A formal procurement process is a systematic step by step exercise that is important to follow to ensure no or little mistakes, and also achieve time saving, ensure the right solution to meet business needs, to also ensure the right price is paid (not necessarily the lowest price!), and lastly not to miss out on important steps that might have serious consequences.
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The company Green Chilly (GC) is a private owned restaurant chain operating in the UK. It runs several restaurants for takeaway meals and for people that will stop and sit down for lunch or during any other time of the day. The company currently have 53 restaurants all over the UK in the major cities and towns, collectively they serve on average 16000 eat down in meals everyday and 23000 customers coming for snacks and drinks which are mostly taken away to eat. Due to the company’s successful growth the restaurant chain is facing certain seasonality problems of staffing issues and over stocking of items due to the UK holiday seasons and the unfavourable variable weather conditions that are influencing customer preferences. The company have communication, information, pricing issues, quality issues and above all no structured procurement process in place.
After offering consultancy services to the company regarding its procurement structure the next stage is developing a well structured procurement strategy for the sourcing of high usage food and non food items that will meet the needs of the company – wide procurement process.
The owner of the company is experienced and has been in the business for a long time, I will be going through the process of sourcing with him and the rest of the staff.
In 1967, the Canadian, American and Israeli marketing researchers, Robinson, Faris and Wind, introduced the buygrid framework as a generic conceptual model for buying processes of organisations. They saw industrial buying not as single events, but as organisational decision-making processes where multiple individuals decide on a purchase. Their framework consists of a matrix of buyclasses and buyphases.
The BUYCLASSES
Buyclasses are:
1. New Tasks
2. Modified Rebuy
3. Straight Rebuy
Based on field research, Robinson, Faris and Wind divided the buyer purchase process into eight sequential, distinct but interrelated BUYPHASES:
Assessment of a company’s current spending: Fully understand the spend category (what is bought, where, at what prices?
Assessment of the supply market (who offers what?).
Total cost analyses (how much does it cost to provide those goods or services?).
Identification of suitable suppliers.
Development of a sourcing strategy (where to purchase, considering demand and supply situations, while minimizing risk and costs).
Negotiation with suppliers (products, service levels, prices, geographical coverage, etc.).
Implementation of new supply structure.
Track results and restart assessment (continuous cycle).
Assessment of a company’s current spending:
Using Green Chilly Company as a case study. Assessment of what is bought by the company in recent time and in comparisons to previous years, from which supplier procurement and sourcing were made and lastly at what price were they bought? Fully understand the spend category at the beginning stage, the sourcing team (including the management and some staff) need to ensure it understands everything about the spend category itself. Identify opportunities, what could be of advantage both food and noon food item, especially for meal production. The following materials are needed directly and indirectly by the company:
Equipment : general restaurant equipment like cooling system, cooking, washing and rinsing, ventilation e.t.c
Components: this includes the good will, style, taste, finishing and services of the company.
Raw material: These are items used in cooking, raw meat, rice, beans, vegetables e.t.c.
Completely finished goods: inventory held for these goods are usually between company and customers. Suppliers supply the goods and services directly with out any form of modification by the company. Goods like treats by restaurants to customers.
Service requirement might include:
Computer programmers: for online ordering, restaurant website creation and maintenance.
Hazardous waste handlers: proper disposing of hazardous waste substances according to safety measures.
Transportation carriers: restaurant trucks maintenance and upgrades.
Maintenance service provider: general maintenance in the restaurant i.e. electrical appliances, assets, environment, bill boards (branding), cleaning e.t.c.
Assessment of the supply market:
The top officials in the sourcing team have re – evaluate the supplier’s market for new potential suppliers. The re – evaluation of suppliers is in two areas: quality and price. A direct comparison is made of existing suppliers against at least three potential suppliers using taste panel. As many suppliers as possible are sought which appear to have a product that is similar to that in question or which have the capabilities to produce such a product. Suppliers could be known to any of the sourcing team members or found through trade journals and directories. Other sources of potential suppliers include trade shows and speculative letters. This process is carried out for both food and non – food item. The volume of purchases to be made could be predicted from past procurements with an analytical assessment of which goods and services moved fast and which were slow movers. For fast movers cycle stock inventory purpose or buffer inventory could be adopted especially for goods and services relevant for the production of meals like rice, meat, baking flour e.t.c. And for slow movers i.e. ice cream machines and raw materials a seasonal stock could be adopted, since ice cream are more consumed in summer and summer breaks, than winter.
Total cost analysis:
How much it costs to procure those goods, the food and non food items. In the past, present and possible future forecast by experts. These recommendations are then passed on to the procurement section of the restaurant that will use them to decide which suppliers should be progressed to the price negotiation stage. The procurement team then request for quotations which are ballpark figures which the team later finalizes (direct comparison on price). It is necessary that the specification is complete, and the expected costs including distribution are a part of this. In this way, the procurement team has knowledge of costing and the taste comparison recommendations before negotiations are entered into.
Identification of suitable supplier
The company should periodically run assessment for seeking alternative suppliers to existing incumbents, a well carried out assessment for both present suppliers and potential suppliers. The company should have an in depth understanding of the supplier marketplace dynamics and current trends (how goods and service are packaged and delivered, alternative products that substitute the present). Prepare a study of the cost components of the product service, and analyze the suppliers’ market place for risks (hazardous goods, or infections especially for food raw materials) and opportunities based on a survey to access the capacity and capability of the market to meet your requirements compared with your present suppliers. It will enable the company to assess whether the present sourcing process is feasible or the best. It shows to gather knowledge in the key areas like:
Feasibility,
Capability
Capacity: how much inventory the supplier can provide for the company’s restaurant chain in the country. If the supplier is able to meet the demand of Green Chilly company.
Maturity
Prices of key raw material and other important variables involved in the procurement process such as labour and transportation must be priced and calculations done of the suppliers’ cost elements referred to as ‘should-cost’ information from the major components of the key products. Take a view on the key suppliers’ sub – tier marketplace, and analyse for risks as well as opportunities. ‘Should cost’ analysis drives reduction in cost and supplier continuous improvement efforts. Although should cost analysis does not work for all item, sometimes traditional strategic sourcing techniques work w ell in cases where should cost doesn’t work well.
Development of a sourcing strategy:
Using a cross functional procumbent team in Green Chilly Copany. Deciding where to buy while minimizing risk and costs is the major factor that determines the development of the strategic sourcing strategy. The strategy would depend largely on the alternatives available to the current suppliers, and also how competitive the supplier market is. In addition how open the users are to new suppliers.
This process depends on some factors like:
How competitive the supplier marketplace is:
How supportive your organisation’s users are to testing incumbent supplier relationships
What alternatives exist to competitive assessment:
If the supplier have well developed systems for planning material, personnel, and capacity needs
Does the supplier track key performance measures, such as throughput time, quality levels, and cost?
How easy is it for customers to interact with the supplier’s planning and control systems?
The next step is to determine the sourcing process; the most common method of sourcing is to use a request for proposal process for soliciting bids (RFP, RFQs, eRFQs, ITTs). This will define and make clear the requirements to all prequalified suppliers. It Includes product or service specifications, delivery and service requirements, pricing breakdown and legal and financial terms and conditions. When all these messages are all been passed out, ensuring all suppliers the competition is on a level played field, a follow up message should also be sent out to encourage a greater response.
Negotiation with suppliers
In this stage the selection and negotiation with suppliers is carried out based on the products, service levels, prices, quality, delivery, geographical coverage and additional benefits. In respect to products been bided for, suppliers must meet delivery, price, quality and purposes of inventory meaning the quantity required by Green Chilly Company. The supplier must be able to meet the demands of the company based on the volume forecasting of the company which In the case of Green Chill Company, all the bids should be related to food and non food items (i.e. food stuffs like meat, rice, vegetables, provisions e.t.c. non food like cooking, cleaning, dinning equipments) the process of procurement is different for each item. Could be buffer or safety stock for rice, cycle stock for vegetables and meat, in transit inventory for items like chop stick, seasonal stuck for goods like ice cream, during summer or heaters during winter e.t.c.
The price and quality of goods, both food and non food items most be regulated across all Green Chill chain of restaurants in the country. Geographical coverage is of high essence to Green Chill Company because of the company’s chain of restaurants. The procurement team should apply its evaluation criteria to supplier responses. From this process the GC procurement team will be able to then narrow down to a few finalists. The few finalists should be compared together with the senior executives involved to give their final approval and a final supplier should be selected. The senior executives should be totally briefed so as to prepare them for calls from disappointed suppliers.
Implementation of new supply structure:
After a proper new structure as been formulated, the winning or successful suppliers should be notified and they should be invited to participate in implementing process and recommendations. Green Chilly Company’s new structural process should also be communicated to all staff and users to bridge the communication gaps and problems in the company. Implementation plans vary depending on the degree of changes. The communication plan in the strategic sourcing strategy will majorly comprise of any improvement to specifications or process, changes in delivery (lead time) service requirements (inventory management) or pricing (major changes in the prices of goods both non – food and food item) should be communicated in the process of implementing the new process.
For old suppliers coming back to be winners there will be communication changes in specifications, improvements in delivery, and service or pricing models based on what they do before compared with the new structure. In the case of new suppliers a communication plan has to be developed that will supervise the transition from old to new at every point in the process that is touched by the structural change. i.e department of finance and customer services affected by this change, and the risk supervision will be particularly sensitive during this period, due to their vulnerability to mistakes. It is necessary to measure closely the new supplier’s performance during the first weeks of performance.
It is also important to capture the intellectual capital GC sourcing team has developed during the seven-step process so it can be used the next time that category is sourced.
Track results and restart assessment (continuous cycle):
This is a major aspect of the whole sourcing management process carried out by the Green Chilly Company. It is the start of a continuous cycle, starting with benchmarking the current status of the commodity or category, monitoring the results and ensuring that full value is being achieved.
Conclusion
After spending time planning all the processes of procurement, the roles and responsibilities of each member of the procurement team must be well established. The procurement process is reviewed and communicated to all parties involved including staff of GC.
Given the market Green Chilly chain of restaurants is which is in the United Kingdom. A central distribution system would be of an advantage and feasible. With a central distribution goods and services could be distributed in 4 to 5hours drive to all corners of the UK. With the procurement process listed above putting in mind central location (Birmingham) criteria for suppliers bidding for contracts. Inventories are mostly head in goods in transit, raw material and finished goods in a restaurant. It is safer to run a safety stock for some products in the restaurant and a seasonal stock for some other stock like ice cream ingredients. The main goal is to have a reliable supplier with low price considerations and Just in time deliveries (JIT).
Section 1 (2299 words)
Reference
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Chapter 3, Sourcing Strategies to Manage Supply Distributions, by: Amanda J. Schmitt and Brain Tomlin.Pages [51 to 60]. [Online]. Available from: http://0-link.springer.com.pugwash.lib.warwick.ac.uk/content/pdf/10.1007%2F978-0-85729-778-5_3 [Accessed 6th December 2012].
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SUPPLIER SELECTION
Contents
SUPPLIER SELECTION
Question 2
Introduction
Nowadays the costs and effect of purchasing raw materials, goods and services from suppliers are very important. Majority of the costs incurred by a company are usually procurements of components and materials for production. This shows how important decision of purchasing activity is. The procurement process usually determines the final cost of a product. Among the decisions related to this activity, supplier selection is most capital decision (Nydick and Hill, 1992) and (Mobolurin, 1995). Supplier selection is the most important decision in the procurement process.
Given the market Green Chilly Company is in, the decision making process should be well defined and laid out. Based on the Decision – making process (selection of supplier): raw material inventory (food stuffs like meat, vegetables, perishables e.t.c) seasonal stock, safety stock, speculative stock, cycle stock. Monetary influence and non monetary influence criteria affecting the choice of supplier. Also the risks: both influences and external factors should be well examined. There are so many factors to go through in deciding who to buy from, what to buy and what quantity, how to carry out the procurement process, where and for what purpose for inventory.
Supplier selection for Baking Flour
Baking flour is an essential product in the life operation of a restaurant all round the business year. Used in the production of meals.
Using structural role analysis;
In respect of the simplistic of the BUYGRID framework, structural role analysis can also be used in reaching a structural frame work for the sourcing and procurement process for the company. This technique allows each task in the buying procedure to be related to the individual (procurement team) responsible for decision making and is more flexible in the description of the buying procedures in the company for baking flour. In this way, it is easier and possible to include explicitly factors affecting the decision making process in selecting a supplier, these factors includes:
Social and cultural factors: the cultural differences or social influences on the level of purchases made on some products have to be monitored for the sake of improvement and how to do better on such goods. Since the restaurant chain is different area of UK, with diverse social and cultural differences. This should be put into consideration and monitored.
Political and economical factors: factors like political instabilities, strikes (restaurant union), lock outs, Quotas/ import quotas, Exchange rate fluctuation for goods and services imported, regulations ad restrictions concerning products and designs, application and usage. Laws governing goods and services used in restaurants and also the restaurants in the country. For the supplier of baking flour, some types of flour might be banned in the UK, or importation restricted.
Technological factors: technology advances in the restaurant market, provides new opportunities for storage and distribution of goods and services. Suppliers have to upgrade to meet up with present trends in the market.
Industrial factors: there are mandatory compliance under a variety of industrial acts, affecting suppliers and restaurants concerning some issues like environmental protection, health, safety, and consumer protection laws e.t.c affecting the selection of suppliers.
Organizational: this is from both the buyer and the supplier. Organizational set up of the two parties must be examined.
Environmental/ External factors: there are environment laws guiding the type of pollution and amount acceptable in a particular area. Disposing of hazardous components is essential.
Risks: the potential risk of a supplier defaulting. Adequate contingency plans should be put in place. In the case the supplier contaminates the goods, because restaurants raw material is very sensitive.
Monetary and non monetary factors: the price of goods and services supplied plus distribution is the main factor considered by the buyers. Price drives the purpose for seeking for new suppliers. There are non – monetary factors like the good will of the supplier or the supplier is the sole supplier of such product. The lead time on some goods is also crucial to the delivery of such goods and services.
The above factors throw light on the cause and effect of specific actions during the decision – making process.
Structural role analysis links personnel structures with the roles and tasks that are carried out. In this way the constructed model gives a clear indication concerning who is responsible for which tasks. This is well illustrated by structural role analysis since the effects on the buying behaviour in terms of the individuals that carry out specific tasks and the order in which they are carried out are exact. These individuals are all part of the procurement team (includes managers, commercial director, operations director and marketing director, site catering managers). Structural role analysis requires the identification of key decision makers and the intentions between individuals in the decision – making unit.
To illustrate the use of structural role theory, we should consider the case study of Green chilly company. We should start by displaying the roles of the buying centre (procurement team) of the company’s restaurant chain, for example a straight rebuy. A straight rebuy is a routine repurchase that may have been made many times before. In this case study on Green Chilly Company, let’s pick a straight rebuy for baking flour. A policy of central procurement is followed. Distribution is carried out from the central depot through a specialist distribution company. The distribution company delivers to all restaurants in three to four days per week all over the UK branches.
Each member of the procurement team is briefed and assigned a role (buyer and assistant buyer). In this case of repurchasing baking powder on a straight rebuy process re-evaluation is undertaken before reordering with the same supplier. The re-evaluation of suppliers is going to be carried out in four areas:
Quality: the quality of products supplied is very essential to the services and goods rendered by the company. Better quality supplies lead to better goods and services produced.
Price: the price of goods and service supplied directly affects the selling price. This includes the distribution costs as well.
Service : the packaging and technology advances of the supplier is very paramount to the procurement process
Delivery: just in time delivery (JIT) is very important, especially in a restaurant running all through the week. For a product like baking flour cycle stock or buffer stocking should b implemented to prevent shortages.
A direct comparison is made of existing supplier and against at least three potential suppliers based on the areas above using a taste panel. As many suppliers as possible are sought which appear to specialize in baking flour products with capabilities to produce such a product.
The following steps are carried out:
Seeking of potential suppliers
Direct comparison on quality
Direct comparison on price
Direct comparison on service
Direct comparison on delivery time
Decision/ choice of selected supplier
Seeking of potential suppliers:
Potential suppliers are either already known to the procurement team of the company, or found through trade journals and directories. Other sources of potential suppliers include trade shows and speculative letters. Therefore, there is a pool of suppliers for baking flour from whom to choose as well as active search for new suppliers. The information needs to be readily available to all potential suppliers with a tight specification on the product and with a rough price built into the brief. All suppliers of baking flour need to match the product to these specifications, including quality, delivery time, price and services rendered. The procurement team acts as a forum for discussion and also to make decisions on what quotas to give in terms of quality, price, delivery time and services.
Direct comparison on quality:
In this process all products from all suppliers are all tasted blind and this side – by – side comparison is the key evaluation on the quality aspect. The procurement team makes the decision in terms of taste, texture and colour, and then makes recommendations about which products should be considered further, based on the result of the tasting and recipe compilation. This information is now passed to the leader of the procurement team leader and member who now decided which suppliers should be progressed to the price negotiation stage.
Direct comparison on price:
These are ballpark figures which the team later finalizes. It is necessary that the specification is complete, and the expected costs including distribution of baking flour are well detailed. In this way the procurement team has knowledge of all price quotations of all suppliers and taste comparison recommendation.
Direct comparison on service:
A detailed weighted point method is used to categories each suppliers based on their pat performances in rendering their services with GC or with other companies.
Direct comparison on delivery time
Based on past jobs for GC or other companies, the supplier with the best just in time (JIT) delivery stands better chance of getting contracts from the company.
Non-monetary criteria
Non – monetary criteria includes lead time of some goods and services, good will enjoyed by some suppliers from their clients. There are ways to make decisions just based on abilities not just on monetary basis. A weighted point method is a good example to illustrate this point:
Weighted point method
This method is based on a non monetary criteria evaluation. Not all criteria and decision can be measured in monetary terms, as no market value exists for some criteria. In this method Green Chilly Company we consider the non – monetary costs and benefits associated with each of the identified factors.
Based on the factors for considerations in choosing a supplier, a well weighted point method could also be used. Starting with quality and delivery with the weight of 40 and 30 respectively, quality problems are the biggest problems in supplier performance. Next to quality problems is late delivery with a weight of 30. Followed by price differentials with weight 20, then lastly service with weight 10. All these factors are measured on a scare of 1 to 5, worst performances equated to 1 and best performances equated to 5. In this sample method, three suppliers were selected based on their performances and measure against the factors.
SAMPLE SUPPLY MODEL FOR BAKING FLOUR (Figure 1)
Supplier A rating
Supplier A score
Supplier B rating
Supplier B score
Supplier C rating
Supplier C score
Factor
Weight
How Measured
Quality
40
1 = Worst
5 = Best
(3/5)x40
24
(4/5)x40
32
(3/5)x40
24
Delivery
30
1 = Worst
5 = Best
(4/5) x 30
24
(4/5)x30
24
(3/5)x30
18
Price
20
1 = Worst
5 = Best
(2/5) x 20
8
(5/5)x20
20
(2/5)x20
8
Service
10
Good = 100%
Fair = 70%
Poor = 40%
.7 x 10
7
1.0 x 10
10
.7 x 10
7
Total Points
100
63
86
57
Based on the figure 1 example supplier A has a rating of 3/5 in quality and a total score of 24, 4/5 in delivery and a total score of 24, 2/5 in price and a total score of 8, finally a 70% rating on services render. Supplier B on the other hand scored higher than both supplier A and B, with a total score of 86, scoring higher than supplier A in all levels except delivery with equal level. Supplier C is the worst of all suppliers. So supplier B is the best suited for this purchase of baking flour, and should be awarded the contract.
The above developed weightings for criterion dependent on assessment of how important each criterion factors are to the success of selecting supplier C for the supply of baking flour and the impact it will have on the company’s activities could as well be measured.
Decision/ choice of selected supplier:
All these factors enables the procurement team to make decision regarding the suitability of suppliers to fit into the current portfolio of products and prices, since the overall budget is the responsibility of the procurement team, they reach the final agreement on wish supplier to pick based on the budget and delivery process across the country for baking flour.
Once those suppliers with acceptable products and services have been identified for the supply of baking flour, the procurement team will meet them in order to discuss the prices and volumes under consideration for the product (baking flour). A few suppliers are retained to this stage so that there is a choice from the procurement team’s perspective, and also in the case the chosen supplier starts to under perform. Price is dependent on volume, so both aspects are discussed in tandem. The volumes required for a new product are an educated guess. However, a replacement product has known volume which is traded. The volumes are used as guide in negotiations but are never guaranteed to a su
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