08 - Management of Procurement & Outsourcing

Management of Procurement refers to the process of acquiring goods, works and services. The process spans the whole cycle from identification of needs through to the end of a services contract or the useful life of an asset. To be effective, purchasing must work closely with design, manufacturing and quality control. Design provides the specifications for the components to be purchased and manufacturing provides the requirements for delivery schedules. This also includes “due diligence” for foreign manufacturers/suppliers.

What do we look for?

Exposures

  • Lack of formal documentation on supplier selection and procurement process
  • Informal evaluation criteria
  • Price “only” factor in procurement decision making process
  • Complicated manufacturing processes
  • Outsourcing (manufacturing and designing) from foreign countries
  • Contract manufacturer makes incremental changes to product and quality slowly deteriorates (Quality Fade)
  • Contract manufacturers or designers who are unable to meet financial obligations if a recall is required due to a manufacturing or design error.

Controls

  • Low production volume versus risk of mass produced consumer product.
  • Formal Procurement Plan (describing which product will be acquired from vendor as well as when and how they will be acquired)
  • Formal vendor / contractor specifications and selection process, including “due diligence” for foreign manufacturers and suppliers.
  • Formal change management process where changes to the product area reviewed
  • Contractual clause stating no changes can be made without first obtaining approval.

Risk improvement ideas

  • Legal review by an experienced, independent contracts lawyer is a worthwhile investment when dealing with complex contracts.
  • For major contracts, a sign-off procedure should be implemented to make sure that the head of all relevant departments has a chance to review contracts before they are executed.

Risk topics

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