Procurement Management | Dr.

Nguyen Van Hop

HOMEWORK 1 – GROUP 8
Members:
1. Cao Thị Minh Anh – IELSIU18002
2. Trần Thị Hoàn Châu – IELSIU18251
3. Nguyễn Thành Long – IELSIU18073
4. Vương Quý Như – IELSIU18212

CASE 1: SPARTAN HEAT EXCHANGERS INC .

1. What can the materials department do to facilitate Spartan’s new business
strategy?
Below comes a plan that will support a reduction in raw materials, lead times, low supply
costs and higher inventory turns.
Materials
Raw materials stock-outs were to be reduced by half of current (20%) and replaced with
semi-finished products and finished products stockpile. This process need involvement
from Engineers and Operation-Production team. But maybe there are some suggestions:
- Based on the new defined classification of heat exchangers, Spartan should procure
from suppliers the synchronous parts, common parts of the heat exchangers
(finished products). For the special parts, the production team of Spartan have to
manufacture with the standard designs and sizes.
- Reduction of inventory raw materials also help Spartan avoid obsolescence.
- Check the quality of imported goods well, import enough quantity of expected
goods
Inventory
The new objective for inventory turns was 20 times, these are some quick calculations:
- 365/20 = 18.25 days each inventory checking (ones every 3 weeks).
- Current lead time of supplier’s shipping varies a lot from few days up to 6 weeks,
so Rick would have to forecast the materials in stock which must be sufficient for
3 weeks (the Reorder Point, can be adjusted based on the specific sale units). Then
he need to contact the suppliers for new orders at the same time.
Inventory time increased by 5 times, requires recruiting more staff and cross-checking.
Rick should hire 1 more material control clerk. His business is to check the inventory of
semi-finished products and the others' business is to check the finished products. After
that, they could switch each other tasks for assure quality of their work. This cross-
checking process helps Spartan prevent fraudulence: staffs removed stock without proper
documentation and that workers frequently deviated from established bills of material.
Cost Reductions
 Procurement Management | Dr. Nguyen Van Hop

Set the tight purchasing plan and consolidation of supply to achieve price reductions. Rick
will have to reduce and replace the group of suppliers, maybe just lower than 50 suppliers
for building up close relationship and have lower prices, better discount based on the order
sales. Single sourcing may be an attractive option, in some cases.
Total cost of ownership considerations need to play a role in vendor negotiations. For
example, JIT delivery arrangements and vendor managed inventories to keep inventory
holding costs down.
Delivery
Rick should hire 2 more shippers. One current shipper-receiver will perform and
responsible only receiving task. Three remain shippers will be responsible of the
shipments only. This help the company reach the delivery lead time goal.
2. What are the new challenges for the material department Spartan’s heat
exchangers?
The expected goals are:
- Firstly, customer lead times for finished products were to be reduced to six weeks
from the current average of 14 weeks.
- Secondly, the new objective for inventory turns was 20 times. Meanwhile, raw
material stock-outs were to be eliminated.
- Thirdly, costs for raw materials and components could be cut by 10 percent over
the next 12 months.
Challenges:
The new strategy would eventually lead to new proposed and standardized designs of
products, from which Rick’s first challenge is to generate a proper procurement plan for
raw materials, estimated from the products.
As the strategy aim to standardized production line, the raw materials purchased should
have be in large volume for the line to operate stably. Thus, there is no need for large
number of vendors as before with the custom production. The second challenge for Rick is
to select and form new long-term supply contract with vendors who are able to provide
Spartan stably with large-size shipment of critical raw materials and reasonable prices, out
of the old number of 340, if not to find new capable vendors fit with the new strategy of
standardized production. Large and frequent shipments with deterministic amount of
materials would reduce considerably stock-outs, the lead time for heat-exchanger orders,
as well as transportation cost and screening cost and cut off obsolescence – so that would
be a key step toward the whole three goals.
Last but not least, re-organizing the manufacturing from the job shop to standardized
production line would also requires a considerable effort. Some tasks need carrying out as
soon as possible and revised continuously could be listed as: new technology installations,
rearranging manufacturing areas, training staff for operating new lines, new process and
adjustment in workforce, etc. Particularly, the production planning need revising to fix
 Procurement Management | Dr. Nguyen Van Hop

schedules and specified level in the making of common/special parts, according to the new
make-to stock production strategy, compared to the previous make-to-order one.

CASE 2: SABOR INC 
What supplier that Sabor will sign long-term contract with? Why?
Before going to the analysis, we should do some calculation first. As given in the case
study, the sales was forecasted 20% rising annually; however, the actual sales had
witnessed the growth of 160% higher than the forecasted. Hence, we have the basis that
we could optimistically make an assumption about the actual sales would increase 120%
the this year, 100% next year and 80% the following year (supposed that the market is
approaching saturation).

Table1. Demand forecasted and assumptions

Broadly speaking, what is it that Ray Soles is most likely to get fired for? There are two
major consequences of any purchasing strategy in the face of demand uncertainty. One is
that purchasing fails to meet actual (not projected) demand and the company incurs
opportunity costs. The other is that purchasing commits too much and the company faces
the actual costs of disposing of the excess. Let’s examine the consequences of each
possibility.
(A) Failure to provide enough marconil – 20,000 lbs. example
Suppose marconil sales could have sold 20,000 lbs of extra marconil (converted into
filters) but supply was not available. These 20,000 pounds of marconil could have
produced additional sales of about $45 million in filters. These $45 million in sales could
have contributed over $25 million ($25,650,000) in contribution to fixed costs and profits
(as guessed accounts for 57% of sales).
(B) Provided too much material +20,000 lbs example
On the other extreme an overage of 20,000 lbs of marconil would have cost of
approximately $1 to $1.2 million. One option would be to return this to the seller. Even
without any return value as proposed by Bilt Chemical, this would be the maximum cost.
Other disposal options could be selling on the open market. A discount of ten percent
would cost about $120,000 and 20%, $240,000. Holding on to the material (is there a shelf
life?) at an annual carrying cost of 24% and an annual usage rate of 40 million lbs would
mean a carrying cost of about $72,000 for the average of three months that the full
1,200,000 would be carried.
 Procurement Management | Dr. Nguyen Van Hop

A Comparison of Consequences Under scenarios (A) and (B) an underage cost of over
$25 million compares to an overage cost of $72,000 and this would suggest a service level
of
Ku 25,000
= =99.7 %
K u+ K o 25,000+ 72,000
Which, as expected, suggest that assuring availability is practically 100% essential.
Given such high uncertainty on demand and supply, it is a good question to ask: Which
scenario would provide the toughest challenge for supply? The answer would be the top
combination of sales high, marconil market tight and marconil price up.
If Ray Soles can develop a strategy that deals with this alternative, at least the worst
consequences of underages would be avoided. Therefore, let us define the requirements
for a high sales scenario.
As presented in table 1, this would be the $156 million sales this year, $312 million next
year and $562 million the year thereafter. Translating these sales dollars into quantities of
maraconil gives the following figures assuming a sales volume of $2,250 per pound of
marconil (Selling price = Sales/Total marconil quantity = $72M/(20,000 lbs +8,000 lbs
+4,000 lbs )=$2,250)
This year 69,000 lbs.
Next year 139,000 lbs.
The following year 250,000 lbs.
Comparing these figures to current market capacities as per Exhibit 1. Given Sabor’s
current volume of 32,000 lbs (Exhibit 1 in the case) or about 23% of total industry
capacity, the potential requirements of Sabor for the coming years greatly exceed the
current three suppliers’ capability of supplying of 140,000 lbs. Potentially, at 250,000 lbs.
two years from now Sabor would have to find additional capacity of 220,000 lbs.,
assuming no growth in demand from any other customers and users of the current three
suppliers. Thus, the challenges are not only should they sign the long-term contract with
their suppliers but also the capacity concern.
Given that Bilt Chemical holds the patent and is large and has been a good supplier, we
see strengthening the strategic partnership with Bilt Chemical as a necessary step in
maintain certainty in the supply chain. With the possibility of a much lower-cost substitute
being developed in the market, however, 5 years may be a long time to commit. We
recommend that Ray Soles negotiates the duration of the contract to a relatively shorter
one, like what Wharton is proposing. Should Bilt Chemical remain firm on this, Ray
should work on a price negotiation – reducing the unit cost and/or extending the review
period to that of annually, rather than quarterly. Additionally, the offer about the capacity
should be delicately mentioned as well. Hopefully, both parties could reach the mutual
accept in requirement of Bilt Chemical has the ability of supply a huge quantity in such a
suddenly rising demand, meanwhile, Sabor has to assure the significant purchase in return.
 Procurement Management | Dr. Nguyen Van Hop

However, only one contract with Bilt Chemical might be inadequate in super risky market.
Hence, we support the direction and rationale that Ray has taken so far with regard to
multi-sourcing. Maintaining the relationship with Wharton is strategic in mitigating supply
risks. The length of Warrant’s contract is relatively short and would also translate to some
stability in the supply chain, therefore Sabor should engage in the proposed contract with
Wharton as well.

CASE 3: FORD MOTOR COMPANY: ALIGNED BUSINESS FRAMEWORK

How would the associated costs and benefits be measured and shared among Ford
and its suppliers?
The associated costs and benefits can be measured and shared between Ford and its
supplier based fundamentally on the key elements of ABF.

There will present various cost and benefits to the implementation of ABF, both for Ford
and the suppliers.
Possible cost would be:
For Ford: Since Ford will completely change methods and approach in building and
reserving the relationship with the suppliers, it will require a lot of time as well as money,
especially risk cost for damaging the existing relationship if not done right. The money
and time Ford has to spend on constant meetings, visiting factories, following up with the
suppliers in the journey towards successful ABF will be significant. For example, it
planned to reduce about 200 suppliers for the most 20 high impact commodities to only
100. To do that, Ford will initially have to communicate for mutual understanding and
proceed to trial-order from each supplier to see if they can stick with their promises and
plan or if they are the best fit for Ford. Many evaluations as well as orders, meetings will
have to be done throughout the time for this period, which definitely costs a lot.
Also, some suppliers might think Ford doesn’t have the best interest in presenting ABF.
Hence, Ford will have to take more time and finance into convincing and proving to
suppliers what it truly wants for both sides in the ABF given the fact that the relationship
was considered to be contemptuous and confrontational in the past. It also has to make
sure to keep relationship with those unchosen suppliers for possible future cooperation.
 Procurement Management | Dr. Nguyen Van Hop

Additionally, the cost into building a whole work system of purchasing and training
human resources will definitely increase.
For suppliers: Just like Ford, suppliers will have to take time and money into adapting to
this new project. They will have to change their way of working with Ford (discussing,
quality control…) which will take time. They also have to step their games up, proving to
Ford they have to ability to satisfy Ford’s expectation within the quality management,
quantity production, time-guarantee, attractive cost and being reliable in general. Having a
buyer like Ford would be incredible, however, that requires sacrifice in personalizing and
choosing to support Ford only or mostly, which can be quite unattractive to some suppliers
since it sounds like putting all eggs in one basket. Most importantly, even if they have
been working for Ford for a long time but can’t make it to the ABF, they will still have to
stop working with Ford now that the company only accepts fewer suppliers.
Possible benefits would be:
For Ford: Using ABF will result in fewer suppliers yet higher quality. Since Ford will be
working closely with fewer selective suppliers now, it is easier to maintain relationship
with them and keeping up with the production timeline as well as guaranteeing product
quality and maintenance. The reduction in procurement cost would be incredible with the
possibility of reducing purchase cost from single digit (3%) to double digits. It will also be
easier to communicate what Ford wants as it only has to explain to fewer entities now.
ABF means choosing to work with the long-term, more reliable suppliers, which also
means these distributors understand and devote more to Ford as they have this sort of
exclusive bond. Additionally, transparence in data, information and extended sourcing
availability can be an attractive plus.
For suppliers: Fords is one of the biggest buyers in the world. Being able to work with
Ford means a guarantee for stability with a huge number of goods bought every year,
resulting in high profit rate. This means that suppliers would have higher capacity
utilization as a result due to an increase in production volumes. Additionally, benefits are
created from better collaboration, relationship, early supplier involvement in new product
development, and supplier innovation which will give them more control over the process
and makes it easier to be proactive about doing what’s best for both parties. Not to
mention technology development with the help of Ford might help improve supplier’s
factories.
Share of costs:
These costs and benefits can be shared based on contracts or agreement between two
parties. I think whatever costs that support for the bilateral commitments can be shared
among the two parties. For example, having senior meetings, hiring engineering for
specific Ford’s product parts that require knowledge from both the supplier and Ford.
However, these can be flexible as the aim is to build a strong, reliable and profitable
relationship, hence, based on the situation, both can pay or one of the parties can offer to
pay.
 Procurement Management | Dr. Nguyen Van Hop

That being said, cost resulted from for one-side commitment elements should be taken
responsible by that party side. For example, Ford commitments include improving
products, cycle planning, better forecasting, more disciplined program execution,
improved commonality and reuse,… For these actions, Ford will have to use its own
money to guarantee the responsibilities which it has written out of ABF, like hiring better
forecast planner, using more resources to improve commonality. Same goes for the
suppliers. They have the responsibilities of managing and assuring proper working
conditions for their facilities, or sourcing from minority, women-owned suppliers, provide
technological innovation to Ford if has,… The suppliers, in this aspect have to use its
money, resources, effort to guarantee that they can commit to the rules and improve their
price as well as quality to fit with Ford, which is actually a great way to encourage
suppliers to improve themselves indirectly and willingly.
All in all, we see that signing long Term contracts with their strategic suppliers which
directly increases the level of openness as well as partnership attitude. Both suppliers and
Ford are working together to make a better working relationship to improving the supply
chain of Ford and increase its high standard serviceability and operational efficiency and
low cost in general.