Strategic Procurement Essay Example

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    Business
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    Case Study
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    Masters
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STRATEGIC PROCUREMENT
17

Strategic Procurement

Strategic Procurement

Question 1a

How Product Characteristics Influence Logistic and Supply Chain Costs of the Two Products from Elk Accessories

Fashionculturehas intensifiedin Australia in the recent as a result of influence from other western countries such as France, the US and UK (Kawamura, 2005, p.45). Many people now want to be seen in fashionable and trendy wears as opposed to traditional conservative clothing. Small scale retailers have identified and now want to invest in highly populated cities with demand for fashion. Elk Accessories, a small fashion retailer is one such business that opened a clothing shop in Victoria to capitalize on the demand for fashion. Since its inception in 2012, Elk Accessories has undergone a significant growth in terms of sales and profit margins due to its effective logistic and supply chain (Elk Accessories, 2017). Market analysts claim that its effective logistics and supply chain costs have been influenced by its product characteristics.

Logistics and Supply chain have become a very vital platform for companies for competitive advantage. In fact, Lambert and Cooper (2000, p.68) claimed that competition in current markets is not based on the independent business ventures, but rather on the effective supply chains. However, research has shown that for firms to attain, they must match their supply chain with their product characteristics. When
Elk Accessories just opened doors, they used to manufacture products with varied characteristics and the process made them incur two types of costs including production costs and market mediation costs. Randall and Ulrich (2001, p.1590) pointed out that the production costs consist of material, production technology, manufacturing, labor and overhead costs. On the other hand, Randall and Ulrich (2001, p.1593) posited that the mediation costs take place as a result of the market variability. According to the two authors, mediation costs comprise of inventory holding costs, opportunity costs and mark-down costs. Mediation and the production costs are impacted by the supply chain approach choice.

When deciding on the proper supply chain approach, the firm often takes into consideration the features of the end-products as well as product life-cycle, product variety, demand predictability, and standards set by the market concerning service and lead-times (Qi, Boyer & Zhao, 2009, p.669). The literature has attained a general agreement that firms which offer functional products require lean or lean chains, while firms providing innovative products need an agile or a responsive supply chain. Elk Accessories (2017) points out that the company sells Footwear, dresses and jumpsuits, jewelry, cosmetics, pants and jeans and women bags among others. To match Product Characteristics to Logistic and Supply Chain Costs, the company uses approach such as functional and innovative products (Fisher 1997, p.109).

While some clothing like dresses and jumpsuits are considered functional products, jewelry is innovative products. Functional products are said to have a comparatively predictable demand whereas innovative products hold a fairly unpredictable demand (Qi, Boyer & Zhao, 2009, p.669). The functional goods are typified by long life cycles, longer lead times and low product choices. On the other hand, the innovative products have features such as shorter life cycles, shorter lead times, high product choices, have low predictability and are highly volatile. Fisher’s model claimed that functional products need a physically resourceful supply chain, whereas innovative products need a market-responsive form of a supply chain (Selldin & Olhager, 2007, p.46). The study of that company have a combination of lean and agile products as it sells functional products which are associated with a lean supply chain while innovative products which are highly equated to an agile supply chain. Reviews of various literatures claim that lean or agile is best for clothing sector or companies (Qi, Boyer& Zhao, 2009, p.673). Just as the product are flexible and have a high quality design, supply chain such also match such characteristics and meet customer demands and have great sourcing relations in order to supply materials. In other words, product characteristics influence how supply chain and logistics are categorized.

Question 1b

Analysis of its current inventory management approach for one of the major product lines in the light of four inventory management approaches outlined in Wallin, Rungtusanatham & Rabinovich, (2006)

There are several current inventory management approaches which companies can use today, and they include inventory speculation, inventory consignment, inventory postponement, and reverse inventory consignment (Wallin, Rungtusanatham & Rabinovich, 2006, p.50).

Inventory speculation

According to the research by Wallin, Rungtusanatham and Rabinovich (2006, p.53), this is most frequently used inventory management strategy by firms. In speculation inventory, a company buys products and holds them physically at their warehouse before usage or demand requirements of the products are determined. This approach of inventory management has several advantages including the capability to react fast to usage or demand needs and capacity to safeguard itself against price fluctuations. Furthermore, Pagh and Cooper (1998) claimed that in this management method a company able to allocate itself some discounts and decrease the inbound cost of transportation through buying in bulk. Nevertheless, this approach also has its shortcomings. Pagh and Cooper (1998) posited that the company using this approach often faces the financial and opportunity cost burden due to the fact that cash remain tied in the physical inventory. Companies using this approach also incur high holding costs as a result of storage needs, material handling, tracking and threat of the obsolescence (Wikner & Johansson, 2015, p.220).

Inventory postponement

Elk Accessories use this approach with its jewelry segment. With this approach, the fashion house intentionally postpones buying and physical storage of the inventory until they determine the usage and demand requirements (Wallin, Rungtusanatham and Rabinovich, 2006, p.53). In so doing, it reduces threats obsolescence, minimize a situation where cash tied in the products, and evades storage cost and that of tracking. However, Pagh and Cooper (1998, p.17) opined that this approach also has its disadvantages such as threats of the lost sales. When Elk Accessories does not have readily available jewelry, it cannot respond to quick demands.

Inventory consignment

Wallin, Rungtusanatham and Rabinovich (2006, p.53), claimed that in inventory consignment a company physically holds bought products in its warehouse but the ownership is still under the supplier. The company only pays suppliers when it has used the materials have been used the production or finished products sold to the clients (Valentini & Zavanella, 2003). Elk Accessories will outsource dresses and jewelry or materials for production and only pay suppliers when they have already sold the dresses and jewelry to customers.

Reverse inventory consignment

Different from Inventory consignment, a company using this strategy purchase but does not take inventory of bought products but rather leaves them at the storage facility of the supplier and only transfer them when they need them for production. Sometimes they transfer them directly to their customer from supplier storage facilities. However, this process is rarely used.

Better Inventory Management Approach for the Product Line

Causal official are considered innovative products with unpredictable demand and shorter life cycle (Qi, Boyer & Zhao, 2009). It means that such products require being at the company’s storage facilities most of the time. However, when demand emerges unpredictably when the products are still held at the suppliers’ storage facilities, Elk Accessories loses sales. As such, Inventory speculation remains the better if not the best Inventory Management strategy for Elk Accessories. With such approach, Elk Accessories will buy the products and store them within their facilities even before determining the usage and demand. The practice is beneficial in that the company can respond to quick and unpredictable demands (Wallin, Rungtusanatham & Rabinovich, 2006, p.53). The company will also enjoy discount due to buying in bulk (Pagh and Cooper, 1998)

Question 2.a

An argumentative essay on FOUR reasons why firms adopt Supplier Relationship Management

Based on several literature reviewed, researchers have shown relationship management with the suppliers is a significant factor in procurement management. The firms often engage relationship purchasing with the suppliers to gain the competitive edge. Lambert and Cooper (2000, p.68) opined that firms create different forms of relationship with their suppliers which can be close or even at an arms length. Therefore, this essay will look into reasons why firms adopt Supplier Relationship Management. Under the recommendation, this section will focus on reduced cost, increased trust and efficiency, reduces price volatility and outsourcing of particular activities.

The first argument why firms engage in Supplier Relationship Management is linked to reduced costs. There are critical costs associated with creating deals with new and credible suppliers (Kosgei & Gitau, 2016, p.137). Transport to the suppliers’ place of work is one of such costs. Therefore, by adopting Supplier Relationship Management the company avoids such cases. When a company has beneficial relations with the existing major suppliers, they do not need to often look for new ones. In this way, they save costs which can be used for other projects.

The Second argument why firms adopt the Supplier Relationship Management is that it creates truest and efficiency. Supplier Relationship Management software, like a customer relationship management system enables the manager to pursue of the supplier relations and deal with distress early (Kosgei & Gitau, 2016, p.137). Such system assists in understanding if the supplier is facing complexities or change and offer the company an opportunity to provide help or allocate more time to deliver the item. Song and Benedetto (2008, p.5) postulated that better relationships with the company’s suppliers does not only lead to trust but also efficiency in that it reduces delays, the quality issues, delays and problems. With firms embracing Supplier Relationship Management, suppliers gain a whole understanding of the industry they operate in thus enabling them to fulfill their work efficiently. Van Echtelt et al., (2008, p.183) claimed when concerns emerge in the ordering procedure, the healthy relationship between company and supplier makes those concerns easier to handle.

The third argument why the firms use Supplier Relationship Management is because it reduces pricevolatility. According to procurement theorists, nothing turns off customers than the high volatility of the market prices (Kosgei & Gitau, 2016, p.140. To some extent, the volatilities are resulted by the direct increase in the product prices. Nonetheless,by using the supplier relationship management principles, firms can always exploit scaled increases or of fixed pricing in return for long terms of the agreement, reduced order levels and other qualifying methods. Adopting a clear cost base enables a firm to create its pricing structures which will frequently translate to satisfied and loyal customers.

Second argument of why companies adopt the Supplier Relationship Management is attributed to the need to outsource particular activities (Song & Benedetto, 2008, p.6). An effective supplier relationship management plan usually builds a trusting relationship between an organization and the supplier. Ragatz, Handfiel and Petersen (2002, p.391) asserted that a good relationship sometimes makes some important activities to be outsourced to a supplier permanently. This may consist of delegating customer service and management of the inventory levels to the supplier.

Question 2.b

The significance of early supplier involvement in today’s environment and some potential difficulties that could emerge with this form of collaboration

Involvement of the suppliers in early phases of product development or innovation has become common in today’s business operations. Johnsen (2009, p.189) claimed that some of the common sectors which have adopted this approach are consumer electronics and automotive industries. Its adoption by several purchasing organizations has been based on benefits to the firms. Millson and Wilemon (2002) argued that it enables collaboration with important suppliers hence promoting process, supply chain and product development, and also work as a cost reduction strategy. The supplier understands the quality of materials required to make high-quality products which will give back value for the money. Thus, involving suppliers in the early phases of innovation is vital for an organization.

A study done by Zsidisin and Smith (2005, p.46) held that the Early supply involvement approach might provide extra advantages to a firm such as supply risk management in innovation and management of supply chain at the upstream. Leenders, Johnson and Flynn (2002) claimed that for a supply, if the relationship produces high quality products, it can help it to cement their relationship and even help in securing businesses in the future.
According to Pertersen, Handfield and Ragatz (2005, p.375), the decision arrived at during the development cycle holds a considerable effect on the quality, cost and cycle time of the product. Bearing in mind that 80% of the cost of the product is dedicated to designing, therefore involvement of the procurement practices early bear significant impact by adding value. Pertersen, Handfield and Ragatz (2005, p. p.377) argued that unless a company effect sourcing in the early phases of the new product development or innovation, they will have no effect on the new design.

Suppliers normally have superior technology, which they used to manufacture materials and even create quality designs. Therefore, Song and Benedetto (2008, p.9) affirmed that involving suppliers in product development enable the company to use the supplier technology competence to improve its product designs. This practice helps the company to reduce production because it does need to acquire new technology to improve the design (Walter, 2003, p.725).

However, this collaboration also has its flaws. The notable problems of early supplier involvement include high development and product costs, an incorrect arrangement of tasks, mismatching of resources and choosing incompetent suppliers (Zsidisin & Smith, 2005, p.45). Some suppliers may take advantage of the early involvement to increase the development cost because they are using their technology to do the designs. Being a supplier does not mean, that a company is competent to help in product development. As such, Zsidisin and Smith (2005, p.45) argued that choosing incompetent suppliers can be disastrous to for a company who have hired them. It means they may develop a bad design which affects the quality and outcome of the product. Furthermore, incompetent supplier could result to mismatch of the resource leading to poor final product and even wastage (Petersen, Handfield & Ragatz, 2005, p.374).

Question 3:a.

Parts of the supply chain that are most closely involved with the situation in this case and the responsibility of each part in order to maintain a smooth flow of material

There are three components of the supply chain which involved in the procurement decision-making and process at Avion Inc. The component involved is majorly departments are they include procurement department, production department and marketing department. Procurement department plays a leading role in the supply chain processes. Giunipero et al. (2011, p.66) stated that in many cases, procurement department is responsible for cost evaluation and estimation, issuing of purchase orders, acquisition of suppliers, the invitation for bids, issuing supply contract and managing inventory. Purchase information and information concerning the required materials also needs to be passed to the supplier by the procurement department. In addition, procurement department helps in supply chain or inventory management managing and directing supply of materials for manufacturing operations (Giunipero et al., 2011, p.66). Despite the role of this department, in Avion perspective, it failed to perform as expected. Procurement department at Avion Inc did not wholly evaluate the stock demands which required to be fulfilled.

The personnel at the office underestimated the material demand at 2500 units, while the actual demand turned out to more than 4000 units (Giunipero et al., 2011, p.815). Such eventuality emerged due to working in isolation with other departments such as marketing and production. Similarly, procurement department did not build a strong business relationship with suppliers. Procurement department also failed in their communication. In particular, the officers in that office ignored the communication the suppliers sent to them. Upholding a good relationship with suppliers help the company knows the exact demand for the materials for the production process.

The marketing department is another important component of a supply chain. Marketing process helps in two ways; determining the write suppliers and knowing periodical demands for the raw materials (Giunipero et al., (2011, p.71). Procurement and production are often done based on the demand of the product or sales. Marketing practices determine the quality of the product and what the customers wants then communicating such features to the procurement department. The reality is the quality of products starts with the quality of raw materials brought from suppliers to the production department (Giunipero et al., 2011, p.67). The blame for underestimation of units of materials also relies squarely on the marketing department. The case study analysis finds that marketing department understood that the volume of units required for a month has grown to 4000 units but failed to inform the procurement department. As such, procurement department did not plan well.

According to management researchers, Production department is one of the core components of the supply chain in any organization. Normally, this department is charged with the responsibility of maintaining communication concerning the demand for materials (Giunipero et al., 2011, p.75). It is the department which determines if an organization needs more supplies for continued manufacturing and operations. Leenders, Johnson and Flynn (2002, p.31) argued that from production department information, procurement department makes a decision on units of materials to purchase. Nevertheless, this department also failed to perform its responsibility. The personnel at this office at Avion Inc did not inform the procurement office about the lead time which should have been 10 days and not two weeks. The material handling group which is mainly under production department changed the operation plan, but failed to inform the procurement department. This situation led to problems with the purchase of the materials.

Question 3:b.

The initial concern in the Case

Initially, the two procurement managers at Bill and Susan think that Foster Technologies (suppliers) are not able to supply the adequate materials to Avion Inc as they had promised during contract negotiation (Giunipero et al., 2011, p.815). Foster Technology had promised to supply 2500 units of material on a monthly basis. The supplier’s inability is attributed to the human resource capability. The two even think of looking for another supplier who can a supplier such number of units and even more. Bill claimed that Foster Technology lacked employees in the key manufacturing ranks to provide the needed services.

Furthermore, the size of the company has been faulted by the Avion procurement manager as small and unable to produce the units of materials required (Giunipero et al., 2011, p.815). Upon more analysis, it was found that it was actually Avion faults for the supply chain challenges it has faced. The three parts of departments within the supply chain had failed to perform their duties as expected. As stated earlier, the procurement department failed to correctly assess the number of units of materials which was required by Avion Inc before signing a contract. Both marketing department and procurement failed to do the due diligence and know whether the company had the capacity based on the size and human resource competence to produce the required units of materials. For instance, Giunipero et al. (2011, p.815) posited that Foster Technology assured to deliver 2500 units monthly while Avion Inc actually needed 4000 units of materials monthly that is beyond the capacity of the Foster Technology and causing supply cycle contractions.

No communication or miscommunication between procurement department and production department and suppliers is also evident in the case study. The situation caused confusion all through the supply chain. According to Giunipero et al. (2011, p.815), it turned out that the production department needed the raw materials in 10 days as opposed to two weeks that was agreed earlier. A review of the case study reveals that the Avion changed the material quantities the wanted last minute when the supplier had just planned to deliver (Giunipero et al., 2011, p.815). Furthermore, when Foster Technology managers were reflecting on the issue, no procurement managers paid attention or even shown the willingness to solve it.

Question 3: c

How easy is it to switch suppliers? What could complicate a firm’s ability to switch to a new supplier?

The research shows that it is not easy to change suppliers. Switching suppliers take time as the company needs to search for credible ones while looking into factors such as the quality of the materials and costs. Such process is costly as the company has to visit supplier officers and even pay some fees. The charge can vary from one supplier to the others. Companies and suppliers normally enter into a legal contract which has obligations and needs to be met. The legality of such contract makes it difficult to abandon one and switch to another (Leenders, Johnson & Flynn, 2002, p.112). The company will require proving the supplier has actually breached the contract before switching to another. For instance, in the Avion Inc case study, both company and supplier can be found to have breached the contract. For example, Avion managers changed the content of the contract when they wanted the supplier to provide 4000 units of materials on a monthly basis when they actually signed for 2500 units within a month. Similarly, the vendor lied that they had the capacity to produce 2500 units of material which they could not. Also, Kosgei and Gitau (2016, p.138) contended that building a strong relationship with a supplier is always a complex task and takes time. As such, firms prefer to keep existing relationships than building and a new one.

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