PGN21C | Management | Procurement Strategy and Sustainability

The demand for items supplied to the OEMs is reasonably predictable. Each OEM produces a forward forecast typically covering the next 12 months. The quality requirements demanded from the OEMs is extremely high, due to flight safety reasons. Consequently, any minor errors at any stage of the production mean that parts must be scrapped and made unfit for use. This unquantified high scrap rate has a consequential impact on the overall production schedules, the suppliers, as well as leading to additional costs for the company.

The demand for items supplied to the MRO customers is un-predictable. This is especially apparent when there is an aircraft not fit to fly due to needing a spare part. Such unpredictability has a significant impact on the production schedules as such orders are contractually required to be prioritised. Again due to flight safety reasons the quality requirements are high, hence in order to ensure on-time delivery the company typically makes excess stock and thus a large number of finished items are held in inventory.

Situation

In July this year a new managing director was appointed. Following a strategic review it was recognising that the existing buying department operated on a very traditional basis it was considered that there is an opportunity to take a strategic approach in management, sourcing and procurement. There is currently an opportunity to develop and establish a new organisation and procurement strategy.

The company is currently spot buy key raw materials and components and measuring its performance on the price achieved. The company has not sought to develop long, medium of short term contracts, preferred suppliers or develop relationships with suppliers.

Staff and Organisational Structure

You have been appointed as the first Procurement Manager the organisation has had and have inheriting a large team of buyers, sourcing agents, logistics operatives who are based across the nine operational companies.

The Department is currently fragmented, with different processes, procedures, ways of working, systems and management. It is clear that the majority of focus appears to be the processing of paper-based purchase orders, goods receiving and payment of invoices.

There are pockets of best practice across the organisation including activities on supplier development, strategic sourcing and quality management, however most of this activity appears to have been instigated due to the personal initiative of individuals, there is not a coherent strategy in place.

Many of the individuals are unhappy with the proposed reorganisation including a concern surrounding ongoing employment.

Procurement Expenditure

You took the immediate action to analyse company spend, and identified the following:-

• Packaging, the company purchases pallets, returnable boxes, internal liners, steel straps and shrink-wrap from a large variety of different suppliers. The annual spend is approximately 1% of the known production expenditure. Currently there is no procurement strategy. A total of six staff members are involved in the sourcing and procurement of packaging on a part-time basis
• Castings, were there are multiple different suppliers, however the yield rate seems low and the majority of the suppliers appear to be unreliable. Again a large number of buyers are involved in the sourcing of castings with no overall strategy identified.
• Finishing and treatments, there is the availability of numerous global suppliers, however the company appears to use three local suppliers to supply the majority of its requirements. There is a concern that the current supplier of the Shot Peening service will close due to a decline in demand. Thus there is a threat to the ongoing supply from this current source.
• Machining, similar to the castings, there are multiple different suppliers, however the yield rate seems low and the majority of the suppliers appear to be unreliable. Again a large number of buyers are involved in the sourcing of castings with no overall strategy identified.
• Miscellaneous expenditure, including repair parts for the production machinery, safety equipment, services, office equipment and other miscellaneous items. There are a large number of suppliers supplying many different products and services.
• In addition, the company purchases a very large and unquantified amount of raw materials, typically Titanium, Aluminium and some specialist copper and nickel alloys. It is not currently known how this expenditure is broken down.
• There is additional unquantified expenditure, which is being made on an ad-hoc basis, that is not managed by the buying department. No further information is currently available.

Answer:

Introduction:

Procurement is one of the most important strategic areas of operations in modern business organisations. The pressing need to embrace profitability and sustainability simultaneously has led the business organisations to form strategies to procure raw materials and spare parts. Efficient management of procurement enables the firms to maintain lower cost of production which ultimately raises the profit percentage. Efficient procurement strategies enable firms to acquire high quality raw materials from global supply chain at economies of scale (Špiler, Kvrgi? & Vujadin, 2016). This importance of procurement in the profitability of businesses have made most of the organisations form procurement strategies while others firms consider it insignificant. The paper would explore the procurement strategies of Derbyshire Fabrication Group, a firm which is shifting from the second group of firms to the first group of firms. The outline of the paper would start with a discussion about the role of procurement global supply chain strategy followed by the current procurement strategy at Derbyshire Fabrication Group. This would be followed by suggesting of alternative procurement strategies and finally choosing an appropriate procurement strategy from the point of view of a procurement manager.

Role of procurement in global supply chain:

Procurement plays a very significant role in global supply chain management and has emerged as one of the strategic areas of business decision making. Yan, Chien and Yang (2016) mention that procurement of supply of raw materials in appropriate quantity and quality plays a very important role in ensuring the perpetual manufacturing activities in the manufacturing companies. The supply chains as a result in the profitability and competitive advantage of business organisations. Handfield et al.(2015) point out in this respect that in industries like aircraft fabrication procurement plays a very important since they often require to acquire components from supply chains located in different countries. Thus, it can be pointed out from the analysis that timely procurement plays a very important in the global supply chain management. Wagner and Eggert (2016) point out that the companies enter into contracts with suppliers. This means that function of procurement is not limited to acquisition of materials of suppliers and ensuring proper renewal of supply contracts as well. The procurement managers have to ensure timely pay-outs to suppliers, thus ensuring revenue generation of the suppliers. Razak et al. (2016) point out the second role of procurement strategies in management of global supply chains which is restructuring of the supply chains to ensure that poorly performing suppliers are removed from the supply chain. This gives the suppliers capable of supplying materials to companies at economic rates to opportunities to serve more companies, thus maximising the revenue generation of the latter. Jaehrling et al. (2018) mention that efficient procurement strategy involves training and rewarding of highly performing suppliers, thus promoting business development of the latter. Procurement managers in firms operating in industries like aerospace parts manufacturing like Debyshire are required to obtain supplies of raw materials like metal sheets from different countries. This means that the procurement enables the global supply chains get access to client companies which they can supply raw materials to earn revenue. Thus, it can be construed that procurement plays several important roles in global supply chain. Firstly, procurement ensures smooth manufacturing of products at economies of scale. Secondly, procurement management ensures restructuring of supply chains which gives highly performing suppliers more business opportunities to serve more clients. Efficient procurement strategies enable removal of poorly performing suppliers which creates more business opportunities for superior quality suppliers. Thirdly, the procurement strategies provide training and rewards the suppliers, thus enhancing and motivating them. Fourthly, the procurement enables the global suppliers to collaborate with new firms, thus accelerating their revenue generation (Yeung & Coe, 2015). Thus, finally it can be summarised that procurement promotes growth and development of global supply chains.

Current procurement strategy of Derbyshire Fabrication Group:

The current procurement strategy of Debyshire Fabrication Group suffered from several shortcomings due to different factors. The following are the issues prevailing in the procurement strategy of Derbyshire:

Lack of centralised business strategy:

The first issue which prevailed at the Derbyshire Fabrication Group was a lack of centralised strategy regarding significant strategic areas like procurement. Harrison, Rafiq & Medcalf (2018) point out that centralised procurement strategies enable business organisations to follow uniform procurement standards as far as the quality and quantity of materials are concerned. The case study remained silent on the quality of materials procured at the individual locations. However, it can be assumed that there existed significant variance between the procurement standards of each unit. Shiferaw (2015) points out that in high precision manufacturing processes like building and assembling of air craft parts, high uniformity of quality and precision is very important. Nyamekye et al.(2018) point out that aircraft manufacturers and assembling plants need to acquire materials sheets of metals from different markets. Thus, lack of uniform procurement strategies prevailing between the manufacturing units of Derbyshire resulted in lack of uniformity between the aircrafts assembled at different sites. This variance of quality of aircrafts resulted in lower level of customer satisfaction among the aircraft companies. The outcome of this low customer satisfaction was lack of revenue generation. Thus, it can be inferred from the discussion that lack of central procurement strategy resulted in lower revenue generation.

Lack of coordination between the sites:

The uniform procurement strategy requires uniform procurement strategy between different sites which lacked in case of the Debyshire Fabrication Group. The business cluster functioned across different locations across Europe and the United Kingdom. The case study mentioned that the geographically dispersed sites lacked homogenous modes of procurement strategies. Kujala (2015) points out that uniformity in procurement operations is important to ensure that geographically dispersed assembly plants in order to uniformity in manufacturing activities. This is also important to ensure that the finished products also qualify the uniform quality parameters mentioned by the client. However, it can be pointed out in the light of this discussion that Derbyshire Fabrication Group functioned through nine different production units. The case study also mentioned that the methods of operations varied among the manufacturing units. The outcome of this variance would be disparity in the finished products in terms of attributes, specifications, quality and pricing. This variation would cause resentment among the clients, the aircraft companies. Thus, it can be inferred that lack of coordination between the different sites of Debyshire Fabrication Group resulted in variance of procurement which caused great difference in product attributes. The ultimate outcomes of this issue were lack of customer satisfaction and lack of revenue generation (Wittbrodt et al., 2015).

Proposition of strategic procurement alternative strategies and a new viable strategy:

The following are the procurement strategies which Drbyshire Fabrication Group can consider in order to adopt a strong procurement policy:

Total Quality Management:

Total quality management is the first procurement strategy which Derbyshire must take into consideration. Sadikoglu and Olcay (2014) defines the term total quality management as adoption of   modes of operations within business organisation which lead to delivery of products aligned with the needs of the clients or consumers, thus creating value for the latter. Total quality management involves business organisations to align their total resources in ways aligned to the needs of the consumers. Obeidat et al.(2016) add to the opinion that adoption of TQM require business organisations to integrate their work units, factories, supply chains and even outsource employees. It can pointed out that the nine units of Derbyshire Fabrication Group functioned as individual units and there existed no uniform modes of operations between them. This clearly points out that the first requirement of the firm is to integrate these functional units and enforce a standard mode of operations. The following are the advantages and disadvantages of TQM which the company has to consider while deciding on adoption of TQM.

Advantages of TQM: 

The first advantage of TQM is that it would lead to integrated manufacturing process throughout the manufacturing units of Derbyshire. This would enable the firm to develop a uniform working method which would enable the management to exercise greater control over the units. Thirdly, this would enable the management set a set of performance parameters for all the nine units which would in turn help in performance evaluation and appraisal of employees. The case study mentions that Derbyshire incurred immense losses due to the change of parts of aircraft which led to immense wastage of material along with the associated financial losses (Kerzner & Kerzner, 2017). The fifth advantage which the firm would reap from adoption of TQM would be fabrication works as per the requirements of clients, thus minimising the chances of spare parts changes and associated loss. Moreover, this would enable the firm to ensure high degree of customer satisfaction and generate higher revenue which would the sixth advantage of TQM.

Disadvantage:

The above discussion apparently shows that Derbyshire should TQM however, TQM has certain disadvantage as well. First, as Khanam, Siddiqui and Talib (2016) point it out, total quality management is dependent on application of advanced technology and that would require immense investment in the initial phase. Considering the fact that Derbyshire already suffered great losses due to wastage of spare parts, it can be pointed out that investment in modern technology would prove heavy the financial position of the firm. The second demerit of TQM as Ferreira Rebel., Santos and Silva (2014) pointed out is that adoption of TQM would create opportunities of conflicts between apex management and the regional management in-charges. This is because, TQM would require integration of all the nine units which the unit managers may view as a threat to their powers. This may lead to conflict and disrupt the present actions causing further losses (Kanapathy et al., 2017). Thus, it is clear that TQM, though beneficial towards the procurement of Derbyshire Fabrication Group, cannot be adopted promptly.

Centralised vs decentralized:

The apex management of Derbyshire Fabrication Group would require to consider balancing between centralised and decentralised procurement approach. The first advantage of centralised production control would be, it would enable the management of Derbyshire to bring about uniformity in the operations of the nine units, thus reducing the expenses to some extent. However, Schmitt et al. (2015) point out, centralised management would inhibit the apex management from making appropriate decisions. This would be due to the difference in the market conditions in the European nations in which particular units are based. Thus, it can be construed that the unit managers would be in a better position to take procurement decisions for their respective units. Hence, it can pointed out that the apex management should form the central procurement decisions which the unit managers can adapt according to the market conditions of the locations of their respective units.

Chain level strategy:

The third procurement option which the management of Derbyshire can consider is chain level strategy. This means that supply chain management would involve strategic planning at the apex management level, tactical management at the middle level and operational level management at the operational level (Niknamfar, Niaki & Pasandideh, 2015) The first advantage of chain level strategy of procurement as Gunasekaran, Subramanian and Rahman (2015) is that it enables firms manage robust procurement chains. As far as Derbyshire is concerned, this procurement strategy is appropriate since the firm is involved in aircraft manufacturing and maintenance industry which actually requires robust supply chain management. Kurenov et al. (2015) point out this chain level strategy boosts manufacturing process which is its second advantage. However, Siddiqui and Talib (2016) can be reiterated to mention just like TQM, adoption of chain level strategy requires huge initial investment which is the first disadvantage. Cummings and Worley (2014) point out the second disadvantage which is that, adoption of chain level strategy would require organisational changes like restructuring of jobs which leaves scopes for organisational conflict. As far as Derbyshire is concerned, adoption of chain level strategy might require the apex management increase its supervision over the unit heads which may create conflict between the two parties.

COX matrix:

The COX matrix presents risks in a qualitative manner by marking them with colours to interpret their severity. This is an impractical process as actual risks cannot be analysed. For example, fires can vary from minor to devastating according to their sizes. Thus, this matrix is not applicable for actual risk management.

E-procurement:

The first advantage of e-procurement is that compared to the pervious methods, this procurement method would require less initial investment (Luzzini et al., 2015). As far Derbyshire is concerned, the firm would require to channelize less financial resources to implement e-procurement. The second advantage of e-procurement as pointed out by Ke et al (2015) can enable firms to acquire raw materials from suppliers situated in several markets. As far as Derbyshire is concerned, the firm can advantage of e-procurement by sourcing aircraft parts from suppliers offering the most economic rates. Similarly, the firm can sell the extra spare parts on the e-proc portals to earn extra revenue. However, Yip (2015) contradicts this view by pointed out that e-procurement would expose the firm to data theft. As far as the second disadvantage of e-procurement is concerned, Kanapathy et al. (2017) can be reiterated to point that e-procurement would require integration of units under a single e-procurement strategy. As far as Derbyshire is concerned, e-procurement the process would require integration of the nine units. This would again lead to conflict between unit managers and apex management.

Krajlic Matrix:

Krajlic matrix is a matrix which divides the suppliers into non-critical items, leverage items, bottleneck items, strategic items and getting segmentation right (Webb, 2018). The two advantages of Krajlic is that it enables better procurement management and thus boosting productivity which is its second advantage. However, as Siddiqui and Talib (2016) point out that like TQM, this method is also very expensive in the initial phase which is its first demerit. Secondly, the method would also require integration of centralised and decentralised management. This would create conflict between apex and unit management of Derbyshire making the method inappropriate for the latter.

Recommendation of best practice to be implemented:

The above analysis clearly points out that e-procurement is the most appropriate procurement strategy Derbyshire Fabrication Group can adopt. Firstly, adoption of e-proc would reduce procurement expenditure since the firm would be able to acquire raw materials from the global supply chain. This would leverage economies of scale and improve quality of the products. The fourth outcome would be development and improvement of relationship with customers and ensuring delivery on time, thus encouraging satisfaction among the latter. This would generate high revenue and boost competitive advantage.

Conclusion:

It can be pointed out that Derbyshire should implement e-proc to boost its procurement of suppliers at least in the short run. The firm should aim to achieve TQM in the long for perpetual sustainability in the market. It can also be pointed out that implementation of any of the above methods would call for organisational change. This means that the firm besides implementing e-procurement strategy should also implement change management strategies.

References:

Cummings, T. G., & Worley, C. G. (2014). Organization development and change. Cengage learning.

Ferreira Rebelo, M., Santos, G., & Silva, R. (2014). A generic model for integration of quality, environment and safety management systems. The TQM Journal, 26(2), 143-159.

Gunasekaran, A., Subramanian, N., & Rahman, S. (2015). Green supply chain collaboration and incentives: Current trends and future directions.

Güvenç, S., & Egeli, S. (2016). Changing Naval Balances in the Eastern Mediterranean: Implications for Turkey. Turkish Policy Quarterly, 15(1), 102-103.

Handfield, R. B., Cousins, P. D., Lawson, B., & Petersen, K. J. (2015). How can supply management really improve performance? A knowledge?based model of alignment capabilities. Journal of Supply Chain Management, 51(3), 3-17.

Harrison, R. P., Rafiq, Q. A., & Medcalf, N. (2018). Centralised versus decentralised manufacturing and the delivery of healthcare products: A United Kingdom exemplar. Cytotherapy.

Jaehrling, K., Johnson, M., Larsen, T. P., Refslund, B., & Grimshaw, D. (2018). Tackling precarious work in public supply chains: A comparison of local government procurement policies in Denmark, Germany and the UK. Work, Employment and Society, 32(3), 546-563.

Kanapathy, K., Bin, C. S., Zailani, S., & Aghapour, A. H. (2017). The impact of soft TQM and hard TQM on innovation performance: the moderating effect of organisational culture. International Journal of Productivity and Quality Management, 20(4), 429-461.

Ke, H., Cui, Z., Govindan, K., & Zavadskas, E. K. (2015). The impact of contractual governance and trust on EPC projects in construction supply chain performance. Inzinerine Ekonomika-Engineering Economics, 26(4), 349-363.

Kerzner, H., & Kerzner, H. R. (2017). Project management: a systems approach to planning, scheduling, and controlling. John Wiley & Sons.

Khanam, S., Siddiqui, J., & Talib, F. (2016). Role of information technology in total quality management: a literature review.

Kujala, A. (2015). The advantages and disadvantages of logistics centralization and decentralization from employee’s perspective.

Kurenov, S. N., Ionita, C., Sammons, D., & Demmy, T. L. (2015). Three-dimensional printing to facilitate anatomic study, device development, simulation, and planning in thoracic surgery. The Journal of thoracic and cardiovascular surgery, 149(4), 973-979.

Luzzini, D., Brandon-Jones, E., Brandon-Jones, A., & Spina, G. (2015). From sustainability commitment to performance: The role of intra-and inter-firm collaborative capabilities in the upstream supply chain. International Journal of Production Economics, 165, 51-63.

Niknamfar, A. H., Niaki, S. T. A., & Pasandideh, S. H. R. (2015). Robust optimization approach for an aggregate production–distribution planning in a three-level supply chain. The International Journal of Advanced Manufacturing Technology, 76(1-4), 623-634.

Nyamekye, P., Leino, M., Piili, H., & Salminen, A. (2015). Overview of sustainability studies of CNC machining and LAM of stainless steel. Physics Procedia, 78, 367-376.

Obeidat, B. Y., Hashem, L., Alansari, I., Tarhini, A., & Al-Salti, Z. (2016). The effect of knowledge management uses on total quality management practices: A theoretical perspective. Journal of Management and strategy, 7(4), 18.

Razak, A. A., Rowling, M., White, G., & Mason-Jones, R. (2016). Public sector supply chain management: A triple helix approach to aligning innovative environmental initiatives. ???????, 10(1 (eng).

Sadikoglu, E., & Olcay, H. (2014). The effects of total quality management practices on performance and the reasons of and the barriers to TQM practices in Turkey. Advances in Decision Sciences, 2014.

Schmitt, A. J., Sun, S. A., Snyder, L. V., & Shen, Z. J. M. (2015). Centralization versus decentralization: Risk pooling, risk diversification, and supply chain disruptions. Omega, 52, 201-212.

Shiferaw, B. (2015). Assessment Of The Existing Purchasing Policy And Practices And Its Effect On Performance: The Case Of Ethiopian Airlines (Doctoral dissertation, St. Mary's University).

Špiler, M., Kvrgi?, G., & Vujadin, R. (2016). Attaining the strategic advantage in large business systems through the public procurement system. Ekonomika, 62(2), 111-123.

Touboulic, A., Chicksand, D., & Walker, H. (2014). Managing imbalanced supply chain relationships for sustainability: A power perspective. Decision Sciences, 45(4), 577-619.

Wagner, S. M., & Eggert, A. (2016). Co-management of purchasing and marketing: Why, when and how?. Industrial Marketing Management, 52, 27-36.

Webb, J. (2018). Forbes.com. Retrieved from https://www.forbes.com/sites/jwebb/2017/02/28/what-is-the-kraljic-matrix/#4e28b23b675f

Wittbrodt, B., Laureto, J., Tymrak, B., & Pearce, J. M. (2015). Distributed manufacturing with 3-D printing: a case study of recreational vehicle solar photovoltaic mounting systems. Journal of Frugal Innovation, 1(1), 1.

Yan, M. R., Chien, K. M., & Yang, T. N. (2016). Green component procurement collaboration for improving supply chain management in the high technology industries: A case study from the systems perspective. Sustainability, 8(2), 105.

Yeung, H. W. C., & Coe, N. (2015). Toward a dynamic theory of global production networks. Economic Geography, 91(1), 29-58.

Yip, N. S. M. S. (2015). The Effect of Cyber Supply Chain Security Towards Lean and Agile Supply Chain Performance in Healthcare Industry: The Mediating Effect of Organizational Capabilities (Doctoral dissertation, Universiti Sains Malaysia).