The Role of Supply Chain Management - Assignment Example

?QUESTION INTRODUCTION The role of supply chain management has increased drastically in the last few decades. The immense importance given to supply chain has encouraged businesses to form better relationships with all the stakeholders involved in the supply chain. These stakeholders are no more restricted to the customers only, but other important stakeholders such as suppliers, vendors, and distributors have been given significant importance. This has allowed businesses to improve the value of the product or service being delivered at every step and thus it has helped in better satisfying the customers. Although, it was considered before that the supplier is happy to form relationship with the company and same was the case considered for the buyers i.e. buyers are looking to form relationships with the company and this is the reason why they are buying the product from the company. However research shows that this is not the situation in most of the cases. The needs and satisfaction of suppliers and customers do not match in different cases and either one of these parties loses their money in forming relationship. Therefore in order to discuss the relationship between the buyers and suppliers, a four quadrants purchasing portfolio from the perspective of buyers has been presented below: (Santema and Verheul, 2012) The above four quadrants represent four different situations of buyers. However the focus of this section of the report has been on the second quadrant which is ‘Routine’. Therefore, the routine quadrant has been discussed in detail in this part of the report. The other sections of the report discusses about the other three quadrants and the relation of buyers with the suppliers in the other three quadrants. Moreover, the report applies the above matrix on New Bridge Cutlery Company in the last part of this report. QUADRANT #2: ROUTINE The second quadrant is ‘Routine’ which includes products that are purchased on a regular or routine basis by the consumer. This quadrant means Process reduction which means that the cost of demand are not equal to the value given by the consumer, thus the value will be low as well as the complexity. Santema (2011) has said that in routine cases, the products and services are available in the market; therefore there are no high rewards in forming relationships with the suppliers for the buyers. Moreover, Santema (2011) added that in such cases, the buyers are looking for transactional exchange. Gelderman and Weele (2002) have stated that buyers in routine cases are looking for more efficient processes. It has been said that buyers do not put much effort in order to create the relationship in this quadrants. On the other hand, the suppliers have to go an extra mile in order to make sure that the customers are satisfied and they are able to receive the products or service they want to. Therefore there has been a drastic mismatch between the two stakeholders. Buyers are not likely to pay attention in routine products. As there are many suppliers available, thus this mismatches the demand and supply of these routine products and this reduces the risk and therefore consumers do not give high attention. In such a scenario, the buyers are the dominators (Gelderman and Weele, 2002). Identifying a preferred supplier and then working solely with that supplier could change the position. This could result in reducing the valuable purchasing management time. Portier et al (2011) have claimed that generally buyers do not form such relationships or do not prefer any supplier for routine products or services and buyers do not form supplier relationship. This relationship has been termed as the Key Supplier Management. The main reasons for such relationship not being formed are the barriers that restrict them. These barriers include inability to integrate the purchasing or procurement activities with the other activities, complexities involved in building relationships of supplier portfolio and implementing them, and limited knowledge about value co-creation between the buyers and suppliers. On the other hand, suppliers tend to identify the customers that could give them the most value. Wengler et al, (2006) have identified that almost 70% of Business to Business companies identify their Key Accounts or prospects. These key accounts have been termed as Key Account Management by Homburg, Workman & Jensen, (2002). When the businesses are operating in a competitive environment, this allows businesses to form better and stronger relationships with the most important customers. This not only results in reducing the cost of the suppliers as most of the revenues come from the most important consumers but it results in improving the profits as well. The following figure presents the customer pyramid that businesses generally form: (Santema and Verheul, 2012) Therefore, it can be said that in routine quadrant, businesses or suppliers are the ones that are looking to build stronger relationships with the buyers in comparison to the buyers. By building stronger relationships, suppliers are able to reduce their cost as presented in figure 2. Moreover, greater revenue is generated from that particular customer segment hence reducing the risk in a competitive environment and making the organization more profitable. APPLICATION ON OTHER THREE QUADRANTS The first part discusses about the second quadrant of the matrix and whether buyers or suppliers put an extra effort in order to make the relationship stronger. This part of the report discusses about the three other quadrants and the role of supplier as well as buyers in each situation. Quadrant #1: Leverage In the first quadrant ‘Leverage’, the buyers are generally looking to save as much money as possible and thus it has been represented as the lowest price that the consumer will go for. This quadrant will include products that have low risk and have high value and for this reason, the consumer will look to save as much as possible. In this situation, the buyers as well as the suppliers would be looking to build relationships with each other. This would allow the buyers to reduce the cost as the value of the product or service is high. By reducing the cost, the value would further increase and the buyer would be able to improve their cost to benefit ratio. Moreover, by selecting few or one supplier, buyer would be able to have slight more bargaining power in this situation. On the other hand, suppliers would like to form relationships with the buyers in order to reduce their selling cost and increase the profits just like the quadrant 2. Similarly, by segmenting the buyers into different segments and identifying the most profitable buyers, the suppliers would be able to improve their profits as well. Quadrant #3: Strategic Collaborative The third quadrant is the strategic collaborative i.e. the consumers would like to form a close relationship with the suppliers particularly because of two reasons; the first reason is that the value is very high and the other reason is that the risk or complexity is high as well. Therefore the consumers in such cases would like to form a close strategic collaborative relationship with the suppliers. In this situation, the role of buyer would be critical. Buyers are more likely to be involved and have close relationship and collaboration with the suppliers. With higher risks involved, suppliers may not be looking to form much stronger relationships in comparison to the previous cases. In this quadrant, the value as well as the risk is high, therefore both the stakeholders need to work in collaboration and as a unit in order to be successful and achieve the objective. However, buyers would put in extra efforts in order to ensure as the value is high as well as the risk. Quadrant #4: Bottleneck The fourth quadrant is the bottleneck. In cases, when the value is low but the risk or complexity is high, then the consumers would like to form relationship with the suppliers in order to make sure that the supply is safe and secure. In this situation, the risk would be high but the value would be low. Therefore both the two parties would not be putting much effort to improve the relationship. APPLICATION TO NEW BRIDGE CULTERY COMPANY: If the above model is applied on New Bridge Cutlery Company, then the company can be placed in the second quadrant. To supply cutlery, there would be a number of firms available and the market would be highly competitive. On the other hand, the buyers would not be looking to form stronger relationships as the value is low. Thus, in this situation, the supplier has to put an extra effort in order to identify the most important customer segments in order to reduce their cost, improve efficiency and enhance profits. ANSWER # 2 APPLICATION OF THE TRIPLE BOTTOM LINE TO PURCHASING AND SUPPLY RISK MANAGEMENT PROCESSES AND PRACTICE The triple-bottom line or commonly known as TPL or 3PL phrase was coined in the year 1994 by John Elkingdon for ensuring the integrating the means of consultancy in the business. The objective of 3PL is to generate bottom benefits not only in the single perspective of profit but at the same time it shall employ measures that benefit people as well as planet (The Economist, 2009). The technique is requires across the board implementation of the effective strategy followed by stakeholders’ engagement and value chain optimization in second and third place respectively (Field, 2012). For the purchasing and risk perspective also, TPL proposes system proponent to be employed to achieve three dimensional bottom lines. Cooperation that impacts the purchasing can be generated in terms of research and development to produce more effective product that increases market demand, reduce cost to be incurred, controls auxiliary expenses are some of the important dimensions. In addition to this, fair means of dealing is also among the most important perspectives. Bribery and corruption often generate short term benefits but may end up in legal and even reputational cost in the long runs. It is important to mention that contemporary businesses have developed incremental important lend to the quality of the product and service. Failure to provide same costs business with the many risks that often results in the organizational failure. For incorporating elements pertaining to people, buyers’ perspective shall develop network of supplier and buyer who does not involve any labor law violation such as child labor, unhealthy working environment and long working hours etc. Also, developing network of suppliers based on the merit than favoritism is also an important dimension to benefit the business. Companies that source merchandise from supplier that has exploited people, risk their business as customers in respect of their business responsibility may cancel their dealing with such suppliers. Hence, such risks are present across entire supply chain in case of labor casualties to fatal deaths etc. Further, environmental components are also required to play an effective role in buying. For example, buyers’ strategy of sustainable sourcing is questioned in case the business relationship is built with supplier who exploits the natural resources wastefully etc Similarly, production and packaging processes that are detrimental to the environment shall be replaced with ones that are reduces resource’s excessive consumption. It would require business to invest in collaboration with the stakeholders so as to reduce the excessive packaging that does not add critical value to the product. Production and supply of products that have excessive carbon emission not only cost environment but the same time it is also risks business with financial losses and other risk such as pressures from environmental cost, legal penalties from environmental authorities etc. Hence, companies that consider triple bottom line cannot achieve the most desired results in terms of lowest cost, most environmental friendly; however, by striking a most desirable balance across three dimensional perspectives such companies are rewarded with long term sustainable growth. IMPLICATIONS OF SUSTAINABLE PURCHASING ON SUPPLY RISK IN NEWBRIDGE CUTLERY COMPANY New Bridge Silverware Company offers a wide range of products in the sections of the home-ware and giftware products. The offerings of the company that extends from jewelry to giftware and home-ware that specifically include fine class cutlery made from stainless steel and ceramics (New Bridge, 2013). The company offers unique range of steel products that are constantly innovated to provide exclusive offering to its customers. Offering special products for the occasional gifts requires companies to constantly innovate new ideas and exclusively designed products. Also to ensure the quality, the products are through with series of quality checks (Enterprise Ireland, 2012). Hence, all these at one end increase the product quality and uniqueness offered by the company to its customers while on the other hand have critical implications. New Bridge Silverware Company, in order to maintain the quality of the products requires sourcing the quality of raw material. Most importantly steel is one of the most critical elements in the contemporary business world. Therefore, the element plays a versatile role in the modern world where it is used for the building the skyscrapers, long road to very basic useful product in daily life products such as cutlery. The demand of the steel has increased since last century incrementally and it is still expected to further rise in the coming years (ValueWalk, 2013). Hence, for the sustainable sourcing of the material will continue to increase challenge for the New Bridge. Due to increased demand across the world, the supplier of the New Bridge will have more options and may attempt to compromise on quality to increase the profits. Therefore, New Bridge can sustain the economic benefit by hedging the main raw material such as steel etc. Further, the pressure of innovation may also be higher on the New Bridge Company as the supplier is already available with bulk of buyers from different industries. Further, as the recycle-able steel offers much environmental benefits; therefore, New Bridge Company will be pressured to strike the right balance between the new steel and the recycled material to remain environmental and well as business friendly. Also constant innovation for the design for the different products such as home ware, giftware and other related products, New Bridge has to pressure designers for the innovative ideas which increase the work pressures. The other basic raw material used for the products offered by New Bridge Company, is though low cost but contains ashes of animal bone in addition to the other components. Further, the product is manufactured at high flame. Excessive use of these products is expected to have detrimental effect on the environment. Therefore, in order to maintain the sustainable procurement New Bridge is required to input extensive efforts in developing long term relationship with the suppliers in order to maintain the right balance across environmental, economical and social balance. COMMODITY HEDGE FOR THE NEWBRIDGE CUTLERY COMPANY The New Bridge Cutlery Company is concerned with rising prices of the steel considering the rising demand of steel across the world. Therefore, pertaining to the risk of rising prices of the steel, New Bridge Cutlery Company has to hedge the risk with long position in the steel (OMAFRA, 2008; CME, 2012). From the virtual company ABC producing steel, New Bridge Company is aimed to buy the steel around 100,000 mt. The ABC is located in UK and it is already in a trade agreement in Euro-Zone. Therefore, New Bridge Company has already mitigated the risk of exchange rate. Hence, the current, deal of steel is concerned to mitigate the price volatility risk of steel. ABC Company sells the steel at margin of nearly €80/mt and the contract price of steel is €800/ mt. Therefore, New Bridge Company agrees to contract with ABC as follows: Quantity: 100,000 mt. Price / mt: €800/ mt Units of Contract: 125 future contracts. Terms of pricing: Fixed at €800/ mt Date of Agreement: November 25, 2013 Contract duration: March 25, 2014 Exchange Rate: Zero ( as the deal is in Zero) Expected Trend in price: upwards As the January arise, the demand of the steel increases and the impact is felt on prices. The price of the steel in the market rises. The new prices in the market as follows: Cash: €880/ mt. Futures: €850/ mt Hence, following scenario arises in this case: New Bridge Cutlery Company can sell (swap or short) its future at the current market prices which is €850/ mt and gain the profit of €50/ mt which is then equal to € 6250 (€50/ mt profit * 125 future swaps). In other case, if the New Bridge Cutlery Company requires the steel in January whereas the due date of the futures is March, therefore, New Bridge Cutlery Company can still benefit to certain extent. New Bridge Cutlery Company can short its futures at the current market prices of futures which is Futures: €850/ mt. With the money available from this swap/ short position, New Bridge Cutlery Company can buy steel from market at €880/ mt. Hence, the netting of the profit generated from the futures short position, i.e. €880/ mt less €50/ mt, the net market price that was incurred by the company for the cash purchase of steel from market will be €830/ mt. Hence, in both cases, the New Bridge Cutlery Company can benefit from hedging the commodity (steel) in anticipation of the rise in market price of steel due to inflated demand expectation. List of References CME. (2012). A practical guide to managing risk along the steel supply chain. Available from http://www.cmegroup.com/trading/metals/files/hedging-price-risk-along-the-steel-supply-chain.pdf [Accessed 25 November 2013] Enterprise Ireland. (2012). The NewBridge Cutlery Co. Available from http://www.enterprise-ireland.com/en/Source-a-Product-or-Service-from-Ireland/ClientProfileDetails/?Cid=487 [Accessed 25 November 2013] Field, A. (2012). How to make triple bottom line decisions in real life. Available from http://www.forbes.com/sites/annefield/2012/10/19/how-to-make-triple-bottom-line-decisions-in-real-life/ [Accessed 25 November 2013] Gelderman, C.J., and Weele, A. (2002). Strategic Direction through Purchasing Portfolio management: A Case Study. Journal of Supply Chain Management, vol. 38, no. 2, pp. 30 – 37. Homburg, C., Workman, J. P., Jensen, O. (2002). A Configurational Perspective on Key Account Management, Journal of Marketing, vol. 66, no. 2, pp. 38-61. New Bridge. (2013). All products. Available from http://www.newbridgesilverware.com/products/all [Accessed 25 November 2013] OMAFRA. (2008). Managing commodity price risk using hedging and options. Available from http://www.omafra.gov.on.ca/english/busdev/facts/08-053.htm#withoptions [Accessed 25 November 2013] Portier, P., Pardo, P., Salle, R., Missirilian, O. (2011). Strategy and strategists: In search of “Suppliers’Strategization”, Has Strategic Management Forgotten the Suppliers?. proceedings 20th Annual IPSERA Conference, 10-13 april, Maastricht (NL) Santema, S., and Verheul, D. (2012). Two faced monster: the buyer-seller relation observed from two sides. Working Papers, ISPERA 2012 Conference Proceedings. Santema, S.C. (2011). A conceptual model for interactions between suppliers and buyers: from unifaced to multi faced B2B sales organizations, proceedings. Journal of Business MarketManagement conference. The Economist. (2009). Triple bottom line. Available from http://www.economist.com/node/14301663 [Accessed 25 November 2013] ValueWalk. (2013). The importance of steel. Available from http://www.valuewalk.com/2013/10/importance-steel-infographic/ [Accessed 25 November 2013] Wengler, S., Ehret, M., Saab, S. (2006). Implementation of Key Account Management : Who, why, and how ? An exploratory study on the current implementation of Key Account Management programs. Industrial Marketing Management, vol. 35, no. 1, pp. 103 – 112. Read More