Purchasing

Post-Module Assignment

NAME: LUKMON SUMOLA

Q. 1
Introduction
The advancement of technology and trade barrier reduction proliferate global
sourcing, these catalysts enable companies to procure from suppliers in distance
countries. The complexity of global sourcing presents a tremendous challenge, and
cost opportunity for supply chain management. Choosing suitable small supply base
among plethora of suppliers required rigorous supply selection process. Supply chain
management principles recommend development of long-term strategic supplier
alliances among few preferred suppliers to gain competitive advantage against other
supply chain in the market.

My intention is to suggest how to assess supply base with reference to issues involved
in supply base assessment of tyre industries. The challenges of managing global
supply base, and supply base as a source of competitive advantage with examples.

Supply base understanding

The supply base sometime referred to as supplier base is the list of suppliers actively
managed by the purchase organisation to procure materials, services, stationery, and
capital equipment.

Supplier base assessment

The initial stage of supply base evaluation is the recognition by organisation the need
to decide which suppliers to continue doing business with, the reasons might be cost
motivated or need to eliminate incapable suppliers in meeting future demand. The
supply chain integration enforces few suppliers and the criticality of products/service
to operation play major role in supply base assessment.

There are several methodologies to objectively assess supply base, there is no best
methods, organisations use varieties of approaches. These includes cost base
approach such as total acquisition cost which look beyond just the price of
products/service to consider all costs associate with receiving and usage of
products/services. Pareto analysis will reveal that 20% of the suppliers account for
80% of total spends. There are sophisticated computerise cost-based quantitative
applications often deploy by organisation to quantify suppliers performance on issues
such as cost of defect, cost of detection and correction et cetera.

The non-cost base uses multiple criteria selection such as quality, price, delivery,
financial etc. reliant on basic KPIs (Key Performance Indicator) to set predetermine
selection criteria standard between group of cross-functional personnel from the
purchase company and the suppliers. Many organisations monitor supplier’s
performance on a facilities-to-facilities basis, using field research methodology.
Experience buyers will learn a lot from such visit, and rank the company performance
from best to worse. There are other approaches worth mention such as desk research,
questionnaire, Scorecards, subjective, comparative method, survey, and weighted
point, the list is not exhaustive.

The overall objective of supplier base assessment is to reduce purchase risk and
improve value to buyers. Irrespective of supplier base evaluation approach chosen, the
idea is to identify preferred suppliers to develop long-term relationship and strategic
collaboration with. The first step in supply base assessment is to determine what
performance your organisations require from your suppliers to meet organisation
objective. The answer will determine supplier strategy to pursuit to meet those goals
and objectives.

The next stage is to decide supply base assessment method, cost base or non-cost base
many organisation will assess suppliers base on the following:
 Financial conditions
 Technical and engineering capabilities
 Manufacturing strength
 Delivery
 Quality
 Price
 Certification
 Customer relationship
How to collect data and collate above information from large pool of suppliers create
a challenge. There are different approaches to garner such information, paper
questionnaires, web base questionnaires, survey, field research, extract information
from system, set of KPIs etc. The assessment system needs to be suitable to
organisation objectives, the supplier base evaluation approach depend on feedback
generated from suppliers. Set of KPIs are often use by company in analytical
hierarchy order base on relevancy to organisation objectives but the KPIs have to be
predetermine by purchaser cross-functional team and the suppliers team.

The deployment stage might be difficult, it might require IT system reconfiguration to

extract data and enable information visibility to all party. The final stage is the
feedback and continuous improvement. The lists of those suppliers that have high
performance rating or ranking standards are picked. The idea is to develop long-term
relationship in form of cooperative and collaboration, partnerships and alliances
between buyer organisation and the suppliers.

Examples of the issues involved in supply base assessment of tyre

industry
The main issues involve in supply base assessment of tyre industries is as follows:
 Assessment of a Supplier’s Quality Systems
 Assessment of a Supplier’s Quality Plan
 Quality of responses to formal complaints and rejections
 Timeliness of problem resolution
 Progress against mutually agreed upon goals
 Quality Maintenance and Improvements
 Improved Product Form
 Lab validation maintenance
 Reported product capabilities with demonstrated improvements
 Product and Process Development
 Improved analytical Methods
 Technical Innovation, Research and Development
 Technical collaboration
 Health and safety
Challenges of global supply base management
The globalisation, trade liberation, and internet present opportunities to globally
source for suppliers of goods and services, it also present equal challenges.
Organisation embarks on quest to be effective and efficient. The following address the
principle challenges of managing such supplier base.
Foreign exchange
The fluctuation in foreign exchange rate between the supplier countries and buyer
country create a challenge. The change in exchange rate overtime appreciable making
the price higher or lower than the time agreement was originally signed.
Language
The language barrier present a challenge, although most of the multinational
companies standard of communication is English, every English speaking country
have different interpretation of English words, idioms, and phrase. The influence of
country language on English sentences construction, and dialect on spoken English
could make convey of simple instruction through telephone conversation or e-mail
more cumbersome.
Political and Labour issues
Political instability can destabilise business conditions. The suppliers operating from
such country business might be interrupted due to change of government, coup, labour
strike, protest etc this will cause supply chain destruction. Purchasing company might
need to result in lunching contingency plan or switch to the supplier other location if
the supplier operates multiple locations.
Culture
Every country has the way of doing things, the share beliefs, and values that govern
their society. The understanding of differences in culture is essential when doing
business abroad. In some country brown envelop is norm in contract negotiation,
greeting alone might make you lose contract in another country. What constitute good
practise in one country might be bad in another.
Time Zone
Due to different in time and working days communication can be more difficult. You
get frustrated when you are expecting immediate response for urgent matters from
your foreign colleague only to realise it is mid-night in US, and the other colleagues
in china have finished work for the day
Legal system
Every country has different legal system, and law interpretation varies from country
to country. During the negotiation and drawing of contract law, there should be a clear
interpretation of contract law. The implied incoterms, arrangement for arbitration,
product liability, infringement of patent, term and condition of cancellation, and delay
etc
Tariff and import duties
The tax level on importation of good from foreign countries, it is essential to know
which tariffs and import duties are available, and what products relevant to your
operation are except from tax. There should be explicit understanding of who is
responsible for such tax during negotiation and should be stated in the contract law.
Lead-time
The purchase order cycle lead-time is lengthy when purchase offshore. Although
improvement in transportation and communication minimize lead-time but there are
other factors than contribute to lengthy lead-time such as the customs clearance, off
loading of goods in port depend on numbers of ships inline for unload. Inland carriers
in foreign country might delay shipment.

Supply base as a source of competitive advantages

The initial development of mutual trust between buyer organisation and suppliers is
the beginning of long-term collaborative relationship that transcends traditional arm's
length transactional approach. Organisation can gain significant competitive edge
from such relationship, but require strong integration and risk mitigation for the
relationship to blossom and ensure competitive advantages.

The collaborative relationship encourage alignment of goals, joint planning,

technology and information sharing, best practise and knowledge sharing, and
integrated process. The collaborative approach might develop to strategic partnership
that will benefit whole supply chain. Competitive advantages could be derived
through low cost, quality, delivery, and time improvement etc.
Cost reduction
The collaboration might enable suppliers to share cost information with buyer
organisation, which can result to joint cost reduction program between both parties.
Joint problem solving
Such relationship can reduce risk through joint problem solving and early warning
when suppliers are experiencing problem.
Technology integration
Having integrated technology in place for suppliers spread worldwide enable visibility
through the supply chain, quick decision could be taken in case of any destruction and
result to lunch of contingency plans.
Joint performance improvement project
The joint project seek to reduce waste throughout supply chain, the waste reduction
program will maximise supply chain and make the suppliers more competitive which
help buyer organisation. Embarking on waste reduction program could improve
quality through deployment of just in time delivery system.
Supplier’s involvement in early design stage
Early involvement of suppliers in new products development can improve products
and design, lower development cost, enhance quality, and can reduce concept to
market lead-time.

Example
One of Wal-Mart suppliers in Mexico that have core business was not performing up
to standard, Wal-Mart devotes resources to help the supplier through joint business
planning process and deploy other key supplier development activities to help the
supplier. The support enables the supplier to improve it market share and capability,
was able continue doing business with Wal-Mart.

Reference
Michelin Tyre plc, http://www.michelin.com/corporate/EN/home

Monczka R. R. et al. (2002) Purchasing and Supply Chain Management, Published by

South-Western, 2nd Edition.

Leenders, F. et al (2002) Purchasing and Supply Chain Management, Published by

McGraw-Hill, Twelfth Edition.
Q. 2
Introduction
The recent events around the world remind us of unpredictable and volatile world we
live. The economic downturns, natural disasters, terrorism, industrial disputes, war in
different regions, are external-driven risks that resulted to massive disruptions to
supply chain activities. The purchasing function is responsible for management of
whole purchasing activities interface between organisation internal functions, and
established cooperative relationship with suppliers of critical components. The
purchasing decisions can potentially created internal-driven risks and expose supply
chain vulnerability.

This essay will be in threefold, my intention is to address purchasing contribution to

creating and managing supply chain risks, to describe the risks created by Michelin
tyre purchasing activity, and calculate price fluctuation Michelin tyre would have face
in 2010 had not engage in hedging operation.

Understand Supply chain Risk

Supply chain risks are risks that are associates with all logistic activities in the flow of
materials and information within the whole entity that constitute the entire supply
chain. The supply chain management risk is either internally self-exposed risks or
risks created by external occurrences.

Supply chain risks

The push in creating efficient and dynamic supply chain that respond quickly to
downstream customers demand and effectively management of supply chain risks
create a conundrum. Cisco lost $2.5 billion inventory write off in the second quarter
of 2001 due to lock-in supply chain agreements and weaken products demand.
Recently many businesses experience series of supply chain destruction created by
demand and supply forces.

Purchasing is confronted with making prudent decision to support organisation

functions, the knowledge, and experience of the purchasing personnel tangible for
organisation survivor and in mitigating supply chain risks. The internal-driven risks
created by purchasing function in the race by organisation to meet customer’s
requirement and sustainable profit growth include the following not exhaustive
factors.
Forecast Error
Forecast inaccuracy due to continuous shift in customers demand or inappropriate
forecast approach created problem for many organisation, and to the whole supply
chain. In fact all forecast are prone to error because they are mere guessing, the more
lead-time lengthens, so declined sales forecast accuracy. The more error generated by
forecast system the more inventory skyrocket or the fewer inventory in the pipeline to
meet customer needs. The implication of unnecessary or excess inventory reflected in
lead-time increase, out-of-stock cost, and excess stock cost.
Supply chain collapse
Over dependency of suppliers on the channel master create supply chain risk, if the
centre, the glue that holds the supply chain can not hold any longer, things will fall
apart, as in Dell migration from Ireland to Poland, created domino effect. The whole
supply chain collapsed, all company that constitute Dell supply chain specially those
that generated 80% of there profit from Dell closed down, even company that depend
indirectly on Dell suffered, and community the company served.
Just-in-Time
Just-in-time philosophy emphasis demand driven supply chain, product do not move
upstream unless there is requirement downstream. If any member of the supply chain
fails to perform satisfactorily, for example if supplier delivered defected or damaged
materials not on-time. As experienced by Bosch in January 2005 when the company
failed to detect a defect in the Teflon coating 1.5 cm small socket (cost few
Eurocents) that goes into diesel injection pumps supplied to automotive company
such as BMW, AUDI etcetera. The socket was not manufacture by Bosch itself but
bought from the supplier Federal Mongul which also bought from DuPont.

The defect resulted to standstill in some of the automotive companies manufacturing

assembly, and few thousands products recall. Another JIT issue is inability by freight
forwarder to cope with modification of inbound transportation inhibits JIT approach
and incurred cost to the whole supply chain.
Mass customisation
Forester effect within the supply chain will cause supplier failure to deliver
customised item to customer’s specific requirements resulting in increased cost and
poorer service.
IT disruption
The company information and communication system outage due to system failure or
routing maintenance or an update will disrupted operation, and put operation on-hold.
Transportation risks
Transport delay, products damage on transit due to excessive handling, road re-
routing due to mishap on the road. In 2010, the French air controller strike
grand many transport activities and disrupt supply chain.
Aggressive supply base reduction
Supplier selection process can create risk, especially if wrong supplier was selected.
The desire to optimised supply chain through strict aggressive supply selection can
remove capacity from supply base.
Credit Crunch
The recent economic downturn show interwoven and interconnect world we leave.
What happen in housing industry in US created ripple effect and spread like virus to
affected many organisation supply chain. Many businesses was brought to their fit
due to bank refusal to borrow money, many company that reliant on lending from
bank felt the full impact, some even exit the market altogether.
Natural Disaster
The most recent wide spread of flood in some region, Brisbane, Sri-Lanka, Pakistan
etc Earthquake in the southern Qinghai Province of China in April 2010, the Haiti
massive earthquake that destabilised the whole business and economy. The risk
posted by natural disaster give glimpse of the effect on supply chain, lost of revenue
and plant shutdown of many organisation.
Political
The 2001 terrorist attacks on the World Trade Centre and the Pentagon, the recent
Tunisia grotesque demonstrations, wars in various countries, labour strikes here and
there etc brought supply chain into standstill and caused widespread transport delay.
The outcome is supply chain breakdown, inventory shortage due to plant shutdown
and lost of revenue.
Managing supply chain risks
The supply chain organisations are faced with mammoth challenges of mitigating
supply chain risks to avoid delay or total destructions. Supply chain risk materialised
from various places both from internal and external forces, from customers, suppliers,
the purchasing organisation. There are various methods of supply chain risk
classification, and there different methodology approach to minimized supply chain
risk.
Managing internal-driven supply chain risks might have a work around but whom no
when the next natural disaster will strike. To effectively minimize supply chain risk it
is essential to have complete knowledge of the total supply chain risk and what
created risks. The first step in risk mitigation is to analysis and identifies the potential
events that caused supply chain destructions, evaluate the impact, and design robust
risk strategy.
The supply chain complexity makes risk identification much difficult. The process of
risk identification involved mapping supply chain circle to get to root cause of risks.
The risk assessment required ability to evaluate the outcome of supply chain risks
exposure on cost and price. The effectiveness require involvement of other supply
chain functions such as production, Finance, Marketing, accounting etc prioritise risks
base on objectives to create table of risks and rank them accordingly. Those on high
rank need to be addressed. There variety of other approach to supply chain risk
management, choose method that relevant to your operations.

Risks created by Michelin tyre purchasing activity

The recent economic downturn affected many organisations worldwide, the recent
natural disaster, tsunami, flood etc destructed those countries affected supply chain.
Even supply chain organisation can implement an improvement methodology that
might turn to be risk that will disrupt operation. The following are possible risks
created by Michelin Tyre:-
Supplier collaboration
If a supplier thinks such relationship with Michelin Tyre will not benefit the company,
the risk issue become who has most to gain or lose from such relationship. The
implication is inability to cooperate full in term of sharing necessary information.
Loyalty
If the members of Michelin Tyre Plc supplier base engagement in similar arrangement
with supply base of another tyre company that might be competing direct with
Michelin. The confidentiality and loyalty become issue that can result to potential
risk. Example of such relationship, CEVA manages transportation, receiving, and tire-
mounting services for Michelin in Greenville, S.C., U.S. ` also render similar service
to Goodyear, Bridgestone, and Yokohama Tire.
Operational Risks
The Michelin operation is prone to operational hazard due to usage of flammable
components that if ignite it can disrupted the entire production.
Socio Legal risk
Michelin might be exposed to product liability claims, liability in connection with the
environmental issues or in distribution and marketing of products, and in connection
with its social obligations.
IT Outage
The company reliant on information and technology system integration with the
supply base to support operation, any system outage, or disruption will put the entire
operations to standstill
Demand Forecast error
The forecast inaccuracy caused closure of Alabama in USA plant due to in response
to the unprecedented drop in market demand.
Biology terrorism
If rubber plantation farms intentional exposed to Leaf Blight, a fungal disease that can
wipe entire rubber industry if accidentally introduced.
Rubber plantation risk
Nearly 90% of the world’s natural rubber is supplied by plantations in South East
Asia. If the rubber plantation is attacked with disease, that created major risk and
recent flood eruption of major rubber plantation farms in these areas posted risk.
 Weak demand
Weak demand for automobiles and trucks has led to declines in tyre production and
consequently weak demand for tyre.

Rubber price
If Michelin tyre Plc had not engaged in price hedging operation for the 2010 financial
year, the company would have end-up paying below rubber price, see fig.1 for
complete rubber price as per month for 2010, paid in dollars currency.

Fig. 1 Rubber Monthly Price

US cents per pound

250
200
150
Value
100
50
0
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec-
10 10 10 10 10 10 10 10 10 10 10 10

Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec-
10 10 10 10 10 10 10 10 10 10 10 10
Value 139.8 141.9 151.4 179.1 166.9 161.7 148.5 150.4 160.2 178 195.3 215.3
Month

Source. Adapted from Index Mundi: www. http://www.indexmundi.com

Reference
Michelin Tyre Plc. Michelin Tyre plc, http://www.michelin.com/corporate/EN/home

Monczka R. R. et al. (2002) Purchasing and Supply Chain Management, Published by

South-Western, 2nd Edition.

Leenders, F. et al (2002) Purchasing and Supply Chain Management, Published by

McGraw-Hill, Twelfth Edition.

Index Mundi. http://www.indexmundi.com/commodities/?commodity=rubber