CHAPTER 7: CONCLUSION
7.2 Major Findings
Introduction of risk management in global sourcing has the potential to enhance the success of global sourcing. A strong correlation between successful global sourcing and project performance was highlighted as having a positive impact on project time, project cost and project quality. While all large capital projects spend large amounts in global sourcing, metal and mining, energy, oil and gas sectors, spend significantly more in this regard with their spend varying from 11% to more than 50% of total project budgets. A core aim of global sourcing for large capital project sector is to achieve lower capital cost, faster payback, improve IRR and a greater access to new technology and innovation.
Although global sourcing adds tangible value to the project, it is fraught with risks which too often outweigh the benefits expected from global sourcing. Hence, such expenditure in large capital projects if not managed properly, can be a source of high risk on project performance. This suggests that a structured evaluation of risks is important to identify, assess and evaluate the potential challenges before engaging in global sourcing with any hope of achieving the expected benefits and project performance. Various activities involved in the global sourcing process have direct impact on project performance however the key to successful global sourcing lies in rigorous risk management planning and this should include the following:
identification of risk categories,
vendor due diligence,
vendor performance measurement,
monitoring capital expenditure to operating expenditure (CAPEX to OPEX) ratio,
benchmarking past performance and the productivity achieved, and
capturing lessons learnt from successful global sourcing experiences, practices and systems into a sustainable knowledge management system.
There was overall consensus across the secondary and primary data inputs over the importance of risk management in global sourcing and its direct effect on project performance. However, there were significant differences between the key positions of opinion on risk management planning making global sourcing successful and reducing project time. There were no major differences of perspective on the impact of risk management planning on the reduction of project cost and the delivery of the right project quality.
Based on the empirical findings of the study, key elements were identified for global sourcing success namely, vendor due-diligence, vendor performance measurement, risk classification and lessons learnt. These elements were integrated into a single risk management and mitigation plan. These are included in the model as shown in Figure 20.
This model was constructed with an aim to enhance global sourcing success leading to a positive impact on project time, cost and quality.
The top block of the model shows three internal and three external elements for successful global sourcing which should be evaluated through risk management and mitigation planning. The left column in the middle of the model shows the internal and external risk classifications which are important to evaluate before deciding on global sourcing solutions in large capital projects. The internal risk classification indicates what can be controlled between project and a target supplier organisation whilst external risk classification indicates what can arise due to external context and conditions. The corresponding right hand column shows two components, vendor due diligence and vendor performance measurement, which are important to evaluate during the front end loading process and post contract management phases. Various critical elements are highlighted under both the components and evaluation of these elements is set to enhance success in global sourcing for large capital projects. The inputs from the left and right hand side of the model are fed into the middle block which addresses risk management and mitigation planning. This is the central processing unit of the entire model and correct inputs from each block will determine the results obtainable from the model.
It is proposed that the outcome of this process can be further controlled, monitored and measured in terms of the CAPEX to OPEX ratio throughout the project life cycle as this will be the basis for future decisions to implement successful global sourcing. It is envisaged that the lessons learnt under each project coupled with benchmarking with past performance and best practices of other successful global sourcing programs would be captured in a knowledge management system and be used for future global sourcing risk management and mitigation planning. Based on the research findings and literature review outcomes, the bottom section of the model serves to indicate that the final outcome is the
Figure 20 Model for Risk Management Rules in Successful Global Sourcing for Large Capital Projects
MODEL : RULES OF RISK MANAGEMENT IN
SUCCESSFUL GLOBAL SOURCING FOR LARGE CAPITAL PROJECTS
Knowledge Management System
Control and monitor Project Lifecycle cost in terms of CAPEX:OPEX Ratio
Lessons Learnt and Best Practice Performance Benchmarking with
other projects
Lead to Positive Impact on Project Time, Project Cost and Project Quality
VENDOR KEY PERFORMANCE INDICATORS SHERQ Performance Time, Cost and Quality Performance
Engineering Performance Project Management Performance Innovative Inputs during project cycle Contractual Relationship, Operational
Support
Performance Guarantees Achieved
POST CONTRACT MANAGEMENT
KEY ELEMENTS FOR SUCCESSFUL GLOBAL SOURCING INTERNAL
Comprehensive Front End Loading Process Sourcing skill, past relevant experience, Project team buy-in
EXTERNAL
Country Competitive Analysis through PESTEL
Risk Management and Mitigation Plan for Entire Global Sourcing Process Vendor due-diligence and performance evaluation
Government Policies, Regulations Logistics, Taxation & Currency
RISK CLASSIFICATION
Design & Engineering standards
Cultural differences Manufacturing Standards and process
Factors accuracy to estimate landed cost Management and Project Team buy-in
Contracting Philosophy
Government Policies, Regulations Country PESTEL Analysis
Taxation, Duties & Levies Potential Disruptions Quality of sub-suppliers
Exchange Rate Fluctuation Front End Loading Process
Packing Optimization
Environmental & sustainability risks
INTERNALEXTERNAL
Logistics and Transportation Capacity available to deliver on promise
Escalation
RISK MANAGEMENT &
MITIGATION PLAN
Step 2
Risk Assessment & Evaluation
Step 4 Risk Control & Monitoring
Step 3 Risk Mitigation Plan
Step 1 Risk Identification
VENDOR DUE DILIGENCE CRITERIA Technical Capability and Competency
History and Past Global Reference Check Manufacturing facility and QA/QC System
3 PL/4PL or Transportation Alternatives Willingness to build long term relations Training and After Sale Service Support
Previous SHERQ performance
Financial position and Free cash flow Project Management Organisation Chart
Commercial terms Performance Guarantees
Available Capacity, future expansion plan Acceptable Standard: Ability to comply
with International standards
Ability to work with 3rd party QA/QC Language/Communication barrier
FRONT END LOADING PROCESS
The model integrates the risk classification involved in the entire cycle from front end loading process till the end of life phase of the project including lessons learnt from previous projects. This is set to help improve global sourcing success resulting in better project performance by effectively handling the risks at different stages in projects, potentially mitigating them before they can take effect and measuring the impact and outcome