Procurement Issues in Refined Bus Limited - Case Study Example

Case study report: Refined Bus Limited Student Name Course Institution Date Case study report: Refined Bus Limited Executive summary Refined bus limited Company deals with manufacture of buses and sells parts of buses through its service support center. The company has its major plant in Doncaster, England that majorly handles manufacturing activities. The service support Center (SSC) owned by the company is also located in the same site with manufacturing plant of Doncaster to offer parts to customers of Refined Bus limited who operate buses made by the company. This indicates sustainable customer relations and ability to retain clients of the business. Although the company is doing well, there are certain procurement issues that management must take into consideration and seek remedies. Figures in the procurement department seem not to add up as expected where expenditures are exceeding returns from sales. The organization function incurs a total of £325 million each year when the service support center realizes a total of £30 million each year from sales. However, in the total expenditure, eighty percent are expenses incurred on ten important suppliers of materials needed by the company. Refined bus limited utilizes materials such as electronics, tubular fabricators, aluminum sheets, doors, glass, carpeting and seating that it acquires from its strategic suppliers. The company needs to meet demands of its customers whose satisfaction rate is at 67.3%. Currently, available inventory is at £ 26 million with a total of £ 96 million inventory channeled to meet production requirements. Since the company is involved in production, receipt and discharge of stocks, it will require qualified work force in areas like logistics data handling, finance and suppliers are indispensable. However, this should be maintained at reasonably minimal and affordable levels.Refined bus limited company’s supplies and selling channels must be incurring a hitch since the company is currently selling parts of buses that are twenty years old since manufacturing date. It is definite that the procurement and inventory function needs a drastic improvement and strategic changes in its policies and processes by resolving current issues. It is the responsibility of head of procurement and inventory management to ensure that the improvement procedures are implemented and that the organization welfare from procurement and inventory unit is well catered for. Policies such as first in first out need to be instituted and Just In time approach in acquiring supplies will also help the company avoid wastage and save storage expenses while ensuring fair tendering procedures to all suppliers. Supply chain management is another important function that the company can apply in the system. With the recent inventory hitches and overdue deliveries, the procurement and inventory management manager will integrate supply chain planning, supply program and purchasing management which prevents further hiccups on inventory, supply and demand procedures. Resource planning, project costing and activity management are vital to ensure efficient management and control of organizational projects. There is ineffective use of the company’s working capital because the company does not apply Just in Time inventory methodology. Partnering is another technic that Refined Bus ltd has neglected that can be beneficial to the business for the sake of diversity. The company has set up its own service support center and employs in-house production of all items it requires thus locking out partners that might improve its operations. Procurement issues in Refined Business Ltd A major procurement challenge of Refined Bus ltd is based on its cost efficiencies and pricing strategy in terms of maintaining competitiveness. Another issue facing Refined Bus ltd is its procurement process. The company employs direct negotiation, also referred to as sole sourcing process where contractors or suppliers do not compete but perform direct supplies. The company has selected its own ten suppliers it considers important to the business. Other methods like tendering and direct purchase pose competition to parties and therefore suppliers are challenged in terms of offer price and also quality. According to NSW Government (2008), although direct purchasing has the challenge of quality and availability, it is effective to the organization since it is the company that goes out of its way to seek quality it needs. The company has already put £ 96 million inventory in production and remains with £ 26 million inventory in stock. Procurement issue in this case is that the company needs to minimize the risk of wastage and at the same time delays as a result of delayed deliveries or procurement procedures. The department must understand when deliveries should be made of any materials or equipment needed in the manufacturing process. A time plan for the general procedures of procurement is vital so as to work within a specific time schedule and have a basis of reference. The plan also acts as a checklist outlining when to start and what goals to attain before that specific time (Yulek and Taylor, 2012). Importance of strategic suppliers: Kraljik’s procurement model Although the strategic suppliers are among procurement issues at stake, according to Kraljik’s procurement model, the ten strategic suppliers of Refined Bus ltd who account for 80% of the function’s expenditure are important to the organization. Since Refined Bus ltd is the purchasing company, Kraljik’s procurement model advocates for the strategic suppliers’ presence to the business. The model is focused on ensuring security in supply acquisition by the purchasing company while at the same time cutting on extra costs by maximizing on purchase power. Being a manufacturing company, Refined Bus ltd has a variety of commodities that require supply among which some bear high supply risk in cases of government instability, inadequate suppliers and scarcity in raw materials. Some of these products account for very high value to the company’s productivity and therefore need to be secured for the sake of the company performance. Strategic suppliers are important in securing strategic items and ensuring company productivity. Leverage items also require maximum purchasing power which strategic suppliers will offer to the company. Strategic suppliers are important hen the company is doing an analysis of its market since it does so with definite figures and information relating to these specific suppliers. The power of suppliers can be determined through previous reports of the suppliers’ transactions (Bildsten et al 2010). Strategic supplier reports help the management and procurement unit to be able to plan depending on its strength as the buyer and the strength of the strategic suppliers. This information is useful; in making viable information based decision is on whether to exploit, balance or diversify. Where both are high or both are low, diversification is the best option. However, where Refined Bus ltd has high strength as the purchaser, they are in the right position to exploit their suppliers. Execution of the action plan will be based on analysis of the suppliers (Bildsten et al 2010). Improving the Service support center client demand satisfaction In order to improve the SSC client demand satisfaction rate of 67.3%, the procurement team need to ensure that intelligence of suppliers is considered and quality offered to these customers is at their best other than other relationships with stakeholders of the business. According to Hoek (2013), a company needs to know and understand how their suppliers, especially the strategic ones segment the company who are their clients. Refined Bus ltd is in need of a defined system that is focused on communicating to customers and allocating time to track customer satisfaction levels not only from customers but also other company stakeholders. Information acquired from monitoring procedures of internal and external customers is then used to set targets to meet the required level of satisfaction. To improve the client demand satisfaction, an operational plan will be need to understand the current status and what procedures will follow.An operational plan will link goals of the purchasing department to goals of general organization and provide a plan of the department and organization operations. It is vital since the organizations needs to identify its current status, where it intends to be, strategies for attaining intended position and how this success will be measured. According to Sollish and Semanik (2005), an operational plan serves as the first step in formulating a request for operating budget and also the last step. Refined Bus ltd through its head of procurement and inventory management will intend to reduce the impact of loss of work on the business. This will be attained by asking the purchasing team to work collaboratively with sales and marketing, to identify areas of growth and savings to this effect. Despite the current situation of the company, there is still hope that it will beat its competitors for the work. An operational plan will help the organization ways on how it can reach the three year goal (Razmdoost, 2009). Refined Bus Ltd operational plan: Steps Content Prime owner Strategy 1. Vision The wave to ride Goal (Overall details) Core contribution and values 2. Customer needs and channels of distribution Customer segments (Australia, China, Singapore, India and America). Distribution channels 3. Competitive situation and trend By customers segment By distribution channel Prominent players in the civil sector 4. Necessary products and services By customers segment By distribution channel Improved service and a differentiated offer to the airlines who fly Retrolair planes 5. Products and services strategies Product life cycle plan per product (Price/performance/time) Partners, purchase plan 6. Financial analysis and plan Financial model Risk analysis Operational plan 7. Operational goals (3 years) and plans Top level operational sales plan Sub level operational plans Same for products, manufacturing and service The company’s procurement and inventory management unit intends to attain the following goals in one and half years: Goal 1: Reduce impact of loss of work business by integrating sales and marketing functions to identify areas of growth and savings. Goal 2: Double contribution of sales of bus parts to company revenue Goal 3: Expand investment through partnering Goal 4: Gain a larger share of the bus parts market by focusing on improved service and a differentiated offer to clients. Tendering process The company will first identify its supply needs within the departments so as to understand what is required and with what urgency. A meeting is held among the management team to establish and approve need of the items while at the same time set date of inviting people for tender through publishing. After notification and applicants submit their applications, the company can conduct a detailed evaluation and analysis of the tender to identify qualified parties. Tenders will them be awarded to qualified parties only depending on stated qualities by the department and organization leadership. The purchasing function in an organization is essential especially in inventory management (Lewis, 2009). According to Monczka (2010), purchasing function ensures that organization purchasing and distribution operations link tactical goals and objectives to strategic goals and objectives through an operational plan. Operational plans provide a description of any possible challenges, requirements for success and illustrate portions of the plan that will be used over a given period of time. It is up to the purchasing manager to stabilize the purchasing function and create links with other departments for a well-operating organization. Component manufacturing in Refined Bus ltd production facilities It is appropriate for the company to integrate component manufacturing in the production facilities of the company. In house component manufacturing saves costs. However, sourcing it through partnering poses a challenge to the company in terms of quality. The main task for head of procurement and inventory management together with staff is the burden to develop procurement systems and processes that will change the culture of the procurement and inventory function other than suggesting and implement by consulting company advisors (Great Britain & Great Britain, 2010). The classical technique involving six sigma approaches seems to be outdated and attaining less result than expected. These changes and adjustments have to be implemented out the management infrastructure, mindsets and behaviors and the procurement system. Culture change in operations networks of the company’s inventory procedures is intended to change how cost minimizing and value creation strategies will be put in place through alignment of the firm’s assets and resources. Recommendations It is appropriate for Refined Bus ltd Company to employ Just in time approach. Just in time (JIT) approach is a non-costing policy applied in production involving inventory used within production processes and other carrying costs thus maximizing organization’s return on investment, its efficiency and quality. The policy relies on other key elements of a lean type of manufacturing system. Being a production company and the state that it is in, Refined Bus ltd will not afford to accumulate more stock of supplies or some produced products. JIT will save storage costs for bus part products facing threats; the company might reduce incidences of suffering losses as a result of lost market. This will involve planning and not based on stability presumption. However, JIT takes into consideration aspects of price volatility by assuming a level of stability in input price. At this level of input, JIT does not advocate for purchasing of more input before prices rise and become more expensive for the company. Main focus of Just-in-time is on the minimization of a firm’s inventory. In this case, input inventory of the organization can be outsourced to suppliers (Cheng et al, 1996). Purchasing input in advance will require more storage and increased carrying costs that JIT does not support. Other advantage of JIT involves total quality controls and improved product design through configuration of standard production and increased compliance of workers. Expectations of quality are enhanced since wastage is reduced and product design is married to process design (Cheng et al, 1996). Undertaking and appropriate product costing system is important for the organization operation and ease in management. Product costing information is used by management of organizations in valuation of inventory for the purpose of preparing financial reports. An appropriate product costing system ensures that relevant cost information is provided in time so as to make enhance efficiency in strategic planning and analysis of organization’s profitability. Adequate planning in turn saves the cost of wastage and irrelevant spending. An appropriate product costing system allows assessment of profitability and strategic analysis of the organization. Product line level of accompany is important since most management decisions are based on that level. For instance, decisions concerning a product portfolio in firms dealing in large scale production of diversified products locally and internationally depend on product profitability. According to Fisher and Krumwiede (2012), costing and operational control in most organizations entirely depend on the product costing of the firm. Due to diversity in demands for information on cost, there is no product costing system that can be able to solve both strategic needs and reporting needs. However, identifying the organization setting and needs is vital so as to identify a suitable system that will meet most of the firm’s needs. Operations functionality system provides a complete business cycle through end to end logistics and procurement procedures. The flow of materials is improved by transforming self-service application to flexible billing. Process manufactures are also able to manage production, life cycle in product development and manufacturing procedures. Automation of the manufacturing and production processes cut costs incurred on controlling. This improves customer satisfaction by increasing the quality of products offered to consumers (Thai, 2001). Bibliography NSW Government, 2008, Procurement by direct negotiation. New South Wales government. Retrieved from: Hoek, R. V., 2013, The Problem With Procurement. < http://blogs.hbr.org/2013/08/the-problem-with-procurement> Bildsten, L., Rehme, J. & Brege, S., 2010, Applying the Kraljic model to the construction sector: The case of a prefab housing factory. Retrieved from: http://www.arcom.ac.uk/-docs/proceedings/ar2010-1029-1037_Bildsten_Rehme_and_Brege.pdf Lewis, H. (2009). Bids, tenders & proposals: Winning business through best practice. London: Kogan Page. Retrieved from: http://books.google.co.ke/books?id=94ONapXS5PAC&pg=PA19&dq=tendering+process&hl=en&sa=X&ei=JrR9U_bPOdKM7AbiooGoBw&redir_esc=y#v=onepage&q=tendering%20process&f=false Thai, K. V, 2001, Public procurement re-examined. Journal of public procurement. PrAcademic Press.< http://ippa.org/jopp/download/vol1/Thai.pdf> Great Britain.,& Great Britain. (2010). Private finance projects and off-balance sheet debt: 1st report of session 2009-10. London: Stationery Office. Retrieved from: http://books.google.co.ke/books?id=G_BMOdxwIC4C&pg=PA106&dq=tendering+process&hl=en&sa=X&ei=JrR9U_bPOdKM7AbiooGoBw&redir_esc=y#v=onepage&q=tendering%20process&f=false Sollish, F., &Semanik, J. (2005). The purchasing and supply manager's guide to the C.P.M. exam. San Francisco, Harbor Light Press. Retrieved from: http://public.eblib.com/EBLPublic/PublicView.do?ptiID=267279. Razmdoost, K. (2009). Developing a Refined Model for Purchasing and Supply System Transformation: Benefiting from Organizational Change Theories in Purchasing Development Models. Retrieved from: http://www.academia.edu/1778028/Developing_a_Refined_Model_for_Purchasing_and_Supply_System_Transformation_Benefiting_from_Organizational_Change_Theories_in_Purchasing_Development_Models Monczka, R. M. (2010). Purchasing & supply chain management. Andover, Hants: South- Western/Cengage Learning. Cheng, T.C.E., Susan Podolsky, and P. Jarvis. 1996, Just-in-Time Manufacturing: An Introduction. London, Angleterre: Chapman and Hall. Fisher, J. G and Krumwiede, K, 2012, Product Costing systems: Finding the right approach. online publication: Wiley Periodicals. Inc. Yülek, M. A., & Taylor, T. K., 2012, Designing public procurement policy in developing countries: How to foster technology transfer and industrialization in the global economy. New York: Springer. Retrieved from: http://books.google.co.ke/books?id=VUR0sXUSi78C&pg=PA46&dq=Kraljic+procurement+model&hl=en&sa=X&ei=F7V9U7bJCojm7Aa194H4DA&redir_esc=y#v=onepage&q=Kraljic%20procurement%20model&f=false Read More