Procurement at Advanced Computer Logic - Case Study Example

Case Study-Procurement at Advanced Computer Logic Student Name Student ID Number Institution Course Code Lecturer Date Submitted Executive Summary This report evaluates the procurement strategy at Advanced Computer Logic (ACL) Inc. The aim is to enhance production and cut down cost by looking into the present procurement process. Procurement process is a strategic aspect in respect to ensuring any given company acquires goods necessary for ensuring business sustenance. The director of purchasing, Eleanor Jamison aims at understanding the process of procurement and supply that is costing the company thousands of dollars in contracting different suppliers for similar actuator components. The Kranjic’s Procurement Model is very important at this juncture in the assessment of the risk in the procurement and supply process and eventually maximise profits. This will be vital to the purchasing Director at ACL Inc to apply and cut the extra costs incurred by the use of nine suppliers of the actuator components to the ten fabrication departments. With the prevailing issue of supply increased cost, the company weighs the process of reducing the suppliers to one and the outsourcing process of a new contract have been well illustrated. On the same note, the production of the actuator components is a viable process that has been evaluated to ascertain how effective it would be to reduce the overall cost of production. The tendering process calls for clarity and ensuring that all legal processes are followed in a transparency manner. In essence, the procurement process calls for effective, efficient and transparent procurement systems that replicate the procedures of value of money, lucidity and accountability. ACL Inc will then look for the best supplier in terms of price, effectiveness and genuineness in work. The manufacturing of the actuator components is a noble undertaking though will involve more funding to establish the production unit. This exercise is worth taking in the future after stabilising the costs of supply and cutting down the extra costs incurred with respect to contracting various suppliers. However, at the moment, ACL will have to deal with the contracting of a single supplier of the components and later on embark on evaluating the viability of manufacturing its own. In addition, with a clear understanding of the procurement and supply state at Advanced Computer Logic (ACL) Inc, it is clear to note that the future is held by the decisions and activities of the present. It is therefore the obligation of purchasing director to ensure that supply process is streamlined and made more effective to ensure sanity in the company. The report outlines a number of various recommendations that are worth noting and looking at, for the sake of realising greater success. The recommendations entail measures crucial for ACL Inc that will ensure business growth and consequently cut production costs with effectiveness being a priority. On the same note, utilising the five forces of enhancing competition, the strategy has evaluated ways and means to ensure that ACL Inc competes effectively at purchasing level to get the most favourable seller while at the same time looking for more customers of its finished products. In conclusion, every business venture entails critical implementation of laid down strategies, ACL Inc ought to ensure the strategy is well implemented and made effective. Current Procurement Issues/Problems ACL Inc has been faced with multiple procurement procedure which has complicated the whole process. There are nine suppliers of similar actuator components to the ten fabricating department costing the company thousands of dollars. This not only complicates the purchasing process, but also places the company vulnerable to uncalled for losses. Purchase and supply are key aspects to any manufacturing company and outsourcing has been embraced by many to ensure effectiveness and save the cost of production whenever the strategy is utilised effectively (Sollish and Semanik 2007). Nevertheless, the case of ACL Inc is quite discouraging that there is no conclusive purchase strategy common for the entire company leading to every department outsourcing the actuator components on their own. With various companies outsourcing the product even within the vicinity of the company, procurement and supply management of the same ought not to be a big deal (Van Weele 2010). The director of purchasing clearly states that there ought not to be more than three suppliers of the inexpensive components. However, the managers of the various departments argue their case on the basis of reasons ranging from delivery performance to informal engineering advice as the reasons behind the varying suppliers across the departments. Nevertheless, this should not be a great deal of issues to render the company to such a complex procurement process. There is a greater need to lay down a strategic move to ensure effectiveness in the supply of the products and consequently ensure no extra costs are incurred with respect to the supply. This will be ensured by procuring the most effective and affordable suppliers for actuator component. Strategic Importance of the Actuator Components The actuator components are crucial for the production of customised automated assembly equipment at ACL Inc. Therefore, the anomaly within the purchase procedure calls for strategic move to correct it and realise higher returns. Utilising the Kraljic Portfolio Purchasing Model, the new strategic move in purchasing the actuator components has been evaluated below. This model was created by Peter Kraljic and was available for the first time at the Harvard Business Review in 1983. It has been a popular model in the field of purchase within companies worldwide amid the age since its inception (Kraljic 1983). The Kraljic Model is utilised in the ACL Inc strategic report to help the director of purchasing understand and maximise supply security while at the same time reduce extra costs that have been evident with the previous purchase process. This will be realised by maximising the company’s purchasing power and consequently moving the procurement process from being a transactional activity to a strategic move by ACL Inc with the logic behind Kraljic model of purchasing ought to be a supply management process (Monczka, et al. 2010). The Kraljic model entails four steps as stipulated below in respect to enhancing purchasing and supply. The four steps are; purchase classification, market analysis, strategic positioning and action planning. Step One: Purchase Classification The actuator components have been established as the products that have been supplied to ACL Inc and can be categorised as the supply risk and when looked into could give a great impact to profit returns in the company. In context to ACL Inc, the profit impact is relevant with respect to the actuator component being of much significance to the company’s output. The component is crucial to the manufacture of customised automated assembly equipment and without assessing the stake held by the actuator components at driving higher returns would be risky. In context, the actuator component calls for more attention from purchasing director as well as the purchasing managers. There is need for a long term solution to the purchase and supply of the component at ACL Inc, to ensure higher returns and reduced cost of operation. Figure 1: Product Purchasing Classification Matrix Source: Kraljic, P. (1983), Purchasing Must Become Supply Management, Harvard Business review. The actuator components are critical supplies in the manufacture of customised automated supply equipment. Due to its strategic nature, it falls under the second quadrant of strategic items. Therefore, there is need for more attention from the purchasing director to ensure profits are maximised and the extra costs incurred by contracting several suppliers is rectified (Lambert 2004). In addition, the director should develop a long term supply relationship with the most reliable and efficient supplier of the components (Hakansson and Persson 2007). This is crucial to ensure production is not affected by the procurement process of the components. Step Two: Market Analysis This stage will involve evaluating the power the various suppliers have and the extent of ACL Inc buying power as their customer. Using the Porter’s Five Force analysis, an evaluation of the situation of buying the actuator components is as follows: The five forces that calls for critical analysis are bargaining power of suppliers, threat of new entrants, bargaining power of buyers, rivalry among existing competitors and threat of substitute products. Source: Porter, M., 2008. The Five Competitive Forces that Shape Strategy. Harvard Business Review The bargaining power of suppliers is critical with respect to ensuring to settle for the most reliable and cost effective supplier for the actuator components. In regard to new entrants, the carrying out of a feasibility review of the supply of the actuator components will bring up new entrants into the board, thereby calling for the director to choose the most efficient. Rivalry will arise among the suppliers who will be competition to win the tendering process to supply ACL Inc with the actuator components. This will only require critical evaluation and analysis of the contractual process responses from the suppliers (Carr and Smeltzer 1999). Tendering is a crucial process that has to be transparent, accountable, and all legal processes followed to the latter. Generally, there is need for efficiency and effectiveness in respect to the realisation of transparency in the procurement process. The director will then have the opportunity to assess the suppliers and choose the best. With the manufacture of substitute products, it is upon the purchasing director, with the aid of the various departmental managers to assess and ensure no supplier avails components that fails to meet the standards of the various departments at ACL Inc. Every department will be called upon to avail the specifications of their components to ensure they get what they require. Step Three: Strategic Positioning This stage strategically places our purchasing products in order of priority as analysed. With only one product for analysis; actuator component, it is clear that the component will fall under low supply market strength and high strength of the buyer. This is the category of exploit ad ensures the strategic nature of the product to be procured from the supplier (Carrington 2007). Amid the high number of suppliers, the risk of supply is not high in regard to easier availability of the component. Figure 2 – Purchasing Portfolio Matrix Source: Kraljic, P. (1983), Purchasing Must Become Supply Management, Harvard Business review Step 4: Action Plan for Actuator Component Finally, it is vital to have an action plan looking into the analysis of the actuator component in respect to its strategic state. Having been categorised in the exploit state, the actuator component calls for proper evaluation of the suppliers’ price, in order to secure better prices and earn long term contract with the supplier. At this juncture, the various departmental specifications are critical for consideration, the supplier will be required to demonstrate the capability to ensure meeting various order supplies and ensure the specifications given out are correct. To efficiently enhance the buying power, ACL Inc will ensure contracting one supplier of the actuator components. This is vital as it also increases the chances of bargaining for better terms of purchase (Axelsson, Rozemeijer and Wynstra 2005). Although production of the actuators in-house comes in as an option for ensuring strategic approach and reduction of cost of operation, the venture calls for strategic planning and eventual maximisation of production opportunities. Therefore, this strategic plan involves buying of the components from single supplier and production ventures will be evaluated in the future after stabilising the procurement process. The reason behind halting the idea of in-house production is to look into the advantages and disadvantages of both the production and the single supplier strategy that is being initiated. Every procurement change process requires strategic measures and effective planning to achieve considerable success (Cox 2009). Thus, since the single supplier strategy is yet to commence, the comparison of the two cannot be initiated at the moment. Reduction of the Supplier Base and Supplier Assessment The present nature of globalisation has made purchasing not to be considered as a supportive function, but rather a strategic and crucial element in the organisational structure of any company (Benton and McHenry 2010; Carrington 2007). The purchasing process and supply management at ACL Inc, is a strategic unit crucial for connecting the purchasing strategy to the entire mission of the company. Thus, with the mission of ACL Inc, to continue manufacturing customised automated assembly equipment, there is need to evaluate the fact of supplying effective and cost effective components. This is thereby connected to the purchasing strategy of the actuator components and the operative activities involved in purchasing process (Shapiro 2009; Ellram and Zsidisin 2002). The director of purchasing at ACL Inc undertook a highly crucial step aimed at understanding the trend of purchasing and supply process involved in the actuator components. It is of fundamental importance to understand the strategic change and how it is performed in the purchasing department and consequently assess the manner in which organisational and surrounding factors affect decision making pertaining to the impending change (Hugos 2006). The purchasing director through the electronic component buyer was able to establish that the previous year it cost the company close to $185,000 to place individual orders with the ten fabrication departments. Coupled with other factors, the venture of individual orders seems a liability to the company rather than a procurement process for success. With global competition being a fact and intensely fierce, there is need to strategically and have higher speed in executing to improve on revenue, reduce costs of operation and invest in product development (Hakansson and Persson 2007). This will place ACL Inc at the helm of success within the market. According to Van Weele (2010) there is need for purchasing department to be synchronised with the rest of company functions in order to ensure well informed decisions pertaining to new projects to be undertaken in the future as well cater for the demand for new purchasing trends. This will help in the creation of cross functions aimed at ensuring buying teams and placing into focus the importance behind well and functional organisational design in the procurement and supply processes (Shapiro 2009). On the same note, the tendering for supply will be carried competitively and include the director of purchasing. This is in line with ensuring the tendering and eventual procurement processes are termed accountable and transparent as illustrated by Pooler and Pooler (1997). With the intention of acquiring global competitiveness, ACL Inc is bound to ensure that the purchasing and supply management is carried out strategically and effectively to ensure efficiency and cost reduction. Purchasing actions should follow a well outlined process with the consent and knowledge of the purchasing director and discussed with all the departmental managers (Shapiro 2009). This is crucial to ensure every aspect and interest of the various departments are looked into and addressed effectively. With increased competition even among suppliers, progressive tendering and procurement process becomes an entailing process which calls upon the director to keenly look into the applicants of the supply process. The candidate who qualifies for the tender to supply the actuator components ought to be competent, reliable and offer prices that are reasonable (Geunes et al. 2005). Consequently, there is need to ensure flexibility with the supplier in respect to the supply of the various ten departments within ACL Inc which may have diverse specifications. Manufacture or Buying of components Decision by ACL Inc. The actuator component can be obtained in two ways. ACL Inc has the capacity to either continue buying the components or produce them in-house. However, as far as outsourcing is concerned, the actuator components are inexpensive and outsourcing via utilising a standardised contracting process to acquire the best supplier will save the company the agony of establishing an in-house production unit for the components. Outsourcing has proved to be a highly effective and cost saving strategy in case the company utilises the process properly (Gelderman and Van Weele 2005). For ACL Inc, it will be the most probable mode of acquiring the components since they are inexpensive and allows for the fabrication departments to concentrate on other production issues. In context, purchasing process follows fundamental steps whatever the product being purchased. What matters most is the time and effort put into achieving the purchase process with the varying dependence on the significance of the process. Nevertheless, the idea of in-house manufacture of the actuator components will be revisited and evaluated with respect to the single supplier strategic move undertaken. This is after the new strategy will have established to be compared and evaluate which is the most efficient. Conclusion and Recommendations In conclusion, having evaluated the purchase and supply problem at Advanced Computer Logic Inc, there are a number of issues worth noting. The basic steps in any given purchasing process are universal for given products. Therefore, in respect to the actuator components, the purchase process which progresses to procurement through contracting process, only calls for proper planning and effective implementation of the set out strategy for change. In context, it is worth noting that every aspect in the purchase process has a role to play in the overall process of production and business operation. To effectively ensure that ACL Inc implements this strategy effectively to overcome the problem of purchasing the actuators, there are measures worth noting and looking at them critically would further enhance and effectively raise the level of certainty of the process. The following are strategic measures that can highly enhance the supply management, as well as ensure effective procurement to reduce cost operation while increasing profits. First, there is need to have a consultative meeting with all departmental managers to discuss the issue of single supplier proposal to ensure they get acquitted with the new trend of procurement and supply proposed. Further, future procurement procedures ought to be prepared by the managers, but approved by the procurement director to ensure assessment of the trend being taken whether it is cost effective. Consequently, there is need to look into the ways and means of enlightening the management teams with the upcoming trends of procurement and supply concepts to be up to date with the prevailing processes. This will not only enhance procurement process, but also help identify ways and means of ensuring cost effectiveness. Reference List Axelsson, B., Rozenmeijer, F. and Wynstra, F., 2005. Developing Sourcing Capabilities. West Sussex: John Willey and Sons Ltd. Benton, W., and McHenry, L., 2010. Construction Purchasing and Supply Chain Management, Ney York: McGraw-Hill. Carr, A. and Smeltzer, L., 1999. The Relationship Among Purchasing Benchmarking, Strategic Purchasing, firm Performance and Firm Size, J. Suppl. Chain Manage., Vol. 35(40, p. 55-60. Carrington, A., 2007. Purchasing and Supply Strategy; Directorate of Finance and Performance Management. January 2007. Cox, A., 2009. Beyond Kraljic; Understanding and Benchmarking World-Class and Best-in-Class Practice. IIAPS, 2009. 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Purchasing and Supply chain Management: Analysis, Planning and Practice, 5th ed. London: Cengage. Read More