Risk management in Procurement

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1 Procurement and Risk Management Anura Lokugamage MA (Finance Econ) , PGD (Econ), PGD (Corporate finance) , Dip in IT (SLIDA) , Dip in IT (Thailand), HNDA , DPFM , Dip in Eng (SLIDA) , DIPCA , MAAT, IPFDA

About Risk Management:

About Risk Management Risk Defined “An uncertain event or condition, that, if it occurs, has an effect on a project objective. A risk has a cause and a consequence. It has its origins in the uncertainty that is present in all projects.” Project Management Institute

What is risk?:

What is risk? Risk = Exposure to possible loss x The probability of such a loss Anything that can stop you from attaining your goals & objectives - OR -

Risk Management for procurement – Why? :

Risk management is a part of the financial management and the project management , Procurement management is a part of the financial and project management Analyze cost vs benefits Reduces potential for negative impacts Increases predictability and success Risk Management for procurement – Why?

Risk and Procurement:

Risk and Procurement “Translation of the language of project risk management into the procurement environment.”

Risk and Procurement:

Risk and Procurement Risk Management Planning Risk Identification Risk Assessment Risk Response Risk Monitoring and Control

Functions for risk Mgt process in procurement :

Functions for risk Mgt process in procurement Understand the functions of procurement process Understand objectives of the functions of procurement process Identify risks associated with the each function Document risks identified Discuss risks identified with associated parties

Functions for risk Mgt process in procurement Cont.. :

Functions for risk Mgt process in procurement Cont.. Discuss risks identified, with associated parties Determine whether the existing risk Mgt. processes is sufficient to address to the identified risks Identify risks, not controlled by systems Determine corrective mesuresa to be taken Quantify risk as high, medium, or low

Functions for risk Mgt process in procurement Cont.. :

Functions for risk Mgt process in procurement Cont.. Measure risks as high, medium, or low to prioritize risks Define and apply remedial measures and management techniques to manage the risks Review periodically to monitor the procurement functions

How reviews has to be done? :

How reviews has to be done? High Risk Functions: Be alert , Continues review Medium Risk Functions: periodical review (Ex. Monthly or half yearly ) Low Risk Functions: Randomly or at least annually

Risk Responses :

Risk Responses Avoidance: eliminate the risk or condition, or protect from its impact Transference: shift the consequences to a 3 rd party Mitigation: reduce the probability or consequence Retention: do nothing option, but includes contingency planning

How can procurement risk be assessed? :

How can procurement risk be assessed? When, where, why, how are the risks likely to occur? What is the source of each risk? Who might be involved? Frequency of risks occur? How reliable is the information?

How can procurement risk be assessed? Cont... :

How can procurement risk be assessed? Cont... What are the consequences of each risk? What is the potential cost in time, money and resources? What controls presently exist to mitigate the risk? Is there a need to research specific risks or seek further information?

RISK AREAS :

RISK AREAS Commercial and Legal Economic/ Financial Technology Operational Fraud Regional instability E-Procurement Inappropriate consultant's advice Outsourcing Currency fluctuations IT infrastructure Security of personnel Negligence Misappropriation of funds Information security Reduction in consultant's service Breach of contract Misuse of funds Innovation Threats from interesting parties

RISK AREAS Cont……..:

RISK AREAS Cont…….. Political Management controls Human Resources Natural events Environmental Adverse decisions Inappropriate project objectives Lack of skill labour Earth slips Poor safety measures Continues investigation by media Breach of procedure Informal Groups Drought Noise Terrorist activity Misuse of resources Poor Performance Flood Pollution Community perceptions Mismanagement Conflicts Tsunami Contamination

Managing Procurement Risk:

Managing Procurement Risk Scheduling of procurement Hazard identification Pre-qualification Securities Insurance Portfolio procurement know the law Standard forms of contract Continues monitoring and contract administration

Managing Procurement Risk Cont….:

Managing Procurement Risk Cont…. Keep your skills up to date Know your cash flow Know your bidders Delegation of procurement activities Buffer stocks Aggregate market analysis Forward contract

Managing Procurement Risk:

Managing Procurement Risk Schedule Strategic procurement planning Procurement time scheduling Scheduling of potential bidders . Solicitation planning and front-end docs. Scheduling registered suppliers

Managing Procurement Risk:

Managing Procurement Risk Hazard identification Identification of hazards Evaluation of risks under current controls Remedial measures during the pre bid stage Implementation of controls as change occurs Evaluation of risk during the implementation stage Identification of needed additional controls

Managing Procurement Risk:

Managing Procurement Risk Insurance Third party property damages Workmen’s insurance Site insurance Well defined detailed conditions for insurance in SBDs.

Managing Procurement Risk:

Managing Procurement Risk Securities Bid Bonds Performance Bonds Advance payment bonds

Managing Procurement Risk:

Managing Procurement Risk Standard Form Contracts Use standard documents . know your contract Provide supplementary conditions in the bid docs Produce project-specific ‘front-end docs’

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