuses on the quick and effective interaction of people around these processes, on the creation of human structures that can respond flexibly and creatively to any changes and requests. This is especially important for a non-profit organization.
The implementation of the aforementioned project of changes in Red Cross will allow not only to establish an effective system of procurement based on a pilot project for the acquisition of truck but will also have a generally positive effect on the activities of the organization as a whole, business processes, team interaction, and organizational skills of stakeholder management, among others. In general, adherence to new public management in the activity of the Red Cross implies achieving excellence through the implementation of best practices, which were already proven by the commercial sector as efficient.
References
Bouchery, Y., Corbett, C., & Tan, T. (2016). Sustainable supply chains. Springer.
Brandenburg, M., Gruchmann, T., & Oelze, N. (2019). Sustainable supply chain management: A conceptual framework and future research perspectives. Sustainability, 11, 1-15. Case – Red Cross Canada [PDF file].
Jiang, Z. (2017). Procurement management in the supply chain environment: A practical guide to understanding procurement management and enhancing procurement effectiveness. Chartridge Books Oxford.
McKinsey&Company. (2020). Lean management or agile? The right answer may be both.
Medury, U. (2018). Public administration in the globalisation era: The new public management perspective. Orient Blackswan Private.
Myerson, P. (2018). Lean demand-driven procurement: How to apply lean thinking to your supply management processes. Productivity Press.