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Managing the Risks in Procurement
The importance of managing risks is one of the key elements when executing large multi-million/billion dollar EPC projects. The importance cannot be understated because of the consequential impacts on costs and schedule. The failures of many large projects are attributable to poor risk management. On account of these failures, Risk Management has now gained traction in almost all industries around the world, thus, enforcing the need.

Risk Management principles are simple, but produce best results when a systematic approach is adopted. The basic risk management process comprises elements that apply to any structured work process, i.e., establish project goals, identify risks and prioritise; identify risk mitigation strategies; develop specific action plans; and monitor actions and report status and efficacy.

Risk Management Principles

Establish Project Goals: Establishment of project objectives and goals must precede all risk management activities. By clearly identifying, understanding and documenting the objectives of the project, it is possible to better determine the risks that may impair these objectives and the strategies needed.

Identify Risks and Prioritise: After the project objectives and goals have been established, the second step is to identify and prioritise the risks, which might prevent the achievement of established objectives or goals. It involves brainstorming between the stakeholders to identify risks and prioritise the risks based on qualitative and quantitative ratings. The most important objective of this step is to achieve a risk rating chart.

Identify Risk Mitigation Strategies: After the risks have been identified and prioritised, the next step is to develop and select the appropriate strategies to manage those risks. The strategies can vary from simply accepting the risks to avoiding them, retaining them or applying some other strategy.

Develop Specific Action Plans: Once the strategies are selected, it is important to set out action plans that are possible to achieve within the required timeframe. The objective is to prepare a specific cost effective risk action plan for each identified risk. Each action plan includes a person that has responsibility to implement it.

Monitor Actions and Report Efficacy of the Action Plans: After the action plans have been developed for each risk, it is important that those plans are monitored and a status update is provided on a frequent basis until the risks have been mitigated. This step is crucial for meeting the overall objective of the risk management process.

Procurement Risk Management
Amongst others, one of the key areas of Risk Management is the ability to manage risks with respect to procurement and supply of materials. This is because procurement and supply of materials account for a sizeable portion of the total value of a project. Also, the procurement style has now changed. Projects are no longer averse to limiting procurement to certain geographies and are keen to adopt a multiple-supplier, best country sourcing concept. The overall objective now is to have the best quality material with shorter schedules and a focus on reducing overall life cycle cost. This means that the following factors also may exist:
• An untested supply chain
• Unfamiliar laws and regulations
• Diverse business practices
• Unfamiliar, untested suppliers
• Global quality challenges

The Illustration 1 identifies the key risks associated with procurement and supply of materials and their consequential impacts:

A structured risk management process helps in mitigating risks. For this purpose, letĘs consider a hypothetical, large EPC project that is to be executed for a reputable client by a reputable contractor. The client has the potential to offer repeat future business to the Contractor. However, the success of the current EPC project would dictate inflow of future work. The client is very aggressive and willing to explore an untested supply chain and diverse markets. The project objective for procurement is to buy material from the global market at cost competitive prices assuring at the same time that quality and technical integrity is not compromised. Also an objective is ensuring that delivery is seamless and is in the shortest time possible. The risk management principles enunciated earlier, if applied, could help. Let us look at the sequence of the risk management actions as they would unfold:

Step 1 - Establish or restate the Project Objective; i.e., procure material from the global market at cost competitive prices assuring at the same time that quality is not compromised. Also, ensure that delivery is seamless and has a shorter lead time. This is an important first step in the risk management process that helps the team align with the project objective.

Step 2 - Identify Risks and Prioritise: Once the project objective has been established, the next step would be to identify risks that would prevent their achievement. Some of the risks that could be encountered are:

• Schedule - Risk of supplier not being able to meet committed dates
• Quality - Risk of supplier not delivering to the quality expectations
• Cost - Risk of choosing an incompetent supplier who buys a jo but is unable to deliver at the reduced cost)
• Technical - Risk of supplier supplying materials that are technically deficient
• Currency - Risk owing to procurement from various countries in differing currencies
• Supply Chain - Risk of a lengthy supply chain with too many stakeholders - material procurement, fabrication of material, transporting material, receiving at site, installation etc.

There are possibly other risks and subsets of the already identified risks. Once the risks are clearly identified, they have to be qualitatively and quantitatively assessed for their impacts. By doing so, the team can gauge the top risks that need early attention.

Step 3 -Identify Risk Mitigation Strategies: The key here is to develop strategies that can best achieve the overall project objectives. Strategies could be to avoid, retain, reduce, transfer risks, or even find opportunities amongst the identified risks. A few examples of risk mitigation strategies in this particular instance are:

Schedule Risk
• Reduce the risk by opting for multiple suppliers for large quantity orders
• Retain the risk and increase the schedule duration
• Retain the risk but take specific steps in the project execution plan toaddress them

Quality Risk
• Reduce the risk by performing aggressive quality surveillance
• Retain the risk by choosing suppliers after a supplier performance measurement
• Transfer the risk by asking the Client to recommend suppliers that they have had good experience with and then engage with those suppliers

Supply Chain Risk
• Retain the risk by developing a material responsibility matrix that details the role of every stakeholder in the supply chain
• Transfer the risk by securing appropriate insurance

Technical Risk
• Transfer the risk to more appropriate stakeholders like the Client and Supplier by specifying materials in accordance with Client or Industry Standard specifications

Currency Risk
• Hedging

Step 4 - Develop Specific Action Plans: The next step in the process is to develop specific action plans with tasks assigned to responsible personnel and target completion dates. Examples are:

Material Planning is first step towards procurement of materials, and needless to say, the most important step. Success relies heavily on the project teamĘs ability to plan, work the plan, and communicate.

A Material Responsibility Matrix is a good tool that defines a detailed project execution plan for sourcing, procuring and issuing of all project materials. The key here is identification of all stakeholders during the life cycle from inception (engineering) to delivery and installation on site. This tool serves to mitigate risks that exist in the supply chain

Another important aspect is recording key procurement milestones in the project schedule for all materials that are to be procured in a detailed control level Material Management Schedule. This can reduce the schedule risk.

Material Management Systems setup ensures that the project team is able to control all activities and efforts necessary to ensure material is able to support construction. A material management system can serve to mitigate risks associated with supply chain and schedule. The system used for organising and managing materials would generally meet the following needs:

• Material requirements and planning
• Purchasing
• Expediting
• Logistics
• Supplier management including Supplier Quality Surveillance
• Warehousing and Site Material Management

The process of Determining and Controlling Material requirements includes the definition and selection of material based on constructability, availability, and economics. It is also geared towards achieving minimum surplus while meeting the project schedule requirements. Some of the important facets to be considered are:

• Engineered equipment and material
• Bulk material
• Pre-fabricated material
• Sub-contracted material
• Modular fabrication
• Client furnished materials

The key to success is to quantify materials, baseline them and then control them per this baseline. Thus one can mitigate risks associated with costs of surplus materials. Purchasing strategy and implementation is another vital aspect for a sound material risk management process. Generation of a Purchasing Plan that defines the key execution elements of material purchasing is a good ideal. Sourcing Strategies are an important consideration in the purchasing plan. A successful strategy would encompass the following:

• Foreign and domestic material
• Shop load
• Sole sourcing / competitive bid approach
• Tax and duties
• Financing requirements
• Exchange rate philosophy
• Back-charges
• Performance evaluation measurement
• Surveillance participation
• Supplier warning and alert list
• Warranty and liquidated damages requirements

A sound Expediting Plan reduces the risk of materials not being delivered at the designated location when required. Both Proactive and Reactive expediting can be taken into fold.

In proactive expediting, the expediter initiates early supplier contact and maintains these contacts throughout the project. Shop visits are scheduled to monitor the early phases of the material engineering and manufacturing processes. The expediter ensures that engineering drawings are submitted according to the schedule and that critical material is ordered in a timely manner by the supplier. In reactive expediting, the expediter will initiate contact with the Supplier during the manufacturing phase and activity tends to focus on data gathering. As the scheduled delivery date approaches, shop visits are scheduled to ensure compliance with shipment promise dates.

Development of an early SQS Execution Strategy that includes the level of surveillance and inspection requirements, use of in-house versus third party personnel, shop surveys identifying witness and hold points, ensuring material certification and verification etc., is a good means of ensuring quality requirements. This strategy serves to mitigate risks associated with quality and performance.

Step 5 - Monitor Actions and Report Status and Efficacy. Of course, one has to rigorously monitor the implementation of the identified actions. It helps if the status of actions is provided periodically to all stakeholders so that any corrective actions can be taken timely. Continuous monitoring is obviously the key to the success of the risk management process.

To reiterate, Risk Management principles are simple, but produce best results when a systematic approach is adopted, implementation is rigorous and results are monitored for efficacy.