CIPS L5M4 Advantages & Disadvantages

KPIs
- Advantages of KPIs
- Motivate compliance and improvement
- Manage supply risk
- Support contract management
- Identify high performing suppliers
- Identify closer partnership suppliers
- Give feedback for learning and continuous improvement.
- Disadvantages of KPIs
- Focus is on the measured areas only
- Can lead to cutting corners on quality or service to achieve targets.
- KPIs can be misaligned with corporate objectives
- Can be time consuming to create, monitor and manage
- There is a risk that the wrong metrics can be selected
- can become out of date

Measuring and Monitoring Supplier Performance:

- Advantages of measuring and monitoring supplier performance
- Identify performance problems early
- Drive continuous improvement
- Praise good practice and giving constructive feedback can improve supplier relationship
- Disadvantages of measuring and monitoring supplier performance
- Can be time consuming
- Can be costly
- Negative reporting on performance can damage relationships with suppliers.

EDI (Electronic Data Interchange

○ Benefits of EDI
■ Reduction in cycle
■ Increase in transaction visibility
■ Improvement in tracing and tracking materials and products
■ Reduction in number of errors
■ Reduction in transaction costs
■ Increase in speed of payments
■ Improvement in customer service
○ Problems with EDI
■ Initial cost can be expensive
■ Training and education staff is required: costs can be incurred
■ High volume of transactions may be required to justify the expenditure
■ Lack of common EDI standards
■ Data security: EDI system will need protection from cyber attack
■ EDI reduces the supply base: not all members may have or want EDI
■ Legal issues: disputes can occur so all members need clear terms.
RO
■
○ Advantages of ROI
■ ROI encourages managers to focus on both generated profits and the investment required.
■ ROI produces one single measurement
■ ROI can be used to evaluate the relative performance of other investments centres and
companies
○ Issues with ROI
■ ROI calculations can be easily manipulated
■ It is difficult to measure many investment benefits as they may be qualitative
■ Benefits may be affected by other investments and can be difficult to separate out.
○ Disadvantages of RO
■ Many methods for calculating ROI
■ Over simplify a complex decision
■ Purchasing new assets will increase the amount of capital investment and this will affect ROI.
This may delay new investment
■ Practical application of ROI can encounter issues.
■ May cause under investment
 ■ Different account policies can make comparisons difficult.

Early Supplier Involvement

○ Potential advantages of early supplier involvement in the development of a new product;
■ Reduced product development costs
■ Improved performance
■ Higher Return on R&D
■ Faster product development
■ Greater flexibility
■ lower risk
■ Access to product development capabilities of the supplier knowledge of the buyer
○ Advantages of ESI - CIPS
■ Reduced development costs
■ Reduced lead times
■ Improved product functionality
■ Van Echtelt 2004
● Short term benefits - Better production quality, lower production costs, shorter
development cycle and lower development costs.
● Long term benefits - More efficient and effective future collaboration, alignment of
technology strategies
■ Improved access to supplier’s technologies
■ A contribution to product differentiation
○ Disadvantages of ESI
■ Increased dependency
■ Decreased flexibility
■ third main risk is the loss of information
○ Risk;
■ Sharing of skills, etc - potential leaks
■ Financial & time costs
■ Loss of direct control
■ Poor communication within and between organisations due to incompatible systems.
■ Documentation problems
■ Opportunity costs - time and money that could have been spent on another project
■ Trust Issues
■ High risk where a buyer relies on a sole supplier for the development of a core component.
Cross-Functional
■
○ Cross-functional team - advantages
■ Provides different settings
■ Reduce communication barriers
■ Realise synergies by combining individual and functions
■ Time compression; rather than operating with a complex process, cross function can simplify.
○ Cross-functional team - disadvantages
■ High requirements and expectations of the people involved.
■ Run into process loss risk, when gains from teams interactional e less than the costs of
achieving them.
■ Teams often display a group eve bias. Groupthink

Simultaneous Engineering
■
○ Advantages of simultaneous engineering
■ Getting products to marker in a shorter time.
■ Incorporate more features of variety in the product at less cost
■ Producing more new products more often
○ Disadvantages for simultaneous engineering;
■ Lack of in house expertise
■ Lack of training
■ Lack of management support
■ Lack of communication
■ Inadequate reward system
■ improper company culture
Contract Length
■ .
○ Advantages of long term contracts
■ Assurance of supply
■ Lock in agreed price
■ Provide access to supplier technology
■ Suppliers may be more willing to invest in skills or technologies
■ Companies work together to improve processes and reduce waste
■ Lower costs as the guarantee of long term business should encourage suppliers to offer best
value when the contract is sourced
■ Eliminates unnecessary costs of retendering and renegotiating
○ Disadvantages of long term contracts
■ May select wrong supplier
■ Price may become uncompetitive
■ Difficult to exit if the contract has not been correctly drawn up
■ Suppliers may become complacent
■ Limits opportunities for buyers
■ Contracts can be complex and expensive to draft
○ Advantages of short term contracts
■ Less risk when suppliers are underperforming
■ Can encourage competition as there are more tender and renegotiation opportunities so
prices tend to be fair
■ Tender documents do not need to be as detailed
■ Enables buying organisation to re source if there are any problems.
○ Disadvantages of short term contracts
■ Difficult to establish close working relationships
■ Suppliers may not invest in assets specific for the buying company
■ Need to re-tender at regular intervals
■ Not suitable for many strategic items.
Single and Multi-Sourcing
○ Single source and Multiple source:
■ Advantages of Single Source
● Benefit of partnership
● Reduces the risk of opportunistic behaviour by suppliers
● Substantial commitment by the chosen supplier
● Increases supplier innovation and R&D
● Lower purchase prices as a result
● Improves buyers’ bargaining power to reduce costs
● Reduces the effort and admin burden
■ Disadvantage of Single Source
● High Levels of dependence between the buyer and the supplier
● Increases supply vulnerability and Increases the risk of supply interruption
● Remaining competitive is more difficult
■ Advantages of Multiple Sourcing
● There is an alternative source of material
● Reduced probability of bottlenecks and increased competition among suppliers
promotes increase in quality, price, delivery and product.
● Provides greater flexibility and Allows a buyer to meet local sourcing requirements
■ Disadvantages of Multiple Sourcing
● Low volume of business with the buyer may reduce the efforts made by the
supplier
● Results in higher costs
E-Sourcing
○ Advantages of E-Sourcing
■ Enables integrated process automation
■ Can help to simplify analysis and model complex decision in real time
■ Facilitates collaboration with suppliers through central systems
○ Disadvantages of E-Sourcing
■ Can be resistance within in organisations
■ Creation of catalogues is long and costly process for the supplier
■ Increase risk of losing control

Direct Negotiation
○ Benefits of Direct Negotiation:
■ Purchaser has flexibility in terms of choosing the preferred contractor
■ Time And cost savings involved with the removal of the tendering process
■ Can allow early supplier involvement
■ Permits closer relationships
■ More collaborative
■ Flexible with regard to in process changes
○ Disadvantages of Direct Negotiation
■ Few options for the client choose from
■ Cost may be driven up by the lack of competition
■ Heavy reliance on rust
■ If not controlled, the negotiations can become adversarial
■ It more than likely requires a backup plan

Joint Proposition
○ Benefits of joint proposition
■ Joint product development
■ Improvement and innovation as the resources of the buyer and supplier work together to
develop or improve the product.
■ Increased marketing of products
■ Improved delivery
■ SLA developed, agreed and applied for the benefit of both parties
■ Clear and agreed understanding about when improvements would be made
■ D
■ Clearly defined contractual terms on what improvements would be delivered
■ Transparency
○ Risks of joint proposition - Risk mainly relates to relationship breakdown and include the following:
■ maybe difficult to get buy in from the stakeholders
■ It becomes informal, resulting in meetings and actions that not recorded or auctioned
■ Working relationship may breaks down and agreement stop being reached
■ Issues of ownership of IP rights may arise
■ Contract could prove difficult and expensive
■ Relationship may be difficult to manage
■ Price increases, late delivery, reputational damage and loss of profits may occur if the
relationship breaks down.

Shares
■ Advantages of raising finance via a rights issue
● No commitments to meeting fixed-interest payments (in contrast to debt)
■ Disadvantages of raising finance via a rights issue
● Expenses - the share issue process is expensive
● Dilutes ownership and control
● Only suitable for very large amounts
Loans
■ Loans are external sources of finance
■ Advantages of loans
● not repayable on demand, unlike an overdraft
● makes budgeting more straightforward
● does not dilute ownership
● Interest paid on a loan is tax deductible
● Readily available for an established business
● All business profits are retained
■ Disadvantages of loans
● Commits a company to making regular and on-time payments
● Interest rates may vary, unless the loan is at a fixed rate
● Not flexible - a company may find it does not need the full amount but still has to
make payments on the original loan
● Loans may need to be secured against assets
● unsecured loans may have high interest rates
Debentures
■ It is a type of long term loan issued by a trust deed to a business with the promise of a fixed
annual interest payment to the holders of the debenture.
■ Advantages of Debenture
● Owners do not have voting rights
● Payments are classed as expenses
● Provides good long term finance without losing control of the business
■ Disadvantages of Debenture
● Debentures increase the amount of long-term liabilities of an organisation
(gearing), raising the amount of interest payments to the lenders.

Forward Contracts
■ Advantages of forward contracting
● Known exchange rate for the date selected
● Relatively straightforward to set up
● The amount and strike price are very flexible
● Easy to customise
● No upfront payment - settlement is as per settlement date
■ Disadvantages of forward contracting
● Commitment to fulfil the contract at the price and on the agreed date.
● Not regulated and non-clearing house so high degree of default risk in comparison
with future contracts.
● Less easily available to investors than future contracts.
Currency options
■ Advantage of options
● Rate is guaranteed
● no requirement to exercise the options
■ Disadvantages of options
● A premium is payable at the start of the contract
● Money is lost if the option is not exercised.
Internal Benchmarking
●
■ Advantages of internal benchmarking
● Promotes culture of continuous improvements
● Communication is easy as different business units should already have good
communication with their benchmarking partners
● Intra organsiatoinally shared data will typically be more compatible with the
organisational various systems
● As data is shared between different sites, units with the same organisation,
 confidentiality do not typically apply
● Data is all in house
● Information and lessons learned will typically employ the same systems
■ Disadvantages of internal benchmarking
● Foster mediocrity of the organization's best performing business it is not best in
class.
● It can create complacency because the organisations focus is not on competitors
and the wider industry.
● As the frame of reference is solely on existing internal operations, this can limit the
organisations options for growth.
● The actual improvement in performance can be quite low because the difference
between the organization's star performer and the other business unit’s ma no is
very great.
● Can create unhealthy competitive atmosphere between business units
● Internal bias may result in the wrong measures being adopted
● Does not necessarily yield best in class comparisons.
Comparison of competitors
■ Advantages of competitive benchmarking
● It allows an organisation to compare like processes such as its end to end
● It spurs competition and growth
● Enables better understanding of competitors
● Opens the door to possible future partnerships
● It’s a useful tool for planning and setting goals
● It enables organizations to assess different
■ Disadvantages of competitive benchmarking
● Difficult legal issues
● Relatively Low performance improvement
● The data obtained from competitors may be limited by trade secrets
● Competitors may provide misleading or incomplete information
● Direct competitors may see no value in taking part
● Competitors may occupy a certain market position due to a specific USP
● There is a risk that data sharing with competitors could later enable them to
capitalize on any areas of weakness
● May be difficult to identify emerging competitors as they may not be large enough
to be known by the organisation.