Procurement of a New Plant Equipment - Company ABC - Essay Example

ABC COMPANY Company ABC is part of a large multi-national American organization they assemble transmissions for the North American Truck market. Due to a re-organization the company are moving to a piece part operation i.e. the manufacture of Gears and Shafts only, the transmission will be assembled at another European sister plant. The company previously manufactured gears and shafts for the transmissions they produced. They will now manufacture not only the gears and shafts that they have always produced but the re-organization will involve the introduction of a significant large number of parts not previously produced at the Manchester plant. The company will now move to a Cell Manufacturing Process Plant. A thorough analysis was transpiring for the re-engineering of obligatory business process and the preliminary efforts intense on essentials up to five years hallucination. But prior to endeavor of re-engineering processes by their trade allies, ABC, initially, wanted to improve their internal systems. The first step ABC took in this regard was the installation of monetary software. After that exemplary action several steps in the same track were taken gradually with more advance software modules as per their requirements and the progression is still going on. The main reason for the success of ABC is their implementation of the advance techniques of pricing and distribution in their business. To congregate the supply chain necessities ABC’s management decided to come up with two way solution, first they use radio frequency based data capture to support the on-line communication runs inside the company and then use the bar coding facility, to make it more authentic at their prime retail customers side. For combine podium of B2B communication, ABC and its trade cohorts were selected the Microsoft’s Biztalk. To implement this facility, external experts were brought in with the stern idea of in-house development to stay autonomous on their leaving. 1. Identify the different strategies you will employ to each of the 4 categories of suppliers and material/equipment purchased. Discuss the body of knowledge that surrounds supply chain strategies. (15%) A. Procurement of a New Plant Equipment The purchasing of new plant equipment requires selection of qualified suppliers and preparation and evaluation of bids. Since the product is new and the supplier not pre-qualified in most of the cases, hence the due diligence step in the process has to be carried out. This process is timely and energy consuming since loads of insight has to be put into the process before ending with any commitment that might affect the long run operations of the company. When procuring new plant equipment, the suppliers with relevant quality and technology should be selected. When the asset operator generates a purchase requisition and the maintenance management department in the firm the role of all support departments comes into play (Leeser)i. The process is very important because it is a capital expenditure and has huge and long run impacts on the firm’s operations. In cases of weak or loose attitude in the process consequences such as missed milestones in scheduling, a poor equipment not attributed to the specifications required, and poor supplier relationships can doom to the cost overruns and future problems occurring in the production process. When procuring a new plant equipment, the engineers mentions his or her needs and may ask potential vendors for the correct equipment to suit their needs. All specifications are then quoted in the definition document, which covers the throughput needs, material compatibility requirements, temperature variability and extremes, control mechanism, compatibility with the overall process (Greer, S.)ii. Once all specifications are put in place, tender documents are invited to choose the competitive supplier through an organized process. Once the process is all settled, purchase agreement is generated. It is important to check the post implementation quality and then release the payment. B. The Procurement of Previously used Equipment Since the equipment is a repeat purchase, therefore there is not much need of going into hectic process again. But, the process needs to be repeated if the previous vendor was not up to the mark and had problems in delivery, payment, or quality of service etc. The purchasing process in public sector is called the procurement process and is the very first and obvious factor that contributes into the many of the public sector project failures. Procurement process has become too complicated because of its high cost, especially with the new models. In addition, the complexity of safety and security, the direct cost when a system is breached, and the prospect of indirect cost from litigation may resemble the issues involved in procurement. The government aims to transform the political process through decentralization have also brought disappointments of systems in practice. US federal government has spent almost $2 billion to help the 50 States computerize their enforcement of child support laws during the years from 1980 to 1995. The attempt to introduce a new Computer Aided Dispatch (CAD) system in 1992 has become a classic example of IS failure in the London Ambulance Services (LAS). The fallout from the failure was wide and horrific which resulted to a feeling of vulnerability for there was a lack of confidence within the emergency service itself and the Chief Executive even resigned. It must be noted, however, that although the failure can be described to the limitations of the businesses, it is clear that it was not just about the failure of the computer based Systems but it was also about failure in business process development, the management and organization of change, including issues of human behavior, diverging cultures and politics (Atkinson & Fitzgerald, 2003, p. 1). The procurement process is clearly a more important contributing factor in the public sector than in the private sector in the case of London Ambulance Service failure, where lowest tendering and a poor provider combined (McGrath, 2001). Indeed, the purchasing process is not even cited as a cause of failure by Lyytinen & Hirschheim (1987) in their extensive review of system failures. Buchanan (1995, p. 64) quotes that Steven Kelman, administrator of the Office of Federal Procurement, points out that the process encourages caution and a tendency to give the award to the lowest bidder and that the selection of the lowest-cost system is often mandated and can result in problems. Government procurement is actually the written contracts for pecuniary interest awarded by public authorities, bodies governed by public law and certain utilities for the supply of goods and provision of services. Thus we can say that procurement is a contractual transaction to acquire property or service for the benefit or use of the government. Usually procurement includes services like cooperative agreements, grants, loans, equity infusions, guarantees, fiscal incentives and provision of government for goods and services. Open procedure: the open procedure is a procedure in which any firm is eligible to apply or tender for the procurement Restricted Procedure: a restricted procedure is the procedure in which only those firms that have been invited to tender by the contracting authority may do so Negotiated Procedure: it is the procedure in which the contracting authority consults selected firms and negotiates the terms of contract with them Being the procurement Manager of ABC Company, I, with the consultation of my management, decided to procure 40% of the equipments new from the market and 60% existing equipments will be used. It has been decided that there are 40 new CNC machines to be purchased, which cost approximately £450,000 each and have a lead time of 3 to 8 months. It is also decided that ABC will purchase approximately 60% previously used machines which will be purchased from auctions of liquidated stock from companies who went bankrupt. These will typically range from £10,000 to £50,000 depending upon condition. Different techniques are used to assess economic feasibility, also called cost effectiveness of the proposed system. The choice of techniques should consider the audience that will use them. Purchasing is the acquisition of raw materials, parts, components, suppliers and finished products that an organization needs to produce its own goods and services. Effective management of the purchasing process can ensure better quality and conformity of raw materials, lower prices, dedicated supplier bases and more effective delivery. Steady relationship with suppliers can assure suppliers of steady orders, which gives them more incentives to increase the quality of raw materials and equipments and to be more responsive to the delivery requirement. Our company is purchasing specific parts and services under long-term contracts from just a few suppliers who are considered the part of overall team. This is the concept shared by all of the techniques. The total value of money will certainly increase in the future. This is the same principle that is applied, before performing the cost benefit analysis, to the costs and benefits. Some of the costs of the system will be accrued after implementation. Additionally, the profit and benefits of new system will be accumulated in future. All such costs must be brought back to the current dollar before the final cost benefit analysis. It is estimated that in the future the cost of the equipments will increase at such an extent that it is neither possible to procure new equipments from the market nor very easy to get used equipments from other companies at such a low cost. Thus it is much better from time value of money perspective to purchase the new as well as used equipments from the market in order to run the company smoothly and efficiently. c. The identification and use of new suppliers Since the plant equipment has not been purchased earlier and this is the first time, therefore, the initial work requires research. Searching for the relevant suppliers has to be done. Sources for supplier search includes procurement related websites, available business references who might have purchased similar equipment earlier, yellow pages, interacting with sales people, or might require going through publications, diaries, catalogues, etc. The process of research helps in identifying the relevant suppliers of the equipment. When the suppliers have been short listed according to the category of the equipment, the process of evaluating each supplier begins – evaluation might require analyzing the financial statements, or any other public information that is available. Profiles of the key management personnel, their qualification, experience, and credibility – this information can be obtained from the business bureaus and the market reputation of the supplier. The areas to consider in evaluating a supplier includes: history of the supplier company, the time period for which the supplier has been in business, the existing customers and their experiences based on word of mouth, service, and post service interaction, the financial stability of the supplier needs to be taken into account if the commitment is required for the longer period of time especially, another source is the bankers’ reference to obtain the credit information and market repute. Before entering into any commitment, it is better to audit the suppliers’ facility, go through management’s profiles and check for the technology adopted. D. The management of Existing Suppliers increased supply The existing suppliers should be integrated in the business model and they should be given the forecasts prepared by the organization on the rolling basis, as theirs is a derived demand depending on your future sales. But since we are not the sole buyers hence they even if maintaining a certain buffer of inventory at any point in time might not be capable to meet our demands. Hence, partnering with them by shared information is of utmost importance to us. Information system should be shared to avoid any future disturbances in supply. 2. What supply chain strategies you will adopt to ensure a smooth supply of material for C & D. (15%) The management of supply chain covers many areas from procurement of materials, production, assembly, delivery of product or service to the ultimate customer of the product. Therefore, we can say that supply chain management is no longer limited just to the logistics function of the organization. The supply chain domain therefore, covers managing inventory levels, orders, production and delivery status, reducing variability in the supply chain, and helping suppliers make better forecast for the materials that you have to buy from them because theirs is a derived demand. Turbulence, uncertainty marks the nature of today’s environment. There are multiple reasons that have led to this increase in uncertainty. Foremost, demand has become volatile than ever it was earlier; reasons for which can be attributed to changing customer tastes, and obsolescence in product and technology which has shorten their lives. Not only old products become obsolete, many of the new products that make their debut into the market fail because of competitive product innovations and uncertain consumer tastes, hence making demand for certain products difficult to predict. This uncertain demand has led to vulnerability of the supply chain function. Supply chain function in an organization has its basis on the demand. Earlier it was thought that macro phenomena such as wars, strikes, terrorist attacks, natural disasters etc are the reasons behind this disruption in demand. But today a change in consumer tastes, alterations is business strategy to cope up with the environmental highlights is the task of the day. These have led to such changes as movement towards lean production, outsourcing (as the case of the ABC company) etc. Quasi-manufacturing is the service where manufactured goods are more important and dominant over non-physical services. The products that are manufactured can easily be stored in inventory while the services cannot. Manufactured products such as clothes, foods, cars, and electronic items etc. can all be placed in warehouses and sold at a later date. Customer-as-Participants services are those services where customer is involved in the actual production process (Northcraft & Chase, 1985). One area of lean manufacturing is cellular manufacturing. The idea behind this approach is building of variety of products with little waste. The manufacturing area is divided into group of workstations, (each group termed as cell); it works like an assembly line where machine tools, and equipments are arranged in a manner so that parts processed are moved from one cell to the for further processing. It eliminates the redundant and useless stages in the process to save costs and add value. The benefits from such an implementation comes from one-piece flow in the process that saves much of the time and effort and hence costs. The in transit time between the processes is reduced and thus the materials do not lie idle between the processes. Since some of the materials are outsourced to a sister company, therefore, ensuring good relationship with the outsourced company on business terms is important. In today’s world traditional customer supplier relationship is not the only reason for business success; it goes far beyond that (Marshall, 2009iii). Partnering involves having similar goals for the supplier and the business and plus, the businesses should speak the same language. In the variable demand period, an integrated business model with the supplier is the key to successful and smooth business operations. The responsibility and the risks are shared in this way – a need for holistic approach is imperative in today’s business world (Rittleson, 2009iv). Developing strategic partnerships in the supply chain are foundations for success of the business; but creating synergies amongst the supplier relationships is an important phenomenon; in times of knowledge economy – business strategy is switching – cost savings are achieved through Business Process Outsourcing. 3. Discuss how you will set up partnership agreements with suppliers also how you will decide on which suppliers you will enter into partnership agreements. Also discuss the body of knowledge. (15%) Since suppliers are a long-term strategic partners of the business and businesses rely on them for the continuity of their operations, hence maintaining relationships are of critical importance to the business. And it is believed that good relationship building is of utmost important even more critical than obtaining a one time best price for the product. Courtesy, honesty and fairness should be the major elements of the relationship established between the two parties. For successful supplier relationships businesses should enter into business with established partners, from this relationship it is best to leverage volume, consolidating orders and reduction in administrative cost occurs. Though when inviting tenders all suppliers for the pre qualification of a product should be given equal opportunity to win the deal. Integrity in partnership should be the key aspect and never compromised – pricing, trade secrets etc of one supplier should not be shared with the second. In business, like life, honesty is the best policy…true requirements should be stated and no room for inflating those requirements. Being ethical, courteous, reasonable and prompt in making payments always end up in long term strategic partners. After the process of due diligence, bids are evaluated. This stage allows comparing for the obtainment of best price and service, allows obtaining information and then making an objective choice amongst the selection from the potential suppliers, the process creates health comparison among the suppliers and their offering the best product and the lowest possible price to the customer. When many suppliers have placed their bids, it becomes easy to window shop to compare prices, service, quality etc. The process of evaluating bids begins with setting up of own set of objectives. These objectives are set by the requester of the product or service (one who initiates the request); the support department’s developments also come into play – like finance, the contract administrators (i.e. the procurement department). The specifications set are either company standards or the information gathered in the first phase becomes the basis for setting up these benchmarks – like specifications as suggested by the technical expert in the field. These requirements are all stated in the invitation for tender document also known as request for quotation or request for proposal. The process of invitation for tender eases the process of identification of supplier who can better offer the price suited to the supplier’s requirements. The Request for proposal contains the product specification in details, which should be clear and concise; the document also states the quantity, quality, requirements, packaging, shipment terms, warranties, delivery location and terms, inventory handling etc. The suppliers should be given a reasonable sufficient time period for preparation of their requests for proposal and then respond; the (potential) suppliers should not be discriminated at step in the process; here too, all the suppliers should be given the same document to invite their requests and all subsequent changes or modifications are to be notified to each of them. The documents should all be required to be submitted on a certain deadline, explicitly stated on the document, and extension in deadline if any, should occur across the board for each and every supplier. At times, a pre bid conference is arranged to satisfy the queries of the customer regarding product, any specifications or on clearance of any terms of the process. The criteria should be pre defined for the evaluation of bids, these criteria should be in light of the development and the objectives set in the process earlier. Once the bids are invited on the pre specified deadline, a reasonable time period should be taken to evaluate the bids with care. Initial sorting should be on the basis of responsive and non responsive suppliers. The proposed prices are then listed. There is a need to be cautious not just of high prices but also the low prices (lower than average or those representing significant deviations), such suppliers may just be low-balling to obtain the bid and might compromise on the quality to make their costs affordable. Product samples might be requested for in the tender document, if appropriate – with prices the samples are also evaluated. In case of close bidding, the time period could be extended on informing and a second round of bidding might be conducted. Not just the price but also other criteria mentioned in the due diligence process comes into play when evaluating the potential supplier. 4. Discuss how you will handle suppliers who you have influence with and those you do not. How will you treat these two situations differently. Also discuss the body of knowledge. (15%) ABC holds a constant idea throughout the project and their focal point is to give best services to trade alliances, which are more worthwhile in returns. The main which can be asked in this regard are “Where can we get the highest return?” and “How much influence do we have with the trading partner?” Handling suppliers is crucial for the long term business partnering, when dealing with them price should not be the only factor to influence decision-making. Factors that come into account also cover delivery time, payment mode, maintenance, quality, additional services, etc. The business should understand the imperativeness of the business to the supplier – if the bargaining power of the supplier is weak or the business is important to the supplier then negotiations are weighed in one’s favor. But if the bargaining power of the supplier is stronger then, during the process of negotiations driving a hard bargain should be considered with much care and justice. The bargaining position of the supplier becomes strong when there are multiple number of buyers and relatively few and dominant suppliers of the product, either the brand of the supplier is strong, when suppliers are powerful and strong enough to integrate in the forward market of the business, if supplier has the best quality and service and is known all across for its reputation then too the position of the buyer is that of influencing the business. Therefore, considering both the situations the seniority of the bargaining position becomes relative supplier to supplier. The influence from suppliers can also come from or because of management policies, gifts, gratuities and entertainment, product samples provision, business meals, personal relationships, internal practices, political considerations, advertising, market power, and specifications and standards of the products. But, all in all, when handling supplier relationships it is to be ensured that the transaction between the two parties is legal, and in the best interest of the firm, and is not unethical in any manner. 5. Discuss how you will approach Inventory Management e.g. Order Driven and also discuss how you will approach the defining of the “road map” what you need to do to define the “road map”. Also discuss the body of knowledge. (20%) Procurement, Inventory control and management are such important things, which can make the difference between success and failure for many organizations. The larger the procurement and inventory investment, the more vital is its proper use and control. The importance of these factors, is attested by the fact that inventory typically represents the firm’s major dollar investments. The profit prospects of the firms depend greatly upon maintenance of balanced stocks of the various classes of the merchandise. Both Procurement and inventory control have the same general objective, i.e. to acquire the right goods at the right quantity at the right time. This is the main objective of procurement and inventory control, which requires some other sub goals. Kalakota and Whinston have said that the supply chain management agreement has changed the traditional method of order taking and order fulfillment (Kalakota and Whinston, 1997). Needle had suggested a business strategy (Needle, 1994) while Lynch suggested Management strategy for the business of a Company like ABC (Lynch, 1997). Strategic planning for business is either competitive or cooperative. Porter favored the defensive competitive strategy (Porter, 1985) while some other scholars favored the cooperative approach (Maitra, 1996). Folz described that the return on investment (ROI) for any business is closely related to the total resources and their cost required to make the project a success and the benefits gained from this project (Folz, 1999). Recently, ABC launched its supply chain projects. The assurance of company upholds a top-notch development in the marketplace, which is attracting even more internationally, was the major goal. Additionally the cutthroat insinuation widely, ABC observed the methods by which US retailers were pouring the extra competence support to their supply chains and to building likewise pressures in European market. They sought to be well placed to adjust with the innovative necessities from their prime patrons, and to attain the faithfulness and customer care. The proposed supply chain is the one element of an extensive project, to build the business well organized and to unify most operations. The destined functioning in the milieu of all-embracing transforms, through the supply chain describing flanking actions for example rationalizing Stock Keeping Units (SKUs), unrefined stuff etc. Read More