Procurement and Purchasing Strategies - Case Study Example

Procurement and purchasing strategies Name Instructor Course Date Executive summary This report endeavors to establish the best practices in the component procurement process adopted by Advanced Computer Logic (ACL) within the organization. The report first provides a description of the current procurement issues faced by the company and sets out each of these challenges. The importance of identifying the issues is necessary because in order to find a solution to these issues, it becomes necessary to have a clear understanding of what is to be resolved. The report then assesses the strategic importance of these actuator components to the organization. In assessing the importance of these components, the report uses the Kraljik's procurement model and sets out four categories of components in an organization. This model provides these categories based on the supply of the components and its effect on the company. The model aims at removing supplier vulnerability and maximizing the potential of the company. This concept is necessary in the company as it assists in establishing the significance of the component to the company in order to develop a more reasoned strategic approach to solving the existing issues. Understanding the significance of a component is the primary objective that determines the most appropriate approach to attaining a more effective procurement process. After the significance of the component is established, the following step is to provide a process of obtaining appropriate suppliers for the components. This process is also beneficial as it determines the reliability of the supplier and determines the price of the components based on the market structures. The most effective approach in this situation is using Kearney’s seven steps for strategic sourcing. These steps provide an effective strategy in the process of obtaining a competent supplier as it looks at all the aspects involved. The steps cover the needs of the company, significance of the component and the environmental factors surrounding the supply of this component including the supplier. In developing the most effective strategies, the report also considers the option of manufacturing the components in house. In considering the option of manufacturing the components, in house the report looks into the advantages of outsourcing as well as its disadvantages and uses this analysis in considering whether to manufacture the components in house or outsource the supply of components. Manufacturing in-house might seem to be the best alternate for the organization but in order to opt to in house manufacturing it is essential to establish the viability of this option thus the report provides this analysis and establishes the best approach to this option. Accordingly, the report provides recommendations on the issue and recommends that: 1. The company should adopt purchasing strategies that aim at reducing logistical complexities and administrative costs. 2. The company should develop a strategic approach in selecting competent suppliers at the same time reducing the costs involved in the process. 3. The company should approach the outsourcing process of with diligence to ensure effective results. Current Procurement Issues The procurement issues being experienced by the company touch on its procurement of actuator components. The problem is that there are several suppliers who supply identical components to the company. These suppliers are contracted by the company but through the various departments. It is evident that these departments have various reasons for engaging with the suppliers, which range from the performance of suppliers to informal advice given by these suppliers. The departments pose valid reasons for engaging with different suppliers but this situation significantly affects the company in terms of cost. The most notable of this challenge is that the value attached to procurement of these components significantly increases and affects the productivity and performance of the company. In light of these challenges, it becomes necessary for the company to develop a strategy that seeks to solve the issue and reduce the costs associated with these procedures (Joel, 2011). Among the various options available to the company is manufacturing the components in house, in contrast to outsourcing them in order to reduce costs. Alternatively, the company can develop a strategic procurement strategy that aims at reducing the supplier base, by selecting the best supplier or suppliers of the components with an aim of reducing procurement and administrative costs. Strategic Importance of Components Kraljik’s procurement model assists the organization in the development of a purchasing strategy for its items. The aim of the model is to remove the vulnerability of supply and maximize the organizations potential buying power. This model allows the organization to work in a smarter way with existing suppliers. This is achieved through per supplier or per product basis, and determines the relationship the organization should foster with each of the suppliers. This model maps the profit impact of an item on one axis, and vulnerability to the supplier on the other. This result in four quadrants that form the categories of the organization products based on supply. These categories are strategic items, leverage items, bottle neck items and non-critical items (Andrew, Ruth and John, 2001). 1. Strategic Items Strategic items have a significant financial effect on the organization. This means that either these items have a direct link to the organization’s profit or differentiation or the organization spends an outstanding deal of its finances on these items. This quadrant represents items with a high-value such as scarce items with single or limited suppliers. The purchasing strategies used for these types of items comprise strategic partnerships and collaboration. If an organization seeks to develop a comprehensive strategy to manage suppliers, then this area must have a high priority. The goal here is to maintain excellent relations with the strategic partners 2. Leverage Items Similarly, the items in this quadrant have a significant financial effect on the organization though; the item is in ample supply. Because of the significant financial impact these items have on the organization they are vital to the organization. In purchasing these items, the appropriate strategies include competitive and bidding tendering. These items allow the organization to exploit its purchasing power by use of tendering, product substitution, and target pricing. 3. Bottleneck Items Bottleneck Items that have a small financial impact on the organization; nevertheless, there exists a high supply risk. To put this in context is where there is a new supplier providing new technology. Andrew, Ruth and John, (2001) provide that an effective purchasing strategy in such circumstances is to use strategies that ensure the continuity of supply and to develop policies aimed at reducing dependence on the supplier. This can be achieved through adapting products and exploring alternative suppliers and products. The handling of these products should be by vendor control, volume insurance, backup plans, and security of inventories. 4. Non-critical Items This category of items that have little financial effects on the organization and are in ample supply. Even though, these items have a low effect and are in ample supply, they are, however, interesting since the cost of handling these items can outweigh product cost. Hence, the appropriate purchasing strategies employed here focus on reducing logistical complexities and administrative costs. These products require product standardization, efficient processing, inventory optimization and order volume. Actuator components fall under this category of non-critical items since there are many suppliers the items are in plenty, and they are of interest to thee organization. Additionally actuator components can profoundly affect the cost of the products of the organization in the same way non-critical items do. Reduction of the Supplier Base and Supplier Assessment The best sourcing g process to identify a new supplier requires the employment of the Kearney’s seven steps for strategic sourcing. According to Robert et. al (2010), this process leads to optimal negotiations since the facts on the issue are gathered and analyzed, and this gives the organization a firm base to undertake negotiations with suppliers. The results of this approach include savings in finances, value addition from suppliers, and saving on time (Choi and Krause, 2006). Step 1: Profile the category The purpose of this step is to understand the organizations internal application of products and the external markets. A perfect understanding of these two aspects is necessary to determine the best strategy for sourcing. It also assists to develop a strong fact base when dealing with negotiations later in the process. This step is the most laborious stage of the entire process; therefore, it is imperative to start the step early to ensure completion. This step involves spending analysis, which identifies the organization’s spending with a supplier. According to Florian (2012), another critical aspect here is needs analysis, which focuses on the development of a thorough, considering the needs of products, the organizations view of the performance of suppliers, and other enhancements that the organization would like to introduce in the product. The necessity of the product to fulfill the existing and future requirements of consumers is also noteworthy. Subsequently supply market analysis, helps develop an understanding of the external supply environment that the supplier operates in and market forces the supplier faces. Determination of the present competitive position, competitive pressures, technology pressures, and cost pressures, as well as alternative suppliers, is identified at this stage. Step 2: Select the sourcing strategy The sourcing strategy identifies how the sourced product aligns with the company’s general strategy. The position of the item in the positioning matrix is also beneficial in identifying the appropriate strategies. This follows that the items in the leverage or non-critical categories require strategies such as volume concentration, and best price evaluation. Items that fall within the bottleneck or strategic categories require sourcing strategies such as a product specification, relationship restructuring, improvement, and joint process improvement. Another strategy to put into consideration in these circumstances is demand management. Step 3: Generating supplier portfolio This step involves widening the supplier base and ascertaining all feasible suppliers for the desired items. In this step, it becomes essential to use the needs analysis conducted earlier in the first step to develop criteria for selecting suppliers. The selected criteria depend on a variety of issues comprising the type of item being sought and the category of the item on the needs analysis. Step 4: Select the implementation path The objective of this step is to establish the most appropriate strategy for selecting the identified suppliers. The traditional and most appropriate route in this activity is conducting request for proposals. In the proposal, the organization sets down its requirements and requests the suppliers to stipulate the particulars of their proposed offers including pricing. In order to allow the organization to compare the suppliers on an equal basis, it is critical to complete a standard pricing matrix. Step 5: Negotiate and select suppliers This stage involves negotiations and is attached to a lot of significance; therefore, it requires careful preparation. Information is the vital in developing a negotiations strategy and includes the needs analysis and information from the request for proposals. Additionally knowledge of the supplier markets and their probable bargaining stances are also essential. Robert (2011) provides that understanding the organizations current bargaining position, the most desired outcome, the least acceptable agreement and the best alternative to a negotiated agreement, as well as its negotiation levers, are vital requirements. Step 6: Integrating suppliers If the organization decides to work with new suppliers or discontinue old suppliers, then it is imperative to identify transition issues and consider the organizational effects and any necessary changes. Where necessary, it is also vital to create new procedures and processes and develop an implementation plan whilst communicating the changes to the organizations users where necessary. Step 7: Monitoring the supply market and supplier performance Planning and stay up-to-date with the supply market situations follow after the supplier is contracted as this assists in renewal of supplier contracts. Notably the performance metrics agreed upon with the supplier are undertaken at this stage, and these include improvements and meetings (Wu, et. al. 2007). ACL – Make or Buy Decision Advantages of outsourcing 1. Reduced manufacturing costs The most significant justification for the organization to out-source is the trivial expenses involved in the process. Manufacturing in house warrants the organization’s spending of extra money on researching, developing, and marketing the product. Access to a more profitable organization is the most outstanding technical, objective companies choose to outsource. 2. Improving of the organizations focus The organization can focus on the wider scale of business sections while leaving some details to experts. This is because different types of activities need time and attention. However, the solutions are obstructed in the decision gridlock, usually at the middle management. Financial losses that affect the prospects of the organization occur and, therefore, organizations prefer to outsource. 3. To gain contact with world class capacity According to Chatzoglou and Sarigiannidis (2009), when an organization outsources it gains access to the supplier’s methodology, investments in technology, and people. Outsourcing also gives the suppliers the capacity to refer to the expanded knowledge in the field through working with other clients with related demands. 4. Avail resources for other purposes Often the redirected resources as a result of outsourcing are the employees. When the organization outsources some of its operations to outside companies, it can redirect these personnel to other gainful activities. 5. Non-critical business functions Outsourcing acts to decrease the investments made in adjoining the organizations activities. 6. Shared risks – availability of better technology Outsourcing spreads the risks associated with the items between several individuals, which reduce the risk of the company. 7. Improvement of production and abstraction of delays More components or products are processed outside the organization in a shorter time, and this saves the company’s resources as they are focused on the main activities. 8. Additional profits for employees Outsourcing increases the efficiency and productivity of employees and management. This result in better utilization of resources, employers, and enables the employees engage in activities they possess the necessary skills, therefore, improving their self-esteem. Drawbacks for outsourcing 1. Underestimation of communication costs The higher communication expenses and long distance in working with suppliers require management techniques from the organization. 2. Loss of control over technical staff, key information, and crucial knowledge An independent supplier whose interests may differ from that of the organization controls the knowledge of the technical staff and their performance. 3. Loss of leadership in organizational relations Outsourcing relations tend to expand, and the supplier might have control on the organization in time. 4. Business continuity Dependency on suppliers might grow overtime which makes the organization dependent on such supplier thus affecting its continuity. 5. Suppliers working for competitors With time the supplier might start working for the organizations competitors and tend to transfer, the organizational know how to competitors who can use such information against the organization. 6. Risk of failed projects The organization might suffer high substantial damages when an item is not delivered promptly. This situation makes the organization vulnerable. 7. Unfair and sly suppliers The supplier might turn out to be surprisingly sly and knowledgeable and could abuse its experience in the outsourced project to the organizations disadvantage. In light of these advantages and disadvantages of outsourcing, the most appropriate approach to the case of actuator components would be to outsource. Despite its disadvantages, outsourcing remains the best alternative as the advantages outweigh the drawbacks in this circumstance (Sharma and Loh, 2009). Recommendations In order to identify the importance of the components in the organization, it is prudent to categorize the content according to the Kraljik’s procurement model in order to establish its importance. Consequently, this classification places these components at the non-critical category, which implies that the components have a small effect on the company but are still necessary for the company to operate effectively. Hence, a solution to assist in solving the problem becomes inevitable (Derek, 2008). The recommendation on this issue is to adopt purchasing strategies that aim at reducing logistical complexities and administrative costs. The objective here is to have product standardization, efficient processing, inventory optimization and order volume. In reducing the supplier base, the company should develop a strategic approach in order to guarantee that correct suppliers are obtained and that these suppliers are capable of delivering the outsourced products effectively. An essential strategy here is the use of Kearney’s strategy, which provides seven steps to effective outsourcing. Following the strategy results in effective assessment of prospective suppliers and ultimately provides the best supplier for the items. Concerning manufacturing the actuator components in house or outsourcing, the best approach to the problem would be outsourcing since outsourcing has more benefits to the company than manufacturing in house. However, the process of outsourcing must be approached with diligence and the employment of outsourcing strategies must be used to ensure appropriate results, which are reducing costs and finding reliable suppliers. The basic strategy to outsourcing will be the employment of the Kearney’s seven steps outsourcing strategy. Reference list Andrew E., Ruth F., & John M 2001, Best Practice Procurement: Public and Private Sector Perspectives. Gower Publishing, Ltd. Chatzoglou, P., & Sarigiannidis, L 2009, Business outsourcing and organizational performance: the case of the Greek hotel industry. International Journal of Services Technology and Management, 11(2), 105-127. Choi, T., & Krause, D 2006, The supply base and its complexity: Implications for transaction costs, risks, responsiveness, and innovation. Journal of Operations Management, 24(5), 637-652. Derek H. W 2008, Procurement Systems: A Cross-industry Project Management Perspective. Routledge. Florian C. K 2012, An Evaluation of Supplier Selection Methods in Strategic Procurement. GRIN Verlag. Joel D. W 2011, Principles of Supply Chain Management: A Balanced Approach. Cengage Learning. Robert, M., Robert B., Larry C., & James L 2010, Purchasing & Supply Chain Management. Cengage Learning EMEA, Robert W. T 2011, Supply Management and Procurement: From the Basics to Best-in-Class. J. Ross Publishing. Sharma, A., and Loh, P. 2009. Emerging trends in sourcing of business services. Business Process Management Journal, 15(2), 149-165. Wu, T., Shunk, D., Blackhurst, J., and Appalla, R. 2007. AIDEA: a methodology for supplier evaluation and selection in a supplier-based manufacturing environment. International Journal of Manufacturing Technology and Management, 11(2), 174-192. Read More