Supply Relationships in Procurement Management - Essay Example

 Supply Relationships in Procurement Management Introduction Essentially, procurement management involves the process of sourcing the required goods or services from independent external suppliers. Basic steps of an ideal procurement process include explicit determination of products or services to purchase, identification of suitable external suppliers, establishment of purchase and delivery agreements with the suppliers, reception of goods or services from suppliers, review as to whether supplied goods or services meet expected standards, and finally approval or disapproval of the suppliers’ delivery based on standards reviewed. In practical contexts, sourcing products from external suppliers does not lack in technical hitches, particularly hitches related to supplier performance. According to Maxwell (2005), a procuring firm expects suppliers to demonstrate high levels of production and delivery competences. Unfortunately, maintenance of the required level of competences by suppliers may be restricted by internal factors like high costs of production, and external factors like intense industry competition. Subsequently, suppliers may deliver goods and services that are below the required standards. In this context, the significance of supplier relationship management in procurement processes cannot be overemphasized. Within practical commercial settings, outsourcing goods and services from external suppliers is indispensible. Currently, most firms in Europe and the United States are sourcing products from external supplies in Asian nations like China and India. Apparently, suppliers in these Asian nations deliver goods and services at relatively low prices. Therefore, companies rely heavily on such suppliers. Since external suppliers are essential players in today’s business, it becomes necessary to create and maintain a healthy relationship between enterprises and their suppliers. According to Lydia (2010), supplier relationship management, commonly abbreviated as SRM, is a managerial discipline meant to optimize the efficiency of processes used in acquiring products from suppliers. Undeniably, supply chains are becoming increasingly complex. In most cases, external suppliers may sub-contract certain production processes to third parties. In addition, such third parties may assemble goods from products and services delivered by other parties. Therefore, elongation of supply chains necessitates sustainable development of supplier policies. Arntzen and Harrison (2010) mentioned that lack of constructive relationships between enterprises and suppliers increases occurrence of procurement risks. In illustrating the nature and significance of procurement management, a detailed literature review will be conducted in succeeding sections of this paper. Also, practical examples of enterprises-suppliers relationships will be used to highlight the importance of supplier relationship Management in today’s complex supply chains. Literature Review Observably, sourcing of goods and services from external suppliers is becoming increasingly popular in competitive commercial environments. First, external suppliers are known to incur reduced cost of production during manufacturing processes. Griffin and Thomas (2006) mentioned that most external suppliers operate with economic of scale. On the other hand, enterprises need small quantities that only meet local consumers’ demands. Therefore, cost reduction is an attractive attribute possessed by the use of external suppliers. Besides reduced costs, external suppliers present substantial flexibility in dynamic business environments. Undeniably, consumer behavior is a dynamic parameter in business. According to Morris, G. & Palmate (2009), intense competition, advancement of technologies and innovations increases changes in consumer behaviors. Ernest (2015) agreed that typically, erratic fluctuation in consumer behavior exerts considerable pressures on enterprises. For example, purchase and installation of product manufacturing plants are often expensive to enterprises. Unfortunately, such expensive projects are often rendered obsolete when consumer preferences on produced goods shift. Occasionally, goods sold by enterprises may become obsolete before plant purchase and installment costs are recovered. Fortunately, external suppliers are shielded from such obsolesce risks by economies of scale production. According to Tang and Zimmerman (2010), the use of suppliers increases business flexibility because enterprises can swiftly adapt to changing consumer behaviors without risk of incurring losses in initial investment costs. Besides the aforementioned benefits, favorability of using external suppliers is instrumental in managing drastic changes exhibited by globalized supply chains. According to Cooper, Lambert and Pugh (2010), supply chains are becoming increasingly complex. As a result, risks associated with complex supply chains invariably infiltrate into the procurement management sector. Influential factors in complex supply chains include but not limited to, sudden scarcity of raw materials, changes in economic regulations, and environmental dynamics among others. Unfortunately, causative factors of supply chain challenges like limited resources and environmental dynamics are not controllable. According to Kant, Rao and Young (2013), procurement risks associated with such challenges include disruptions in delivery timelines, or delays in procurement processes. Occasionally, labor disputes within the suppliers’ labor market may stall production processes for extended periods. Also, sudden shortage of raw materials necessitates stoppage of production processes. Presently, examples of factors that may initiate sudden shortage in raw materials include wars, and economic sanctions in raw material producing regions. Judith (2012) said that undeniably, disruptions or slight delays in delivery of purchased goods or services impacts the business processes of enterprises severely. Consequently, consumers experience inconveniences associated with delayed shortage of desirable or essential products in the market. Irrefutably, adaptive procurement approaches are necessary in mitigating the effects of challenges presented by complex globalized supply chains. McCormack (2007) agrees that shallow procurement process increases the likelihood of hitches associated with complex supply chains. For example, rushed selection of inappropriate suppliers is a recipe for potential procurement problems in future. In competitive environments, commercial enterprises are striving to maximize profits through mechanisms like reduced costs of operation. In such cases, cheap products from external suppliers feature as a clear avenue towards reducing costs of business operation. Despite enhancing maximization of profits, procurement of cheap goods and services from external suppliers compromise on the value aspect of a company’s business. According to Gottlich and Piccoli (2010), products should never be purchased from cheapest suppliers simply because they are lowly priced. Technically, cheapest options offer the lowest value to enterprises and consumers. Cheap products means that shoddy production processes were used, especially unskilled labor and substandard raw materials. In this case, selection of external suppliers should not be solely based on the price aspect. As aforementioned, one procedural step in procurement processes is selection of suitable external suppliers. Wince (2004) mentioned that during selection of suppliers, thorough analysis and background evaluations should be conducted. Prior to awarding contracts to external suppliers, deep analysis on their financial capabilities, technical expertise of their workforce and technological competencies must be ascertained. Another procurement problem worsened by complex supply chains is misinterpretation of consumers’ needs. In marketing contexts, enterprises procure goods requested by customers. Subsequently, detailed information on customers’ requests is delivered to external suppliers for processing. Patterson and Monza (2011) agreed that during production, external suppliers will stick within the boundaries of information provided by enterprises. For example, consumers may request toys of specific designs priced at approximately $40 per piece. Morris and Palmate (2009) highlighted that during collection of the consumer preference information; certain essential elements pertaining to product design may be omitted or misinterpreted in the process. Subsequently, misinterpretation of consumer preferences is relayed to the external suppliers. In the end, goods delivered by external suppliers are characterized my design hitches caused by misinterpretations. In such cases, procurement firms will end up receiving products with unacceptable features. Typically, such products may never be purchased by customers; hence both the enterprise and the external supplier invariably incur substantial losses. According to Cooper, Lambert and Pugh (2010), cases of product recalls are becoming increasingly common today. Primarily, recalls occur because products or services delivered by external suppliers are poorly designed, or possess undesirable features that may be harmful or unacceptable to consumers. Technically, misinterpretation or delivery of subjective procurement information to suppliers can be addressed through the use of feedback mechanisms. In practice, feedback mechanisms should be employed in consultations between suppliers and enterprises. In executing the first step of procurement processes, which is detailed determination of goods or services to be procured, thorough consultations with customers should prevail. Lai and Lindsey (2008) agrees that prior to sending orders to suppliers, procurement staff should obtain explicit and confirmed statements pertaining to the nature and intended use of products from customers. Actually, functional requirements coupled with performance expectations of products must be explicitly defined. Benita (2008) mentioned that during consultations, appropriate feedback mechanisms like the use of suggestion boxes should be used extensively in sourcing product information from the consumer population. After documentation and delivery all the products’ functional and performance requirements to external suppliers, frequent consultations with the suppliers becomes necessary. Smith (2012) mentioned that during production, external suppliers are at increased risk of misinterpreting user needs. In such cases, suppliers must be encouraged to seek seconded approvals from enterprises prior to initiating major changes in product features. Horvath (2011) asserted that during such approval situations, procurement managers should provide adequate responses and specific clarifications to external suppliers. Through such consultation feedback approaches, issues of product undesirability and recalls can be significantly minimized. Analysis of Real Examples in Procurement Processes Case Example 1: Mattel Crisis of 2007 Apparently, challenges and risks in procurement management are not merely theoretical in nature. In the recent past, some multinational corporations have suffered consequences caused by shallow supplier relationship management. In 2007, Mattel Corporation, the world biggest toys manufacturer, was engaged in a deep quality crisis. Based on the crisis’ timeline, it is admissible that 2007 was a disastrous year for Mattel Corporation. In June 14th 2007, the toys manufacturer was forced to recall approximately 1 million toys from its consumer markets in Asia and America. Supposedly, the 1 million toys contained significant amount of lead paintings. In August 2nd the same year, Mattel Corporation recalled approximately 900,000 toys because of the same reason; high levels of hazardous lead paints in their products. Kent and Taylor (2007) mentioned that during media briefings, Mattel Corporation’s president Robert Eckert specifically accused the supplying Chinese firm Lee Der Industry for delivering harmful products; and accusation that led to total ban of product exports from the Lee Der Industry by the Chinese government. In response, Lee Der Industry’s owner Cheung Shu committed suicide over the issue on August 13th. Subsequently, Mattel’s president was summoned by the US Congress to elaborate on the lead-paint toys. In his report, Lin (2009) said that by October 2007, 78% of retailers and customers across the world distanced themselves from sales and purchase of Chinese made toys. From the Mattel’s crisis of 2007, multiple lessons on supply relationships were learned. According to Lin (2009), Mattel Corporation had outsourced approximately 80% of toy manufacturing activities to Chinese firms. Because of quality related issues in the supply relationship, Mattel Corporation was forced to issue approximately 30 recalls in a period of 8 years. According to the International Consumer Product Safety Commission, Mattel Corporation together with contracted suppliers from China violated international laws by deliberately selling toys containing impermissible and hazardous levels of lead paints. Morris and Palmate (2009) agreed that at such junctures, one can ask; what went wrong in the supply relationship between Mattel Corporation and suppliers like the Lee Der Industry? Undeniably, the Mattel crisis underscored the importance of shared responsibility and control necessary in management of global supply chains. According to Mattel’s president, the giant toy manufacturer emphasized that its standards and product features were violated by the supplier, Lee Der Industry. In response, the Chinese toy Industry on behalf of the Lee Der Industry mentioned that Western enterprises like Mattel Corporation demands unrealistically cheap products from the Chinese suppliers. In an effort to meet unrealistic demands of enterprises, Chinese suppliers asserted that product quality was often compromised. In the end, both the suppliers and the enterprise incurred substantial economic costs for the poor supply relationship that caused the crisis. Undeniably, lessons from the Mattel crisis highlight the importance of robust supplier relationships in a rapidly changing business environment. Currently, vendors and suppliers are caught up in an inescapable network of intricate supply chains. In the face of such intricate supply chains, procurement professionals must demand higher levels of conformance from suppliers than previously demanded. According to Gladys and Sparks (2010), cultural difference between Chinese manufacturing environments and Mattel’s marketing environments led to misinterpretation of user needs. Conventionally, customers in liberalized markets like the United States and the United Kingdom require toys which pose no harm to their children. During relaying of product functional features to the supplier, the Lee Der Industry misinterpreted the safety design parameters of Mattel’s orders. In addition, Mattel Corporation failed to implement effective safety check mechanisms for products delivered by the Chinese contractor. Apparently, Mattel focused on price factors at the expense of product value. In addition, Mattel Corporation failed to keep a keen eye on its supply relationship with Lee Der Industry. Gladys, M. & Sparks (2010) insinuated that the Lee Der Industry may have subcontracted production procedures to third parties in order to meet the unrealistically cheap demands of the Mattel enterprise. In this regard, resultant blames of negligence and irresponsibility between Mattel and the Lee Der Industry was a practical example of poor supplier relationship management in global procurement processes. Case Example 2: Boeing 787 Dream-liner Crisis of 2013 In April 2004, Boeing announced a project to manufacture a 787 Dream-liner with a first flight test scheduled for 2007. Upon successful completion of testing exercises, the commercial Dream-liner was scheduled to make its debut service by May 2008. All Nippon Airways, which made a first order of 50 planes, was supposed to be the first customer for the Dream-liner. As usual, the plane’s production process involved substantial outsourcing of tasks to foreign specialty firms. For example, the Japanese firm GS Yuasa was contracted to make and supply lithium-ion batteries for the Dream-liner’s engine module. The Paris energy products manufacturing firm Thales Group was contracted to make control circuits for the lithium-ion batteries from Japan. In addition, United Technologies in Connecticut was also involved in production and delivery of auxiliary power units to be complemented with batteries and circuits from the other foreign suppliers. Loan (2009) argued that during the plane’s production process, incidents of flight delays associated with problems from foreign suppliers were reported. Actually, supply chain problems necessitated the push of first test flight 15 months back from June 2007 to November 2009. Upon the debut launch of the 787 dream-liner, incidents of battery-related engine hitches were reported. In January 2013, a 787 Dream-liner operated by the Japanese Airlines spontaneously caught fire in Boston, sparking an outrage of safety related criticism for the Boeing plane. By March 2013, all 787 Dream-liners were grounded indefinitely for safety related concerns. Before and after the indefinite grounding of the planes, Boeing and external suppliers traded intense accusations regarding the technical faults experienced by the new plane. According to Bout (2010), design and manufacture of Boeing planes involve efforts from more than 50 independent suppliers, with each supplier contracted to make and deliver a specific section of a plane. In the supply relationships, each contracted supplier is independently responsible for risks and rewards associated with creation of a specific plane section. This means that the all the three firms contracted to make the battery section of the 787 Dream-liner were responsible for the technical hitches experienced after the plane’s launch. Sucre (2010) mentioned that during press briefings and commission inquiries, Boeing management reiterated that the Japanese firm GS Yuasa, the Paris firm Thales Group, and the Connecticut-based United Technologies Corporation were collectively responsible for the plane’s battery problems. In response, the three contracted suppliers traded accusations among themselves, and blamed Boeing for lack of effective oversight during integration of outsourced components. United Technologies asserted that Boeing was negligent in managing the components’ supply chain. The Japanese firm GS Yuasa mentioned that the quality of batteries supplied to Boeing’s assembly factories was in accordance with the cost paid by the Boeing Corporation. In the end, the American Federal Aviation Administration blamed both the external suppliers and the Boeing Corporation for failing to maintain functional supply relationships. According to Boeing spokesperson, the department for supply chain management in Boeing Corporation is considerably understaffed. Bout (2010) agreed that apparently, the few employees within the supply chain department were overworked during the Dream-liner’s production process. As aforementioned, consultation and feedback is primarily important in supplier relationship management. In addition, effective management of contractual agreements in globalized supply chains should be prioritized. In the face of understaffed departments, effective management of global supply chains is severely compromised. During manufacturing of the 787 Dream-liner, managers of supply relationships were supposed to stay focused on specific tasks. In this context, staying focused means providing timely feedback and engaging in thorough consultations with foreign suppliers. According to Sucre (2010), the Japanese firm GS Yuasa was restricted by cost factors in production of the plane’s batteries. Apparently, there was limited consultation between the Japanese supplier and the responsible Boeing’s supply chain manager about the cost issues. Probably, the manager was overworked; hence he or she could not stay focused on the batteries task. According to Loan (2009), lack of coordinated consultations between the three firms contracted to manufacture battery sections may have led to technical incompatibility of separately produced battery components. In this regard, lack of timely feedback and sufficient consultation in supply chain management led to delivery of defective products by the independent suppliers. Conclusion In conclusion, it is undeniable that success of procurement exercises relies of efficiencies within the component of supplier relationship management. Presently, and even in future, outsourcing is and will be a necessary part of business. According to Griffin and Thomas (2006), globalization of production and consumer markets is invariably necessitating outsourcing of commercial tasks. Unfortunately, outsourcing increases complexity of supply chains. Correspondingly, risks and problems encountered during procurement exercises through intricate supply chains increase in magnitude and complexity. Based on the literature review section, it emerged that addressing challenges related to complex supply chains require employment of advanced measures in procurement management exercises. In procurement management, importance of communication and negotiations in creating and maintaining supply relationships cannot be underestimated. According to Cox (2004), effective communication and negotiations not only emphasize on the needs of enterprises, but also facilitate joint deliberation and resolution of problems faced by suppliers. From the case examples on Mattel and Boeing, it is undeniable that limited communication in supply relationships cause detrimental consequences to both suppliers and enterprises. Reference List Arntzen, B. & Harrison, M. (2010) Global Supply Chain Management in the Aviation Industry. Journal of Supply Chain Management 25(1), p.10-31. Benita, M. B. (2008) Supply Chain Design: Models and Methods. International Journal of Production Economics 3 (15), p.281-294. Bout, A. (2010) Challenges of Outsourcing: Analysis on the Boeing 787 Batteries Crisis. Harvard Business Review (10)6, p.384-371. Cooper, M. Lambert, D. & Pugh, J. (2010) Supply Chain Management: More than a New Name for Logistics. International Journal of Logistics Management 13(6), p.87-99. Cox, A. (2004). Art of the Possible: Relationship Management in Power Regimes and Supply Chains. Supply Chain Management: An International Journal 9(2), p.346-356. Ernest, O. 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