Purchasing and Supply Chain Risk - Case Study Example

Purchasing and Supply Chain Risk Name Institution 1. This section introduces the basic concepts of supply base assessment versus supplier assessment and their application to the whole scheme of supply chain management in the tire industry. An evaluation is also made for supply chain management challenges that face multinational companies and the role of ethics, environment and CSR in the assessment process. (a) Assessment of a Supply Base Supply base can be taken to refer to the pool of suppliers that organization relies on, for all its supplies. Supply base management involves either supply base optimization, or supply base reduction. Optimization involves increasing the number of suppliers who serve the organization, mostly with intention of minimizing risks of supply shocks. Organizations also engage many suppliers so as to get competitive prices. Supply base reduction, on the other hand, entails reducing the number of suppliers with an intention of adopting a good supply base orientation (Fisher 1997). The buyers of modern times are finding it rewarding to participate in the supply base management through forming trade contracts. Supplier base assessment is a logistical problem which defines the terms of acquisition of products by the buyer from the supplier. Supply chain design refers to the set of activities that are carried out to avail the supplies to the buyers’ point of convenience. The activities range from storage, transportation, fragility and even after sale services. The combination of these activities together forms the supply chain design. The design chosen and adopted for a specific product depends on the product features. Highly fragile products will require specialized handling tools and procedures and the design of their supply chain must reflect that. It follows, therefore, that such items incur higher costs than ordinary products. Very sensitive products will require specialized warehouses for storage and transportation. On the other hand, high value products, may call for high security measures (Khan & Creazza 2009). It would be safe to state that the physical attributes of a product dictate the handling specifications and by extension the supply design costs. Both supply base and supplier assessment are involved will devising robust means of supplies acquisition. Supply chain management has been taunted as a core competency in today’s business world. The world is confronted with unexplained inflationary tendencies that push the prices of inputs up. Manufacturers must respond by strategically planning for their supplies so as to remain competitive in product markets. Both supply base and supplier assessment are great compliments in achieving that feat. Supplier assessment differs from supplier base on the scope. Supplier base refers to objective combination of suppliers who could satisfy the needs of the organization by giving assurance for timely delivery of supplies, quality supplies and at the lowest prices. Supplier assessment on the other hand entails evaluating a specific supplier in totality. It entails analyzing all the attributes of the supplier, including the quality of the products offered. It means that supplier assessment gives rise to supply base. The assessment process can take three levels – operational, tactical and strategic. A complete and fact finding assessment would make use of all three levels. Operational assessment is the most basic and focuses on the day to day working of the supply base. The concern is the efficiency with which the junior level activities are undertaken. Such would include the time for delivery, the time between order placement and its processing. The assessment would include after sale services and the waiting time in the queues in the supply base. A tactical assessment would entail systems that would assist the buyer to maximize the gains from the supply base. This entails assessing the manner in which the buyer can arrange her procurement plan so as to benefit from the offers made by the base like quantity discounts, credit services among others. Strategic assessment entails evaluating the benefits that would be attaching under a long-term arrangement with the supply base. Such would include cushioning the buyer from supply shock costs. The product packages offered by the supply base would guide the decision as to whether to choose a long term or short term engagement. Relationship management has been taunted as the most effective technique of managing supply base in the tire industry. There is rising demand for tires due to increased production and usage of automobiles. The supplies for this industry are sensitive to establishing customer loyalty, by building trust of meeting market demand. The relationship management approach involves companies creating close ties with their suppliers so that they can have trusted sources of quality supplies (Nguyen & Leblanc 2001). That way these companies are able to ensure reliable supplies as well as getting guarantee for quality. Approach to marketing in the tire industry is on the precipice of total transformation. There is increased interest in online marketing initiatives where transactions can be initiated and completed electronically, without the need to buyers visiting the supplier’s premises. The system allows both household and corporate customers visiting the company websites, gathering information regarding their products and making orders online. Payment is made through electronic services such as PayPal and delivery is made upon payment. (b). Challenges of Supply Chain Management for Organization operating on International Scale There is continued interest in Just in Time strategy for companies that deal with physical commodities. The method has gained widespread acceptance due to the efficiency it creates to both the supplier and the buyer. Secondly, the cost saving attaching is significant in reducing total operational costs. This comes by way of reduced holding costs and insurance premiums for goods on warehouses. Under this system production is purely based on demand. To effectively apply the system, both the manufacturer and the supplier of the factors of production, must have high level of efficiency in their operations. The system is designed so as to completely eliminate the holding costs, but the challenge for multinational operators is the timeframe, between when an order is placed and when delivery is made. It becomes difficult for an entity to manufacture products when ordered since speed is crucial to customer satisfaction. This means that companies operating on an international scale have to continue operating overseas warehouses to serve their clients appropriately. Demand levels at different parts of the world take different trends. Effective supply chain management entails proper anticipation of demand so that the producer can have an objective view on the scale of operations at any one time. Various general and operational environments in different countries differ significantly. This attribute presents real challenges to the managers of supply chain management who are forced to craft different strategies for each identifiable region. There are limitations to the extent to which technology can be applied in supply chain management. Some areas simply lack the supporting facilities such as internet connection. Other regions have inherent market limitations that make adoption of such systems inappropriate or cannot simply be sustained. It follows therefore that such companies cannot craft a single corporate strategy for the supply chain management function. This necessitates formulation of different strategies for each region which translates to added management costs. The supply chains comprise of many suppliers from different territorial regions and hence apply different currencies. These currencies are susceptible to exchange rate fluctuations. It becomes very difficult to monitor and forecast the trends of various currencies so as to arrange for hedging so as to source supplies at the least cost possible. Different countries have different laws and regulations that guide the practice of business. Also, many countries adopt protectionism policies with regard to international trade. Some of these policies hamper the free flow of products or the ease of signing future contracts. (c). Role of Environment, Ethics and CSR in Assessment Process The assessment process and the decisions in that regard have impact not only on the organization but also on the wider society. Being mindful of the concerns of society and observing its norms and values is a desirable thing to do. Acting this way, creates a healthy working relationship between the entity and the community and hence growth in earnings. Organizations create competitive advantage by acting ethically and responding positively to ethical situations and the desire to attain this feat influences the assessment process. The assessment process is conducted by professionals in the field. Being a professional involves carrying out duties according to ethical standards of a particular profession. Ethics hence play a central role in the assessment process as experts abide by ethical code of conduct of their professions. Concern for the environment is the duty of all players in the trade system. The rationale is that it supports all operations both currently and for future generations. It would be prudent, for example, to source supply base that offers environmentally friendly products. Environmental conservation efforts should be promoted at all levels of business and even by the public sector. The assessment process pays attention to corporate social responsibility since such a move is good for business. Acting in a socially responsible way is viewed as a compliment to sourcing business deals and by extension, making big profits. Organizations should arrange their affairs such that they are accountable for their acts whether good or bad. Doing that will enable them relate with stakeholders more easily (Vogel, 2005). The public has a way of expecting high levels of compliance with laws and regulations as well generally acting responsibly. This is presumably the pressure that such entities have to deal with in their course of operations. In most cases, entities pay attention to environmental conservation to the extent of the law. However, safety and health of the workers go beyond the demands of legislation. This is a case of corporate social responsibility. By so doing, the assessment process is not only guided by laws and regulations prevailing, but also by pressures of being socially responsible. It is safe to state that in light of the issues o highlighted, there is a strong case for companies, to be socially responsible for their actions in the assessment process. Consumers are more informed in modern times, more than ever. They would perceive an entity as being socially responsible if it engages in socially responsible supply bases. As the debate continues, as to what is ethical and what is not, entities can capitalize on facts already gathered to gain business mileage. For instance, managers should target to be socially responsible to increase sales volume out of acceptance gained by presenting a good public image. Acting in the morally prescribed manner will prevent awkward situations companies find themselves in, with the society. Being accountable for every action is the way to go. Conclusion There has been a wave of transformation in the tire industry with regard to supply chain management. There numerous and considerations factors that have driven the change some of which are improvement in product design, e-marketing and concern for the welfare of the society in the assessment process. 2 This section evaluates the role of purchasing in creating and managing supply risk with specific reference o the Michelin Tyre Company. Available literature from past studies refers to supply shock costs are the primary sources of risks in supply chain management. (a). Contribution of Purchasing to Creating and Managing Supply Chain Risk Procurement managers make a decision to buy and then have to make a rational choice which involves choosing the supplier from whom to buy from. There are various attributes that guide the supplier choice, some of which are general while others are technical. The general factors entail the prices’ quotation, quality and after sale services offered by specific supplier. The other factors are a bit technical to handle since they involve aspects that are hard to quantify such as political risks, regional risks, reliability and supply base design among others. All these factors create certain risks that the buyer must prudently manage and try to mitigate the losses that could result from such. The choice to buy from a specific supplier involves assuming the regional risks that prevail in that region. The environmental conditions that influence such aspects like supply shock and political stability are non-static. The uncertainty presents risks whose extent is difficult to predict with precision. Any occurrence in the region that frustrates production presents risks. The supply shock can be as a result of unfavourable climatic conditions in the area. Labour strikes could also hamper the process of production. The implication of short supply pushes prices up. This means that the buyer needs to diversify the risks of supply shocks by choosing supply bases that are located in different regions. There could also be transportation problems due to certain events even when the production process went uninterrupted (Zhixi & Damian 2009). Sea calamities such as tsunami or air calamities like an eruption of a volcano are some of the other factors that can hamper supply. Political circumstances for different regions are different. If political trauma affects a supply base, then the impact is felt by a buyer who was solely dependent on that supply base alone. Political effects are highly felt in times of a general election in regions with young democracy. Some parts of the word, particularly the Arab World, have frequent revolutions that hamper production process. If the supplies form a basic item of her manufacturing process, then her operations could be stagnated. Beside lost revenues and profits, the buyer could lose major market battles since the customers lose trust with a trader who cannot meet their demands without fail. The legal and regulatory systems of any country or region differ significantly and this could be another source of risk for the buyer. Governments respond differently to economic status prevailing at any one time. In times of global crisis, for example, the inflationary tendencies force many governments to adopt contraction policies. To this end they may limit the level of activity in the international scene. A buyer who is dependent on a supplier from this region will suffer shortages (Zhixi & Damian 2009). It is difficult to predict economic downturns even with experts hence firms will always have to live with the risk, and take measures to cushion themselves from their impacts. The risks that a supply base is exposed to have an influence on the insurance premiums paid. Such is translated into the final price that is offered for supplies. It follows, therefore, that the higher the risks a region is subjected to the higher the price of supplies that come from that region. The most viable response that a buyer can make to regional cost supply shocks is negotiating deals with suppliers from unaffected regions. However, this could prove difficult since time is needed to evaluate the suppliers and sealing a contractual agreement. Supplier selection also involves the process of qualification which is costly (Zhixi & Damian 2009). The added expenses would cancel out the very intention of buying at the lowest possible prices. To avoid from reacting to supply shocks when they actually happen, buyers usually build their supply base as a long-term strategic decision. One approach is by negotiating contracts with supplier from different regions. This allows the buyer to continue paying normal rates for supplies despite increases in its price in some regions. The payment contract is negotiated using competitive bidding. The buyer’s ability to design auctions assists to negotiate a competitive bid. That one aside, the bargaining power of the buyer is also central to the price agreed. The bargaining power of buyers would originate from the presence of many suppliers who are not differentiated and where there are no switching costs. A buyer with a higher bargaining power will be better placed to negotiate a more lucrative deal. Otherwise the buyer would largely rely on the supplier’s willingness to compete on prices (Zhixi & Damian 2009). Procurement agreement should entail in depth evaluation of the financial viability of the supplier. There is always a risk of bankruptcy of a supplier. Buyers should be cautious when negotiating long-term mega contracts with suppliers to avoid falling on the trap of losing heavily should the supplier be liquidated before termination of the contract period. The risk assessment feeds the contractual costs as it may entail hiring the services of a financial analyst or taking an independent audit. The long-term contracts are usually supplemented with short term supply contracts with stable base. The benefit of such arrangement would be to capitalize from a supply base that promises stability in the immediate future and has a good bargain on prices. Constant engagement with such supply base would prove worthwhile in the future as the buyer can get a chance to identify the lowest price supply base and forge a long term agreement. (b). Contribution to Reducing Risk – Case of Michelin Tyres Michelin obtains supplies from diversified bases. The major product, rubber, is sourced majorly from Africa, in Congo and parts of Asia. Congo as a country faces serious political turmoil and constant civil wars. However, these events have not stopped its participation in international trade but have reduced the scale of operations. To cushion itself from supply shocks, Michelin deals with local companies that trade in the rubber rather than the original producers. In times of lapses in the central African Country, the supply bases in other parts of the world come to the aid of the situation. Michelin has entered vertical integration with vital supply bases of vital raw materials of its production process (Michelin 2006). For instance, oil refinery companies, have a high amount of carbon as by products, the same is vital in strengthening of rubber. By engaging in contractual agreement with these refineries, Michelin is assured of a stable supply of the commodity. Michelin has also engaged in a number of acquisitions. Few years ago acquired Shanghai Tire and Rubber Co. This move was deliberate to ensure cheaper supplies which are available in Asia Pacific region (Michelin 2006). Michelin is now able to create a market edge from the supply side rather than solely depending on marketing initiatives of the finished products. Michelin has also used its brand recognition to negotiate lucrative deals with crucial suppliers. This has been done in an effort to curb against the risks of supply shocks. The position of Michelin, as the market leader in the tire and rubber industry, has enabled it to win trust of the suppliers. Furthermore, as an effort of minimizing cost of suppliers, the company has engaged in purchase of recycled materials. The rationale is that the world has lots of rubber waste which in most cases is not put into constructive use (Michelin 2006). Recycled inputs are much cheaper and hence by adopting this strategy, Michelin has found its costs of production fall significantly. (c). Commodity Hedge for Michelin Tyres Currency % volatility Recommendation Euro-dollar 10.8 Take a long term future contract Dollar-yen 10.3 Take a long term future contract Sterling-dollar 8.1 Take a short term future contract Dollar-Swiss 10.5 Take a long term future contract Dollar-Canadian 6.2 Take a short term future contract Conclusion Probable calamities in different parts of the world that affect political, social or economic stability, present inherent risks to supply base management. Firms hedge the risks depending on the specific cause of the risk and the firm’s bargaining power in negotiating strategic payment contracts. References Christopher, M & Holweg, M 2011, Supply Chain 2.0. 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