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

c. My suggestion is to have a centralized purchase team. Rate contracts can be made. Standardization is facilitated. Supplier-relationship development is facilitated. This would help not only ensure profitable rate contracts and improve cost efficiency, but also ensure proper utilization of funds. There must be SOPs i.e. standard operating procedures in the purchase processes. Thus, maintaining transparency and non-bias in the system. Also, the capital expenditure made must be treated separately, and permissions from higher authority with proper tendering must be done.
A centralized purchase means uniting the company towards common objectives. This helps the purchase make savings plan and have a good communication between the various plants.

d. The employees, i.e. the Purchasing manager and Chief Buyers may fear loss of power and control over the purchase. Also, the respective plant heads would too resist centralization as they would loose power and unlimited authority they possessed over the purchases being made. These would be the obstacles to the change.

e. The following are the benefits which the company would reap from a changed purchasing structure:

• Focus on improving supply chain efficiency.
• Reduced variation and improved cost savings.
• Reduce in dependency on people. Rather would be driven by system.
• Able to standardize and benefit from it. i.e. reduce variation.
• Cost savings plan
• supplier development.
• Uniting the entire company and focussing on increasing the total profitability of the organization.

Systematic processes to procure capital goods.
Reduce wastage.
Reduce the possibility of frauds and illegal activity,