Late delivery of equipment the case study of korea national oil corporation vietnam office

When interviewing procurement manager, the writer realizes that procurement department is facing with lots of problems including late delivery of equipment, poor quality of equipment, wr

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-

MASTER OF BUSINESS ADMINISTRATION

LATE DELIVERY OF EQUIPMENT - THE CASE

STUDY OF KOREA NATIONAL OIL

CORPORATION VIETNAM OFFICE

LE THI TUNG ID: 20150077 SUPERVISOR: Prof TRAN HA MINH QUAN

Ho Chi Minh City - 2017

CONTENTS

Excecutive summary 2

Introduction 3

Overview of oil & gas industry in Vietnam 4

CHAPTER 1: PROBLEM IDENTIFICATION 6

1.1 Company background 6

1.2 Problem symptoms 7

1.3 Problem definition and importance of the problem 10

1.4 Problem existence 11

1.5 Potential causes of problem and the justification 11

1.5.1 Ineffective company policy 11

1.5.2 Inappropriate procurement procedure 14

Conclusion 19

Cause and effect map 21

Chapter 2: ALTERNALTIVE SOLUTION 22

2.1 Solutions 22

2.2 Solution comparison 22

2.3 Solution selection 23

2.4 Solution details 24

Chapter 3: ACTION PLAN 31

Appendix A: In depth Interview information 32

Appendix B: Terms and conditions 38

Appendix C: Procurement Procedure 48

Reference 61

EXCECUTIVE SUMMARY

Korea National Oil Corporation is production sharing contract with Petro

Vietnam. Its activities take place in exploration, development, and production of oil & gas in Block 11-2, approximately 320 kilometers offshore Vietnam.

Procurement of equipment is considered one of the most importance works of the company such as a factor determinant of revenues, expenditure costs. To build and

maintain a significant effect to organization, the procurement department needs to know that problems are affecting its business.

When interviewing procurement manager, the writer realizes that procurement department is facing with lots of problems including late delivery of equipment, poor quality of equipment, wrong item. Among many issues, late delivery of equipment will create significant impact to the project objective, specifically for the project in the remote area such as offshore where access for transportation and delivery is geographically limited.

Its existence, importance and causes have also been justified by interviewing with KNOC’s Procurement Manager. The consequences are clarified late delivery of

equipment leads to cost overrun and poor production capacity. Moreover, in order to find solution for central problem, the writer makes an attempt to discover its possible causes which are ineffective company policy and inappropriate procurement procedure. From those points, the solution for central business problem is determined to build a process for supplier selection and performance evaluation in order to work well for further purchase orders. The company will take action on the third quarter of 2017.

INTRODUCTION

Global business trends have led the oil and gas industry to seek better solutions to overcome the emerging challenges and critical issues, such as the need for procurement process based on new values and contextual factors including multi-cultural complexity.One way to overcome some of these critical issues is to adopt new innovative approaches

to suit different locations, countries or regions while trying to incorporate the differences

in business philosophy, culture or values within the oil and gas organization themselves into these approaches.

New innovative approaches to procurement process are also required to meet the contextual needs found in different locations and countries around the world. These approaches also need to accommodate specific project needs and different values either in the business philosophy or culture within the oil and gas organization themselves. Oil and gas exploration and production is a highly risky business in a very complicated industry. It links government, owners of the natural resources with operators, investors of private capital, technology and equipment necessary for resource development, in a single

industry where the stakes and risks, as well as the possible profit margins, can be very high.

Effective procurement of equipment will have an impact on company's competitive advantage. The quality of equipment inputs to finish products’ quality as well as

stakeholders’ satisfaction and revenue. If the procurement process management is not

effective and efficient input costs will rise and be a large part of the total cost. Being an important factor in determining revenues and cost, it is obviously seen that procurement has recently been receiving more attention within business industries.

A comprehensive procurement guideline on selection processes to be used by decision makers in the industry should be developed and produced comprising a set of phases and critical steps that needs to be followed and performed during the selection process. The thesis will focus to identify and validate the existence of problem of KNOC and to improve the procurement procedure.

Overview of oil & gas industry in Vietnam

Petroleum is currently one of Vietnam’s most promising areas for foreign

investment, and it could be the engine that carries the nation into the ranks of Asia's newly industrialized countries. As a source of desperately needed hard currency and a catalyst for private sector growth, the petroleum industry could play a vital role in Vietnam’s

economic development.

Oil and gas projects in Vietnam are implemented through joint ventures

partnerships involving multinational companies like British Petroleum, Petronas, Nippon,Chevron etc. Such partners supply capital and high technologies needed for oil and gas projects which Vietnamese partners are still lacking. The participation of foreign partners makes the projects suffer from risks such as differences in practices between domestic and foreign partners, policy and political risks, financial risks, legal and political risks. The inflation rate in Vietnam is quite high; while the national currency is relatively weak.

Vietnam is located in South East Asia, a region considered the most dynamic and challenging in the world. The quality of management in Vietnam is still below world standard as the country is emerging from a planned economy. The oil and gas construction projects in Vietnam pose lots of risks that can cause adverse impacts on project

implementation.

Today, the industry continues to grow strongly implying demands for construction

of new oil and gas facilities. Oil and gas construction projects are often capital intensive.Hence, their successful implementation is strategically important. However, oil and gas construction projects are exposed to risks because of large capital investment, involvement

of many stakeholders, using of complex technology, high environmental and social

impact.

CHAPTER 1

PROBLEM IDENTIFICATION

1.1 Company background

The Vietnamese full name: Korea National Oil Corporation- VPĐH tại Vietnam

The English name: Korea National Oil Corporation - Vietnam office

Address: 10th Floor, Diamond Plaza, 34 Le Duan Street, District 1, HCM city, Vietnam.

Korea National Oil Corporation Vietnam office (KNOC VN) began its operation in Block 11-2 by signing a production sharing contract (PSC) in May 1992. After confirming gas reserves in the block through the drilling of three explorative wells, the company signed a tentative gas sales agreement with Petro Vietnam to secure a stable sales channel

in December 2004. It soon concluded a construction contract and placed a construction order, beginning full development of the block.

As the sole operator, KNOC VN carries out exploration, development, and

production activities in Block 11-2, approximately 320 kilometers offshore Vietnam.

KNOC VN holds 75% of participating interest in this block on behalf of the

Korean Consortium which consists of LG International Corp., Daesung Industrial Com.,Daewoo International Corp., Hyundai Corp., Samwhan Corp., and Seoul City Gas Co.Ltd. PetroVietnam Exploration and Production Company (PVEP) holds the remaining 25% of the interest in the block.

Production began on December 25, 2006. The average daily production of natural gas from the seven production wells in the block reaches 171 million standard cubic feet.The block’s recoverable volume is 770 billion standard cubic feet. Production will

continue until 2024. Total reserves are 770 billion cubic feet. Daily production is 108 million cubic feet. Production period is from 2007 to 2024 (17 years).

It is KNOCVN’s first overseas operating project. Successful production in the Rong Doi and Rong Doi Tay fields marked a milestone not only for the company, but for Korea’s oil and gas industry. KNOC VN employees were involved in all stages of

exploration, development, and production, including important negotiations, drilling,reserve estimation, and engineering and construction of offshore facilities.

Number of employees: 164. Departments: 4 (Admin & Finance, Operations,

Drilling, Sub-Surface). Procurement Team belongs to Operations Department.

Procurement team has five members (one Procurement Manager and one

Sr.Procurement Officer, three Procurement Officers) take care of purchasing mechanical equipment, electrical equipment, logistic services and consumable. All are generally called equipment.

remains unchanged.

Report for yearly flight

Late delivery of equipment is the first reason cause to cost overrun.

YearDescription

with poor quality. Those were purchased in which was refurbished not brand new. The

lifetime of those materials and equipment are very short. End-user is unable to manage the

operating period. It has been broken without any signal or can not be repaired.

The third reason is wrong item. The equipment has not been delivered correctly

part number in accordance with the purchased order. It will take time to return back and

receive the replacement.

In accordance with report and information, it can be concluded that the issue of late

in delivery materials and equipment is the central problem.

1.3 Problem definition and importance of the problem

Al-Momani 1 stated that late delivery of equipment was a major cause of project

delays along with notices to proceed being later to site. Ismail et al 2 indicated that late or

irregular delivery or wrong types of material delivered during construction can lead to poor productivity and cost overrun. Flyvbjerg et al 3 defined that cost overrun is the difference between the actual cost at completion and initial budgeted cost.

1.4 Problem existence

Based on the definition and information of interview, the company is now dealing with cost overrun. From 2007 to 2012, the transportation cost from onshore to offshore was still the same for each year. The company had been used equipment from spare parts that were purchased with main machinery of project phrase. From 2013 to 2015, company has paid a lot of money of each year for transportation cost from onshore to offshore for adhoc chopper. Those each adhoc choppers have been using to carry critical equipment due to late delivery.

Compared with Rosneft Vietnam (former TNK-BP Holding), they recruited

qualified and skillful employees for procurement team. Rosneft also has appropriated procurement procedure to apply for worldwide offices. With high resource of human capital and supportive system, their procurement team has been working very efficiency.They are seldom using adhoc chopper or supply boat to carry equipment onshore to

offshore for emergency case.

1.5 Potential causes of problem and justification

1.5.1 Ineffective company policy

In accordance with the interview with Ms. Giang, The function of procurement is responsible to support company to procure equipment of the right quality, at the most cost

effective price and ensure that equipment is available when needed. All equipment is purchased and delivered to KNOC warehouse at Vung Tau city. According to the need of end-users on Rong Doi Platfrom offshore, the equipment will be sent to offshore by supply boat or chopper. Normally, the company runs two regular supply boats for every month to carry cargoes such as foods, equipment to offshore, and two regular choppers on Monday and Thursday of every week to bring manpower and small items of equipment to offshore. All equipment is required delivery on-time in accordance with choppers’ schedule as well

as supply boat’s schedule.

Among five members of the procurement team, there are two staff was shifted from document controlling department. Those two staff has been assigned procurement works without experience and background. Their contributions were not met the

requirements. In accordance with job assignment, procurement officer is assigned a key person to act as the primary point of contact for suppliers on a daily basis maintaining pro-active communication channels with suppliers to ensure the equipment on-time delivery.But some purchase orders were not on-time delivered. It is resulted from low response and decision making from procurement officers. When the seller informed issues of purchase orders, they do not know who to dealing with and take lot of time to make decision

informing to seller. Some critical orders were failed when dealing with vendors because lack of communication and support within internal parties.

Negotiation skill is a must for procurement staff. Negotiation can solve the disputes

of day to day works. Negotiation can be required as a result of procurement role in

challenging user identified requirement. This is important because through negotiations

procurement professionals can ensure that the requirements are commercially sound and add value. Negotiations can also be applicable as a means of conflict resolution between the buyer and the supplier. In successful negotiation, a negotiator will obtain something of greater value in exchange for something on which he or she places a lower relative value.Lack of negotiation skill was leaded to lengthy process results in which delays in the award of projects that lead increase in costs.

From 2013 upto now, the company is facing with oil price deceasing. Company do not have training budget for staff. Without proper training, employees both new and current do not receive the information and develop the skill sets necessary for

accomplishing their tasks at their maximum potential.

Employees refer to training programs that provide information, new skills, or professional development opportunities in order to fulfill their responsibilities. Therefore,training program is a necessity in the workplace. Effective training and development programs aimed at improving the employees’ performance.

The company is used the MBO (Management by objectives) program to evaluate employees’ performance. However, staff has not been received any feedback from human resource department for the result as well as salary increasing. Company did not increase salary for staff by 2014.

Evaluating and ranking the employees working in organization are challenging tasks involving several factors. Each employee achieves certain performance levels in various factors and the resulting information can be overwhelming. An effective program should do more than set salary and promotion decisions on past performance.

In many cases the procurement is technically very complex and uncertain as each project is unique. This means that procurement is a very important aspect within the industry and has an enormous impact on the profitability. Procurement activities are often depicted as a sequential process which reflects the different decisions made by different people with different authorities. Procurement process covers all activities from deciding

on a business need to committing to a supplier to satisfy that need, and ensuring that the outcome is acceptable.

Shehzad 4 stated that among the five most frequent causes of oil & gas construction project delays were identified is shortage of skilled labor. Derek et al 5 explained on human capital and ways in which its effectiveness can be leveraged through procurement systems. Human capital consists of the skills, competences and knowledge and creative energy that employees bring an organization.

1.5.2 In-appropriate procurement procedure.

According to the article 7.3 of procurement procedure, selection of bidders is required work before sending inquiry to supplier. Suppliers (Bidders) shall be selected based on their technical and financial capabilities. The following criteria may be considered for companies to be included in the Bidder List: experience, track record, previous performance, financial statement, key personnel experience of company.

But there is no systematic process to select and evaluate supplier performance in KNOCVN procurement procedure. There is no logical and strategic decision on the supplier selection process. Most of the sourcing is based on experience of each individual

procurement officer. Equipment will generally be procured from the familiar suppliers and/or suppliers in the record of Purchase Order and Contract. In addition, there is no record of the performance on other dimensions such as product quality, delivery delay, and etc.

The procurement process of KNOC VN starts from the purchase requisitions generated by offshore engineers or onshore engineers. The purchase requisition is the document which contains the information of the required materials, such as quantity,description, specification, required on site date, drawing, and etc. In the purchase

requisition, the manufacturer or brand of each item will be clearly identified. For the standard or generic items, the purchase requisition creator may not specify the brand or manufacturer name. After receiving purchase requisition, procurement officer will request for quotations from the suppliers. Subsequently, engineer will conduct technical evaluation

of supplier’s quotation, if required, while procurement officer will carry out price

comparison. The purchase order will be awarded to the technically acceptable supplier who proposed lowest cost.

There are many purchase orders with small value. The end-user raised a lot of purchase requisitions. Procurement officer sends all small inquiries to big suppliers but they do not combined all in one. The procurement officer does not realize that big

suppliers are busy and often do not pay their attention to small orders. Because

procurement officer required for many small purchase orders with small value, supplier does not agree to apply penalty clause. With unsuccessful dealing with big supplier,

procurement officer placed purchase order to the supplier which is a trading company

without knowing that trading company does not have stock item until they got the

purchase order from their client.

During purchase order processing, procurement officer did not require supplier send them shipping document for checking before sending to shipping agent. If any

mistake on these documents, it could delay customs clearance.

Purchase order closeout is the last step in procurement procedure of KNOCVN. It does not include the step of supplier performance evaluation. Equipment required for maintenance work will be sourced from local and oversea suppliers. Therefore, suppliers are one of the most essential components of the procurement process, effective supplier selection and performance evaluation is considered to be one of the important

responsibilities of procurement. The benefits of supplier evaluation are expressed in various ways. Carr et al6 represented one common view when arguing that supplier

evaluation provides the buying firm with a better understanding of which suppliers are performing well and which suppliers are not performing well. Without tracking suppliers performance can lead to wrong supplier selection and poor supplier performance.

Sambasivan 7 stated that poor supplier performance is one of the most significant causes in causing the construction delays. “Inefficient and poor performance of supplier” was identified as an important risk to address in the oil and gas industry of Vietnam.KNOC VN is not exception. The competence of supplier is always a source of concern for owners. In Vietnam projects often suffer from time delays, cost overrun, low productivity,and low quality due to suppliers failure to performance due to lack of financial ability,

relevant experience, trained manpower, technology and equipment, good management skills, good construction methods and inadequate resource availability.

Typically in huge projects, there are many sub-suppliers working under main suppliers. If the sub-supplier is capable, the project can be completed on time as planned.The project can be delayed if the sub-supplier under performs because of inadequate experience or capability. High degree of sub-supplying leads to high risk of delays and leads to inefficiencies in the oil & gas industry.

Poor sub-supplier performance was identified on the top five reasons for delays Oil

& Gas construction project. The performance of the sub-supplier is one of the most

important factors governing project performance, as they physically carry out the work not the main contractor. Many sub-suppliers lack qualifications or proper training. They reiterated further that it is difficult to identify their workers and properly train them and to endeavor to enhance their welfare and safety.

Many sub-suppliers are not registered, operated with a minimum of paid up capital.Aliya et al 8 concluded that subcontracting led to problems including unsatisfactory time and cost performance.

There was the lesson learnt for sub-supplier on the nitrogen purging leak test equipment on shutdown campaign of 2013. When main supplier was awarded for contract,they called their sub-supplier to provide manpower to perform service. When he arrived at KNOC VN warehouse to check equipment for before sending to offshore, he did not pay attention to the tag on pressure valve that not met the technical specification as per on the contract. After sending to working site at offshore, his crew recognized that the pressure of

the valve is under pressure and unable to install to processing system. Therefore, main supplier has hand-carried another pressure valve from oversea to Vung Tau and the

company had been one addhoc chopper to send this valve to offshore to perform service in accordance with shutdown campaign schedule.

There was another case of poor performance by sub-supplier. It was for leak test Nitrogen purging leak test equipment on shutdown campaign of 2014. Contactor submitted lifting certificates for nitrogen tanks which were still valid. However, the equipment was arrived KNOC warehouse. The HSE team of KNOC VN conducted a visual inspection all the gears were corroded so much. Therefore, main supplier was requested to do lifting service again and requested to change all new gears.

Linh et al 9 concluded that to meet the high technology in the construction part,especially in oil and gas and petrochemical industry, the role of foreign

contractors/manufacturer is decisive. Almost equipment is purchasing from developed countries such as USA, UK, Europe and Singapore etc. The procured items shall be used for the area of maintenance, repair, and operations such as booster compressors, valves,pipes and fittings, controllers etc. Those are critical items and very importance for rig operating. They are required long lead-time and delivery from oversea to Vietnam. To achieve the goal, it is required skillful employee and appropriated procurement procedure.

Yik et al 10 identified fluctuation in prices of raw materials is in the top three factors of cost overrun. In addition, there are significant challenges that exist in

commodity volatility associated with major raw material inputs into oil and gas

exploration as well as downstream capital projects, including fabricated steel, nickel,

copper and other major commodities. This requires significant effort to hedge prices for these commodities, as well as to monitor and to plan for purchases against uncertain project schedules, leading to significant shortfalls between supply and demand.

To prove for this issue, Ms. Giang informed that on the year of 2013, the company placed order for one unit of anti-surge valve with inlet 12 inches and outlet 10 inches,gross weight is around 1300kg. The material of valve body is duplex stainless steel type A995 Gr. 4A. Due to the fact of fluctuation in prices of raw materials, the manufacturer has spent more time to procure. Therefore, the delivery time was pro-longed for more than two months. When the equipment was arrived KNOC VN warehouse in Vung Tau city, it had not been catched-up the supply boat schedule. Therefore, the company has paid for adhoc supply boat to carry it from onshore to offshore in order to meet shutdown plan.

Conclusion

The cause of delivery problems of purchased materials is often related to late requisitioning by other departments In practice this leads not only to a higher price being paid (as a result of extra work, speed of delivery, buying from stock-keeping wholesalers), but also in many cases to higher organizational costs and operational problems (the

delivered materials do not comply with the specification, many deliveries, postponed delivery of critical parts)

The delay in supplying of equipment by suppliers which is found at KNOC VN caused to the cost overrun in transportation from onshore to offshore. The quality of supplied materials is another problem found. The writer believed that one of the causes of the aforementioned problems is that there is no systematic supplier’s measurement put in

place. Equipment sourcing based on experience of the procurement officer does not always guarantee that the company will award contract to the suppliers who have high

performance. From these results, again, it is noted that most causes of delay and cost overrun relates to the qualification of staff and procurement procedure problems.

Inappropriate staff’s performance evaluation

Lack of negotiation skill

Lack of communication skill

Slow response and decision making

Lack of supplier selection

and supplier performance

evaluation

Poor supplier performance

Inappropriate procurement procedure

Poor supplier performance

sub-Purchase orders with small value cannot be applied penalty clause Supplier is a trading company with no control over production

Late delivery of equipment

Cost overrun (more transportation cost from onshore to offshore)

Unskilful staff and no motivation program

Selecting wrong supplier

Supplier performance

Prolonged delivery time of equipment

CHAPTER 2 SOLUTION 2.1 Solutions

The company is now facing with cost overrun for transportation from onshore to offshore. It is caused by the qualification of staff and procurement procedure. There any many solutions to solve this problem such as provide to staff necessary training courses,stock equipment, provide clearly supplier selection and performance evaluation process to procurement staff.

- To enhance the ability

of employees to perform their jobs at peak level.

- Available to use at any time.

- To control the production capacity.

- To select the right supplier.

- To build a good relationship with supplier.

Boundary

conditions

- Local in-house courses.

Every item needs to

be available at

On job training by Sr.Procurement Officer /

- Professional development courses from oversea centers.

warehouse using for one replacement.

Procurement Manager.

2.3 Solution selection

With above comparison, the writer believes that the best way to solve the

company’s problems that the company should built-up a supplier selection and

performance evaluation process. It is a crucial process to identify strengths and

weaknesses of suppliers which can help the company to manage their suppliers. The supplier selection and performance evaluation process can also be applied to monitor day-to-day operations with the suppliers.

It has been recognized it as a key process that contributes to the competitive advantage of the firms. Organizations have started focusing on their core competencies and outsourcing the remaining activities to outside suppliers. Suppliers have even been responsible for design of new products, sub-assemblies and component parts.

Hotabe et al 11 found that supplier’s competency, service quality control,

transaction cost-drivers, supplier’s brand image and supplier’s country characteristics are more important than others. The supplier selection and evaluation performance process

should not only consider price but also a wide range of factors such as quality,

organization and relationship with a view to decision making by considering the whole supplier capability in a long term and strategic way.

Shenhar et al 12 suggested that adopting effectiveness measures will more often lead to project success, by relating success to long-term impacts to the business.

2.4 Solution details

Qualifying and selecting new suppliers method

To survive in the intensely competitive global economy, it is often critically important to not only develop existing suppliers but also to discover new suppliers. There are many factors make new suppliers important. First, there may exist new suppliers that are superior in some way to a firm’s existing suppliers. Or a new supplier may have a structural cost advantage over existing suppliers, for example, due to low labor costs or favorable import/export regulations in its home country. Second, existing suppliers may

go out of business, or their costs may be increasing. Third, the buyer may need additional suppliers simply to drive competition, reduce supply disruption risks or meet other

business objectives such as supplier diversity

Production delays due to parts shortages and recalls of faulty products produced by noncompliant suppliers have cost buyer firms millions of dollars through recalls, warranty costs, and associated inventory adjustments, and have inflicted untold damage on their reputations and future sales potential.

Lopez 13 stated that supplier selection is one of the most crucial components of the purchasing function of a firm. It becomes a strategic decision when the purchasing

organization attempts to establish a long-term and win-win business relationship with its suppliers. In order to select the right supplier, comprehensive and configurable metrics for supplier selection must be outlined early in the process. Depend on each industry, the supplier selection criteria is being considered.

The proposed model here takes from company’s strategy incorporating top level policies and requirements. To develop a fundamental framework for Supplier Portfolio management, including supplier selection and empowerment, based on the company’s corporate and procurement strategies. It is used to combine similar requirements from various projects into attractive package of business for suppliers who are then selected not only based on their price and quality but also by strategic partnership initiatives and long-term development outlooks. In this model, outsourced items are grouped into two distinct 80-20% Pareto sets. The first set, 80% of non-critical items, with 20% price, may still be purchase with simple or traditional methods. The second set, 20% of is chosen within Supplier Portfolio methodologies looking at corporate, business, and procurement strategic elements.

The guidance regarding the performance criteria used to evaluate potential sources

of supply or to evaluate an existing supplier for an item not traditionally provided by suppliers. Management wants to make sure that supplier selection occurs only after

purchasing thoroughly reviews all criteria.

Supplier selection criteria include the following:

‐ Price/cost competitiveness

‐ Product quality

‐ Delivery performance

‐ Financial condition

‐ Engineering and manufacturing technical competence

‐ Management of its own suppliers

‐ Management capability

‐ Ability to work with the customer

‐ Potential for innovation

Supplier performance evaluation method

Teng 14 stated that there are a number of approaches being used to assist the supplier performance evaluation. Four commonly-used traditional methods stated in several studies are categorical method, weighted-point method, cost ratio approach and dimensional analysis model, analytic hierarchy process (AHP).

The AHP model approach was selected with a strong credence that this approach can respond and fulfill the objective of company. This is due to the fact that each

evaluation criterion has difference relative level of importance when compares with homogenous criteria. AHP is designed to break down a complicate, multiple criteria problem into levels of hierarchy. With its flexibility and systemization, it can signify the elements of a complicate problem. Performance evaluation criteria are also selected to form the conceptual framework. The performance of many suppliers will be measured

by referring to four main-criteria, namely: quality, delivery, service, and flexibility,and eighteen sub-criteria under those four main- criteria.

AHP can be considered as a problem-solving tool with flexibility and systemization

to signify the elements of a complicate problem. The AHP is designed to break down a complicate, multiple criteria problem into levels of hierarchy with the top level as the objective, the intermediate levels as the criteria and sub-criteria, with the lowest level as alternatives. The relative importance of each criterion determining which criterion has the highest priority. Ordoobadi et al 15 stated that a series of pair-wise comparisons of all criteria, the weights of the criteria are determined and can be used to construct a supplier evaluation system.

Supplier Performance Evaluation Criteria

The most important part in supplier performance evaluation process is identifying the evaluation criteria which are related to the supplier performance. There are many major criteria for supplier performance evaluation.

Kwong et al 16 pointed out that the supplier performance is not just related to price or quality, instead, supplier performance evaluation requires a multi-criteria

evaluation process. However, it is fair to accept that the quality will be on the top priority

to satisfy the customer, but there are other attributes which are important and need to be considered. Therefore, the buying companies need to select and identify the evaluation criteria which will serve the company’s objectives, activities, and to satisfy the

customers. Cormican et al 1 7 concluded that it is very important to identify the criteria and metrics which are objectively relevant to the company at all levels.

packaging/packing

Supplied goods are properly packed and packaging is suitable for transportation & storage Supporting Required supporting document and material Delivery On-time delivery Goods are delivered to the required destination as

Delivery accuracy Goods are delivered accurately with no missing or

Non-splitting delivery Goods are delivered in large lot and with no

Advance informing of delivery

Supplier informs in advance if the delivery schedule is not as planned

Shipping document accuracy

Shipping document is issued correctly and accurately

Ability to arrange replacement

Supplier promptly arranges replacement delivery

if defect or discrepancy is found Service Responsiveness to

request for quotation

Supplier promptly submits quotation after receiving a request for quotation

Responsiveness to Supplier quickly responses back when

Information sharing Supplier willingly supports and shares

information, e.g.Quality of sales person Salesperson is knowledgeable about the goods and

accurately and courteously to support company’s Communication

systems

Supplier has good and reliable communication system, e.g. email system, document tracking

Inventory availability Supplier always has inventory on-hand to fulfill

customer’s demand

Flexibility

Capacity to respond to Supplier always has inventory on-hand to meet Order customization Supplier has ability to customize order as per Negotiability Supplier is willing to negotiate on price and

delivery schedule

Supplier evaluation often follows a rigorous, structured approach using formal surveys. An effective supplier survey should have certain characteristics. First, the survey should be comprehensive and include the performance categories considered important to the evaluation and selection process. Second, the survey process should be as objective as possible. This requires the use of a scoring system that define the meaning each value on a measurement scale. A third characteristic is that the items and the measurement scales are reliable.

The supplier performance evaluation should be proceed yearly by the end of the year. The result needs to be informed to all procurement officers in order for implementing incoming orders.

The reason for these problems usually can be traced back to unclear specification

or a careless supplier selection Another reason may be that suppliers are not

systematically evaluated, as a result of which troublesome suppliers stay on board and delivery problems occur time after time

The presented purchasing model may help manager to structure their purchasing decision-making processes and the optional processes involved The results will not only

pay off in terms of lower prices paid for materials and services, but certainly also in lower organizational costs and a higher productivity

CHAPTER 3 ACTION PLAN

The best way to ensure supplier is to achieve a common view of the potential for improvement and systematically track the implementation of purchasing. The process of supplier selection and performance evaluation should be applied. It will help both buyer and seller understand each other’s. The program needs to be implemented as soon as possible.

According to the current company’s financial status, the program will be drafted by

Sr. Procurement officer with reviewed and commented by Procurement Manager. The timeline is as below:

1 Draft the process of supplier

selection and performance evaluation

process

Sr. Procurement officer 31 March 2017

2 Review and comment Procurement Manager 21 April 2017