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

With the given information, it is clear that each plant is operating autonomously. Though they have targets based on the capital employed, there is no emphasis on procurement which is one of the major cost departments.

1. Alternate structure for procurement:

It is given that five major purchases account for 61% of the group purchases. Given this information, it clearly shows that there are common items being purchased by individual units from their respective suppliers.

Centralization of procurement activities that report directly to the group operations head or CEO can help the firm to a large extent. There should be a central team to analyze the spending of individual units, compare the prices of the common items being procured from different vendors and guiding the units to change the vendors or to negotiate for better pricing with the existing supplier.

Another way of handling the situation is to make the existing chief buyer in charge responsible for all buying activities and change the reporting to a central team.

In both ways, the emphasis on cost reduction should be clearly highlighted to the procurement team and should be monitored by a specific central procurement team or by the unit head handling the respective project.

2. Potential obstacles for change:

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.

3. Benefits of changed structure:

A central procurement team to analyze and control the costs will help to identify gaps in procurement policies.

Reduces the cost of procurement by introducing a competitive policy among the suppliers.

Economies of scale can be achieved by reducing the number of suppliers for certain common items being procured at individual units.

Brings uniformity in procurement and reduces the payment period which can help in attracting competent suppliers.

Having a central team which keeps a track of spending by individual units can help the corporate teams to have a clear view of the project costs and profits.

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