How to Maximize Profit-Making in Refined Bus Company Limited - Case Study Example

Case Study Report on Refined Bus Company Limited Name Institution Case Study Report on Refined Bus Company Limited Executive Summary The report, based on Refined Bus Company Limited, is divided into seven sections, exclusive of the reference page. The report contains the current procurement issues, Kraljik procurement model, service support centre, tendering procedure, evaluation of existing suppliers, make or buy and recommendation sections. Each section has distinctive issue that it portrays. However, there are some similarities between the sections since they are all related and present the concepts based on a case study of the Refined Bus Company Limited. The current procurement issues section discloses the challenges related to tendering in the company. It highlights the issues which include high expenditure on procurement and the uncertainty of supply of items to the company. At the same time, the section explores the challenges in the company’s Service Support Centre inventory. The aim of the section is to provide an overview about the challenges that the company undergoes in order to devise ways of solving them. On the other hand, the second section introduces the Kraljic procurement model that the procurement officers can use to evaluate suppliers. The tool offers a guideline into the criteria used to predict the future of the companies where there is a relationship between the suppliers and the purchasers. In the model, the report shows the application of the theory in the Refined Bus Company Limited. The third section, the Service Support Centre (SSC) looks into one of the sections of the company that deals with the supply of vehicle parts. The centre is the centre of the issue since it does not meet the expected company standards. The report looks at the challenges at the centre before proposing some of the solutions that the company can apply to make positive changes. The fourth section concerns the tendering process. In the section, the report discusses step by step procedure of ensuring that a justified supplier wins the tender and supply the company with the needed item. Of significance is the fact that the company deals with strategic suppliers, a matter that the section also acknowledges and discusses it. In the fifth section, the report underscores the evaluation of the existing suppliers. It looks at the techniques used in evaluating suppliers apart from the aforementioned Kraljik procurement model. The section looks at the resource-based and the multiple attribute theories. It discusses how each of the two theory act as a guideline in the evaluation of suppliers. In essence, the two offers choices to the procurement manager and the entire procurement panel on the actions to take during certain situations. In the sixth section, the report offers a discussion on whether the company should continue outsourcing the items it uses for vehicle making and other activities or it should focus on making its own materials. The report argues that the company should make its own items because it has the potential to do so. Furthermore, it saves costs and gives the company assurance that there is no threat in the supply of the needed goods. The last section is the recommendation. In the section, the report suggests the steps that the company can take in order to make a positive transformation. Current Procurement Issues/Problems The Company spends a lot of money in procuring the items needed in the company. It spends £325 million, a figure equivalent to eighty percent of the total expenditure. Besides the large amount of money spent on procuring the required items, the company also faces a challenge of getting an assurance that the suppliers will become consistent with their delivery of the items in tandem with the company demands. The fact that the suppliers are strategic makes the company vulnerable to future uncertainty since there are no other competing suppliers that can offer a variety of choices to the company. Suggestively, the company seems to rely more on outsourcing rather than seeking its own independency. In the inventory, the company faces the challenge of satisfying the needs of the customers whom thirty three percent express displeasure. Evidently, the company has taken twenty years to supply vehicle parts to its clients who might have had their vehicles in garages due to lack of spare parts. Kraljik Procurement Model The Kraljic procurement model operates by curving out the profit effect on one hand and the susceptibility to the disappearance of the supplier on the other hand. It is a system through which an organization handles its many suppliers. The matrix gives an opportunity to look at the best approach to take in a procurement process. Significantly, enables the management to identify the crucial suppliers. The model that was created by Peter Kraljic aids buyers to increase the security of the supply. At the same time, it helps in minimizing costs by taking advantage of their purchasing power. The model has two dimensions: First, the impact of a specific product on the earnings of the organization. When the commodities have a significant value to the organization, the profit effect becomes high. Second, supply risk increases when the commodity is scarce, or tends to become vulnerable to such forces as state instability or natural factors or when the suppliers are few (Adedokun, Ibironke and Babatunde 90). The risks that Kraljic discusses appear in four product categories: First, the strategic items category indicates that there is a high profit effect and high supply effect. The items have a high significance and there is a need to develop a long-term effect supply relationship in order to ensure that the business make a progress at all times. For that reason, it is advisable that the organization should become the owners of production of such an item. In the case of Refined Bus Limited, the company requires various items from the strategic suppliers. The reason why the items are crucial is because they form the key components of the company. Actually, the company cannot do without the item and should therefore purchase them. In the making of vehicles, the materials indicated as the items that the suppliers should avail insinuate that the Refined Bus Company will not mange to operate at a profit. The Refined Bus Company Limited purchases eighty percent of the items from the ten strategic suppliers. By virtue of the fact that the company considers them strategic shows their level of importance in the company. The supply risk is high (despite the high profit) and shows that there are chances of losing the business due to disappearance of suppliers (Fernandez and Kekale 170). Second, the leverage centralizes on the tenet that there is a high profit impact and low risk of supply. Therefore a procurement officer should consider executing the purchasing power to the advantage of the supply. Hence, the management may decide to change suppliers by switching to the one that have chances of generating higher profit to the company. The company can know this by confirming the number of organizations or individuals producing a particular item. When the suppliers are high in number, it means that the organization can take advantage by quoting low buying price. In the case of the Refined Bus Company Limited, there are limited chances of abiding by this notion of the leverage items because all the suppliers are strategic. The company risks the chances of losing the supply of commodities because the suppliers are diverse. Consequently, the procurement office should maintain a good relationship with the suppliers since the company will have to attract loses from the loss of the raw materials. Third, the bottleneck items imply that there is a low profit effect but high supply risk. The company may take advantage of the availability of surplus raw material to purchase from the sellers. The over-ordering promotes the control of the suppliers. The approach does not add many benefits to the company since the over-purchase does not guarantee fat profit making but only acts as an indicator of the fear of the future. Essentially the company must continue buying the items because they are necessary. With the use of strategic suppliers, there are minimal chances that the company will have to employ the approach. Each supplier has definite item to supply and even if the company will purchase large quantities of items from tem, it will not change the fact that the company relies on suppliers for raw materials. Evidently, the attempt might backfire because the suppliers may read the motive in advance and maintain their cost in order to ensure that the company does not control their prices. Last, there is the non-critical item that centralizes on the tenet that there is low profit effect and supply risk. The items under the category include those that have a low financial impact to the company but remain significant. Economists advise that the approaches of buying the items include the use of monitoring order volume and the use of standardized products. The use of strategic suppliers renders the company vulnerable to getting into the non-critical items category. Service Support Centre (SSC) The Supplier Relationship Theory explains that there is a need for a paradigm shift from the transaction oriented business philosophy to developing a buyer-seller relationship. It follows that the buyer and supplier consider themselves as mutual partners that should assist each other in satisfying their needs. The theory argues that relationships are crucial in effective marketing activities. The shift from the transactional focus to relationship perspective insinuates that there are changes in the functions, processes, and techniques of organizations leading to an initiation of a new inquiry. The buyer understands the supplier as a customer and vice versa. The most effective way of creating value in the relationship is through cost reduction during trade (Khorramshahgol 59). By extension, the theory applies in the identified problem in the SSC. Using the theory as a guide, it shows that there is a necessity to nurture a mutual relationship between the clients and the SSC. The customer satisfaction level still demands an attention. The percentage of sixty seven shows that some customers do not meet their interests from the company. Therefore, it is appropriate to meet with the customers seeking SSC services and develop a relationship of a mutual understanding. For example, the company should even apologise for waiting for twenty years before availing vehicle parts that the customers purchased twenty years ago. It shows that the company did not care whether the vehicles they sold in the past needed servicing. To effectively improve the relationship, the SSC should reduce cost of the transactions (especially the cost of the vehicle parts) in order to develop a friendly relation with the customers. Research indicates that by accepting weaknesses and promising to change, relationship between buyers and sellers improves. Tendering procedure First, the procurement office advertises for the tenders so that interested parties can apply. The applicants will then receive an issue of an invitation tender containing instructions, conditions, and other details. The shortlisted individuals or companies will attend an interviewed that has appointed officials from procurement, finance and other departments attending. Thereafter, the officials initials, lists and enters analysis sheet indicating the rates, prices and other details that will form part of the interview. The panel evaluates the applicants based on the agreed basis and the applicants receive the feedback. The qualifiers get the information and so are the losers. The latter may not receive any explanation as to why they did not qualify unless they demand (Sarkar and Mohapatra 152). Evaluation of existing suppliers The resource-based theory focuses on three aspects in the supply transactions. It argues that there are three instances of evaluating a supplier: First, it explains that supplier-customer relationship is desirable. The condition transpires when the supplier’s capability levels match the outsourcing wants of its clients. The process shows a mutual relationship between the buyer and the supplier (Cheng, Chen, and Mao 464). In that case, the two enjoy the benefits without any deficiency. Regarding the case of Refined Bus Company Limited, the management should evaluate whether there is a mutual benefit between the two parties or not. If it does, it means that the transaction should continue because there is no fear of losses. Second, the resource-based theory describes a situation where customer-supplier relation undergoes toleration. The situation occurs when a deviation from a good condition takes place. The situation appears when one of the parties become disadvantaged, for example, when the supplier’s resources become under-utilized or the supplier do not meet the needs of the buyer. The Refined Bus Company limited faces the danger of lacking adequate supplies if it does not critically consider the kinds of suppliers it relies on (Blackhurst, Scheibe and Johnson 145). On the other hand, the multiple attribute utility theory functions in the situations where there are uncontrollable and unpredictable forces that affect the decision (Gibson and Fraser 352). Through the theory, the procurement manager handles several diverse attributes in the supplier selection. The management evaluates the possibility of changes that might occur, especially due to the adjustments in the company policies. In reference to the Refined Bus Company Limited, the procurement manager may decide to neglect a particular supplier because of his interrogation in relation to the company policy. He may realize that there is a possibility of generating losses to the company if the supplier is allowed to provide his items. Make or Buy The Company should establish its way of producing the items on its own rather than outsourcing. According to Make or buy decision theory, there is a need to agree on whether to produce an item or seek a supply from the external source. The proponents of the theory explain that the company can arrive at the decision when it has problems with its suppliers. In the case of the Refined Bus Company Limited, the company has problems with the acquisition of items because the suppliers are strategic. If the suppliers withdraw their services from Refined Bus Company, there are chances that the business will collapse (Arya, Mittendorf, and Sappington, 1750). Therefore, there is a need to safeguard the future by seeking alternatives in time. To reach the decision, one has to look at the strategic and operational level. At the strategic level, focus is on the analysis of the future in relation to the current environment. For example, future emergence of competing firms, government regulation among others (Carter and Yan 215). Similarly, the company should know that with time, other companies will emerge and compete over suppliers of the items. At the operational level, there is a consideration of cost. First, it is possible that the cost of making such items in the country is lower than purchasing from suppliers who are looking for profit (Mudambi and Tallman 1440). Secondly, the Refined Company can elevate its status by seeking to become self-sustained in the item and the final product. Third, the company can develop better quality items than the ones purchased from the external source. Fourth, there is an assurance of a continual supply of the commodities. Fifth, by producing its own items, the company avoids relying on suppliers while saving transportation costs. At the same time, it enables the company to have steady workforce and earns itself pride of becoming independent. Recommendations In order to maximize profit making, the company should start manufacturing its own items rather than relying on outsourcing. Through such independence, the company will also gain reputation and become widely accepted. In addition, avoidance of outsourcing will eliminate fears of shortage of items required in the company. Moreover, the company should build a good relationship with the customers by reducing transaction costs of vehicle parts. BIBLIOGRAPHY Adedokun O A, Ibironke O T, & Babatunde S O, 2013, Assessment of competitive tendering methods of procuring educational building projects in Nigeria, Journal of Facilities Management, Vol. 11 No. 1, pp. 81-94. Arya, A, Mittendorf, B, & Sappington, DEM 2008, ‘The Make-or-Buy Decision in the Presence of a Rival: Strategic Outsourcing to a Common Supplier’, Management Science, vol. 54, no. 10, pp. 1747-1758. Blackhurst, J.V., Scheibe, K.P. & Johnson, D.J. 2008, "Supplier risk assessment and monitoring for the automotive industry", International Journal of Physical Distribution & Logistics Management, vol. 38, no. 2, pp. 143-165. Carter, JR & Yan, T 2007, ‘The procurement function’s role in strategic outsourcing from a process perspective’, International Journal of Procurement Management, vol. 1, no. 1/2, pp. 210-226. Cheng, H, Chen, M & Mao, C 2010, ‘The evolutionary process and collaboration in supply chains’, Industrial Management & Data Systems, vol. 110, no. 3, pp. 453 – 474. Fernandez, I &Kekale, T 2007, ‘Strategic procurement outsourcing: a paradox in current theory’, International Journal of Procurement Management, vol. 1, no. 1/2, pp. 166-179. Gibson, A & Fraser, D 2011, Business Law, 5th edn, Pearson Australia, New South Wales, p352 Approximately. Khorramshahgol, R 2012, ‘An integrated strategic approach to supplier evaluation and selection’, International Journal of Information Technology & Decision Making’, vol. 11, no. 1, pp. 55-76. Mudambi, SM & Tallman, S 2010, ‘Make, Buy or Ally?: Theoretical perspectives on knowledge process outsourcing through alliances’, Journal of Management Studies, vol. 47, no. 8, pp. 1434-1456. Sarkar, A &Mohapatra, P 2006, ‘Evaluation of supplier capability and performance: A method for supply base reduction’, Journal of Purchasing and Supply Chain Management, vol. 12, no. 3, pp. 148 – 163. Read More