Challenges In Competitive Global Business Environments Commerce Essay

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Competitive global business environment has required many companies to concentrate on supply chain management to deal with the increasing competition. Therefore, supplier selection process has gained importance in recent times because most of the companies have been spending significant amount of their revenues on purchasing. Carrying out supplier selection is a multi-decisive-making procedure which includes weighing both qualitative and quantitative factors. In order to select the best suppliers it is necessary to make a tradeoff between these tangible and intangible factors some of which may contradict each other

In the past, the selections of suppliers are mainly based on:

Quality - Product quality and the ability to meet specifications and standards

Cost - Competitive pricing

Delivery - Reliable delivery methods; On time delivery

Service - Service quality; Warranties and claim policies

However in present times, there has been an increased in significance in considering the supplier internal processes, the management and company structure, as well as their financial situation due to the fact the supplier is now sharing the business risk with the company it services.

All the above mentioned factors are listed among the 23 criteria (Table 1) that appear in the list of Dickson's vendor selection criteria, Dickson's study (Dickson, 1966). The Dickson study was based on a questionnaire sent to 273 purchasing agents and managers selected from the membership list of the National Association of Purchasing Managers. A total of 170 (62.3%) responses were received.

In this assignment, ten most common factors was selected based on reviewing both Dickson (1966) study as well as the analysis done by Weber et al.'s (1991) study, represented in table 2.

The ten factors as followed:

Quality

Technical Capability

Delivery

Price

Performance History

Financial Position

Reputation and Position in Industry

Management and Organization

Production Facilities and Capacity

Geographical Location

*The line up for the above factors are arranged according to the priority which they might have over others.

Table 2- Weber et al.'s (1991)

Chapter 2.1 - Quality

Dickson (1966) defined it as the ability of each supplier to meet quality specifications consistently. It means the supplier need to meet the requirement of the buyer in terms of quality as well as being consistent in deliverying the required specification. This is rank first in priority among the remaining criteria seeing that it is neccessary for companies to maintain the quality of the products as the satisfaction of their customer depend on it. As mention in www.businesslink,gov.uk, accessed on 11th March 2010 "the customers will associate poor quality with you, not the suppliers." This applies to any industries as qualities are always view as the atmost importance in doing business dealings. Quality will determine the standard of the products which in the end will affect the reputation of the company in the industry.

Marc Day, 3rd ED, Gower Handbook of Purchasing Management expressed that in recent stage, quality can also be measured in some form of supplier or vendor assessment. It may be represented by process certification such as ISO 9001:2000. A buyer will have a lot more confidence in products which have been tested and meet with international standards.

Quality is also particularly important in a JIT environment due to its nature of being so closely linked in every process. If the supplier ships a batch of substandard component, it is likely the buyer will run out of materials before a corrected order can be received, thus causing a backlog. Therefore, suppliers who assure quality will in return reduce the time and expense associated with returning materials or the consequences of using substandard materials.

Chapter 2.2 - Technical Capability

Technical capability refers to the level of knowledge/skills the vendors can offer. Whether it is highly skilled or just possesses basic knowledge. Vendors with outstanding technical capabilities are able to provide buyers with exceptional services/goods which in return facilitate improvement for the buyers. In addition, suppliers are encouraged to consistently upgrade their products/services in order to survive in this ever changing world.

Technical capability can also be referred as the flexibility one supplier can provide. It is very important especially in specialize industries where single sourcing situation occurs. Example when one specialize machine breaks down and it needs only a specify component or a specialize technician to attend. The supplier is required to be able to provide responsiveness support to the buyer requirement. This allows the buyer to avert crises due to last minute situation as such situations are sometimes inevitable and flexibility from the supplier is the only solution to survive such scenarios.

Chapter 2.3 - Delivery

Dickson defined delivery as the ability to meet specified delivery schedules. In the present day, its meaning has extended into sub catogories such as lead time, turn around time, delivery capacity, shipment quality, cycle time and Just-In-Time (JIT) delivery capability.

In today global business environment, suppliers and customers might be located at two different part of the world. Delivery schedules need to be met to ensure no disruption is created for the buyer daily schedules especially in the JIT environment. Buyer could not risked of having delayed deliveries when the whole operation is closely link together.

But with the invention of RFID and statellite tracking, buyers are able to track their shipment and prepare themself in case on any delayed delivery. Moreover, global logistic players such as DHL, UPS are commonly used by many suppliers to provide them with fast delivery services to any places. This is also a reason why geographical limitations are not widely applied in present time.

Chapter 2.4 - Price

As per Dickson Study, price includes discounts and freight charges. It is vital for vendors to offer a fair and competivtive pricing to the buyers while also providing themselves with a fair profit. "A mutually beneficial price allows suppliers to remain profitable and continue business. Firms that earn extremely low profit margins relative to their competitors are likely to either cut corners on quality or to exit the relationship'' (North Caroline State University, http://scm.ncsu.edu/public/supplierevaluation/6costben.html, accessed on 31st March 2010)

Although cost saving is and always will be an important indicator of the supplier performance evaluation, buyer must also not compromise on the quality. Having quality assurance will lead to increased efficiency due to superior performance; it will reduce the frequency of getting replacement for the defective parts; less money and time spent on repairing; as well as most high quality products comes with longer warranties and claim period. All the above reasons deem them not to take only the price as a sole factor but it should be measured together with other aspects of purchasing performance to produce a clear evaluation of the buyer's impact on total cost and overall company performance. (Christer Hallqvist, IBX Consulting, The challenge with buyer performance measurement and some pitfalls to avoid)

Chapter 2.5 - Performance History

Performance history is represented by the quality of the service/product the supplier had performed/produced in the past. As a result from those past histories, buyers are able to deduce the reliability, credibility, and competency of the supplier simply by recalling past experience or checking up with the supplier existing customers. Performance history enables new buyers to either have confidence or create doubt on the supplier.

Reliability denote as carrying out all performance activities as promised by the supplier. It includes delivering on time, quality as per promised and etc. Credibility refers to the supplier honesty and integrity. Suppliers need to deliver as promised and not with intention of misleading the buyers. Competency is necessary as the main objective of business dealing is to create profit. If the supplier is not competent enough for the buyer business then that supplier will not be suitable for the company.

Chapter 2.6 - Financial Position

The elements use to determine the financial position of the company is based on the credit limit, cash flow condition, financial stability, and liability assets they have. This component is gaining more awareness due to in today's business environment, company and their suppliers may develop a closer partnership to boost the whole supply chain's profit.

Suppliers that are financially stable are more likely to be resilient during difficult times, provides long term partnership, producing consistent quality products, and having continuous growth in the research and development area.

This is important as buyer would not want to have sub standard products or a sudden discontinue of services by the supplier. All this will create chaos in the buyer normal operation process especially when the products/services are one of-a-kind goods/skills.

Chapter 2.7 - Reputation and Position in industry

By holding a good reputation or high position in the industry, it allows the supplier to dominate the majority of the market share. Especially when we are talking about genuine maker spare parts or authorized repairer for specify machineries. In addition of having a good reputation will result in creating more faith for first time buyer to use their services/products. Moreover, being the leader in the industry, they are more likely to continually improve their products and equipment. Thus buyer would usually take into consideration of the supplier reputation in the market.

Nonetheless, if buyer does not have a good buying experience with a reputable supplier in the past, the buyer most likely will not use them again if such supplier can be widely found in the industry. Therefore considering past performance history is important.

Chapter 2.8 - Management and Organization

The reason why buyer will take into consideration of the organization of the supplier company is because when one company is flourishing under a good leader and workforce, they are more likely to perform better compare to an organization where staffs are not cooperating and talents are leaving due to the management problem. Having a group of competent organization will eventually lead to increase sales thus generating a stable financial income.

Chapter 2.9 - Production Facilities and Capacity

It is also necessary for buyer to understand the production facilities and capacity of the supplier business. Buyer need to ensure the business is not sub-contracted out to another unknown third party contractor. Meantime, buyer also needs to understand the available premise space - whether supplier is capable to handle large order, or last minutes order. Furthermore, if the premise is on rental basis, buyer needs to take caution on the possibility of the closing of the supplier production house which might thus create problems for the buyer.

Chapter 2.10 - Geographical Location

Due to economic globalization, suppliers are selected from all around the world in particular from developing countries for their low cost. With the introduction of JIT environment, having the materials to be deliver promptly is very important. Therefore, geographical location is considered one of the major criteria as mention in Weber et al.'s study. However, with the development of global logistics, geographical location is no longer a major criterion for supplier selection.

Chapter 3 - Conclusion

Based on above review, it shows that supplier selection decisions are made based on weighting a few other factors together. The main factors that influence the selection are mainly quality, delivery, technical capability, and price. These main 4 factors should be considered as a whole instead of selecting based on individual factor. If supplier selection is based solely on cost, it will cause buyer to forfeit quality, on time delivery, services, all for just lower price. This might result to buyer incurring more losses due to those non-value added costs such as failure costs, service cost, delay cost, and inspection cost etc.

Although at the end of the day, cost savings is still an important factor but the core purpose is to have a balanced approach in taking considerations of the other relevant factors to choose the optimal supplier that best fit the buyer business. Buyer needs to look far and weight the factors outside of the supplier's cost structure instead of the present immediate cost saving which might lead to incurring more losses in the future.

Chapter 4 - Reference List

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