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This resource report studies the sourcing and purchasing activities of electronic components for Panasonic Asia Pacific which is based in Singapore. The report includes an analysis of literature relating to all possible options available for obtaining the resources under investigation, an evaluation of issues related to the procurement process with regard to the literature and Panasonic, and provides recommendations suggested to Panasonic.
In the first two sections of the report, the company background as well as the current practices and procedures are being discussed. In the third section, three areas of best practice in sourcing practised by Panasonic are being identified: reverse auction, benchmarking and outsourcing. The characteristics, pros and cons of each are being discussed.
The applications of literature to practice are enhanced by examples similar to those in reality and tables tabulated to provide a clearer picture of the illustrations. Through this section, the readers are able to understand the standpoint of the purchasers at Panasonic and the benefits gained and constraints faced by the purchasers in decision-making.
The report finishes with three recommendations that are overseas sourcing, setting up of companies in developing countries and e-purchasing. The reasons for the choice of these recommendations are discussed in detail. The report concludes that by carrying out the procurement activities strategically, Panasonic can then pass on the cost savings and value-add to its customers, and eventually gain extra competitiveness in the market.
Panasonic Corporation is a Japanese-based multinational corporation and leads the world in the growth and production of electronic goods for consumer, business and industrial use. The principal activities of Panasonic Asia Pacific, based in Singapore, include carrying out regional headquarters functions, exporting, importing and selling of Panasonic's electrical and electronic products. Its production in Singapore includes plasma television, DVD recorder and micro SD card player.
Before the manufacturing process, electronic components such as resistors, diode, capacitors and Led need to be purchased locally. In order to gain competitive advantage and/or obtain more market share over its competitors, Panasonic aims to produce quality products with the collaboration of its purchasers, engineers and quality department. The purchasing role is viewed 'as a strategic resource for reaching high quality levels, fast delivery, and cost savings' (Carr & Pearson 2002 p. 1032). After final products have been manufactured, the products would be exported to overseas markets, while a fraction will be left for local consumption.
In Panasonic, the purchasers usually hold meetings before a newly launched model is being released into the market. The purchasers are responsible for purchasing the components for firstly the testing stage, followed by pre-run and finally, actual production. There are a few methods of procuring components including reverse auction usually meant for large volume of components, benchmarking of suppliers and outsourcing.
At the testing stage, the purchasers would source for suppliers for parts that meet the specifications of the model to be manufactured. After sourcing, purchasers negotiate with the suppliers on the lead time, price and delivery of components. During this stage, samples are obtained from the various suppliers for the engineers to test and analyse which suppliers' components have better performance or desirable results that the engineers are looking for. Concurrently, samples are also sent to the quality department for quality control checks to make sure that there are no prohibited contents in the components.
The basic role of a purchaser is to liaise and coordinate closely with the suppliers, engineers as well as the quality department. Although the purchasing function targets to reduce costs to the minimum, purchasers would usually recommend that engineers use components of lower cost with the condition of not being at the expense of compromising quality standards.
When there are certain changes that require amendments, the purchasers would sit in with the suppliers and engineers for discussions. After the engineers have selected the suppliers for various components, it is critical that the purchasers verify with the quality department whether or not the components have met the stipulated quality standards. If the results do not meet the standards, the purchasers would request that the suppliers make further improvement on their quality until the minimum standards and requirements are fulfilled. The engineers are to discuss with the suppliers regarding the specifications they need while the purchasers attempt to protect the interests of the organisation by trying to further reduce the lead time, price and delivery of the components. Foogooa (2008) notes that in order to gain competitive advantage cost reduction is needed. Once all the aspects are satisfactory for all parties, a contract is drawn up and signed between Panasonic and the suppliers. Leonidou (2005) highlights the importance of a legal contract being to safeguard the company's interests if the supplier fails to comply.
The areas of best practice in sourcing discussed in this section are reverse auction, benchmarking and outsourcing.
According to Lysons and Farrington (2006), reverse auction is a process such that the buyers name the commodity and price that they intend to purchase and are agreeable to pay. In addition, the features, specifications, delivery requirements of the items and bid decrements are stated. The buying party then invites potential suppliers to take part to bid on the auction.
Suppliers can place more than one bid and the bidders' identities are kept confidential. One attractive point to the buyer is that the suppliers will vie to tender the lowest price in order to secure the deal. The outcome of the auction is decided by the buyer either by 'using the lowest price or most economically advantageous tender (MEAT) options' (Lysons & Farrington 2006, p. 199). As such, there could be one or more suppliers wining the bid.
Suppliers submitting the lowest price may not necessarily be awarded the bid as factors such as like lead time, quality and specifications of components, capability, reputation and geographical proximity of the supplier need to be taken into consideration before the final decision is made. The adoption of reverse auction as a method of purchasing allows items and requisitions to be fulfilled in a strategic manner.
Reverse auctions put forward both advantages and disadvantages for buyers and suppliers.
Advantages of Reverse Auctions for Buyers
Greater cost savings due to competition
Elimination of negotiations in terms of price with suppliers
Reduction in waiting time while suppliers tender quotations
Access to a wider range of suppliers
Availability of market information
Advantages of Reverse Auctions for Suppliers
Ambiguity in specifications and requirements is minimised
No further cost reduction after being declared the winner of the bid as both parties are bound by the sale
Reduction in time spent on negotiating with buyer in order to secure business deals
Entrance to penetrate new markets and/or previously closed markets
Disadvantages of Reverse Auctions for Buyer
Unfavourable buyer-supplier relationships as the buyer makes a good deal at the expense of the supplier's low prices
Reduced supplier base as suppliers that are unable to compete on the low prices are removed from the approved vendor list or do not participate in the bidding
In the event that the appointed supplier is unable to deliver as stipulated in the contract, other suppliers might not be able to supply as readily due to commitments to other customers
Disadvantages of Reverse Auctions for Suppliers
Inability to sustain low prices in the long term
Suffer cuts in profit margin in order to secure contract
Benchmarking highlights the significance of process improvement and process control, thus the suppliers' performance need to be included in the benchmarking process to ensure quality supply chain. According to Tan and Koh (2006, p. 122), 'the emphasis should be on accessing their contribution to reducing the total delivered cost'.
The purchasers will first request for meetings with the suppliers for negotiation as well as to obtain samples for testing. Suppliers with samples that did not meet the requirements are dropped off the buyer's sourcing list. By doing so, the purchasers gain additional knowledge of what the market is offering and thus, the sources of market information are enhanced.
Apart from comparing the suppliers' prices, specifications, quality and lead times on local or global scale, Tan and Koh (2006, p. 122-3) suggest that the following issues need to be addressed:
Willingness to work as a partner/co-maker
Commitment to continuous improvement
Acceptance of innovation and change
Focus on throughput time reduction
Utilization on quality management procedures
Use regular and formal benchmarking processes themselves
Flexibility is seen as the prime goal in logistics systems design
Do their employees share common core values of customer concern?
Do they actively seek to improve communications with us?
Does their leadership emphasize the primacy of total quality management?
In addition, supplier benchmark should include comparing the suppliers' performance against others especially those with reputation for outstanding performance.
Advantages of Benchmarking
Gain cost savings
Ability to select suppliers based on desired specifications, quality, price and lead time for delivery
Ability to select more than one supplier to supply components
For example, if the given lead time for production is short, buyer can obtain supplies from another supplier first when the initial supplier cannot meet the stipulated lead time and then later change back to the original supplier.
Outsourcing is defined as the distribution of part of the job to external parties to perform. Before an approved manufacturer is appointed, the purchaser needs to compare the strengths and weaknesses of each supplier to determine which supplier best fit the outsourcing job.
Advantages for Outsourcing
Tap on external expertise to perform the required job
Allows purchasing party to focus on the core business competencies and/or better the current practices
Savings on manufacturing costs, freeing up of company assets, minimise overall head count and avoidance in obsolescence of equipment and machinery
Gain competitive advantage through integrating in-house manufactured products with outsourced products and thereby establish reputation and brand identity, thus gaining market share
Disadvantages for Outsourcing
Quality of products uncontrollable
Competitors can approach the same manufacturer to make products, final product may not be unique and so unable to secure niche market
The manufacturer has high bargaining power to raise prices if the quality of the output are satisfactory to the purchaser and/or if the component being outsourced is an important part of the final product
Limitations in sourcing for alternate suppliers as there would be a likelihood of varying quality and difference in the work in progress
Application of Literature to Practice
Reverse auction is one of the best practices that Panasonic practices. Although many suppliers would view reverse auction as a threat that would worsen the buyer-supplier relationship, Panasonic has managed to deal with the situation strategically and the result is a win-win situation for both the buyer and suppliers.
Panasonic has been constantly using established suppliers listed in their approved vendor list to support their production for key items with huge volume. This would assure the suppliers' concerns with regard to the securing of business with Panasonic.
The utmost reason for using established suppliers is that the quality and performance of their components are much more stable as compared to other suppliers. Furthermore, Panasonic cannot afford to lose their market share by using suppliers that are providing components at cheaper rates but poorer quality as there would bound to be lots of complaints received about their products.
For instance, because the quantity for resistor components is too large, Panasonic would need to do allocation of stocks. If stock allocation is not done, Panasonic would face a risk of production line stoppage in the event that the supplier is unable to provide components on time. The same would also happen if the supplier s unable to supply due to financial problems such as facing bankruptcy.
In Panasonic, there are four regular suppliers which are Rohm, Sanken, Murata and TDK that supply the resistor component in different percentages. Panasonic allocates the supply mix through reverse auction. On a yearly basis, Panasonic would inform the respective suppliers of the given criteria stating the fixed quantity, quality criteria, price, specifications and lead time that Panasonic is looking at. The portion of the pie is then allocated to the suppliers based on their ability to fulfil and support Panasonic's production. An example of Panasonic's component requirements is tabulated in Table 1.
1.5KW ~ 7KW
10R ~ 200R
Pricing (per resistor)
Lead time for production
2 ~ 3 weeks
Must pass Restriction Of Hazardous Substances (i.e. lead, mercury, cadnium, hexavalent chromium, polybrominated diphenyl ethers)
1 million resistor per month for year 2009
Table 1: Panasonic's component requirements stated on auction site
Thereafter, Panasonic would inform its suppliers to submit their first bid within one week. After receiving the first submission, Panasonic would compile a chart to rank each supplier from lowest to highest price. Panasonic would then inform the respective suppliers of their current status in terms of their positions and requests for suppliers to submit one last bid before announcing the results. Suppliers would then decide whether or not to give further cost reduction in order to secure a bigger allocation. Table 2 illustrates the comparison chart compiling the individual suppliers' initial and final bids, and the outcomes declared by Panasonic.
Lead Time for Production
Supplier with Lowest Bid
Lead Time for Production
Supplier with Lowest Bid
Contract Awarded To
Table 2: Suppliers' Initial, Final Bids and Outcomes
The data in Table 2 assumes that all suppliers had passed through the quality check for not containing the six prohibited items and possess the same specifications. The outcome is that Rohm is being awarded with the most allocation of 40% because Rohm can perform better in terms of lead time and has the capacity to handle such quantity.
Tassabehji, Taylor, Beach and Wood (2006) state that in reverse auctions for suppliers to out win the other, suppliers will bring down their costs of products to floor price in order to secure the contract. The win-win situation is such that Panasonic gains from cost savings and maximisation of profits, whereas the suppliers have each secured a 1-year contract with Panasonic.
Benchmarking of Suppliers
Another way of improving production or the quality of products is to find appropriate suppliers with the right capabilities as stated by Knudsen (2003). This is where benchmarking comes into the picture. Leonidou (2005) notes that benchmarking enables cost reduction which is made possible by remaining in contact with various suppliers, asking for quotations and comparing them. The importance of benchmarking is highlighted by Sanchez-Rodriguez, Martinez-Lorente and Clavel (2003, p. 462-3) as the purchasing performance is measured by 'quality of purchased items, on-time delivery, degree of achievement of inventory goals, timely response to inquiries, and overall internal customer satisfaction'.
The following is a scenario that is likely to occur:
A capacitor is needed to be added in each product for the item to operate smoothly. The crucial part is that the capacitor components have to be delivered to Panasonic in 53 days' time.
The purchasers would source for potential suppliers to request for their quotations. The purchasers would then request the suppliers for samples so that the engineers can carry out tests for the capacitors which take an estimate of three days and the quality department to test for ROHS contents as prohibited items must be omitted from the components which requires around seven days. Usually, the engineers would be involved in testing the components and ranking the suppliers based on their samples. On top of the lead time for production and delivery, there is a need to add another ten days for the tests and quality checks till the components can be made available for Panasonic to run its assembly and production lines. In the meanwhile, the purchasers would negotiate with the suppliers on the price, lead time, delivery of components for production, amount of supplies that can provided and do up a comparison chart.
Firstly, the purchasers need to inform its suppliers of the quantity needed for production. In this case, 25,000 capacitors is required for the current month but information of 20,000 units for the subsequent months is being withheld. This is because by withholding the demand information, Panasonic is able to benefit from quotations meant for larger volumes and thus lowering the purchasing costs. Table 3 is an illustration of the capacitor components.
Total Lead Time for Production & Delivery
Price per Unit
Monthly Capacity for Supply
Performance Rated by Engineers
Table 3: Suppliers' Commitments and Panasonic's Results
Engineers are recommended to use the cheapest components that have passed through quality checks and are able to meet the production timeline. With reference to Table 3, all suppliers, with the exclusion of Supplier D, have passed the quality checks. Therefore, Supplier D is being removed from consideration. Supplier A would be the best choice to supply the capacitor components as the price is the most attractive as compared to other suppliers, however the drawback is that its total lead time for production and delivery cannot meet with the current demand. Based on the current situation, Panasonic's production lines need the components to be ready in 53 days, so only Suppliers B, C and E can meet the requirement.
The decision is to purchase capacitor components from Supplier C for the current month as the price is the lowest amongst Suppliers B, C and E. As for the rest of the production months where there is no urgent requirement of parts, Supplier A would be selected as the main supplier due to its competitive rate quoted. The buyer is regarded the biggest winner as they not only get to enjoy cost reduction, maximization of shareholders' benefits but also understand its suppliers' capabilities and stands.
Some of the benefits given to the suppliers include providing financial incentives to improve quality standards and shorten lead time for delivery. For instance, earlier payments to the suppliers or paying the suppliers slightly more on what is agreed initially could aid the above mentioned. This is because if parts were delivered earlier, Panasonic stands a higher chance of releasing their products into the market earlier than planned and may gain more market share and in return more profits.
Panasonic lacks the skills and capabilities in producing speaker units, so it is more economical and logical to outsource this activity to other companies that are stronger in this aspect. There is enhancement in the final product as Panasonic would assemble the outsourced speaker units into the speaker boxes produced in-house.
Panasonic taps on external expertise and thus add values to the product and its potential customers. Panasonic would benefit from this in terms of freeing up their cash flows as they are not doing in-house production and this is ultimately turning fixed costs into variable costs. Other benefits are as per discussed in the previous section. Carr and Pearson (2002) state that cost reduction in purchasing can help to increase the company's competitiveness. This is also agreed by Harland, Knight, Lamming and Walker (2005) who mention that companies can focus on their core activities and improve their uniqueness of products to be competitive.
Panasonic needs to first perform supplier risk assessment as Zsidisin, Ellram, Carter and Cavinato (2004) indicate that supplier risks do exist. Examples include the timeliness of the delivery of goods for production, failure of components to meet quality standards and the occurrence of defective parts and shortage in quantity from the suppliers.
Before the contract is being signed between Panasonic and the manufacturer, the purchasers would communicate with the other party of the specifications required, price of the speakers units, contract clauses, etc. Some of the contract clauses could be that Panasonic would receive free replacement in the event that speaker units are being damaged during the delivery process, penalties being imposed on the manufacturer on late deliveries and payment terms would only be a certain number of days after receiving the goods.
As the volume being outsourced is huge, Panasonic has the upper hand in negotiation so Panasonic is able to request the manufacturer for further cost reduction. It is not necessarily that the manufacturer who quotes the lowest will be chosen as quality is what Panasonic is expecting. The ultimate reason lies with the sound quality being the main delivery point to the end consumer as Panasonic aims to produce quality products for its customers.
Panasonic should source for electronic components in overseas market such as China, India and Japan. This would allow Panasonic to compare the prices, specifications and quality of individual components on a global scale as there are many advantages to gain including cost savings. As mentioned earlier, all suppliers would submit their best price in order to beat their competitors to secure the deal. In addition, benchmarking can be used to press potential suppliers for lower prices.
Setting Up Companies in Developing Countries
Panasonic can purchase cheaper electronics components in the China market but definitely not at the expense of compromising quality standards, and register for sister companies in countries such as China, India, Bangladesh and Sri Lanka where labour costs is low. By doing so, Panasonic can gain market share in the developing countries through the sale of manufactured products as well as expand their overseas operations.
When the workers in developing countries have picked up the necessary skills, some of the operations can be transfer from Singapore to the developing countries. In addition to the greater costs savings as a result of the advantages of lower labour costs and cost of running business, the sister companies set up in the developing countries also serve as revenue centres. For example, products that have limited market in the developed countries or that are obsolete like the video tape recorder/player can be sent to the sister companies for sale since technology in these developing countries are not as advanced. Although the profit margin might be lower, it beats selling these obsolete products to keen parties at dirt cheap rates or keeping inventory in the warehouse where no revenue is being generated and storage space is being taken up.
Panasonic could consider purchasing its electronic components online through e-purchasing. This option serves advantages for both the buyer and suppliers.
The advantages of e-purchasing for the buying party include cost savings as the transactions and correspondences are carried out online, allows accessibility to information real-time and obtaining information at the tips of the finger.
On the other hand, the advantages of e-purchasing for suppliers are cost and time savings on travelling and cost savings on printing because of the provision of all relevant information made available on the web so suppliers do not need to mail brochures or catalogues to its prospective customers.
From different methods of sourcing and followed by benchmarking, Panasonic would be able to purchase its components in a more strategic manner. As such, Panasonic can consider lowering its selling price of its products which adds values in the eyes of the consumers and ultimately, gain extra competitiveness in the market.