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Internal Control Weaknesses

Discuss about the Strategic Procurement for Organizing Suppliers.

The process for special orders begins with a department head preparing a requisition form that is sent to the purchasing department for review by one of the six buyers, who verify the sender.  Upon verification, the buyer seeks out potential suppliers from a file and requests them for a price quote by phone then a verbal order is placed. A Pre-numbered purchase order is prepared and copied to accounts payable, the department head, and receiving departments. An open purchase order is filed by the accounts payable department: the open purchase order is later transferred to the filled file after a verbal confirmation form receiving. The receiving departments’ stamps details of reception of equipment on the purchase order and any disparities noted (in red ink) and the purchase order (now stamped) is sent to the requisitioning department.  The vendor invoice is matched to the relevant purchase order by the accounts payable and a check prepared on the due date of the unpaid invoice. The treasurer sorts all checks received from accounts payable on a daily basis into two groups: those below $ 10000, that are machine signed and those above $ 10000 that are signed by both treasurer and cashier.

One of the biggest weaknesses with the Platinum process for special orders purchase is verbal (and telephone) methods of placing orders and making confirmations.  The oral/ verbal confirmations and order placement has an inherent weakness in that one of the parties may forget the exact details of the product, resulting in either the wrong product/ equipment being purchased or time and resources being wasted as a result. Further, apart from just forgetting the important details about the order, the parties involved may disagree in the end if there are discrepancies on order filling and the delivered product: the parties are likely to disagree on the exact details of the orders and verbal confirmations.  The other internal weakness is the buyer selecting appropriate suppliers from a file, rather than selecting a few Pre-qualified suppliers and asking them to send their quotations and then select the most competitive bid. This implies they may not be getting value for money and there may be bias in selecting supplier, or even chicanery between the buyer and some suppliers. Further, it is questionable that these requisitions are approved by the board beforehand, rather than on a case by case basis because this could be open to abuse.  The idea of automatic signing of checks is also a weakness that can be open to exploitation or misuse, and would only be necessary where there are numerous purchase orders

Impacts of the Weaknesses on the Organization

The impacts include procurement risks: the weaknesses will expose the organization to supply risks such as the wrong product being supplied. Further, the system does not provide a watertight method for monitoring the activities of the purchasing department: the loopholes can be exploited by malicious employees (Balm, Van Amstel, Habers, Aditjandra, & Zunder, 2016, p. 254).  The system creates inconsistency in how purchases and equipment’s are procured; this is because there is no guiding quality principle, such as the requirement to get competitive quotations from suppliers before making a purchasing decision (Rao, Radhakrishna, Mishra, & Kata, 2016, p. 33).  The system has serious inefficiencies, with much use of paper and manual handling, as well as verbal order confirmation and document confirmation. The result will be poor procurement experiences for all stakeholders (both internal and external) (Kuuse, 2016). The current system creates knowledge gaps and eventually, some members will find their own ways of accomplishing tasks; for instance, there is not clear policy on how suppliers are selected, how orders and requisitions can be verified through detailed descriptions, or internal verifications of documents and task completion.  The weaknesses in Platinum special orders procurement approach will create a misalignment between the organization and the equipment suppliers (Ronson, 2013).

There will be no uniform experience for internal customers such as the different department heads because the buyers do not collaborate and choose suppliers competitively or based on a written policy. The result is the internal customers at the organization will not know what to expect because of a lack of standardization in selecting suppliers. The reputation of Platinum with suppliers can be damaged as a result of this misalignment (Koppelmann, 2011, p. 37). Proper and effective communication within the organization and with suppliers is crucial in aligning procurement goals and creating positive relationships with suppliers and internal customers.  The present system does not enable effective measurement of procurement performance, yet this is crucial in gauging the existing procurement policies. The present system and its weaknesses and loopholes do not provide suitable metrics to use in measuring procurement performance. When there are standard approaches, such as in selecting suppliers, metrics can be generated easily and performance of procurement effectively measured (Thai, 2017, p. 7 The following measures should mitigate the risks posed by the internal procurement weaknesses at the organization in the next few weeks and do not require significant investments

For starters, the orders should be placed in a documented manner, such as using PDF or even word documents to generate purchase orders. Further, confirmation of orders and receipt of goods delivery should be documented; for instance, all received goods and equipment should be accompanied by a delivery note that Platinum duly signs and a copy attached to the purchase order and filed, after inspection of the equipment (Smith, 2013, p. 55)

Modifications to the Recommendations

To get value for money, the process of selecting suppliers should be made competitive and standardized, so that a number of suppliers are requested to submit quotations and only the most competitive bids and terms given selected to supply equipment (Muckle, 2015)

A machine should not be used to sign checks; the equipment requisitions under special orders cannot be so many that the cashier and treasurer cannot sign, otherwise, it points to a poor and flawed procurement strategy where there are many special orders for equipment (Booth, 2010, p.16).

The recommendations can be modified an enhanced even further if ICT is brought into the equation.  For starters, the organization can re-engineer its procurement processes so that department heads raise orders through a unified application portal; for instance the company can make use of free or low cost SCM (supply chain management) software that have online/ cloud functionality to streamline procurement processes (Day, 2014). When a department head wants equipment, they log into the system using provided credentials and place the order. The buyers automatically get the requisition and can confirm if the sender is a department head quickly (through the verified password). Next, the buyers check their database for shortlisted suppliers or alternatively, send out a supply tender or an e-mail to possible suppliers to submit quotations. The system is configured to undertake preliminary review of price quotes and then buyer team can then evaluate the shortlisted quotations and make a structured decision on who give the supply order.  The supplier, once shortlisted, then sends a Pro-forma invoice against which a purchase order is raised, through the system. When the equipment is delivered, a bar scanner is used to assign it a unique code and accept the equipment into the organization. The equipment is accompanied by a delivery note that must be signed and then entered into the system to confirm receipt; the bar scanner automatically enters the received item into the organization assets management system. A check is then issued against the invoice attached to the delivery note and updated on the system.
The system needs to be a complete ERP with links to financial systems in the organization. The system should use electronic forms to replace paper forms as much as possible (Reaume, 2010). The system will have automation and inbuilt control policies that ensure that only authorized people can make some changes or requisitions. The system should also have a strong access and credential management system to ensure only authorized persons can access the system and make changes. The automated system should then have a cloud application, such that all transactions are stored in a hybrid cloud to ensure redundancy and business process continuity in the event that there is downtime with the private cloud/ physical servers where the firm runs its operations. With a cloud instance, the system will remain fully updated and ensure there is no downtime or interruptions. The system also has the benefit that actions and processes can be tracked so that if there is a problem, it is easy to track it to the source. Such a system will also offset some of the impacts of the internal weaknesses in the current system (Walker, 2008, p. 246)

Reference

Balm, S., Van Amstel, W., Habers, J., Aditjandra, P., & Zunder, T. H. (2016). The purchasing behavior of public organizations and its impact on city logistics. In The 9th International Conference on City Logistics (p. 254). Retrieved from https://www.sciencedirect.com/science/article/pii/S2352146516000648/pdf?md5=0840882efba6a226dceeabcb31aad17a&pid=1-s2.0-S2352146516000648-main.pdf&_valck=1

Booth, C. (2010). Strategic procurement: Organizing suppliers and supply chains for competitive advantage (1st ed.). London: Kogan Page.


Day, A. (2014, May 29). 10 ways the procurement profession can improve. Retrieved from https://www.cips.org/supply-management/opinion/2014/may/10-ways-the-procurement-profession-can-improve/

Koppelmann, U. (2011). Procurement marketing: A strategic concept. Berlin: Springer.

Kuuse, A. (2016). 5 Consequences of Not Adhering to the Procurement Management Plan. Retrieved from https://blog.deltabid.com/5-consequences-of-not-adhering-to-the-procurement-management-plan

Muckle, K. (2015, December 21). Why Tender? The Benefits of Running a Competitive Tender     to Procure Services. Retrieved from https://www.linkedin.com/pulse/why-tender-    benefits-running-competitive-procure-services-muckle
Rao, N. C., Radhakrishna, R., Mishra, R. K., & Kata, V. R. (2016). Organised Retailing and
Agri-Business: Implications of New Supply Chains on the Indian Farm Economy (2nd ed.). Delhi: Springer.

Reaume, J. (2010, March 1). 6 Procurement Actions that Can Boost Your Business. Retrieved from https://www.scmr.com/article/6_procurement_actions_that_can_boost_your_business

Ronson, S. (2013, February). The impact of poor procurement decisions | FM Magazine. Retrieved from https://www.fmmagazine.com.au/sectors/the-impact-of-poor-procurement-decisions/

Smith,K.I. (2013). The PMP Notebook: A Study Companion to the PMP exam (2nd ed.). London: Springer.

Thai, K. V. (2017). International Handbook of Public Procurement (1st ed.). london: CRC Press.


Walker, D. (2008). Procurement Strategies [electronic resource] : A Relationship-based Approach (3rd ed.). Oxford: Blackwell Science.

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