Question

Crank Ltd

Crank has been in business since the 1920’s and have three locations in the UK. Their Head Office and main manufacturing site is in Leicester. This site makes complex tubular assemblies for defence organisations, oil and gas and transportation. There is a site at Southampton making tubular shafts for golf clubs, and a site in Glasgow manufacturing aerospace Duct assemblies up to 8″ diameter.

The procurement organisation is currently decentralised. At Leicester, there is a Purchasing Manager, whereas at Southampton and Glasgow, each site has a Chief Buyer in charge of small procurement teams. There is a new Chief Executive of Crank who fervently believes that he needs a new approach for the Group in the way procurement is structured. Over the past month, he has, quietly, been obtaining some salient facts.

The more important ones are

• Each site operates as a ‘Profit Centre’ and the Site Director has to deliver a targeted Return on Capital Employed;

• There are no Group purchase contracts;

• Five major purchases account for 61% of total Group expenditure – they are all raw material including different specifications of tubing;

• There are more than 40 suppliers for the five major purchases;

• No formal tendering has taken place, on any site, for more than two years;

• Capital equipment is purchased by the Group Chief Engineer;

• The company has embraced modern logistics practices including JIT and OTIF (On Time In Full);

• There is no savings plan for purchasing;

• The purchasing teams do not liaise.

The Chief Executive intends to consider an alternative purchasing structure that can deliver benefits for the Group and each operational site. On the basis of your knowledge and the salient facts above what advice could you give him?

Tasks

(c) What alternative structures could be considered?

(d) What are the potential obstacles to change?

(e) What business benefits could accrue from a changed purchasing structure?

Answer 1

Answer:-

C)

There must be a centralized purchase department. This would be lead by a Senior Purchase Manager. The majority of the purchase decisions would be based on best of three offers, i.e. the purchase officer would have to take quotations from minimum three vendors and award the order to the vendor with the most optimized offer, while taking other aspects such as market credibility, quality, service, etc. into consideration.

For the regularly required items, there must be yearly based contracts with supplier firms and vendor development programs must be launched. However, the Chief Buyers of respective centers must have authority to sanction purchase of minimal cost and urgent items, but keep the Senior Purchase Manager informed.

d)

Employees may be reluctant to change from a free environment into a structured environment.

Emphasis on cost reduction may seem irrelevant to certain employees.

Some suppliers will not be ready for a cost reduction and the company may find it difficult to replace a quality supplier who is reluctant to reduce the price.

Emphasis on cost reduction may have an impact on the quality of the products. There should be a balance between cost reduction and quality enhancement which should be monitored by a central team.

If the transition is not handled carefully, there are chances of production taking a hit due to the irregular supply of raw materials.

e)

Purchasing would improve multi-fold. There would be a cost-sensitive cultural built-up organization-wide. Besides supplier/vendor development programs could be initiated so that the company can improve relationships with it's chief suppliers and ensure they get quality raw material, reliably as well as cost-effectively.

Also, this would facilitate JIT and Kanban systems for inventory management - replenishment processes. Closer monitoring and control on cash flow will be achieved.

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