Sourcing Essentials in Procurement and Supply - Case Study Example

Sourcing Essentials in Procurement and Supply: Case Study Analysis Student’s Name Institutional Affiliation Table of Contents Executive Summary……………………………………………………………………………3 1.0 Introduction..………………………………………………………………………………..4 2.0 Supplier Analysis.…………………………………………………………………………5 2.1 Benefits & Consequences of Supplier Analysis…………………………….5 2.2 Stakeholder Engagement Analysis in Procurement Process…………….6 2.3 Supplier Selection & Assessment: Literature Review……………………..7 3.0 Financial & Ratio Analysis of the Supplier.….…………………………………………..8 4.0 Strengths and Weaknesses of the Organization………………………………………12 5.0 Recommendation and Conclusion………………………………………………………14 References……………………………………………………………………………………..16 Executive Summary The organization’s profitability, efficiency and gearing ratios posit a sound and healthy operations within the two-year period. The higher profitability is attributed to improved sales revenues as a result of the management adopting workable marketing and pricing strategies that has triggered the level of sales revenues posted within the period. Efficiency of the management team reflects its capacity to collect cash for goods sold on credit within a shorter period and invest it in short-term projects in order to increases current asset base. The decrease in the gearing ratio indicates that the organization is making stringent efforts to eliminate possibility of using debt funds in the future hence reduce financial costs. However, the liquidity position of the organization is somehow risky given that falls below the recommended standard of 2:1. Despite all this, I recommended the organisation for the sourcing exercise involving Facilities Management Services but only for a short period of not more than 2 years to come in order to assess whether the liquidity position has improved or not. The positive recommendation has been associated with its current high profitability and efficiency levels of management that might allow for flexibility in pricing of intended supplies. 6.0 Introduction Research indicates that most of business-supplier partnerships present a risky affair (Humphreys, Huang, Cadden & McIvor, 2007). Thus, the ability to understand the possibility of potential weaknesses or vulnerabilities as well as possessing the capacity to manage each of these factors assures a purchaser of much tangible benefits. It is important to understand that the entire exercise involved in making heavy investment for certain projects can result to fundamental level of risks, which has a capacity to limit the readily-available level of cash flows and, also posits a challenge to a firm’s strength in pursuing other notable potential sources of revenues (Humphreys et al, 2007). For this reason, firms should ensure to adopt proactive mechanisms that focus on assessing the immediate financial stability of their suppliers in advance in order to minimize possible financial risks while still fostering the degree of business confidence with each new project in place. Consequently, the ability to strengthen on the connections within the entire supply chain helps to assist in reducing possible delays hence saving time resource at the end. Of particular interest to note, a purchaser is expected to undertake a mitigation delivery risk exercise in order to improve on customer service. Azadnia, Saman and Wong (2015) ascertains that recent-generated surveys on supply management indicate that whenever firm’s make effort to meet its project deliverables prior to the set deadline; it satisfies its different stakeholder groups that include; investors and customers. The focus of this assignment rests with the evaluation of a case study that involves the determination of the viability of a potential supplier to successfully conduct and meet purchaser’s requirements. In this regards, the paper focuses on finding out the supplier’s financial stability based on the readily-available financial statements and thereafter, make an effective and relevant recommendation on whether or not the supplier can be considered for a sourcing exercise for Facilities Management Services while still indicating whether a limit should be introduced on financial exposure awarded. 7.0 Supplier Analysis 2.1 Benefits & Consequences of Supplier Analysis The process involving the assessment of suppliers is considered to be a fundamental aspect in meeting procurement requirements. In addition to improving on business confidence that is necessary for ensuring that all projects are met on time, it also focuses on improving the overall supply chain; a feature that guarantees saving of time and money resource (Azadnia, Saman & Wong, 2015). Certainly, purchasers are called to identify business operations for which they can diversify suppliers as a way of mitigating skills and expertise risk. This is especially because; the overreliance on a single source of supply for certain business-critical products and services exposes a firm to intensive degree of vulnerabilities relating to external forces for which they lack control over (Azadnia, Saman & Wong, 2015). In fact, in the event that a firm is fairly-positioned to source to a given specialized product or service from an extensive number of places then it increases its flexibility as well as responsiveness to possible uncertain circumstances in the near future. There are also certain consequences that relate to failure to scrutinize potential suppliers on their capacities to undertake a certain sourcing exercise without any hindrance. In case of overreliance on a single or unreliable supplier, a firm will likely be subjected to financial loss (Azadnia, Saman & Wong, 2015). The process of managing supplier failure uncertainty is able to distort the overall value of the business that it provides these supplies. For instance, in the event that a supplier goes under, firms and their respective long term business plans will likely come to a halt or even altered. In essence, plans for underlying projects might be delayed till a time when newer and reliable suppliers are secured; estimates might require revision exercises; while still project chances might be lost in the end. All of these uncertainties in business operations might result to extreme financial loss for a firm. Notably, the failure to assess suppliers might result to violation of the contracts as well as distorted level of credit for firms (Humphreys et al, 2007). This happens especially when suppliers, without notice, goes out of business partnerships thereby rendering the purchaser unable to accomplish their own goals and objectives; meeting set deadlines and complete projects- an occurrence that might lead to violation of contractual agreements with other partners hence damaging their future credit reputation. The failure to assess also distorts the reputation image of a firm (Humphreys et al, 2007). It is noted that most successful businesses highly depends on customers’ positive reviews and referrals in order to secure future projects. However, this reputation and ability to attract proper reviews is challenged whenever there is little or no efforts to assess on suppliers’ financial viability. 2.2 Stakeholder Engagement Analysis in Procurement Process The procurement personnel ,while assessing the viability of underlying suppliers, is expected to engage the different sets of stakeholders that have an influence on the entire business activities as a whole (Humphreys et al, 2007). Some of the most important stakeholders that should be involved while undertaking this important task include; user branches, design department, the Board, and even the statutory authorities. These stakeholders should be engaged in order to come up with new policies and procedures that deems important and crucial in aligning the sourcing goals and objectives to the organizational strategies at hand (Humphreys et al, 2007). Consequently, it might involve implementation of initiatives for early buyer/supplier involvement within the business plans or even projects hand; formulation of a multi-talented teams needed for ensuring that the assessment process is undertaken to its completion and also, making relevant and knowledgeable presentation to these different stakeholder groups. 2.3 Supplier Selection & Assessment: Literature Review Kannan and Tan (2002) agrees that the ability to meet on purchasers’ immediate needs, which is considered to be the most crucial aspect, relates in a positive way with product quality while supplier operating capacity; which is deemed to be second in importance, correlates in a positive manner with quality management and competitive position of a firm. Both suppliers’ capacity to meet the purchasers’ needs and their capabilities are operational in nature since they are based on the ability to deliver in accordance with purchasers’ expectations. It is notably clear that high-quality delivered products or services have a high level of impact on the quality prowess of the purchasing firm’s products hence a positive correlation with such important factors as product quality and competitive position; in the event of supplier’s capability. Subsequently, the market share as well as the return on assets is performance mechanisms that portray a long-term position of the supplier. Thus, improving on the long-term position by the supplier requires both strategic commitment necessary for formulating and conducting a proper supply chain performance and also, a commitment to its business partner; purchasing firm. In determining the best criterion for evaluating suppliers, Ho, Xu, and Dey (2010) note that a multi-criteria decision making process is far much reliable and efficient in comparison to the conventional approach that only focused on costs. The author notes that there is need to embrace both individual and integrated supplier analysis models in order to come up with efficient information and knowledge about the viability of selecting specific suppliers over others. The commercial criterion needed in evaluating this supplier rests with conducting an extensive financial stability in relation to the existing financial statements. It is important to note that there are number of benefits for which a purchaser can enjoy while integrating technical and commercial criteria in evaluating a supplier and they include; gaining extensive levels of input from other relatively positioned functions of the supplier; it makes certain that the performance is assessed and matched to the requirements set in place; ensures that the purchaser is guaranteed of value for money invested; and also, reduces the degree of risk involved while still fulfilling the overall organizational goals and objectives. 3.0 Financial & Ratio Analysis of the Supplier Ratio/ Year Liquidity 2013 2014 Current ratio= current assets/ current liabilities 1,446+30,457+5,483/33,842+2,340 = 37, 386/ 36,182 =1.03 726+35,975+12,253/43,524+4,079 = 48,954/47,603 = 1.03 From the calculations above of the current ratio, it can be noted that the ratio value remains steady within the two period t 1.03. Despite any possible increase or decrease on this ratio value, it can still be noted that it falls below the recommended standard value of 2. In fact, the ratio value of 1.03 means that the supplier only has 0.03 of assets for every short-term liability held, which is way below the recommendation of 2 assets for every liability. It thus goes without saying that the supplier is unfairly positioned in terms of being able to meet short-term commitments as and whenever they fall due. Ratio/ Year 2013 2014 Gearing Ratio= Long term debt/capital employed 111/ (111+4,231) = 111/ 4,342 = 0.03 73/(73+4,206) = 73/ 4,279 =0.02 From the calculations above, it can be seen that the supplier’s gearing ratio decreases slightly within the two financial periods from 0.03 to 0.02. The decrease in the ratio value indicates that the supplier is trying so hard to eliminate the debt funds and thus, improve in equity funds to conduct operations and projects. The move is directed towards the right direction given that it eliminates the burden of the supplier having to pay-off enormous amounts as interest or rather finance costs to long-term debt (Helfert, 2002). subsequently, the willingness and ability to eliminate the level of long-term debt assures the supplier of full control of his operations as opposed to when using creditors funds that is accessed with lots of restrictions on projects to undertake hence the supplier will likely enjoy flexibility to conduct operations as and whenever they deem fit. Ratio/ Year Efficiency Ratios 2013 2014 Stock or Inventory Turnover = cost of sales/ average 112, 654/722 = 156.03X 124,677/150 = 831.18X Debtors days/period= trade debtors/ sales revenue *365 days 30, 457/138,276*365 days = 0.22*365 days = 80 days 35,975/161,438* 365 days = 0.22*365 days = 80 days Creditors days/period – trade creditors/ cost of sales * 365 days 33,842/112, 654*365 days = 0.3*365 days = 109 days 43,524/124,677*365 days =0.35*365 days = 127 days From the calculations above, the supplier’s stock ratio value increases significantly from 156.03 to 831.18 within the two periods; 2013 and 2014 respectively. The increase in this ratio value is an indication that the firm has adopted efficient ways for which to improve on the number of times stock is converted into cash resources. In fact, as a result of this increase in the stock turnover ratio there has a massive increase in the level of cash from $5,483 to $12,253 within the same period of operations. The supplier has maintained steady debtor’s days of 80 days. The efforts to maintain a steady number of days for which the customers can pay for products bought on credit is crucial for the supplier’s ability to access cash needed for conducting other short-term projects like the sourcing exercise at hand. In essence, the management team seems to have come up with efficient trade policies that might include; awarding trade discount for customers in order to encourage them pay at a much faster rate (Helfert, 2002). The money is then reinvested in some other short-term projects to generate even more revenues before a new batch order is made by the supplier. The supplier’s creditor’s day’s increases significantly within the two financial periods from 109 to 127 days in 2013 and 2014 respectively. The increase in this number of days indicates that the business has taken to withholding the cash resource from its customers that is needed for paying off their suppliers. This can be a deliberate attempt by the business to increase the number of days in order to direct the cash to short-term projects before fulfilling their commitment to pay (Helfert, 2002). As much as this might be seen as a workable and profitable strategy, there is a higher chance that the business might ruin their immediate relationship with their suppliers, which has a direct effect on the way they will conduct their operations in the future. In case the relationship is ruined, then the business will lose its viability to be selected for the sourcing exercise underway. Ratio/ Year Profitability Ratios 2013 2014 Gross Profit Margin = Gross profit/ sales revenues*100% 25, 622/138,276*100% = 18.5% 36,761/161,438*100% =22.8% Mark Up = Gross profit/ cost of sales *100% 25, 622/112, 654*100% = 22.7% 36,761/124,677*100% = 29.5% Net profit Margin net profit before interest and tax/ sales revenues *100% (1,344)/ 138,276*100% = -0.97% 4,217/161,438*100% =2.61% The business gross profit margin increases within the two-year period from 18.5% to 22.8% in 2013 and 2014 respectively. This increase indicates that the business has improved on its capacity to post higher earnings on its underlying trading activities. This might be attributed by the business adoption of intensive and workable marketing campaigns that has saw the increase of the sales revenues as a result of new customers; effective pricing strategies for its products so that there is increased sales; or even adopting of other effective marketing strategies like discounting to all products sold and paid for within a given amount of period (Helfert, 2002). The business mark up certainly increases from 22.7% to 29.5% within the same period of operations. The improvement in the ratio is an indication that firm is had devised efficient ways of improving their gross profit in comparison to the cost of goods sold. This might be a result of increased sales revenues due to effective and top notch marketing campaigns as well as sourcing for stock or inventories from cheaper suppliers. The net profit margin increases significantly from a negative percentage value of -0.97% to 2.61% in the two-year period. The significant increase in this ratio percentage postulates that the firm has established newer ways of ensuring to increases profits level in relation to the underlying business expenses in place. It might also be a result of increased level of sales revenues or rather turnover due to efficient management policies and, also adoption of up-to-date marketing strategies. 4.0 Strengths and Weaknesses of the Organization Having analyzed the financial data provided for the organisation, it can be noted that the operations of the firm are sound and healthy in so many ways. First, it can be vehemently ascertained that the organization’s profitability has improved over the two-year operational periods. There have been intensive efforts made by the management to improve on sales revenues while at the same time minimize the cost of goods sold in order to post sufficient amounts of profits. It is highly likely that the organization’s management has opted to improve on their existing marketing strategies in order to prompt increase in sales due to increase in customer-base and, also there is a higher possibility that they have opted to embrace up-to-date pricing strategies that serve to increase profit margins. In essence, the notion behind introduction of trade discounts has prompted more customers to purchase products. Secondly, the organization seems to be enjoying a stronger and much reliable efficiency mechanism. The computations of stock turnover, debtors and creditors’ day’s ratio indicate a positive operation. In fact, the organization has been able to come up with efficient ways of translating the existing stock levels into sales within a shorter period of time. This can be attributed to introduction of effective marketing strategies and discounts, which have prompted improved revenues from both new and loyal customers. Of particular interest to note, the organization seems to require customers pay for the products sold to them on credit within a shorter period of time as can be seen by the steady debtor’s days of 80 days while taking more time to pay for goods or stock materials they purchase on credit as can be noted by the increase in creditor’s days period. This is seen as a strategy that the organization embraces in order to invest the cash asset in short-term project before making payments. The company’s gearing ratio decreases within the period, which is a sound indication; it basically means that the firm has opted to use more of equity funds in conducting operations as opposed to relying on dent funds. On the contrast, however, the organization’s liquidity position is somehow unreliable considering that it remains steady within the given period and falls below the recommended standard of 2:1 ratio. In fact, at the present level, the organization’s liquidity position indicates that it has assets that are slightly above the level of current liabilities hence it is certainly unreliable in meeting its short term obligations for a long period unless there are improvements made in relation to increasing the level of current assets. Another crucial weakness noted rests with the fact that the firm has opted to increase the number of days it takes for it to pay-off creditors. While the increase might be a strategy to increase on its current asset base through engaging in short-term projects; it poses as an imminent challenge especially since it has a possibility of damaging past smooth relationships it had with its suppliers; an aspect that might result to future short supplies as suppliers would rather opt to cut down on amounts of stocks they offered on credit to the organization. 5.0 Recommendation and Conclusion To sum up the analysis above, it can be seen that the organization’s operations is sound and healthy in most of its operations especially in relation to profitability, efficiency and gearing ratios. The liquidity position is somehow unstable but there seems to be a strategy by the management to improve it soonest enough; gauging by the tremendous increase in the amounts related to cash resource within the two-year operational period. Considering this fact, I would consider this organization for a sourcing exercise for Facilities Management Services because the improved levels of profitability levels is a perfect indication that the supplier is flexible enough to offer lower prices for purported products/supplies. It also means that the supplier is fairly positioned in relation to financial success as well as trading proficiency. Certainly, the supplier’s management team also seems to be efficient in the capabilities to devise and implement policies useful for triggering higher level of sales revenues and this can be likened to intensive and strategic adoption of efficient marketing strategies prompted to be effective in ensuring improved sales revenues. Furthermore, the efforts of the supplier to cut down on debt funds might prove efficient in the long run given that the creditors of funds might allow the supplier even enormous amounts to engage in future long-term projects due to its present condition. However, I feel that the sourcing exercise should be done within a shorter period to ascertain whether the supplier will be able to improve on its liquidity position given that the current liquidity position poses a high degree of uncertainty. References Azadnia, A. H., Saman, M. Z. M., & Wong, K. Y. (2015). Sustainable supplier selection and order lot-sizing: an integrated multi-objective decision-making process. International Journal of Production Research, 53(2), 383-408. Humphreys, P., Huang, G., Cadden, T., & McIvor, R. (2007). Integrating design metrics within the early supplier selection process. Journal of Purchasing and Supply Management, 13(1), 42-52. Helfert, E. A. (2002). Techniques of financial analysis: A guide to value creation (11th ed.), New York, McGraw-Hill/Irwin. Ho, W., Xu, X., & Dey, P. K. (2010). Multi-criteria decision making approaches for supplier evaluation and selection: A literature review. European Journal of Operational Research, 202(1), 16-24. Kannan, V. R., & Tan, K. C. (2002). Supplier selection and assessment: Their impact on business performance. Journal of Supply Chain Management, 38(3), 11-21. Read More