How Aerobord Company Mitigates Their Risk Purchasing - Case Study Example

Supply Base Management SECTION 1 In this section we will discuss supply base by giving a broad definition. We will also discuss some of the challenges of supply base management, and we will also dwell on the roles that environment, ethics, and corporate social responsibility play in supply base assessment. Introduction During the era of 80’s and early 90’s it can be well argued as the period of quality. Late 90’s and early part of the 21st century, it may be considered as the period of the lean. Now as the world enters into the second decade of the 21st Century, we are fully in the age of the supply chain that expands the reach of an organization beyond its immediate grasps to areas where competitive advantage exists (Li, 2007, p.60). As enterprises shift their competitive focus from the organization itself to the supply chain, companies have to recognize that no supply chain is stronger than its weakest link. However, when these weak links exist beyond the boundary of the supply chain (organization), tones of problems tend to arise, and this is also the case in regard to the supplier base (CSCI et al, 2000). It is against this background that interesting questions crop up, and organizations begin to ask themselves how they ensure that they have the best suppliers within their supply chain (Krause & Handfield, 1999; Victor, David & Farney, 2004, p.96). Supply base assessment In response to the above, a new approach known as supplier base management has emerged. Supply base management can therefore be described as a systematic, holistic, and strategic approach to planning, developing, and managing an enterprises supply chain system Christopher & Hollweg, 2011). In a lean supply chain, logistic officers normally conduct both supply base management and supplier base assessments. Supplier assessments on the other hand are the processes that are used to evaluate and approve quantitative suppliers by using quantitative assessments. The primary aim with supplier assessment is to ensure that the supply chain benefits from a portfolio of best in class suppliers. Supply base assessment entails Nurturing a lean supply network through determining the right mix and number of suppliers required to maintain each purchase item, category, or commodity. Optimized supply base requires supply managers to work with fewer suppliers with an aim of driving out redundancy and waste that adds minimal value (Moser, 2007, p.125). It is through harnessing this supply chain specific data and utilizing advanced analytical techniques such as predictive modeling and optimization, forecasting, and statistical analysis, that business leaders can find practical solutions of enhancing efficiency within their supply chain (Trent, 2007, p.167; Monczka et al, 2010, p.226). As a result, supply chain managers are confronted to decide on which model, either proactive or reactive to implement for their company. A supply chain that shows some signs of relative in-stability, is a natural candidate for proactive risk management, that are normally implemented in environments with high probability of risks. On the other hand, a supply chain with low probability of risk exposure may embrace reactive risk management model. Supply base assessment can also take place at three levels. In the past, it was influenced by the operations of the company, and once materials were replenished, they were acquired from the nearest vendor. Come 80’s when business competition begun taking shape, procurement shifted towards a transaction-oriented process whereby the cheapest supplier was chosen. Late 90’s to today procurement has transformed itself as a strategic initiative, whereby this particular shift from tactical in the 80’s to today’s strategic, is attributed to factors such as supplier selection, supply base management, risk management, and market knowledge. Supply Base Assessment in building and construction industry Building and construction materials range from materials that retard flow of heat energy through combination of insulations. Some of the insulation technique includes; electrical insulation, thermal insulation, soundproofing, and building insulation. The demand for these insulation materials are growing at a steady rate, whereby some of the key costs include; installation labor, manufacturing labor, and cost of supplies. However, one of the major trends in insulation and construction industry includes consolidating the supply base, and increased environmental efficiency among others. The risk outlook for the industry is deteriorating based on the macroeconomic environment. Some of the category best practice management in this industry includes; international market dynamic advantages, green initiatives, and strategic sourcing advantages. Benefits associated with an optimized supply chain Supply chain optimization enables supply managers to initiate cutting edge supply chain management activities that can deliver competitive advantage (Trent, 2007, p.176). In selecting suppliers there are several approaches used, to rationalize the supply base. A common approach is the eighty twenty rule based on Pareto’s law that implies that 80% of problems come from 20% of suppliers, meaning poor quality suppliers should be the first to be eliminated from the supply chain. In addition, 80% of core purchases normally come from 20% of core suppliers which implies the remaining suppliers normally deliver less products and should be candidates for elimination. These approaches can be summarized in the table below (Monczka et al., 2010, p.196). Competency staircase approach All suppliers should pass some series of performances hurdles similar to climbing a staircase Hurdles may include performance requirements in quality, technical capacity, cost, and responsiveness Purchaser defines the hurdles and their required performance levels Improve or else approach Suppliers should be given a chance to remain in the supply base Suppliers should be given specified period of time to meet stringent performance requirements Suppliers who fall short soon should be demoted to ex-suppliers Triage approach Suppliers should be placed in one of three categories The first category should include suppliers who are incapable of meeting performance requirements The second category includes suppliers likely to develop from supplier development support The third category includes the near perfect suppliers 20/80 approach This requires some analysis to determine top 20% suppliers receiving top dollars, or bottom 205 suppliers causing problems Bottom category of suppliers receiving less dollars should be candidates for elimination Fig 1.0 approaches that are used in assessing supply bases Challenges of a Global Supply Chain Management to a globalized organization One of the catalyst propelling global sourcing is worldwide competitive pressures that are forcing organizations to seek ways of reducing cost while improving on quality and responsiveness. Global sourcing in this context refers to integrating and coordinating procurement requirements across worldwide business units. The ability of a company to move its production across the globe, acts as a key source of competitive advantage (Cousins et al. 2008). Often, established multinational organizations are engaged with global sourcing, and such enterprises are more likely to have worldwide production facilities, design centers, and sales and marketing activities. However, processes and procedures associated with integrating, and coordinating procurement requirements across business units is mired with numerous challenges and sometimes difficult to master (Gelderman & Semejin, 2006; Choi & Krause, 2006). Some of the common challenges facing companies on a global sourcing level include; Logistics Increased outsourcing of production parts across the globe has introduced heightened complexities within global supply chains. In addition, product life cycles are becoming short, new products are being introduced into the market at much faster pace, clients are more demanding, and organizations themselves are also seeking ways of reducing inventory. There are also other issues such as bureaucracy in port of entry, political instability from the outsourcing country, corruptions, and unpredictability in business operations. International purchase costs According to (Levy, 1995) there have been concerns with international purchases and costs because technological and organizational advances have minimized costs coupled with increased speed of transport and communication hence facilitating international purchasing. There is also extensive material ordering lead times, reliance on new or unfamiliar sources of product supply, managing various currencies fluctuations, and foreign culture (Vickery, Carter, & Ditri, 1993). Legal Systems Different countries have their own legal systems that foreigners may sometimes be uncomfortable with. For instance, in United States there is common low or case law that is associated with lengthy contract negotiations compared to other countries that use code or civil law. There are certain advanced economies such as China where legal systems that recognize private property are still evolving (Trent, 2007, p.240) Counter trade demands This is where both the buyer and the seller conduct some partial exchange of goods for goods. Often counter trade demands are made by foreign governments not companies, and supply managers are usually reactive participants in any counter trade arrangement because they perceive such arrangements as restricting their sourcing options. Roles that Environment, ethics, and corporate social responsibility should play in the assessment of Supply Base Environmental role With increasing environmental consciousness, governments worldwide are forcing companies to improve on their environmental outcomes, and in a response to this, enterprises have now begun to formulate green plans to organize their supply chains. As a result, enterprises are therefore forced to only collaborate with suppliers who are green so that sustainability of the environment may be achieved (Che et al. 2010, p.21). Corporate Social responsibility (CSR) This promotes a vision of organizations accountability. CSR is nurtured under the rationale that enterprises can no longer continue operating in isolation by detaching themselves from the broader society. In the business world, traditional business views pertaining to competitiveness, survival, and profitability are being carried away. Suppliers are therefore mandated to begin leaning towards CSR because; In the past governments have failed due to their shrinking resources and companies must therefore cooperate through exploration of voluntary and non-voluntary initiatives There is an increasing demand of disclosure from activist organizations, communities, employees, and stakeholders The communities stand to benefit from improved product safety and quality, involvement in community education and homeless ness programs, and also charitable contributions. As a result, companies tend to focus most of their attention towards suppliers who initiate CSR in their day to day operations. Ethics The supply management process should strive for transparency as much as they can, and this implies being open with all those who are involved so that everyone involved within the supply chain (customers, suppliers, contractors) understand various elements of supply chain process which could be criteria used in supplier selection, and also forming part of the entire supply chain requirements, expectations, timescales, and procedures. SECTION 2 Here we will discuss the effect of purchasing on supply base and we will also mention some of the risk associated with purchasing on a global level How does purchasing contribute to creating and managing supply chain risk? Global business trends have ushered complex and dynamic supply chain networks. In the last decade the business community has witnessed increased competitive pressure with their business operations due to globalization of markets. These changes have propelled enterprises to make their intra-firm business processes and inter-firm supply chains to be either more efficient or more responsive. This has been achieved by collaborating intensively with other supply chain partners, reducing inventories, sourcing in low cost countries, and outsourcing and offshoring manufacturing and R & D activities. These very supply chain alterations hold promise of making organizations operations leaner and efficient, but at the same time, they also significantly contribute towards fragility and vulnerability of a company’s supply chain (Wu & Blackhurst, 2009, p.610. This fragility and vulnerability are also echoed by natural disasters such as earthquakes, flooding, Tsunami, terrorist attacks and so on. As a matter of fact, supply chain managers find themselves sandwiched between a relatively unstable world on one hand, and an increasingly sensitive supply chain. For instance, iconic organizations such as Nokia, Ericson, wall-mart, Apple, and Hershey’s among other host of companies have all incurred heavy losses due to supply chain disruptions. It is due to this fact that organizations are now beginning to take their supply chain disruptions in a serious manner, and at the same time rethinking on their supply chain strategy and design (Degraeve & Roodhoft, 2006). Risks in purchasing Risks mainly deal with two of its essential components that are losses in relation to money, and uncertainty of occurrence. Risks may be defined as collection of pairs of likelihood (L) and outcomes (o) and this can be denoted by the formula below. Risk = {(L1, O1), (L2, O2),…, (Ln, On)} Oi and Li denotes outcome, I and its related likelihood In order to properly define risk on a supply chain various perspectives should be understood. On a global level, there is the supplier’s environment, company’s environment, and customer’s environment. Under these environments, there are various risks that are depicted on the diagram below. Fig 2.0 Supply chain risk perspective Supply chain risks can therefore be divided into demand side (disruptions coming from downstream supply chain operations), supply side (purchasing, supplier activities, and supplier relationships), regulatory, legal and bureaucratic, infrastructure, and catastrophic risks. Demand Side risks These are mainly disruptions that occur from downstream supply chain operations. This may include disruptions in the physical delivery of products to the end customer, and it is prevalent in transportation operations (e. truck driver strikes), and the distributions network (e.g. delay in the distribution center). Demand side risks also tend to occur from uncertainty caused by business customer’s unforeseeable demands. Demand in this context tends to occur from mismatch between the organizations projections and actual business demands as well as from uncertainty with supply chain coordination. Also in this particular context, issues affecting forecast quality hence demand side disruptions are the bullwhip effect that is characterized by an effect of demand volatility towards the upstream volatility of the supply chain (Zsidisin & Ritchie, 2008, p.203). Some of the causes of bullwhip effect are; price fluctuations or shortage gaming, order batching, sales promotion, and delayed and distorted information. Supply side risks These are risks residing from purchasing, suppliers, supplier relationships, and supply networks. These risks may include changes in technology and product design, quality issues, production capacity constraints on the supply market, and supplier business risk. Supplier business risks may relate to events that affect the continuity of the supplier and may result in interruption or termination of buyer-supplier relationship. Disruptions may also occur when suppliers are vertically integrated directly with competitors hence abruptly forcing termination of relationships. There are also issues pertaining to constraints as well as poor logistics performances that lead into poor supplier production and operation management. Finally, inability of certain suppliers to adopt to product design changes is likely to have detrimental effect on the customer’s costs and overall competitiveness (Olson, 2012, p.41). Regulatory, Legal and Bureaucratic Risks In different jurisdictions, authorities whether regulatory, legislative, or administrative play an influential role in setting up and operating supply chains. Regulatory, legal, and bureaucratic risks may refer to legal enforceability and execution of supply chain relevant laws and policies. This may extend to the ability of a company to obtain approvals adequate for supply chain design activities and operations, whereby this particular risk source is external to the individual supply chain company. Supply chain disruptions may be associated with certain actions such as decisions from authorities, administrative barriers (e.g. customs trade regulations) which are likely to influence the design of supply chains. It is also very difficult to anticipate legal and regulatory changes. When regulatory, legal and bureaucratic risk is highest, and then the poor the supply chain performs poorest. Infrastructure risks This involves risks that materialize from the organization and it may include socio-technical accidents such as equipment malfunctioning, disruption in electricity, telephony, or water supply. It also includes human centered issues such as industrial accidents, labor strikes, sabotage, and vandalism. The higher the infrastructure risk, the lower the supply chain performance. Catastrophic risks This includes events such as terrorist attacks, civil unrest, socio-political instability, and natural hazards. In different regions across the globe, catastrophes such as; floods, hurricanes, earthquakes, droughts, and tsunamis act as constant threat with negative consequences on supply chain because production facilities and transportations systems are highly vulnerable. Using the company (Aerobord) describe how purchasing contributes to reducing risks Aerobord on of the leading insulation suppliers in the construction industry is in an alliance with Kingspan company so that the two companies can efficiently and effectively modernize their supply chain networks, in order for goods to be produced and delivered in right quantities, at the right time, in a cost effective manner. These two companies are engaging with their supply chain participants, from suppliers to logistics to distributions, and in order to achieve on this, the two companies are going to leverage on their new purchasing power. Aerobord has sought active management with some of its primary suppliers, and it has even initiated series of supplier meetings and presentations. Part of the company’ policy is that all of its principle suppliers should be accredited with BS EN ISO 9001/14001 and OHSAS 18001 certifications that cover environmental management, health and safety, and quality. Even though these certifications are not compulsory, Aerobord and Kingspan have long standing relationships with their suppliers, and as a result, most of their suppliers are now working towards attaining these particular certifications. Aerobord company purchasing and supply chain managers have focused on risk reduction by selecting strategic suppliers who possess very strong capabilities coupled with quality management and operational risk management. The company’s supply managers were also able to identify the most relevant single supplier selection criteria that supported various strategic measures. To begin with, Supply managers who focus on cost reduction for materials and services preferably select strategic suppliers who possess strong capabilities in relation to corporate governance compliance, cash management optimization, and process cost management. Secondly, purchasing and supply managers selected suppliers willingly to jointly develop new products or services. This requires collaborative capabilities (Moser, 2007, p.196). The company is also collaborating with its suppliers in crucial environmental issues such as site waste, trialing methods used to dispose and recycle packaging in an effective manner. The company has even set up an internal team to develop an ethical procurement strategy, and the company is making considerable strides towards replacing all or part of the base chemicals with materials that are derived either from waste streams or other chemical or production processes. Aerobord Kingspan collaboration has also made laudable progress on transportations and through the kingspans sustainability action plan for 2008/9 these two companies have decided to improve on their freight transport operations, logistics, and the supply chains. Virtually all transport operations are outsourced by Kingspan and various logistics initiative are in pipeline being developed by the companies supply chain teams who are collaborating with their logistics provides in order to address both environmental and sustainability concerns. Commodity Hedge Cash Future June Price for Sells 2 November New Copper materials insulation at Copper insulation contracts $6.00 per insulation At 6.25/insulation material September Sells 10,000 Copper Buys 2 November Insulations at Copper Insulation contracts at $5.72 $5.95/insulation material Result Cash sale price $5.72/Insulation material Futures gain + .30/insulation material Net selling price $6.02/insulation material Cash price for new copper insulation are $6 and the price of November copper future is $6.25. The company short hedges copper insulation materials by disposing two November 5,000 copper material futures contracts at $6.25. Come the beginning of September, cash and future prices have gone down, when the company disposes of their copper materials locally at $5.72, it lifts its hedge by purchasing November copper insulation materials at $5.95. This very 30-cent offsets gain in the futures market offsets that the company received for the copper insulation materials in the cash market. Had the company not hedged, they would have only realized $5.72 for the copper insulation materials, which is 30 cents lower than the net selling price that they received. Conclusion In this section we have dwelled on the risk aspects of purchasing, and we have also elaborated on a case study on how Aerobord company mitigates their risk purchasing. References Cees J. Gelderman, Janjaap Semejin 2006, managing the global supply base through purchasing portfolio management. Journal of purchasing and supply management. 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