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

What alternative structures could be considered?

Five big purchases are issued to account for 61 per cent of group purchases. Because of this information it clearly indicates that specific products are being purchased from their respective manufacturers by individual units. Centralization of procurement activities that report directly to the head or CEO of group operations will benefit the company to a great extent. A central committee should be in place to evaluate the spending of individual units, compare the prices of the specific goods being procured from various suppliers and direct the units to change the suppliers or negotiate with the current supplier for better pricing. Another way to manage the problem is by making the current chief purchaser responsible for all buying activities and moving the reporting to a central team.

The emphasis on cost savings should be specifically stressed to the procurement department in all ways and should be supervised by a particular central procurement committee or by the head of the unit handling the respective project.

What are the potential obstacles to change?

Employees can resist going from an atmosphere of independence to a formal climate. The emphasis on cost savings can sound negligible to some workers. Some manufacturers will not be up for a cost reduction, so it may be hard for the company to substitute a premium manufacturer that is unable to cut the price. Focusing on reducing costs may influence the consistency of the commodity. A balance will be found between cost cutting and quality enhancement and will be regulated by a central committee. If the transition is not handled carefully, there are risks of production taking a hit due to the unpredictable availability of the raw materials.

This move is expected to be met with opposition from the various departments arguing that the acquisition process has been delayed and is time consuming and inefficient. Both the purchasers and other relevant agencies will avoid.

What business benefits could accrue from a changed purchasing structure?

A department for strategic procurement will also identify vulnerabilities in acquisition approaches and analyze and track costs. Reduces procurement costs among suppliers by introducing a competitive policy. Economies of volume can be accomplished by increasing the amount of suppliers for such particular items to be procured at individual units. Made sourcing structured and decreases the payout period, which will continue to employ eligible suppliers. Having a consultant who maintains track of individual team spending would help the executives get a clearer understanding of the project's costs and profits.