1.0 Introduction
to procurement and background
Procurement can be described as the processes
through which materials needed for production and sale are acquired from
suppliers and made available to both internal and external customers in a given
company (Croom and Brandon-Jones, 2007). This function plays an integral role in the
creation of value to customers with its efficiency expected to significantly
contribute to customer satisfaction. The procurement systems and practices also
play a major role controlling the operation costs of the organization. The
tradeoffs that must be considered in any procurement system involve the choice
between incurring transportation overheads and the stocking of a large amount
of inventory thereby incurring heavy storage and related costs (Emberson and
Storey, 2006). The JIT (Just in Time) concept is commonly used in ensuring the
efficiency of the supply chains and mainly focuses on procurement systems and
how the same can contribute to efficiency and cost effectiveness in the
organisation (Sunil and Meindl, 2001). This concept is in most cases embraced
in conjunction with relevant procurement systems together with the provisions
of the MRP concept. Organisations with a number of operation centres, the
manager should also weigh between centralization and decentralization of
procurement operations. Each of these options has its merits and demerits.
This
paper considers the situation of Viverra Motors and seeks to provide informed
solutions to the challenges faced in relation to procurement processes. It
focuses on the challenges identified before discussing theoretical and
practical approaches that could be useful to the organisation.
2.0 Challenges arising
from dealing in a variety of brands
Viverra motors, having just acquired a new
dealership is marketing 3 different brands of cars. This has far reaching
implications as far as procurement is concerned with the company expected to
require more materials. To begin with, different materials are likely to be
used more often than others. Other materials are likely to be need more space
while others can be stored for longer periods than others. This implies the
need to establish a complex procurement system controlling schedules and
quantities of products being procured. It also implies the need to engage a
variety of suppliers from whom the materials are sourced.
Materials can either be generic or
genuine. Genuine materials are sourced from the manufacturers of the cars and
this implies that the company is restricted in its choice of suppliers (Sanchez-Rodriguez, Hemsworth and Martinez-Lorente, 2004). Generic materials on the other hand are
sourced from a variety of suppliers. Such suppliers are often many and in
competition with each other. This competition puts a downward pressure on the
prices of such products hence allowing for crucial savings to be made (Sanchez-Rodriguez, Hemsworth and Martinez-Lorente, 2004). The increase in the number of brands being
marketed does not necessarily imply a commensurate increase in the number of
parts being procured. This is due to the fact that certain parts are usable
across brands and the dealers are therefore forced to make adjustments only on
parts that are considered genuine parts and a small proportion of the generic
products.
In
the procurement of these parts, certain considerations must be put in place
including considerations on the lead time required by suppliers and decisions
on the size of inventory to be held at the organisation. This decision may
greatly be influenced by the amount of space available, the cost of storing and
maintaining the stocks as well as the transportation costs. The main role of
procurement functions in organisations is to ensure that materials needed for
production and for sale are availed in time for delivery of goods and services
to the customers (Mentzer, et al., 2001). Lead time refers to the time that
lapses between the point at which an order is placed with a supplier and the
time that the materials ordered are actually delivered to the company (Yang,
Hong and Modi, 2011). The procurement systems must take cognisance of different
lead times and ensure the reorder quantities are accurately determined.
The provision of several brands can therefore
be said to impact the company’s procurement systems on the following fronts:
need to procure more materials, increased complexity from engagement with a
large number of suppliers, varying lead times and reorder quantities due to different
rates of consumption of parts, and the need to establish complex but reliable
systems to coordinate the varied dimensions.
3.0 Weaknesses
of Viverra Motor’s procurement management systems
The company’s main weakness is the inadequacy
of space to store inventory. The nature of the dealership’s operations is such
that the company requires that a large number of parts are kept within the firm
for sale and timely delivery of services to the customers. The lack of space is
bound to be more prominent with the acquisition of the new dealership. The
other weakness relates to the company’s strained finances. Having made an
acquisition at a significant cost, the company’s finances are strained and that
reduces its ability to develop the infrastructure needed to store more
inventories. This calls for a creative approach in the design of the structure
of their supply chains and procurement systems in particular.
Another
potential weakness would lay in the fact that their procurement systems are
decentralised where each of the four dealerships conducts its own procurements.
This could be a disadvantage in the sense that it denies the company the
economies of scale that could be realised had such practices been centralised.
However, considerations on transportation and related costs may work to justify
the procurement model and its merits can therefore only be justified upon
consideration of the relevant tradeoffs (Matsuura,
Kurosu and Lehtimaki, 1995). The
acquisition of the new dealership is unlikely to add value to the procurement
systems if they are to remain disjointed. However, in the case where a
centralised procurement system is embraced, then the company would have a
higher bargaining power and be able to keep its operation costs at the bare
minimum.
4.0 Application
of supply chain and inventory management concepts
As has been noted above, Viverra motors is
faced with a prospect of increasing number of materials and suppliers as well
as limited space for keeping the inventory required. This calls for a solution
that allows for stocking of inventory that is just enough while also ensuring
that customer service runs uninterrupted. The aim of any supply chain
management system is to secure value for customers in a manner that generates
maximum levels of customer satisfaction. Success in business lays in the
organisation’s ability to maintain a satisfied and loyal clientele. In addition
to focus on customer service, Viverra runs on a policy of low-price low cost
strategy and this requires that they keep a keen eye on their operation costs.
The lean manufacturing and the Just in Time concepts are very useful in
enabling organisations to keep their operation costs at the bare minimum.
The
Just in Time concept is a system that traces its origins in the Japanese
companies and gained popularity around the world in the 1990s (Gupta and
Snyder, 2009). This system advocates a collaborative approach between
organisations and their suppliers. Under this arrangement, the suppliers would
be aware of the consumption patterns in the organisations and make deliveries
‘Just in Time’. The system was designed to help in minimising inventory costs
while assuring continued operations by ensuring that at no point can operations
be held at a stand still due to lack of supplies (Huq and Huq, 1994). This
therefore implies the need for closer integration of information systems
between the suppliers and the organisations. The Just in Time system presumes
the existence of a relationship with suppliers. These relationships are often thoroughly
negotiated with systems such as payment systems being put into perspective. For
an organisation which is cash-strapped such as Viverra Motors, the
establishment of such an arrangement could help in alleviating pressure on
their working capital. For instance, such relationships would often require
some degree of assurance that the organisation in question would continue
trading with the supplier in question for a given minimum period of time. The assurance
would in most cases be accompanied with a concession in payment terms where
payments could be done within a reasonable time after delivery (Brookshaw and
Terziovski, 1997). The company could therefore sell off all or part of the
supplies before their credit period expires and that would easily solve their
cash problems.
The
tradeoffs that must be weighed when making the decision on whether or not to
establish an integrated system with given suppliers include the benefits of
such an arrangement versus loss of opportunities to make savings from temporary
price drops (Stuart and Hongyi, 2010). Market prices are bound to fluctuate and
companies in constant relationships where the price ranges are strictly
provided could miss out of the opportunity to make substantial savings. On the
other hand, failure to engage suppliers meaningfully could lead to
inefficiencies that would not only be more costly, but also a threat to the
levels of customer satisfaction in organisations (Emberson and Storey, 2006).
It should also be appreciated that the fluctuations can also go in the opposite
direction where the organisations are forced to spend more due to price hikes.
This is especially the case with organisations dealing with seasonal demand.
For instance, in the auto industries around the world, it is a well acknowledged
fact that sales go up during festive seasons (Stuart and Hongyi, 2010). This is
especially so with small non-luxury cars. The procurement system should
therefore be designed to either take advantage of low prices during low
seasons, or embrace the option of forming relationships with suppliers where
they get to be shielded against price hikes to a certain degree.
The
lean manufacturing concept focuses on the structure of the supply chains and
aims at eliminating duplication of roles, integration of systems and an overall
focus on ensuring that the operation costs are as low as they can be (Yang,
Hong and Modi, 2011). One of the common trends that have been taken by
organisations embracing the lean manufacturing concepts has been the
integration of their manufacturing plants (Yang, Hong and Modi, 2011). In a
typical manufacturing setting, the managers could choose to either have several
factories scattered all over a region or have one big factory which would then
distribute products to regions where customers are located. While integration
has been known to help in making significant savings for most companies, it
must be appreciated that the outcome could be very different. For instance,
establishment of a common production site implies the need to transport
products over longer distances. Where there are no cost effective means of
transportation, the costs may even exceed the cost of running decentralised
manufacturing sites (Sunil and Meindl, 2001). In the case of Viverra Motors,
the lean manufacturing concept can effectively be applied to the organisation
of its procurement activities where each dealership runs its procurement
systems independently.
Centralised
procurement systems can have a number of advantages. To begin with, the
centralised departments are able to procure large quantities of products (Yang,
Hong and Modi, 2011). This improves their chances of bargaining for better
prices and more lenient terms of payment. Suppliers are easier to influence
when the buyers are doing so in bulk. Secondly, centralised systems help in
avoiding duplication of roles (Stuart and Hongyi, 2010). By centralising the
procurement systems, it is likely that certain positions would be rendered
untenable and this is likely to help in reducing the cost of labour in the
organisation. Thirdly, where procurement is centralised and materials procured
in bulk, suppliers are likely to take the buyers very seriously in fear of
losing a lucrative business (Croom and Brandon-Jones, 2007). Deliveries are
therefore more likely to be timely and this can help in ensuring that
operations are as smooth as required. On the other hand, a centralised system
comes with various additional costs. For instance, the organisation is likely
to need a sophisticated system of communication where the head office is made
aware of inventory needs in time. There is also likely to be an increase in
transport costs from the head office to the dealerships. The much needed space
for keeping inventory would also need to be made available as procurement would
be done in bulk. Demand planning can get complicated where different
dealerships are concerned. The patterns could differ from one point to another.
However, such differences can easily be dealt with through effective
communication systems (Croom and Brandon-Jones, 2007).
As has been seen from the arguments
above, every model of the supply chain has its merits and demerits. The manager
should therefore be able to accurately evaluate the cost implication of the
options available before making a decision on the way forward.
5.0 Conclusion
and recommendations for Viverra Motors
Procurement management is a very crucial
function in any organisation. Its main aim is not only to ensure that materials
needed are availed, but also that they are acquired at the lowest possible
cost.
In light of the challenges faced by Viverra
Motors, this report recommends as follows:
Firstly, the organisation should consider
centralising all their procurement operations. It is unlikely that the
additional costs in terms of transportation and internal communication could
offset the benefits that come with a boosted bargaining power that comes with
bulk.
Secondly, the Just in Time approach should be
embraced where there is more collaboration with suppliers who avail their
supplies just before the inventory runs out. This approach would minimise the
pressure on the available storage facilities.
Thirdly, the company should use its
consolidated procurement systems and the Just in Time approach to cement
lasting relationships with main suppliers who may then be able to provide
materials on credit. This would help the company to operate without hitches
despite its difficult cash position.
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