Introduction
The competitive global marketplace has shifted the way managers perceive corporate risk. Today, the risk is inevitable due to both internal and external risks in the marketplace. Executives must develop strategies that will help the company to manage risk. Businesses face different kinds of risks including corporate strategies risk, management risk, and operational risk. Risk can be referred to as a combination of probability and its impact on the business.
Business activities that lead to negative impacts on the firm represent risks. Risk has the potential of reducing the business value of stakeholders, especially if it affects the reputation of a company. For instance, the J&J Company has lost its reputation after it was accused of producing products that harmed thousands of people across the globe. Thus, preventing risk is an essential role of executives to maximize business value.
Moreover, preventing risk becomes imperative to increase business value and maintain a high reputation. A company’s reputation plays a critical role in determining its success in a given marketplace. This paper critically analyzes corporate risk management strategies in the Johnson and Johnson Company in its purchasing department. It also establishes corporate risk exposures in the purchasing department and recommends strategies that can be used to overcome the problem. The major challenge facing the company is over-relying on outsourcing to solve internal deficiencies in the procurement department.
A snapshot of Johnson and Johnson Company
Johnson and Johnson is one of the largest pharmaceutical companies in the world (Benson 2016, para. 1). Moreover, it is the world’s largest seller of health care products which has established a globally recognized brand in the market. The company has been facing many challenges, especially in its supply chain across the subsidiaries. J&J Company faces different types of exposures in its procurement departments. These risks include corporate strategy risk, operational risk, and management risk.
Procurement can be defined as the management of external resources which has become a function of strategic importance in the modern economy. Although the J&J has developed a central procurement center, managers have been giving greater risk management in the procurement departments due to the increasing use of the contingent workforce, such as the use of contractors rather than workers. The executive must ensure that the company has an effective supply of external products and services which offer value for money. Managers can be able to overcome corporate risk exposures in the procurement department by developing inbuilt controls strategies tailored to control risk.
Johnson and Johnson’s purchasing department is ineffective which encourages corruption and mismanagement. Managers can be able to overcome these challenges by encouraging public tendering which will discourage corruption and collusion between suppliers and workers. The major challenges facing the procurement department are tendering, evaluation of suppliers and over-relying on outsourcing.
Corporate risks theory
Corporate risk arises due to the circumstances in the firm or outside the firm’s control, which affects the normal operations of a company. Corporate risk occurs at every level of the organization which compels managers to develop strategies that will minimize risk exposure. Every organization faces risk and as long as it is operating, the risk is inevitable. In many businesses, the higher the risk, the higher the expected returns. Therefore, managers must develop strategies that balance risk with acceptable reward.
Corporate governance is responsible for creating business value by managing risk exposures. The theme of the executive should be to manage risk rather than to minimize it. The executive must establish significant risk exposures facing the company. The board of executives is also responsible for developing risk evaluation procedures in the procurement department to ensure it is working efficiently. Finally, the board monitors those risks to ensure it does not affect the business or exposure the firm to significant damages such as a business lawsuit.
Since risks in the procurement department are systematic, it is critical for the board to develop sophisticated supply chain management tools that will help them to establish aggregate risks by measuring the interdependencies within the entire value chain of the company. These tools will also help managers to determine the most efficient options for mitigating risk exposures.
The purchasing department of Johnson and Johnson Company
Johnson and Johnson have a well-established procurement department that has a collaborative relationship with suppliers. Most of the suppliers have a well-working relationship with the company for years. The company relies on ten thousand suppliers who provide materials and services to the enterprise to manufacture high-quality products. The company outsources most of its products from well-established groups of suppliers.
However, outsourcing has become a major challenge for executives because junior managers tend to rely on it instead of other procurement policies that eliminate inefficiency in the department. The manager believes that outsourcing is an attractive option because it eliminates the deficiencies in the supply chain department. However, Holzhacker, Krishnan, and Mahlendorf (2015) argue that outsourcing does not eliminate deficiencies in the procurement of products and services (p.2316).
The company has a Chief Procurement Officer who ensures goods supplier meets the high-quality standard (Procurement Practices: Procurement Practices 2016, para.4). The theme of the supply chain is to obtain high-quality products and services for value by maintaining a high-quality ethical standard. Finally, the company also has a well-established procurement sustainability initiative, which is the foundation of the purchasing department because it establishes a framework to guide suppliers. Moreover, it enables the company to establish the financial performance of suppliers to collaborate with those that are aligned with the long-term sustainability commitment of the company.
Wrong strategies in the purchasing department
A critical analysis of the procurement department of J&J shows major deficiencies. They include outsourcing from many suppliers, long-term relationships with suppliers and over-relying on outsourcing. First, the major challenge facing the J&J procurement department is relying on outsourcing. While outsourcing is an impressive option for many executives, it does not eliminate deficiencies in the supply chain department.
Many executives believe that as long as the company can maintain world-class processes of outsourcing, it can be able to eliminate corruption and inefficiency in the purchasing department. However, Kalvet and Lember (2010) note that many executives forget that outsources cannot be a solution for deficiencies in the supply chain processes (p.256). Lavastre, Gunasekaran and Spalanzani (2014) argue that outsourcing brings new challenges to the organization (p. 3394).
Outsourcing can only be beneficial to an organization if it can be able to control the process, products, and documentation to ensure quality systems are observed. Since Johnson and Johnson procurement officers cannot be able to verify the processes, documentation and quality system, they should not rely on outsourcing. Moreover, they should not expect outsourcing to eliminate deficiencies in the purchasing department.
Outsourcing can only benefit J&J Company if there is an independent outsourcer managing the process of procurement. An external outsourcer can be able to focus on detailed metrics and audits before and after suppliers are made. External outsourcers have well-established technology and experience in outsourcing that enables them to eliminate corruption and poor quality suppliers. Thus, relying on outsourcing is the wrong strategy that must be replaced with internal controls in the purchasing department.
Secondly, J&J has very many suppliers that make it impossible to verify the quality of suppliers. Since the company is moving from co-promotion to co-development, the degree of invasiveness is high. The procurement department cannot be able to manage the supply chain because the agreements are built on consensus at every level of the supply chain. Regrettably, the mechanism required to achieve this goal is difficult to operationalize because it requires highly detailed processes. Moreover, it calls for an extensive relationship between the procurement department and suppliers in contracting and strategic alliances. Therefore, obtaining products and services from many suppliers is a wrong strategy that will create inefficiency in the company.
Risk management strategies that can be employed
J&J ensures that they contract suppliers who are transparent and in line with the long-term goal of the company. The company achieves this goal by ensuring that suppliers’ contracts are comprehensive and do not contain a discriminatory condition that might prevent some suppliers from the tendering process. A team of experts and lawyers is responsible for ensuring that the supplier’s contracts are sustainable (Lee, Li, & Xie 2013, p. 856). This team ensures that they can verify the legal and regulatory compliance in the procurement department. J&J has developed a sustainable toolkit to help suppliers to understand the commitment of the company to quality standards and long-term sustainability to improve processes. The company has also segregated its suppliers into 14 broad categories such as active pharmaceutical ingredients chemicals and external manufacturing.
To ensure quality products and services, the company relies on outsourcing in its procurement department. Managers believe that outsourcing can be used to reduce costs and inefficiency in the purchasing department. Most of the products are outsourced from many suppliers, which makes it difficult to verify the quality of products and services.
Are the strategies good for the company?
Some strategies implemented by the company are good while others are not ineffective when applied in the purchasing department. Executives must certify that steps are taken to ensure the supplier’s contract has captured all the relevant issues of quality and transparency. When managers ensure that supplier’s contracts have specified all the requirement from both the financial standpoint and legal perspective, they can be able to manage risk effectively.
This will ensure that suppliers meet the quality expectation of all the products and services supplied. A well-though-out procurement contract enables managers to sue suppliers in case they breach of contract. Before drafting the final contract, executives ensure that the documents are comprehensive and do not contain conditions that would discriminate against some suppliers without reasonable grounds. Moreover, they ensure that they have experts who are employed to assist the procurement officers in their duties when they experience challenges. This strategy minimizes the risks facing the company such as outsourcing products and services from many suppliers.
Corporate risk management in the purchasing department is fundamental because it enables managers to manage risk in the procurement department. The executive has been able to manage risk effectively by carrying out a life costing analysis in the purchasing department to ensure all procurement officers are familiar with risks associated with every stage of the business cycle. This can be done by allocating risk to the departments that can best manage them effectively. Finally, the company should establish a department responsible for identifying risk, analyzing, assessing and establishing risk mitigation strategies to eliminate deficiencies in the procurement department. Although most of the strategies applied by managers have been able to minimize the level of risk in the company, using outsourcing to eliminate deficiencies in the internal operations of the company will be ineffective in the long term.
How to improve risk management in the purchasing department
In any organization, they are both internal and external risks. To improve risk management in J&J, executives should establish a precondition that involves analyzing the risk exposure to identify the probability of the risk occurring. Managers must be able to identify the nature and impact of risk to establish corrective measures. Therefore, managers need to establish a risk mitigation plan which will gauge the severity of risk in the purchasing department. The risk mitigation plan should also be based on the nature of procurement risk exposures. Managers should establish procurement planning agenda in more formal acquisition plans to ensure they achieve the expected outcome of the plan.
Managers can improve risk management in the purchasing department by understanding the risk. It involves establishing the probability and severity of the risk to establish the appropriate corrective action (Louth & Boden 2014, p. 317).
When the need to procure products and services arises, managers should think about identifying and analyzing the risk associated with procuring the products. However, this process might fail because the company has very many suppliers who increase the risk associated with procurement (Steckler & Caulfield 2016, p. 32). Managers should then develop a procurement strategy that will enable the company to identify the specific needs in the purchasing department to establish whether to carry out a formal risk analysis. After managers have developed a procurement strategy, they should prepare for a quotation.
During the development of procurement specification, if the manager had determined that formal risk analysis is required, they should consider collaborating with the procurement officer in drafting a procurement risk register. A risk register enables managers to identify the nature of risk and suggest the best approach that will help the company to reduce the level of risk. Managers should then issue a solicitation, which should establish the procurement risk precisely during each stage. A solicitation is a fundamental approach that helps managers to identify the most significant risks facing a project and the best cause of action.
Recommendation
J&J executive should develop new strategies that will help the company to minimize the level of the risk in its procurement department. The company should transfer the risk through insurance, bid deposit and performance, and payment bonds. However, managers should ensure they select the best type of insurance covers such as comprehensive, automobile liability, omission, and error to reduce any potential losses.
If the manager realizes that the level of risk is very high, they should consider bid deposit and payment bond security (Tumuhairwe & Ahimbisibwe 2016, p.92). However, the amount of bid deposit should be based on the nature and the probability of the risk occurring. A safety bond acts as a surety of compensation if suppliers do not meet the quality standard expected by the company. Deposit bonds help the company to reduce risk exposure by indemnifying the company in case the risk exposure insured causes damages such as a breach of contract by suppliers. It indemnifies the company based on the terms of the agreement.
Therefore, it is critical to ensure the terms of the contract are clearly understood before signing the agreement. Moreover, the risk covered should have a high probability of occurrence to prevent the company from paying insurance and bond premium for risks that are not likely to occur. Moreover, the risk should have severe consequences when they occur. However, the contract should be clear and concise to help procurement officers to understand the nature and type of risks covered by the bid deposit and insurance agreements.
Conclusion
Businesses face different kinds of risks which include corporate strategies risk, management risk, and operational risk. Risk can be perceived to be a combination of the probability that hurt the business. J&J Company faces different types of exposures in its procurement departments. They include corporate strategy risks and operational risk. The board of executives is responsible for developing risk evaluation procedures in the procurement department to ensure it is working effectively. The board monitors those risks to ensure they do not affect the business or exposure the firm to significant damages such as a lawsuit. The procurement department cannot be able to manage the supply chain because of the mechanism because the agreement is built on consensus at every level of supply chain management.
References
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