Procurement and Purchasing Strategies - Refined Bus Ltd - Case Study Example

Name: Topic: Case Study Report on Refined Bus Ltd Institution: Date of submission: Instructor: Executive summary Most manufacturing companies spend almost half of their sales revenue on buying components and services. A reduction in the purchasing expenditure will, therefore, result in a substantial increase in the profit margin for the business. Studies have been carried out on procurement and purchasing procedures, and how improvements can be made to increase their contribution to the company’s competitive advantage. Due to increased interest and better understanding of the function in purchasing, the process of responsibility has developed buying through procurement to supply management. This has led to a greater emphasis on purchasing activities within the companies involved. One of the major breakthroughs in this respect is the Kraljic comprehensive portfolio approach (Matevz, 2007). In this report, an explanatory approach will be used to highlight the current practices of Kraljic purchasing portfolio model that the Refined Bus LTD should employ in its purchasing strategies. The report shall help Refined Bus Limited in analyzing the potential suppliers of the required materials such as aluminum sheets, glass, seating, tubular fabrications, carpeting and doors. Similarly, the Kraljic model along with the supplier relationship theory, are used to evaluate the existing suppliers so that an informed decision can be made, and provide the appropriate recommendations. In addition, this study reveals and analysis the challenges that the procurement is facing at Refined Bus Limited whilst providing solutions to overcome those challenges. The report focuses and keenly examines the supply chain and procurement systems at Refined Bus Limited and offers perspectives on the strategic procurement approach that should be employed to eliminate inefficiencies Methodology This study was carried out using certain types of procedures. This will allow the reader to have a critical assessment of the report and gauge the credibility of the study. The two distinctive research methods that were used include the deductive and inductive. The inductive method focuses mostly on the process, comprehension and interpreting, and other findings are used as the basis for generating new theories. On the other hand, deductive approach departs from the already valid theories and hypothesis are derived and analyzed. In this respect, the Kraljic matrix is used in determining the best purchasing strategy, and other theories are applied to compliment it. There are two different methods used to conduct this research: qualitative and quantitative. The reason for using qualitative research is to comprehend the context of a phenomenon or a particular experience. Quantitative research is also used to help understands the way all parts are in tandem, so as to create a clear picture of the phenomenon. The quantitative method is formalized, structured, and more controlled during the research. Furthermore, quantitative research is based on statistical analysis and a high degree of generalization. On the other hand, qualitative research, deals with contexts that are more complex and where the purpose is to have a proper understanding of a particular aspect in the context. Challenges Procurement practitioners all over the world from both developing and developed countries face many challenges during the procurement process in the business. The recent economic recession experienced in many parts of the world has forced companies to keenly examine their supply chain, procurement and operational excellence, in order to eliminate inefficiencies. After some thorough review and restructuring at Refined Bus LTD, the following are the key procurement challenges that the company is facing (Lintukangas, 2008). Firstly, Refined Bus Limited faces the possible risk in procurement such as supplier failure. This could have far-reaching implications on the future of the business. The business, therefore, has to assess and redesign periodically in accordance to market changes, including global sourcing and new acquisitions. The company needs to identify the procurement risks and quantify them. Additionally, Refined Bus LTD faces other risks such as how to cope with commodity price volatility. This is especially true because in the manufacturing industry, the speed at which the commodity prices go up is unprecedented. In addition, the procurement needs to be able to monitor the entire chain, rather than just tier one or 2 suppliers so as to avoid being caught up in controversies and legal issues (Bauer, 2011). Moreover, Refined Bus Limited faces the challenge of ensuring sustainability in procurement. The business needs to be forward looking by branding and marketing itself around what it is doing in its supply base in terms of sustainability. For instance, the company needs to elaborate on its role in reducing CO2 emissions and engage with second and third tier suppliers. In this respect, Refined Buses Limited needs to initiate sustainability ventures that directly relate to supply chain and procurement over a period. This will enable the company take on the challenge and be on the forefront of taking care of the environmental and social issues in the supplier base. Currently, lack of fresh, talented and skilled procurement professionals is a key challenge that the procurement department at Refined Buses Ltd is facing. A skilled workforce is required to scale up and diversify the companies supply chain requirements. Therefore, the company needs to invest in the recruitment of skilled and talented people who can engage better with organizations and show that procurement can contribute to the top line. Furthermore, executive training and development is required because supply chain managers are required to understand the necessary competences needed in supply chain management and procurement. Refined Bus Ltd needs to collaborate with schools and industry bodies to attract young talent that can be natured and developed into future leaders (PWC, 2010). The procurement is having trouble in getting the senior management at Refined Buses Limited to agree on an appropriate procurement structure. The constant reduction in positions due to the tight expenditure and the task of convincing the senior managers at the company that procurement contributes to the profit of the firm rather than incurring the cost is a significant challenge. There is the inability by the senior management to recognize the procurement function as a profession despite the availability of experienced staff. Without the support of high-level management within the firm, it is extremely difficult to implement change and develop appropriate systems. The procurement department is not a cost center, and therefore, it should be resourced appropriately to allow the company realizes its cost saving target. Refined Bus Limited staffs are non-compliant with the procurement policies and procedures. Challenges such as the level of staffing and tools, lack of measurement and data analysis systems that assist in the formulation of better procurement decisions; greatly stifle efforts to help people fully understand the process. In addition, the company needs to know the strategic benefits that can be exploited by working with preferred vendors and by pooling volumes together (Sudarshan, 1996). Another challenge that the procurement at Refined Buses Limited face is the effective management of the supplier or partner relationship. Firms and even departments within the firm might have contrasting methods for assessing the level of communication and the expected performance or results. The managers at Refined Buses Limited should initiate trust and cohesiveness with the suppliers by avoiding internal biases and by making conscious decisions that adhere to mutually agreed upon standards. This will enable a better understanding of the current performance and identify opportunities for improvement (Klein, 2006). Cost control in the supply chain is also a major challenge at Refined Buses Limited. The supply chain operating cost have gone up due to pressure from the rising transportation cost, an increase in global customers, technological upgrades, rising cost of commodities, rising labor rates and new regulatory demands. This cost will consequently strain resource allocation to the procurement department. The firm, therefore, needs to control these cost by using the appropriate metrics measurement. In addition, managers need to identify the critical factors that drive the total cost of supply chain within Refined Bus Limited. Procurement model Portfolio models are mostly used in strategic decision making to assist in the allocation decisions, by choosing the groups of suppliers, products, or relationships that require greater attention than others do. Therefore, it seen as a useful management tool. From a purchasing perspective, purchasing portfolio models were essential in supporting decisions regarding different types of supplier relationships (Fenson & Edin, 2008). The Kraljic matrix focuses on procurement by highlighting purchasing as an important managerial area with enormous impact on profit. This model can be used at Refined Bus Limited to assess the value of the ten strategic suppliers. The Kraljic model is suitable for this firm because it emphasizes on the purchasing area as an important management issue. Additionally, likelihood of success with this model because it clearly differentiates buying conditions and provides the logical recommendations on how to act in those circumstances. The Kraljic matrix classifies the steps of purchasing the sophistication within companies and identifies four steps: material management; purchasing management; supply management and sourcing management. The matrix classifies the steps of purchasing the sophistication within companies and identifies the four steps According to Kraljic, supply management is critical when the supply market is complex, and the need for purchasing is high. Therefore, Refined Bus Limited must act in its own advantage and changes the view from purchasing, which is an operating function, to supply management. Going by the matrix model, supply management is important when critical materials are procured throughout complex situations. Supply management is even more important when uncertainty in the relationship between the buyer and the supplier. Kraljic model shows that the two factors are important for a supply strategy. More importantly, Refined Bus Limited should consider factors involving the importance of purchasing such as percentage of the raw material in respect to the total cost, value added, and the effect on profitability. Another factor to put into consideration is the nature of supply market as determined by scarcity of the required materials at Refined Bus Limited. Furthermore, material substitutions, pace of technology, the logistical cost and the nature of the market should all be critical in selecting the strategic approach in purchasing (Pooler, 1997). The Kraljic matrix also classifies products as either strategic, bottleneck, leverage or non- significant. The classification dimensions that are used are supply risk and the impact of profit. By applying this model at Refined Bus Limited, working method consisting of four phases should be followed. The phases in this classification include; plotting the bargaining power between the company and the ten suppliers, strategic positioning of items chosen in the classification phase and finally formulating a long-term action plan (Aljian, 2006). The classification of Refined Bus Limited commodities based on the dimensions of profit and supply risk is the first Phase in Kraljic’s working model. The classification in the four categories needs a distinctive approach and the prevailing condition of the supply market is in proportion to the strategic implications. Analytical techniques are required to support supply decisions in this strategic quadrant. For instance, these techniques can be in the form of market analysis, computer simulation and optimization models, microeconomic analysis and price forecasting. Specific decision models and individual market analysis are required for bottleneck products. Moreover, vendor and value analysis, decision models and price forecasting, may be important for leverage material. For the non-critical items, Refined Bus Limited needs to carry out a simplified market analyses, formulate clear decision policies and carry inventory optimization (Sudarshan, 1996). Service support center Most companies that invest in new-shared service centers so that it can pay dividends by providing quality support services and reduce administrative cost. In addition, back office processes might be easier to maintain, improve and control. However, at Refined Bus Limited, this venture has not fully achieved the desired results even after implementing the SSC. This is because the satisfaction rate stands at just 67.3 percent. Furthermore, some customers might be unhappy about the quality of service offered at the center. This might consequently lead to low morale at the shared services center, deterioration of relations between the company and its partners, increase in turnover and increased cost. The supplier relationship theory may be used to address these problems. The theory outlines a framework for managing portfolio relationships. In this respect, strategic partnerships correlate with the investments from both the company and the suppliers or partners in the relationship. The portfolio provides assistance to the senior manager in such a way that they are able handle the governance structure and the relational design under external contingencies. In addition, the supplier relationship theory provides guidelines on how to manage the various relationships in the business at different levels (Thai, 2008). By employing the abovementioned theory, Refined Buses Limited should formulate an organization structure that will best serve its customers and foster good relations with its partners, including the suppliers. This can be achieved by encompassing all the workflows, through defining the competencies and standards against which the employees are evaluated. This will encourage higher output and proper service delivery, which is key for effective implementation of service support center (Fenson & Edin, 2008). Evaluation of existing suppliers Since the contractual details of the ten strategic suppliers of materials to Refined Bus Limited, the tendering processes will be carried out with respect to Kraljic’s matrix model. A proper understanding of the two dimensions that include the supply risk and profit result in the model will allow the senior purchasing executives formulate the appropriate supply strategies. Additionally, this theory will be applied to allow Refined Bus Limited to improve the power balance with its suppliers and therefore exploit its buying power towards important suppliers. This approach will also mitigate risks such as the regional spread of supply sources, contractual coverage, and availability of scarce materials. Profit impact Supply risk According to Kraljic, the strategic importance of certain supply item is related to its profit result and its supply risk. Profit result in this case can be the value purchased, impact on supply chain, dependence or the growth potential of the business. The segmentation of supply items in this approach will enable Refined Bus Limited to position each contract systematically and establish whether to award the tender to a particular supplier or not. The supply items that fall on the bottleneck and strategic categories are at a higher risk; therefore, they should be properly checked and appraised. The items that are categorized as routine and leverage may not pose such risks therefore they may not need the same approach (Pooler, 1997). After the completion of the categorization and segmentation process, information on existing contracts, suppliers and their performance will be available. The categorization will additionally provide a strategy for each category and the supplier. This information will enable Refined Bus Limited to establish the existing suppliers and the new suppliers. Depending on the individual performance of the suppliers against the set targets, the appropriate decision on which suppliers to award tenders should be made (Thai, 2008). The decision to make components internally or procure them on the open market is a complex issue that has been extensively studied within the transaction cost framework. The incentives versus transaction cost theory define the firm’s boundaries in terms of the activities that should be carried out in the firm, and which should be procured across the market. In this respect, Refined Bus Limited should consider the buying decision since it is much more cost effective compare to the make decision. In case the firm decides to make its own components, it will have to bear all the cost and risk associated with the production of the components (Aljian, 2006). Furthermore, the complexity and variance of the materials required by Refined Bus Limited will further increase the logistical and cost challenges. The buy decision is also justified because of the uncertainty about the rate of technological advancements and the frequency of changes in product specifications (Aljian, 2006). Recommendations The choice of a suitable purchasing strategy in the business context is embedded in the theoretical framework. In this regard, I would recommend the procurement or purchasing function of Refined Bus ltd should be keen on the overall mission of the firm because purchasing is a strategically vital component of the business purpose and, therefore, reflect the overall corporate image of the company. In addition, cooperation is required between the procurement department and other functions within Refined Bus Limited. The business should also and strive for joint purchasing action to exploit the opportunities that available. In terms of the service support center, I would recommend Refined Bus Limited to identify and engage all the relevant stakeholder groups who may be directly and indirectly affected. These stakeholders include; customers, service providers, suppliers and trade unions. The firm should not just focus on the employees since most shared services implementation affects a wide range of individuals. The business should, therefore, come up with a well thought out change management plan in order to increase the chances of all parties to get the appropriate level of involvement, communication, and training. This report extensively covers most of the areas pertaining procurement and inventory management. An in-depth perspective and diligent coverage of the key issues that relate to this discipline clearly demonstrates my comprehensive knowledge and skills in this area. In the light of the conclusive literature review and the thorough theoretical analyses carried out in this report, I believe I possess the required competences for the position of Head of procurement and inventory management at Refined Bus Limited. Bibliography Aljian, G. W., 2006. Purchasing Handbook: Standard Reference Book on Purchasing Policies, Practices, Procedures, Contracts and Forms. 2 ed. New York: McGraw-Hill. Bauer, C., 2011. Public Procurement. Sharing expertise, pp. 22-53. Fenson, C. & Edin, P., 2008. How purchasing practitioners use the Kraljic matrix. How purchasing practitioners use the Kraljic matrix, pp. 102-140. Klein, P. G., 2006. The Make-or-Buy Decision: Lessons from Empirical Studies. Handbook of New Institutional Economics, Volume 1, pp. 435-464. Lintukangas, K., 2008. Theoretical frames for studying supplier relationship management in global purchasing. supplier relationship management theory, pp. 14-35. Matevz, R., 2007. Buyer-Supplier Relationships and the Resource Advantage Perspective. Journal of competitiveness, pp. 16-38. Pooler, V. H., 1997. Purchasing and Supply Management: Creating the Vision. 1 ed. New York: springer. PWC, 2010. Shared Service Center - the 2nd Generation. Point of view*, 2(1), pp. 37-55. Sudarshan, D., 1996. Purchasing & Materials Management. 2 ed. London: Discovery Publishing House. Thai, K. V., 2008. International Handbook of Public Procurement. Florida: CRC Press. Read More