Procurement and Inventory Management - Assignment Example

Procurement and Inventory Management Introduction Structured procurement process substantially relies on the accurate, timely and regular flow of information. Structured procurement refers to that kind of logistics arrangement and management that substantially relies on the support of information system. And more logistics information is important for the logistics operator (Glass, 2013). The importance of this information support can be gauged by the fact that the major and strategic procurement decisions mainly depend on the frequency of information. In this regard, it is important to mention that there are different types of information that are required for making logistics management decisions. For example, type of supplier, name, address, requirement, type of quality, time of loading and offloading are some of the significant operational types of information that are highly relevant and essential for carrying out the work and procurement. Moreover, with the recent surge in the global operations in which many logistics firms are required to satisfy the growing business demand which is created by the rise in the business activity especially in Europe. And it is this global surge that has increased the significance of information systems and information management in the procurement and inventory management. On the other hand, drawbacks increase in case no integrated and well-developed information systems are installed. First, it would increase cost of doing business. For example, if a distribution centre manager does not know the arrival time of a returning truck, it would not enable the manager to plan the maintenance and determine time for the subsequent logistics delivery to another client. Under this situation, if there is a strategic and important client expects that the logistics firm is required to send delivery within 8 hours and the distribution centre manager has not been informed this message on time and the manager has been informed within 4 hours to 8 hour deadline, it would not be possible for the distribution centre manager to arrange truck and send the consignment toward the client. As a result, the subsequent ramifications could bring loss of strategic client besides expected revenue from the delivery of consignment. Keeping these strategic issues in mind, it is highly essential to develop a centralised, integrated and structured procurement process so as to avoid such losses and ensure obtaining the expected profit. For this purpose, it is highly needed that Big Trucks Company (BTC) should develop and implement its own well-integrated procurement process. Question no. 2 What types of information systems might be used to reduce the number of parts suppliers currently used by BTC Freight for truck maintenance, how would these be implemented; (what data would be required to make an information decision) and what could be the expected benefits. Drawbacks of the existing IT systems BTC uses various obsolete IT systems and there are serious effects of having more than one integrated IT system. As a result, right information at the right time and to the right person is not being provided. For example, if two distribution managers provide logistics services to a same area in which both are unaware of this fact and the senior BTC management has not taken notice of this issue as well. Consequently, BTC incurs more cost in terms of fuel and energy cost which is being consumed by the trucks working in both area. At the same time, from the financial terms, BTC is paying more cost by hiring additional workforce serving the same area. Additionally, this puts pressure on the running cost of distribution in terms of the distribution centre’s building rent, heating and lighting charges and other maintenance const attached with maintaining the fleet of trucks. Moreover, effective procurement decisions cannot be considered and carried out without having appropriate level of information relating to the availability, condition and capacity of trucks for providing procurement services to the clients. In this regard, it is important to highlight that information and physical operations are two different activities within the ambit of procurement in which the latter heavily relies on the accuracy of the former; and the latter’s efficiency and effectiveness would not be obtained if the former has not been provided to the decision making authority. Availability of trucks is also important type of information needed for making subsequent decisions. For a distribution centre manager, it is highly essential that before receiving a consignment order from the regional headquarters, the manager should precisely know the information relating to the availability of trucks; at the same time, the manager should also know that drivers are also available and they are ready and waiting for the next consignment delivery. In other words, the distribution centre is required to maintain information relating to truck drivers and work schedule as well as this information is also needed for making decisions about the current and future consignment deliveries. Information about maintenance and working conditions of trucks is of crucial importance. BTC currently have a fleet of 10000 trucks providing logistics services throughout Europe. In the existing IT system, based on the available information, it can be deduced that BTC has decentralised IT systems which are installed at all distribution centres where the managers have been authorised to develop and install IT system that they consider appropriate for effectively management of centre performance. In other words, the distribution centre managers are separately and individually attached with the headquarters and they are allowed to process and receive information and orders from the regional headquarters. Under this situation, it would not be incorrect to extract that each distribution centre has installed different types of IT systems which are not similar and do not work in a coordinated way. Consequently, each system is generating and providing different type of information which is unique and specifically represent the work flow and information flow of the distribution centre. Implementation Enterprise Resource Planning (ERP) should be put in place centrally. ERP provides facilitates vendor management and procurement support system specifically designed to ensure coordination between all dimensions of procurement process (Leon, 2008). And ERP is customer-oriented as it provides an opportunity to provide services by keeping in view the expectations of customers (Adam and Sammon, 2004). And contractual systems are used to develop formal relationship with the customers (Bowersox and Closs, 2008). And this ERP system is used for highlighting and planning the enterprise-wide resources required (Sharma, 2004). The ERP should have main server at BTC headquarters and this should be accessible via the Internet by the designated and authorised distribution centre managers. For example, the individual managers are required to collect the relevant data every day and they are required to upload and update the information through accessing to the centralised ERP system. And in case, any data is not available, the ERP system should give them additional instructions concerning how to proceed further on the matter. Currently, BTC uses a decentralised mechanism. Under the decentralised system, the distribution centre managers are authorised to take operational decisions relating to truck spares parts and their maintenance as well. The biggest drawback of decentralised mechanism is that the distribution centre managers can use their authority to conceal their inefficiencies by manipulating truck maintenance records for attempting to reflect higher performance. This is not something new and is commonly used by managers. In order to avoid it, it is highly essential that the centralised mechanism should be introduced under which the managers are only authorised for making decisions to a particular spares parts and they are required to provide more information relating to the trucks maintenance and spares parts. More clearly, they are required to provide rationale behind making any decision besides ensuring that the monthly report of such decisions are the regional authority is dispatched. Important supplies should be separately identified and they should be subsequently managed. For example, truck tyres, engine lubrication oil and truck batteries are some of the key truck parts that are of crucial importance as they are commonly used for all trucks. By identifying the specific spares parts and buying it from specific suppliers, BTC will be able to reduce reliance on multiple suppliers. In this regard, it is reasonable to highlight that reliance on suppliers can be reduced by identifying the main spare parts that are used in all trucks and the supporting spare parts, such as wind screens, mirrors and other similar parts should be identified separately and they should be bought from another single supplier. Through this mechanism, considerable reliance on suppliers can be achieved. Data Requirement Various types of data are required for implementing the ERP system. From now onwards, BTC should collect data from all distribution centres and the collected data should be centralised. This activity should be given a top priority as the current state of affairs are not in favour of BTC financially, operationally, logistically and strategically as well. In other words, BTC is making loss and risk losing clients due to ineffective and inefficient freight operations through ineffective procurement process. In order to curtail the effect of inefficiency from the procurement process, it is highly essential that all distribution managers are required to provide data relating to current number of trucks, number of operational trucks, number of trucks under maintenance, number of fully depreciated trucks, trucks on the tracks, names of truck drivers along with truck identification number, working hours of drivers and their all schedule days allocated weekly, monthly and annually as well. At the same time, the distribution centre managers must submit information relating to engine efficiency of trucks, average fuel consumption by trucks by keeping in view distance. Moreover, it is highly encouraged that the distribution managers are required to provide their useful suggestions for improving the performance of trucks as their suggestions will be highly valued and their practical applicability will benefit them in their annual performance appraisal which will rewarded in the shape of pay rise or bonus. ERP’s Expected Benefits Centralisation of information and information distribution will be a key benefit through implementation of the ERP. All distribution centre managers will regularly update the relevant information. This regular flow of information will enable the other managers to know the availability of trucks, drivers, spares parts and maintenance of trucks for any specific distribution centre. For example, if a manager requires services of two trucks and X distribution centre has no excess capacity to satisfy this additional demand. Under this situation, the manager can use the ERP system to access information relating to the nearby distribution centres for seeking their assistance relating to the additional trucks. Subsequently, if a distribution centre has some trucks which are idle and the location of this distribution centre is near to the X distribution centre, the manager of the X distribution centre can ask for some spare trucks for satisfying the additional demand. In other words, the installation of the ERP has not only benefited to BTC but also has improved the performance and efficiency of the X distribution centre. Efficient and effective use of resources will be availed. Resources, such as drivers, time, truck fuel, truck engine and spares parts, are the most important for BTC as they collectively and individually enable BTC to serve the expectations and requirements of the clients. If these resources are used optimally through on time usage, BTC will be ensure effective use of these resources. In this regard, it is important to mention that for organizations, wastage of resources is of the serious issue as it directly affects performance and efficiency of business operations. Consequently, in order to avoid the wastage of resources, managers working at different distribution centres can employ information through ERP by attaining their individual objectives relating to the distribution centres. In addition, segregating spares parts into main and supporting categories, BTC will be able to experience cost reduction besides effectively controlling and managing the use and misuse of spares parts. For this purpose, BTC should employ certain number of employees who are only authorised to record the regular flow of such supplies. And this management will enable BTC to track the usage of spares parts. Question no. 4 BTC Board have decided to drastically reduce the number of centres to 500; accounting for truck service requirements and maintaining the level of OTIF deliveries. Identify and describe the key cost drivers as well as the internal and external influences to consider for maintaining an appropriate inventory level of truck spares to support the current business. Discuss the impact of these changes on the current problems faced by BTC described in the case. Key cost factors Type of Consignment orders Type of consignment orders puts a direct effect on cost of providing logistics services. Some consignment orders are long while others are short. Within this context, the long consignment orders require a regular supply of products from place of production to place of distribution; such contracts are more common with fast food companies as they deal with perishable food items having shorter life span period. Thereby, the fast food companies enter into long term business relationship with the logistics firms, such as BTC, for providing regular but interrupted supply of food items; and more importantly, some fast food products do not last for long as they have a very limited expiry period; at the same time, such food items also require a special environment (cold or hot temperature) so as to retain their original taste and appearance as well. Based on this situation, BTC and other similar firms are required to ensure that a particular number of trucks are allocated to transport and supply the delivery of such clients. In other words, this type of consignment agreement will regularly incur different types of costs for BTC and they should be accounted for. On the other hand, there are other types of logistics contracts that are commonly arranged between firms. For example, a client comes and requires that a total of 50,000 units are needed to be transported from one Germany to France and this delivery will be completed within 15 days. In other words, the client is not permanent but needs the services of BTC for transporting 50,000 units from Germany to France and after the completion of delivery; the contract between BTC and the client will be terminated. In a nut shell, there are two types of consignment: permanent and temporary. And each one has its own attached cost drivers which influence on delivery, time, resources and other factors relating to contract and amount of delivery units or products. Truck insurance cover Currently, BTC has a fleet of 10000 trucks for running the business operations. If each truck is insured and BTC is required to pay £ 600 annually and that will become 6,000,000 for all trucks owned by the company. Based on the provided information, it can be deduced that BTC faces financial issues as it finds it hard to remain competitive in the logistics market. And the main hindrance is effective cost control over different types of costs which are being paid by BTC. Within this context, the total amount of truck insurance cover remains considerably higher for the company and if this figure continues along with the maintenance cost of the entire fleet of trucks, BTC may not be able to effectively sustain the pressure of rising cost of fleet maintenance. Within this context, if cost relating to building and storage of spares parts is managed and decreased reasonably, this would offer BTC to experience a decline in the overall cost relating to trucks. Delivery Destination Delivery destination affects cost of providing logistics services. Currently, BTC has around 10,000 trucks which are managed through 1000 distribution centres. In other words, each distribution centre has a fleet of 10 trucks which distributes products and goods of clients. However, this allocation has become costly for BTC as it involves a considerable amount of maintenance cost. In this regard, maintenance cost encompasses the rent of building for parking trucks, storage of maintenance spares parts, truck cleaning, fuel and lubrication costs and other costs associated with. Maintenance cost of truck Maintenance of truck consumes a considerable amount of cost. Under the maintenance structure, costs associated with truck tyres, truck engine performance, lubrication, and fuel consumption efficiency of engine, truck wind screens and other parts of truck that require regular maintenance, mostly appear and are maintained throughout the truck engine life. On the face of it, these look small and minute factors but on the larger scale they consume a considerable amount of money from companies like BTC as they frequently require cost amount which is used for renewal of many of such items. Tracks also increase maintenance cost of truck. For example, some roads are well constructed enabling vehicles to drive smoothly whereas some roads make it hard for the vehicles to maintain their traditional speed limit which is observed while driving on well-constructed roads. Under this situation, if a truck is required to use a very uneven and patchy track, there would be chances that it would affect the truck speed, engine performance and may puncture the truck tyres. In all cases and their possibilities, it would increase cost for BTC. Availability of truck drivers Availability of trucks also affects logistics operations. Truck driving is tiring work for drivers as it is mainly carried out to reach distant destinations through using different types of roads and tracks. And most of the time, uneven tracks increase the tiredness of drivers as they physically affect the truck drivers. Consequently, this increases the chances of reduced truck driving as drivers find it hard to retain their physical strength essentially necessary for fulfilling the driving requirements. In other words, this aspect has a possibility to augment cost for BTC if a driver is unable to drive for a scheduled delivery of consignment. Consequently, BTC would be required to hire additional truck drivers and this additional truck driver would consume additional wages and other benefits provided to such type of hiring. In this regard, it is important to highlight that the availability of drivers is also internal factors that directly affects the logistics operations besides putting negative impact on the cost side of logistics. External influences Competitors’ logistics services Logistics market is becoming highly competitive. And price is important point relating to client satisfaction (Cahill, 2007).Various logistics firms attempt provide attractive prices for attracting clients for generating strong amount of revenue. They offer reduced logistics prices and on time delivery of consignment. And for clients, both aspects are highly essential as they do not expect anything but timely delivery of consignment with reasonable cost. In this regard, it is important to highlight that the firms not only want to attract clients but also retain them. And the retention of clients is mainly done through satisfying quality logistics services along with adhering to professional standards. And some relationships are based on long term basis (Cheng and Choi, 2010). Keeping these facts in mind, if BTC does not take into account such factors, it will be very challenging for the firm to remain competitive in the industry besides providing quality logistics services to clients. Additionally, geographical situation, logistics infrastructure, technology, economic and political stability are certain factors that affect logistics cost structure in the industry (Farahani et al., 2009). and within this context, it is relevant to highlight that global logistics and national logistics are totally different especially in terms of inventory management, transportation, information systems and transportation as well (Ailawadi and Singh, 2012). And to become succeed and increase return, it is highly essential that firms, working in the logistics, are required to have a network mindset (Wieser et al., 2013). And all these factors must be considered by BTC management for developing its strategy to counter the offers provided by the competitors to clients. Impact on current problems Identification of out of service (OOS) trucks will be a major benefit of reducing the number of distribution centres. Under the existing condition, the strategic management of BTC is finding it hard to effectively manage the operations of 1000 distribution centres where the problem of OOS is more frequent. However, in the proposed format, there are chances that the problem of OOS will be considerably resolved as immediate attention and subsequent maintenance of the OOS truck will be ensured by giving top priority to any such problem. Consequently, this will bring and add more efficiency to business operations of BTC which will subsequently transform the logistics operations and improve the effective and efficiency of the firm. Effective coordination with the suppliers will be ensured. After reducing the number of distribution centres to 500 and making cost analysis, BTC will become in a position to identify specific number of suppliers who will be providing spares parts to the firm. This coordination will ensure that both (suppliers and BTC) will be in a position to satisfy the expectations and requirements of each other. And the importance of this relationship will be increased particularly after reducing the number of distribution centres to 500 in which more coordination relating to delivery of spares parts will be made. Conclusion ERP is important information system for BTC as it provides all features and options that are highly essential for carrying out the procurement processes. At the same time, BTC requires all types of information that enables the distribution managers to upload the relevant information through using the source of the Internet. For this system, BTC should switch over to the centralised mechanism in which only integrated system can easily be fitted and used as well. In addition, telematics system can be used to track the location of trucks on road so as to improve the condition and performance of procurement through reducing the number of distribution centres. Competition, prices and customer retention polices, truck maintenance cost, driver availability are certain other factors that directly or indirectly are required for retaining the required level of inventory. References Adam, F., & Sammon, D. (2004). The Enterprise Resource Planning Decade: Lessons Learned and Issues for the Future. London: Idea Group Publishing. Ailawadi, S.C., & Singh, R.P. (2012). Logistics Management. 2nd ed. New Delhi: PHI Learning. Bowersox, D.J., & Closs, D.J. (2008). Logistical Management: The Integrated Supply Chain Process. New Delhi: Tata McGraw-Hill. Cahill, D.L. (2007). 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