Business report

Introduction

This business report is aimed at offering procurement advice to the Director of BenBori; a major manufacturing company which has in the recent past suffered loss of scales as a result of deterioration of its own performance. The report analyzes some of the major procurement problems and their causes with major consideration being given to the main problems in this company which can be traced back to failure of the suppliers to deliver and control the quality. The other problems that this company faces and which this study analyses on are the notable decline in the profitability, attributed to the increase in the cost of purchasing which has been caused by increasing costs of raw materials and labor.

The other key issues to be highlighted in this report includes the appropriate circumstances in which BenBori can conduct direct negotiations with the suppliers together with the ethical issues to be considered in the negotiation and the sources of information to be used by this company in identification of the suppliers for the purpose of global sourcing. The conclusion in this report is based on the findings and recommendation that are appropriate to enhance the company to improve its performance and revive its market share in its area of operation.

Procurement problems, causes and solutions

            BenBori is a good example of a company facing the most common problems that are found in the procurement. Cost to a procurement process is very sensitive based on the fact that it is through maneuvering around this variable that a company is able to justify the reason for operating in the market. In the procurement process, the companies are usually faced with a similar dilemma in which they are unable to establish and maintain a supplier relationship that is profitable, the price increase confrontation problem in addition to ensuring the control of the quality supplied. Therefore, the major procurement problems revolve around profitability, the level of price and the quality that the company procures from the supplier (John, 2010), as illustrated in the figure 1.

Chart 1: relationship between profit, quality and price

Price

Quality

Profit

Procurement

 

 

The concern that is usually raised by the managers in most cases usually involves their relationships with the supplier becoming unbalanced in addition to involvement of too much emotional attachment. Basically, the end- user resistance to the supply selection changes can be too much while there can be a possibility of having proximity between the supplier and the purchasing company that is too much. This is basically caused by failure to establish strong objectives by the Company in addition to holding the suppliers accountable for the levels of delivery and performance. The same objectives should be applied in the process of supplier selection in addition to not restraining from maintaining a relationship with the supplier that is professional as well as a safe distance. There should be periodic measurement of the alliance performance in the effort to determine the level of benefit of the supply relationship from the perspective of time and cost (Bajari and Lewis, 2009).

The determination of how well the supply base price fluctuation can be handled is another concern that keeps reoccurring. Initiation of the earlier supply involvement in the development of the product will be one of the solutions. Through ensuring that the suppliers are kept at loop from the onset in addition to their expertise being leveraged, the company will be able to very accurately focus on the increase in the prices. The suppliers should be fully brought on sight failure to which, this problem will always occur. Through this process, an opportunity can be opened whereby the company can be able to establish deeper collaboration levels with the suppliers through which there can be result of deductions in the cost, provision of better service together with less downtime (Heywood, 2003).

The company should likewise as the same time establish a communication to the supplier on the forecast on the demand through which the supplier will be able to reduce the lead time. The lead time should in addition be tracked together with ensuring that the acknowledgements are requested within specific time frame. Within the next 48 hours, the company needs to be able to demand all the acknowledgement verification. There is also need for the purchasers stressing the suppliers to ensure that as the raw material cost is reduces, they respond by keeping their prices at low levels. This can better be done by the company through ensuring that they keep their own tabs on the market of the raw materials. It is also highly recommended for the company to perform a cost analysis on labor, materials, the profit level and overhead. Through this analysis, the acquired information will be vital in the future cost leveraging with the suppliers, which in most cases will result in a high percentage of saving on the procured goods (Dobler et al, 1990).

The suppliers are of course in most cases expected to pass the increase in the material costs to the purchasers in form of high pricing. This can give a good explanation to the increase in the cost of raw materials. The company can prepare itself for the price increase through ensuring that long time agreements are established with the supplier, especially for the frequently purchased products. Purchases leverage can also be sought by the buyer across the corporation through development of agreement for the items that are commonly purchased. This can be used through the use of the commodity teams to centralize the selection of the supplier.

Another problem highlighted is that of quality in the products that are supplied by the supplier. Through the issue of test certificates for the raw materials, the departments that are concerned with the purchasing are provided with a means through which the accountability of the supplier can be leveraged, based on the fact that the buyers put in writing their exact expectation. This is however overlooked by many companies. The failure of the supplier to comply will result affect the supply if it is not accompanied by disciplinary measures. If the consistent problem remains to be lack of standards, there should be consideration by the purchasing department that should include finding a new supplier.

The effectiveness can also be realized by the company decision to set up systems of e- procurement, strategic sourcing implementation as well as conducting reviews that are comprehensive for the process of the supply chain. In the modern procurement world, the technology of e- procurement has not been sufficient to help the company’s department procurement in ordering, tracking and managing over the internet the purchases. Through strategic resourcing, the total purchasing cost is usually reduced through a structural approach through which the combined purchasing power and the company’s business unit’s practices are leveraged. The review of the supply chain means formation of a cross functional team through which the business needs are determined and a supply wish list created.

Another problem arises when the company is aware that is has to trim its pool of the supplier without being sure if the right ones are maintained. In such a circumstance, the company which in this case is procuring is usually unable to start a review that is extensive on the realization of the need to reduce the supplier base. Through supplier performance evaluation over time, the company can be able to know the supplier to be retained which is not usually the case in most companies. Through ensuring that the supplier is kept close at had, the company can be able to diffuse this situation that may hold a potential of being costly. Establishing a relationship in working that is close will entail offering advice to the sole source supplier of the production schedules in the production in addition to ensuring that these suppliers are provided with the bracket order, which will be aimed at avoiding shortages in the future.

Supplier appraisal

            Basically, there are usually many suppliers with the capability of delivering the same product to the company. Based on these factors, the supplier evaluation will be very essential in order to ensure that the supplier that the company selects meets the company requirements in addition to resulting in satisfaction of the overall demands of the company. The major step that will be essential in this process is collecting all the information that is relevant regarding the suppliers. Based on the fact that the company deals with many raw materials, it will be required to collect the supplier’s information which will result in making the best decision of the relationship in the future. The information about the supplier can be sourced from; (1), the mass media which will include the magazines, radio and television among others (2), the suppliers catalogue issued to the company by the suppliers themselves (3), establishing direct link with the suppliers in their companies and (4), through introduction by other parties that are related or who have in the past benefited from the services of the specific company (Neff, 2001).

The next step should involve making of the initial suppliers list in which there will be an update of the list initially (Bartle and Korosec, 2003). After this stage, a criteria should be set by the company through which the supplier can be evaluated through considering the matter concerning the company such as; the relationship that the supplier has with the company, whether the products that are bought by the company   from the specific supplier are able to comply with the environment requirement as well as the quality, whether the price offered by the supplier is reasonable and whether the supplier is able to respond to the provoking problem. Other matters that are of essence if considered will include the time when the procurement is to be delivered by the supplier, the method of payment together with the supplier’s ability to supply the quantity that the company has ordered.

After the potential of the supplier is examined and evaluated, the evaluator that the company selects will have to classify and select the suppliers that are most suitable through evaluation criteria of the standards that the company has selected. The evaluation should be repeated again until the suitable supplier has been selected. This should be followed by paying a visit to the factory of the supplier for the examination of the facility, the permission granted to the supplier to do business as well as the ability to do the business. When a list of the official suppliers is compiled, it should be presented for approval to the company’s General Director. In approval of the list, the evaluation criteria will be examined by the Director and if there will be a justifiable disapproval of the list, then the evaluation process will have to be repeated and following the Director’s approval, then the list of selected suppliers will be made. For a company to ensure that the list compiled is reliable, frequent updating is highly recommended, therefore calling for the need to keep the files related to the appraisal, records as well as the results of the evaluation, the inducing problem and the report.

The supplier re-evaluation will be necessary after a certain period of time probably one year or through the General Director request. Under this circumstance, the official suppliers will have to be reevaluated in the official list compiled in front of the current suppliers of the raw materials.

The key elements to be considered in the supplier appraisal will include the following: (1), the information to be gathered should be factual and objective. This will include information on the order lead-times and the compliance to the pricing. (2), the views of the customers should be ascertained for example in respect to their response and attitude. (3), the company will also have to consider the experience of the supplier in the appraisal while working with the buyer of the raw material.

Conducting direct negotiation

            There will be variation in the circumstances under which the company will have to decide whether or not to justify direct negotiation. The company may initiate the direct negotiation by itself or through a proposal which might come from another sector. Basically, what may in most case force the company into direct negotiation could be due to lack of another alternative, although at other times, direct negotiation may be justified despite there being other alternatives (McMillan and Tadelis, 2003). The direct negotiation occurrence will also vary in transactions which will range from small agreements verbally to contracts of procurement involving an enormous amount of money.

The main circumstances under which the company may have to result in direct negotiation will include;

• When      the company has only one source of supplier for the procurement raw      materials
• If      the company has to develop a system that is compatible with the      infrastructure that is already existing
• In      case of emergence of some requirements that require urgent attention and      which the company had not foreseen
• When      the goods that are required in the procurement are unique or are      complicated, the company may result in the need for direct negotiation
• There      are also other times when there is a significant risk as a result of  delaying the procurement process, such      as a situation occurring as an emergency

The authority of the management of the company to undertake direct negotiation should be backed by a justification of the decision. This is especially in the circumstance whereby the negotiation process that will result in the procurement is aimed at involving a lot of finance, a specific importance, if the process is sensitive to the company in addition to involving a lot of risks (Kraljic, 1983).

For the approval of the direct negotiation, there should be a submission with a clear explanation of the circumstances and direct negotiation details through which the proposed course of action should be justified as the best value for the option of the money; considering the risks as well as the costs that would be associated with the alterative action of procurement that the company may be weighing to undertake. The company also has to ensure that in the direct negotiation process, the procurement must be steady with the particular administrative and financial limits that the company has established in its manual. Although this process of direct negotiation may be within the authority of the managing director, there is need for the company to exercise discretion. This will include the duty segregation appropriately in reference to issues regarding approval. Therefore, before any financial obligation is exercised, there should be need for the managing directors together with the other concerned parties to establish the availability of the funds that will enable the company to meet the expenditure committed in the procurement process (McMillan and Tadelis, 2003).

Sources of information

            For the purpose of identification of the supplies, various information sources are available for the global sourcing purpose. The information to be used should consider its ability to spread over a wide area in order to target the suppliers at the global level. Basically, many sources of information are available, each with its own advantages and disadvantages.

Paper based information: This type of information includes; magazines, newspapers and financial statements. The major advantage of this information source is based on its ability to be comprehensive. For the manager seeking a fully detailed source of information about the supplier in terms of its past performances, this can be a reliable source of information. This source is also advantageous in terms of being informative, easy to read at any time without having to be inconvenienced by such factors such as the power source. Relative to other information sources, this source is highly reliable in providing the company with the accurate type of information. However, the company may obtain irreverent information due to the high probability of this source to be out of date. In addition, searching the exact information that is required by the company about the supplier may be a process that can sometimes take a lot of time. In addition, it may be hard for the company to ask questions and expect response

Broadcast: This will include the television and the radio. The major advantage of this source of information is based on the fact that due to the rapidly changing technology in addition to provision of the latest information, the company can be able to get latest information on the suppliers. The major disadvantage of this source of information is based on the fact that the tightly followed program will limit the number of times that the company will be able to obtain information on the supplier from this source. In addition, there must be a need for the company to record the information obtained from this source if it has to be available for the future reference.

Internet  

This is the latest and the most reliable source of information in terms of being able to spread to the global sourcing. The major advantage of the internet is the ability of the source to be comprehensive in terms of being able to cover the global level. In the effort of the company to expand its operations at the global level, this will be the most reliable source of information. In addition, this source of information is very dynamic therefore enabling the company to be updated with the latest information on the suppliers. The access to this source of information is instantaneous, available worldwide together with being able to download the information and storing it for any reference in the near future (Dai and Caufman, 2001). However, this source of information has some disadvantages. The access to this information is basically limited to the availability of a computer, thereby reducing its availability. The ability to acquire this information will also be limited by the ability of the company to be able to effectively search the internet. However, the ability of the company to obtain the information to assist it on procurement will strongly depend on the type of source that is more prominent in spreading the information.  Therefore the company should in addition to seeking the latest source of information consider the source through which they can be able to acquire the relevant information (Davila et al, 2003).

Conclusion

            For any problem in the procurement process of the company, a specific plan should be employed in offering a solution. At least every situation usually has an optimum way through which it can be approached. When the solution strategy mentioned in this report is properly enacted, the procurement department in BenBori will be able to provide a profound advantage in controlling the relationship with the supplier which has been seen to adversely affect its performance. The cost will also be minimized in addition to ensuring that the products purchased meet the required level of quality. In the modern business economy, it is only the companies that are efficient and streamlined that are able to ensure survival and BenBori Company should aim at settling for nothing less. In addition, the decision on whether to engage in direct negotiation will depend on various factors which must be critically evaluated for appropriate decision. With appropriate decision, this company holds the potential of improving its performance.

 

References

Bajari, P. and Lewis, G., (2009). Procurement Contracting with Time Incentives: Theory and Evidence. Mimeo, Harvard University.

Bartle, J. & Korosec, R. (2003). A Review of Procurement and Contracting. Journal of Public Procurement, 3 (2): 192-214.

Dobler, D. W., Burt, D. N., & Lee, L. Jr. (1990). Purchasing and Materials Management (5th ed.): McGraw Hill.

Carr, A.S. & Smeltzer, L.R. (2002). Buyer–Supplier Relationships: An Exploratory Analysis of the Buying Firm’s Perspective. IEEE Transactions on Engineering Management, 49 (3): 293-304.

Dai, Q. & Kauffman, R.J. (2001). Business Models for Internet-Based Procurement Systems and B2B Electronic Markets: An Exploratory Assessment. p34

Davila, A., Gupta, M. & Palmer, R., (2003). Moving Procurement systems to the Internet: the Adoption and the use of E-Procurement Technology Model. European Management Journal, 21 (1): 11-23.

Heywood, J.B. (2002). Procurement: Managing Successful Procurement Implementation. Harlow, NJ: Financial Times -Prentice Hall.

John, A., (2010) . Procurement when Price and quality matter. Journal of Economics. Vol. 41, No. 1, pp. 1-34

Kraljic, P. (1983). Purchasing Must Become Supply Management. Harvard Business Review: 109-117.

McMillan, R., and Tadelis, S., (2008). Negotiation in Procurement: An Empirical Analysis. Journal of Law, Economics, & Organization, Vol. 25, pp. 372–399.

Neef, D. (2001). Procurement: From Strategy to Implementation, Englewood Cliffs, NJ: Prentice-Hall