Pacific case

Purchasing

INTM 543

Pacific Systems Corporation Case

Instructor: Prof Herbert Shields

By,

Jose Sosa – A20313080

Niket Panchal –A20365666

Billy McFarland – A20078959

Ismail Bouaida –A20387720

Prateek Mishra – A20381901

Questions

Que. 1: What is your recommended sourcing strategy in this case? Please support your decision with quantitative and qualitative evidence gathered during the case analysis. Also, present your plan to reduce any risks associated with your sourcing decision. Pacific Systems can single source their DVD drives and try to build a good relationship with the supplier. DVD’s are new in market and not only computer industry but also other electronic industries are looking forward for this product. For uninterrupted supply, leverage the Just in time, it will be better to have a single supplier with a long term contract. Sourcing strategy is a practical approach to collect data and to use it to find the best possible values in the market. As a quantitative analysis, we placed all 4 suppliers with their offering under the below drawn table

Detailed analysis of above data, we came to conclusion that E-drive Systems is the best supplier choice according to our requirements. E-drive commits excellent on time delivery performance stands them out from other suppliers. E – Drive Systems meets the highest quality metric of 99.5% with on time delivery and with facility capacity that enable a lead time of 2 weeks. Even though their Quote unit price is a bit higher compared with other two suppliers but their local presence is given priority over the price because as in some cases Low price does not guarantee success. Plan to reduce risk in sourcing decision: The biggest step to reduce risks in supply to show belief on your supplier and make him understood that we are with you and will do a great business together, this faith will increase supplier’s confidence and they will try to exceed its limits. Other than this we can work with our supplier and can do the cross functional risk planning for such situations. A demand/supply forecast will also help to understand supplier’s capability and whether supplier can cop up with us if at times demands exceed their limits and according to that we can plan our financials for the situations where we might have to face situations like customer penalties. Reference- https://scm.ncsu.edu/scm-articles/article/risk-reduction-mechanisms-a-managerial-framework-for-reducing-the-impact-of

Factors Elecom Sure Tech E-drive Park

Quoted price(per unit)

$127 $144 $140 $132

Delivery Lead time 8 weeks 3 weeks 2 weeks 10 weeks

Supplier Quality 9500 PPM defects

10,500 PPM defects

7500 PPM defects

4000 PPM defects

On time delivery record

95% 97% 99.5% 99%

Tooling cost $2.73 $3.18 $2.95 $1.20

Frequency of Shipment

Monthly Weekly Every other day

Monthly

Ramp up time 4 months 5 months 4 months 4 months

Denomination of Contract

Yen Dollars Dollars Dollars

https://scm.ncsu.edu/scm-articles/article/risk-reduction-mechanisms-a-managerial-framework-for-reducing-the-impact-of

https://scm.ncsu.edu/scm-articles/article/risk-reduction-mechanisms-a-managerial-framework-for-reducing-the-impact-of

Que. 2: This case provided the data necessary to perform a cursory supplier financial analysis. In reality, cross-functional sourcing teams must often obtain this data during their assessment of potential suppliers. Discuss possible sources of supplier financial information. What may impact a purchaser's ability to obtain supplier financial data? Our case provides us with all the required data to do a financial analysis [Appendix-3], but every time the case will not be the same.

There are number of websites which provides companies financial standings, such kind of databases are rich sources for collecting data.

Purchasers can refer to eclectic companies with whom suppliers had worked or working and ask for performance review.

Buyer can refer B2B resources which are a good source of information for such situations. With all above solutions purchasers should try to maximize their reach and look for as many

sources as possible to gather information about supplier with whom they are looking forward for a deal

The most critical factor which affects a purchaser’s capability to obtain supplier’s financial data is the kind of relationship they have. If Purchaser has good terms with supplier they can work on the things which suppliers usually do not prefer like sharing (Financial Data).

Que. 3: A sourcing decision of the magnitude highlighted in this case requires a serious commitment of resources and time. Do all sourcing decisions require similar commitments of time and effort? If not, describe the types of sourcing decisions that justify this effort. Describe the types of sourcing decisions that do not justify or require the level of effort and analysis required in this case. We feel that not all sourcing decisions require similar commitments of time and effort due to the variety of suppliers that are available locally and globally. Something like a DVD drive and monitors or printed circuit boards that are key components to the finished product do take more time and resources to procure. You have to take into account if they are financially stable to supply consistent high quality and reliable material with zero defects. A company whose strategic goals match closely what you intend to do usually helps in building a long term relationship in which it is mutually beneficial. The type of sourcing for this company that does not justify the level of effort and analysis are fasteners for the computer, poly bags to keep the product protected from dust or one time buys that are not critical to the end user.

Que. 4: How important is the issue of supplier capacity in this case? How did your group evaluate supplier capacity? What level of attention or importance should supplier capacity receive during the sourcing decision? Why? This is a booming market and is on the verge of increasing demand due to the revitalized economy and end of the recession. Technology is a big area that quickly changes either in demand or innovation. We need a supplier that has the capacity not only to source spikes in demand but have capacity to take on new projects and prototypes. They need to be stable enough to absorb increase in demand or a new

product line that will need a quick response to be able to capitalize and gain market share. If a supplier does not have capacity then they do not have the type of structure we are looking for to grow which plays a big part in our decision, regardless if they can supply, we are losing out of potential customers due to not having enough DVD drives to build our PC’s. There should be a high level of importance when reviewing the supplier and deciding who to source from.

Que. 5: Supplier selection decisions, such as the one presented in this case, usually require many weeks or months of analysis and discussion before reaching final agreement with a supplier(s). Creatively identify ways that the buying company can shorten the time from recognition of a purchase need to reaching agreement with the selected supplier. (Hint: Consider performing certain required activities concurrently or in anticipation of a purchase requirement). This is also necessary due to the time to market we are looking to achieve, in order for our supplier to be ready to ramp up and give us a full shipment by July in order for us to start production on the 55,000 units forecasted to be sold in August launch is critical. While a team is working on negotiating the price and contract for the units, an engineering team has to work on getting a prototype approved for production and see what materials are required to manufacture that DVD drive. What type of metal should be used what type of characteristics does the DVD need, what type of speed and capabilities? How well is the supply chain back up to our vendor’s suppliers? Are the components able to be sourced or will there be issues that can cause a shortage. This can all happen prior to a purchase requirement being agreed upon. This is why the price of the unit can change, it can get pricier or it can get cheaper but the work must be done concurrent to the negotiation and bidding of each supplier.

Que. 6: The issue of single versus multiple sourcing is an important consideration during supplier selection. Using the following table, identify the potential advantages and disadvantages of single and multiple sourcing (not only as they relate to this case).

Single Sourcing:

Potential Advantages

1).Sole sourcing helps

in optimizing the

company’s supply

chain.

2).Lower production

cost and product

better value for

shareholders and

customers.

3). Downtime and

inefficiencies caused

by interoperability

issues can be reduced.

Single Sourcing:

Potential Disadvantages

1). Greater power to

the supplier

2). Failure of supplier

may cause a total

shutdown to our

production, and as a

result our customer

service may suffer very

badly.

3). Supplier may not

cop-up sudden spike or

decline in the demand.

Multiple Sourcing:


1). Drives up

competition within the

supplier base.

2). Drives down prices.

3).Display your

company’s interest and

commitment to the

economic growth of

your community.

Multiple Sourcing:


1). Different suppliers

need to be managed

and monitored. A

critical job for

purchasing people.

2). Low cost cannot be

leveraged as there is

no economies of scale

in production for your

suppliers.

Sources: https://scm.ncsu.edu/scm-articles/article/benefits-and-risks-of-single-sourcing

https://scm.ncsu.edu/scm-articles/article/benefits-and-risks-of-single-sourcing

Case requirements

Que. 1: Develop a process that provides a logical order evaluating the market data and reach recommendations regarding how to proceed with the supplier selection process. Present this process in the form of a flow chart with key decisions points clearly identified. The flow chart shows the necessary sequential steps to be performed for making decisions through the

supplier selection process. We’ve identified 7 key steps of decisions making.

I. Develop a cross-functional team: Cross-functional team can generate better results in

identifying and analyzing the market data. For planning the whole process and determining the

scope of project, cross-functional team can be very helpful.

II. Supplier market research and Supplier preferencing: Based on our product specification and

requirements, an initial RFI can be sent to different suppliers in the same market niche. Supplier

preferencing is basically placing the product and supplier in purchasing criticality matrix to add

better visibility in supplier selection process.

III. Solicit supplier’s info. (Bid): Based on the suppliers’ willingness and response to RFI and RFQ, a

very few supplier can be selected for bidding process (Request for proposal). Where the precise

drawing and specification are submitted to short-listed suppliers. Detailed information is

requested on payment and Inco-terms from suppliers.

IV. Conduct the thorough evaluation: There’re some techniques like AHP (Analytical hierarchy

process) and DCA (Discrete choice analysis), where suppliers’ attributes can be pair wise

compared to make the decision. These processes helps to understand what proportion of

business should be offered to a specific supplier based on its capacity analysis.

V. Contract negotiation with selected suppliers: Based on the analysis conducted, negotiation can

be done with selected suppliers. Payment terms, Inco-terms, Quality, Quantity, Delivery window

can be negotiated.

VI. Final supplier selection, monitoring and feedback: Based on the negotiation, best supplier(s)

can be selected for contract. After selecting the supplier(s), continuous monitoring of

performance is very important. Supplier relationship management (supplier reward and score-

card) plays an important role for maintaining long-term strategic relations.

Que. 2: perform the analyses designed to support the supplier evaluation and selection decisions.

Financial Risk Analysis (Que. 3)

Selected Financial Ratios

Elecom

SureTech

E-Drive

Park

Asset Utilization:

Asset Turnover =

Sales/Assets

1.32

1.57

1.64

1.38

Inventory Turnover = Cost

of Sales/Average

Inventory

5.20

5.43

9.06

7.005

Receivable days= Account

receivable/Sales *365

49.92

29.86

60.30

47.00

Payable Days = Accounts

payable/Sales *365

29.53

49.77

35.70

33.67

Capitalization:

Leverage = Assets/Equity 2.58

2.03

2.28

2.10

Return on Equity = Net

Income/Equity = Profit

Margin X ATO X Leverage

0.065

0.217

0.168

0.099

Long-term Debt to Equity =

Long-term Debt/Equity

0.649

0.318

0.39

0.35

Long-term Debt to Assets

= Long-term Debt/Assets

0.251

0.157

0.172

0.168

Current Ratio = Current

Assets/Current Liabilities

1.21

1.338

1.348

1.129

Quick Ratio = (Cash +

Short-term Inventory +

Accounts Receivable)/

Current Liabilities

0.62

0.73

1.05

0.74

EBIT Coverage = Earnings

Before Interest and

Taxes/Interest Expenses

0.75

5.46

2.62

1.85

Profitability Ratios:

Profit Margin = Net

Income/Sales

0.019

0.068

0.045

0.034

Conclusion and Interpretations:

E-drive does have a good inventory turnover ratio. In more, a company’s Asset turnover is also

good. Company has good payment terms for their customers. On the other hand, company has

moderate profit margin and return on equity.

Elecom has poor Asset turnover in compared to other suppliers. His ability of quickly paying to

his suppliers indicates its financial strength. Lacks in the profit margin and return on equity.

Low long term debt to equity in case of Park technologies confirms that company will perform

well financially in future as they don’t have long-term loans. Company’s financial strength in

foreseeable future is very important in deciding long-term strategies.

In short, suppliers’ long-term, &short –term debt, equity, profit margin and return on

investments are the factors need to be considered for deciding long-term business partner.

Que. 4: Total Cost Analysis. Identify the relevant additional costs beyond the unit price for each supplier. Calculate the estimated per unit total cost from each supplier for year one. The forecasted demand of 9000x is 500,000 units for the first year (Aug. 2003-july 2004). As demand of

DVD drive is dependant over the product 9000x, we referenced 500,000 units of DVD drive, for

calculating the estimated unit total cost from each supplier for year one.

For simplification, we’ve shown the equation for finding out tooling cost and cost of non-conformance

per unit for first year.

Tooling cost per unit for first year =[{ Total cost of tooling (2-year contract)* total demand of

DVD drive for 2 years (forecasted)}/demand of DVD drive for 1st year (forecasted)]…Eq.4.1

Quality non-conformance cost per unit for first year= [defects per million*300], where $300 is

cost of non-conformance that Pacific system may end-up bearing…Eq.4.2

Carrying cost calculation:

For domestic suppliers: Safety stock= 2 weeks, 2*9615(Stock of one week) =19,230 Units

Carrying cost per unit for domestic supplier = [{19,230 Units*Unit price*18}/ {100*500,000}]

For International suppliers: Safety stock = 4.28 weeks, 4.28*9615= 39,440 Units.

Carrying cost per unit for international supplier = [{39,440 units*Unit price*18}/ {100*500,000}]

Cost Category

Elecom

SureTech

E-Drive

Park

Quoted Unit Price

$127

$144

$140

$132

Transportation

18

6

14

18

Tooling (Based on Eq.4.1)

2.73

3.18

2.95

2.5

Quality non-conformance

costs(Based on Eq.4.2)

(9500/100000

0) *300=2.85

(10,500/1000

000)

*300=3.15

(7500/100000

0) *300=2.25

(4000/100000

0) *300=1.20

Duties/customs, insurance, and

tariffs

11.50

1.50

3.00

13

Inventory safety stock carrying

charges:

1.80

0.996

0.97

1.87

Ordering, inbound receiving and

inspection costs

4.5

4

3.25

2.25

Estimated Per Unit Total Cost

$168.38

$162.83

$166.42

$170.82

Conclusions and Comments:

Even though Sure Tech has very small market share and less experience, they are offering the

lowest price from all 4 suppliers.

The expected unit price of DVD drive should be in the range of $125-150 according to the Pacific

corporation. Knowing the fact that Sure Tech is a small supplier trying to expand its market

share, Pacific corp. can have better price deal with Sure Tech. Yet, their ability to respond the

spike in demand is questionable.

E-Drive has second best offering. They are domestic supplier and have obtained a good market

share. They also could be a potential supplier from cost perspective.

Que. 5: Supplier Evaluation and Selection Analysis. Using the GE Scorecard as a model, create and complete a scorecard for your each supplier.

The GE Scorecard for all different 4 suppliers is drawn as below. Based on the final score, we narrowed

our supplier selection process on E-Drive Systems. We considered total 8 different categories. Then

subdivided the categories in sub-categories and assign the weight to each sub-category.

Supplier: ELECOM

Category Total/Sub

Weight Weighted

Score Sub-total

Quality performance 20 12,75

Total quality commitment 11 8,25

Defect performance (PPM) 9 4,5

Financial condition 10 2

Asset turnover 4 0,8

Debt structure 4 0,8

Profitability 2 0,4

Process capability 15 7

Research and development 5 3

Volume capacity 5 1

Process innovation 5 3

Management capability 10 8

Labor relations 5 3

Management and personal 5 5

Delivery performance 20 8,2

Performance to promise 7 4,2

Lead time 6 1,2

Responsiveness 7 2,8

Total costs 20 18

Costs competitiveness 10 10

Cost control 5 3

Flexibility 5 5

EDI 3 3

Others risks 2 0,6

Exchanges rates 1 0,2

Country security 1 0,4

TOTAL 59,55

Supplier: Sure Tech

Category Total/Sub

Weight Weighted

Score Sub-total

Quality performance 20 16

Total quality commitment 11 13,75


Financial condition 10 6,8

Asset turnover 4 4


Profitability 2 1,2



Volume capacity 5 2



Labor relations 5 5




Lead time 6 6


Total costs 20 7


Cost control 5 3

Flexibility 5 2

EDI 3 0,6

Others risks 2 2

Exchanges rates 1 1

Country security 1 1

Total

68,2

Supplier: E-Drive

Category Total/Sub

Weight Weighted

Score Sub-total


Total quality commitment 11 11


Financial condition 10 6



Profitability 2 1,2



Volume capacity 5 2



Labor relations 5 3


Delivery performance 20 20

Performance to promise 7 7

Lead time 6 6

Responsiveness 7 7

Total costs 20 12


Cost control 5 3

Flexibility 5 3

EDI 3 0,6

Others risks 2 2

Exchanges rates 1 1

Country security 1 1

Total

71,1

Supplier: Park Technologies.

Category Total/Sub

Weight Weighted

Score Sub-total


Total quality commitment 11 11


Financial condition 10 7,6



Profitability 2 1,2



Volume capacity 5 4



Labor relations 5 4




Lead time 6 1,2


Total costs 20 12


Cost control 5 2

Flexibility 5 2

EDI 3 0,6 0,6

Others risks 2 1,6

Exchanges rates 1 1

Country security 1 0,6

TOTAL 70,85

Que. 6: Sourcing risk Management plan. 1).identify the potential risks associated with a sourcing decision, 2) assess the possible magnitude of each risk to operations, and 3) identify ways to manage or reduce risk exposure. Sourcing Risk Management Plan Supplier: E-Drive Systems.

Potential Concern Area

Risk or Concern Risk Reduction Plan

Management Capability

Internal communication between the production and quality departments

Product were shipped to the buyer, having quality issues in past.

Measure, manage and monitor improvements in all departments.

Understand the value of the team reports to the organization.

Show executive management the impact of improvements on the organization’s bottom line.

Delivery Performance

E – Drive Systems commits the highest on-time delivery (95%) with a very short lead time (2 weeks) and best quality.

Continuous monitoring metric must be established and shared between both parties.

Quality Performance

Quality = 7,500 PPM Defects Establish a Critical to Quality characteristics check list.

Process Capability

Lapse in monitoring control limits Establish Lean six Sigma into all processes Utilization of Statistical Process Controls

Capacity E – Drive Systems operates nearly at full capacity (96%). Scale of our growth may exceed their ability to meet our future needs.

Develop a long-term relationship with Sure Tech – Young company that has potential to grow with us and leads in technology.

Cost Transportation cost are high in regards to locality (10 miles)

PCS - controls its own transportation. Establish a new

shows inefficiency in logistics

Inventory cost is a concern $165,000,000 at 18% inventory per unit.

rate negotiated prior to purchase.

Lock down date to enact JIT delivery and mitigate inventory levels required.

Technical Ability E- Drive Systems states that it will work with company in future product development.

Collaboration between both companies R & D departments with transparent goals and technical capacity.

Logistics None ----- ---- --- ---- --- ---- --

Financial Issues Cost of inventory – Total current Liabilities – Long Term Debt

Constant monitoring of balance sheet. Nurture relationships with other suppliers to be agile.

Other Commercial Issues

None

Sources: http://www.talentalign.com/it-hrknowledge-base/capability-managementcapability-index/ https://www.moresteam.com/resources/metrics.cfm https://www.isixsigma.com/tools-templates/capability-indices-process-capability/competently-use- capability-analysis/

Que. 7: The issue of short versus long-term contracts is also an important consideration during supplier selection. Using the following table, identify the potential advantages and disadvantages of short and long-term contracts.

Short-Term Contracts:


1). Greater flexibility in

terms of taking

advantage of

advancement of

technology from other

emerging and potential

suppliers.

2). It drives

competitiveness for

the supplier base. They

try to enhance their

Short-Term Contracts:


1). Supplier may not

be able to offer good

price because of the

uncertainty of future

business and income

stream.

2). Less likely the

suppliers are to

commit their capital

for design, build and

finance the special

Longer-Term Contracts:


1).Suppliers can be

involved during early

product development

process to get the cost-

reduction suggestions.

2). Strong relations

with supplier help

during spike and

decline of demand in

the market. Supplier

remains flexible in this

Longer-Term Contracts:


1). Supplier volume

uncertainty.

2).Selection of wrong

supplier.

3).Supplier volume

uncertainty

4).Buyer is

unreasonable.

http://www.talentalign.com/it-hrknowledge-base/capability-managementcapability-index/

https://www.moresteam.com/resources/metrics.cfm

https://www.isixsigma.com/tools-templates/capability-indices-process-capability/competently-use-%20%20capability-analysis/

https://www.isixsigma.com/tools-templates/capability-indices-process-capability/competently-use-%20%20capability-analysis/

own performance for

getting future

business.

demands of buyer.

3). It takes time and

effort to analyze and

evaluate different

suppliers. Increases

administration cost for

buyer.

4). Supplier

relationship

management and

vendor development

process cannot be

executed properly.

case.

3).Continuous

improvement. Joint

ventures and JIT can be

implemented.

4). Optimized and

streamlined supply

chain.

Sources: http://www2.westsussex.gov.uk/ds/cttee/ses/ses060711i6b.pdf Purchasing and Supply Chain management book by Robert M. Monczka, Robert B Handfield.

Que. 8: Consider the following statement: Supplier evaluation and selection, which is really a process of risk management, is one of the most important activities performed today. If your group agrees with part or all of this statement, provide arguments and evidence as to why your group agrees. If your group disagrees, provide arguments and evidences as to why your group disagrees. Our group agrees with the statement that supplier evaluation and selection; a process of risk management that is most important activities performed today. As we know this ear is of Globalization. To leverage the cheap labor, many buyers have started looking forward in developing nations for cheap suppliers to remain competitive in the market. Suppliers from country like china, India, Indonesia have gone globally, and it became impossible to compete in price by American suppliers in the same market. On the dark side, because of the longer lead time, sourcing the material internationally is uncertain inherently. There, the supplier risk management comes into the picture. Buyer prepares contingency plan (risk mitigation plan). They assume bearing the calculated risk and prepare risk mitigation techniques. All the multi-national companies, who do have global suppliers, have developed these risk mitigation techniques with time. And thus we believe that it is very common business practice now in the field of supply chain.

Que. 9: Instead of conducting evaluations through formal assessment, some firms rely on product samples as a means to validate supplier capability. What are the risks associated with relying only on supplier samples when making a supplier selection decision? How can a company minimize this risk? Relying on mere sampling may not be as accurate as formal assessment, for validating supplier capability. Samples may only indicate the quality.

http://www2.westsussex.gov.uk/ds/cttee/ses/ses060711i6b.pdf

Furthermore, Supplier samples do not provide holistic approach of supplier selection process. Only quality of products can be determined. In the absence of suppliers’ major attributes like delivery performance, payment terms, capacity utilization, Inco-terms, contractual agreement should not be done. To minimize such risks, a company should have cross-functional team, who can do the systematic analysis of gathered market information. Based on the DCA (Discrete choice analysis) and AHP (Analytical hierarchy process) techniques, a company can do the pair wise comparison of 2 suppliers at a time over the different attributes. After that, a company can narrow their choice down to filtered supplier for final negotiation. A visit of supplier’s company is very significant. Considering all these factors company can minimize such risks.

Pacific case

Documents

Transcript of Pacific case