Strategic Supply Chain Management - Essay Example

?SUPPLY CHAIN MANAGEMENT THE STAGES OF SUPPLIER SELECTION AND THE COMPARISON OF PROCUREMENT IN THE PUBLIC & PRIVATE SECTORS INTRODUCTION Organisations all over the world have the need to purchase various assets and inputs to enable them render their primary service to society. Procurement usually accounts for a large proportion of a business’ expenditure. In modern times the need to manage the purchasing and supply of goods above a certain price limit has become necessary due to the complicated nature of business like the need to cut down costs, satisfy stakeholders, beat competitors and globalisation. Thus, the management of procurement is vital. This paper sets out to critically examine the four stages of supplier selection. This will look at the various decisions, criteria, approaches, and challenges at each stage of the supplier selection process. It then goes further to examine and evaluate the differences and similarities in supplier selection in private sector and the public sector. STAGES IN SUPPLIER SELECTION The main things organisations analyse and examine critically in supplier selection are quality, reliability, price and other performance factors1. This is done by using structured systems to evaluate the purchasing need of the organisation exhaustively and also identify the capabilities of an ideal supplier. When this is done, organisations seek potential suppliers and invite them to bid for the procurement. When the bids are obtained, the business critically examines each supplier bid against set standards and also against other potential suppliers. This way, an organisation can only acquire the best of materials and services from the best suppliers. The process is summed up scientifically in four steps: 1. Initial Supplier Qualification 2. Agree Measurement Criteria 3. Obtain Relevant Information 4. Make Selection INITIAL SUPPLIER QUALIFICATION This stage is concerned with the identification of the importance of the item being procured to the organisation and the details of the ideal supplier to procure it from. This is a very rudimentary but important stage in supply chain management because it matches the resources available for the purchase with the strategy of the organisation and then carves out an ideal supplier. According to Kraljic, a business will identify the profit impact of the purchase and the supply risk impact2. The profit impact analysis is where a company matches its purchase with its overall strategy and profitability targets. This is done by comparing the purchase with the internal factors in the business. This way, the business will be able to identify and document exactly what it needs and where to look for it. Supply risk is about main factors of the supply markets that affect the purchase at hand. Supply risk is assessed by examining the prevailing conditions of the markets in relation to supplier scarcity, pace of technology and/or material substitution, entry barriers, logistics cost or complexity, monopoly and oligopoly in the markets. Supply risk analysis is therefore vital to identify the position of the business in relation to where it stands on the market for a given procurement transaction in relation to the buyer-seller power situation. When this is completed, a business can get a good idea of the kind of supplier it would want to contract for the purchase at hand and plan a strategy. These broad standards are set by identifying the minimum manufacturing capability, vendor assessments and financial viability that an ideal supplier must possess. In practice, most businesses have procurement committees and teams that take the purchasing and supply needs of the various units of the organisation for the next year. They critically analyse the profit impact and supply risk and get the supplier specification based on the resources available, importance of the purchase, and the kind of supplier to source from. The challenge at this stage is that there is a lot of work to be done in analysing each purchase at every point in time. This comes with administrative costs and time considerations. Also, there are some challenges with estimation and forecast, in that market factors can change and this will make it difficult for the team to set a good scope. Additionally, conflicts of interest and internal politics can lead the process to become ineffective, especially in a case here the procurement team falls into groupthink. AGREEING MEASUREMENT CRITERIA When a business sets its broad supplier requirement, it goes to the next stage of setting scientifically measurable standards for the selection of the best supplier to deliver the goods or services required. Usually, the criteria are set based on purchase costs, quality, responsiveness and environmental factors. Through such metrics the business can measure which supplier meets its requirements best and also, which supplier is the best when compared to the other bidders. Huang & Keskar identify four major steps in the design and creation of metrics for the selection of an ideal supplier3. They are: 1. Metrics collection & Definition: At this stage, the business scans secondary and primary sources for supply chain metrics and selects the most relevant. 2. Metrics evaluation and categorisation into qualitative metrics and quantitative metrics based on the needs at hand 3. Relevancy & Repetition Check: This is done by an independent team to ensure that the metrics are relevant to the procurement at hand and have not been repeated unnecessarily. 4. Structure Development: This is the attachment of statistical values to each metric identified. It requires in-depth knowledge of statistics and probability. This way, suppliers that bid can be graded and ranked in relation to the needs of the buyer as well as in relation to other suppliers also bidding. In practice, a business will translate its qualitative and quantitative needs through this system by identifying the main metrics and assigning measurable statistical values to each. It has also become common for businesses to incorporate environmentally preferable purchasing (EPP) this stage because it helps to environmental responsibility in businesses by setting criteria that examine multiple environmental impacts as well as the environmental effects of products throughout their life cycle4. The main challenge at this stage is that it is quite complicated to identify the best metrics to use. This is because the stage comes with a lot of technical and statistical requirements that most managers cannot fulfil. Secondly, there is a lot of subjectivity which can lead to so many variations in the standards setting. Also, it requires a lot of time and resources to complete this stage of the supplier selection process. OBTAIN RELEVANT INFORMATION From the first stage, the business needs to identify a list of potential suppliers and get them to present information about themselves. This is done by the request for information, request for quotations or the requests for a proposal. Through this, the buyer gets firsthand information about the specific competencies and capabilities of specific suppliers. This information can be compared to the metrics set for the procurement and a decision can be taken. With information obtained, the procurement team of the buyer needs to do some independent verification of the information submitted. They can visit the supplier or request for some more information about the supplier. In other instances, it is more advisable for the business to make third-party follow ups through research companies like Dunn & Bradshaw. TAHAL Engineering, a global engineering company with an office in the UK, usually does this by taking supplier quotations and proposals from new potential suppliers. They then request their preferred suppliers (good suppliers they have done business with in the past) to present additional information with respect to every new purchase. When this is done, they get an independent procurement audit team to verify the data of each supplier and check its credibility. Variances are identified and the supplier is asked to make clarifications where necessary. After that, they present the individual information to the procurement team for further action. The challenge at this stage has to do with the verification of information presented to the procurement team. Some information can be misleading and of course this information is about what a supplier can do and not what he would actually do when contracted! Also, different organisations might interpret the procurement differently this means there will be inequalities in standards used to present the information this will complicate the analysis of this information. SUPPLIER SELECTION In selecting a supplier, the product type will determine the time and money committed to the selection process. The process is done in two ways. First of all, each supplier is evaluated according to its competencies to supply the specific needs of the buyer. Secondly, each supplier is ranked in relation to the other suppliers in a comparative analysis. This comes about because a business will want to work with only the best supplier and thus, must ensure that each bid is thoroughly matched against its expectation and also in relation to the other suppliers available. With the metrics from the second stage, each bidding supplier is given a score for each criteria based on the information submitted. These scores are summed up and the suppliers are ranked accordingly. Baring any unusual happenings, the highest ranked supplier is selected. The challenge with the selection process is that there could be some criteria that a particular bidder possesses that were not factored into the metrics. This will mean that such a supplier will perform poorly. There is also a problem with the objectivity of the people who evaluate it; matters like conflict of interest and organisational politics can cause people to become biased and this will affect the selection process. Additionally, the selection process requires some mathematical interpretation and analysis that some members of the procurement team might find daunting. PROCUREMENT IN THE PUBLIC SECTOR & PRIVATE SECTOR The Public Sector and Private Sector have fundamental differences that affect the procurement strategies of both sectors. In terms of similarities, public and private sectors share the need to purchase goods and services for their operations in the modern free market. In the modern free market, the public sector is treated as any other entity and they therefore have to purchase goods and services at market prices. They both need to maximise returns by selecting the best suppliers using laid down criteria that are relevant to them. Typically, they both do this by accepting quotations from three or more suppliers and use scientific methods to select the best supplier. This is because the public and private sectors are owned by entities that seek results and require them to reduce costs and maximise returns. Public sector organisations need to justify their existence by remaining productive. Thirdly, they both operate in democratic settings where the rights of all stakeholders need to be respected. This therefore means that they follow similar basic rules for the purposes of dealing with their suppliers. However, there are some fundamental differences between procurement in the private sector and the public sector. First of all, the public sector procurement is funded by taxpayers’ money so the accountability framework is quite different. On the other hand, the private sector is ran by funds from the owners or shareholders so there also, the supply need to conform more with the desires of the shareholders (who are represented by managers). Procurement in the public sector seeks to provide value for money. In other words, it should meet some strict economic, efficiency and effectiveness standards. If a procurement transaction does not provide these, it is seen to be unacceptable in the public sector. Usually, in private sector, a procurement transaction must meet the fundamental objective of increasing the wealth of the shareholders’. In other words, each procurement must cut down transaction costs, optimise resource combination and increase returns to the organisation. Thus for example, a department of government is funded by taxpayers’ money so every procurement must go to maximise the best interest of the public. On the other hand, the owners of an airline will expect every procurement to be in the interest of increasing profitability. If a manager fails ensure this, he is looked at with contempt. Procurement in the public sector comes with complicated internal and external requirements that need to be considered before it can be authorised. There is the need for the purchase to support the policy of the government and the needs of stakeholders these are constrained by the budget and culture of the nation in question. In the private sector though, main requirement is how to increase profitability in the face of various competitive needs. In a ministry in Britain, many major procurement activities are centralised. This is because the government would always want to use procurement budgeting as a tool to promote its policies and promises to the people. Due to this, procurement is shrouded in many requirements in the public sector. Also, procurement in the public sector is highly regulated. In the UK, most of the procurements are guided by the EU directives for public procurement that create a framework for opened and restricted bidding procedures5. The regulation applies to a certain threshold of transactions and it requires the publication of public sector bids in journals, non-discrimination against potential EU member state suppliers, equal treatment of bidders as well as transparency. This is aimed at enhancing the internal markets and stimulating competition and efficiency in the EU. Private sector companies can purchase any product from any supplier without regulation or restriction. They can design their own procurement system and abide by it. CONCLUSION Supplier selection is a very important element of business. It therefore requires proper analysis, good and measurable standards, information from potential suppliers and evaluation for selection of the most ideal supplier. Although the public sector and public sector are similar in their need to procure goods and services, there are some differences in procurement in these sectors. They include to the source of funding and hence expenditure for procurement, stakeholder requirements, government centralisation and policy needs as well as legal requirements. REFERENCES Cousins, Paul, Lamming, Richard, Lawson, Benn & Squire Brian (2008) Strategic Supply Management: Principles, Theories & Practice London: Prentice Hall Financial Time p62 Environmental Protection Agency (2008) Environmentally Responsible Purchasing Program Washington DC: EPA Heijboer, Govert & Telgen Jan (2002) “Choosing The Open or The Restricted Procedure: A Big Deal or a Big Deal?” Journal of Public Procurement Vol 2 Issue 2 187 - 213 Huang, Samuel H. & Keskar Harshal (2006) “Comprehensive & Configurable Metrics for Supplier Selection” International Journal of Production Economics 105 (2007) 510 - 523 Kraljic, Peter (1983) “Purchasing Must Become Supply Management” in Harvard Business Review (Sep – Oct 1983) Read More