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Every organisation needs to buy materials, service and supplies to support operation. Traditionally the role of purchasing was to obtain the desired resource at the lowest possible price from a supplier. Today, this traditional view of purchasing has changed, the modern focuses are on total spend and the development of relationships between buyers and suppliers. Schary and Skjott-Larsen (2002) address that the role of procurement has become a strategic issue, relationships between buyer and supplier have shifted from arm's length to close collaboration with key suppliers. Therefore, it is very important task for the organisations to interface and effectively to manage its supply base in order to assess those more suitable for potential long-term collaboration. On other hand, supply base is potential to be used as competitive advantage in competing market. Today, as the global sourcing is increasing, organisations operating with global supply chain (SC) are facing more challenges on supply base management (SBM).
According to Bowersox, Closs and Cooper (2007), successful procurement depends on locating or developing supplier, analyzing their capabilities, and selecting and working with those suppliers to achieve continuous improvement. In fact, supply base appraisal is known as a process.
Supply base assessment
According to Daniel and Robert (1999), before selecting and development of suppliers, organisation should identify strategic SC needs, search for competitive suppliers, establish performance metrics and assess suppliers, and supply base rationalization. Based on end-customer requirement and new product development target, organisation should identify the overall business needs in terms of cost-reduction goals, technology road maps, global market expansion plan, etc, search for competitive suppliers to match organisation's strategic SC needs. When potential suppliers have been sourced, the next step is to evaluate those suppliers.
However, lots of companies and organizations have paid more on supplier failure because of a lack of effective supplier evaluation. Emmett and Crocker (2006) state that when seeking to approve suppliers, procurement departments must take effective actions include identifying potential suppliers and evaluating their capabilities in terms of:
? Technically sound
? Managerially competent
? Adequately resourced
? Financially stable
From the supply base assessment perspective, we can understand this as follow:
Technically sound associates with technical and engineering capability. Suppliers must perform technical competence very well. We can measure it from some main aspect, such as: technical background, training and experience of key person; organisation and control of technical activities; quality control management; availability of testing equipment and procedures; adequacy of after-sales service; product innovation and quality improvement;
Assessment of managerial competency is to assess suppliers' management capability. It means that how well the suppliers run? Such as the organisation's structure of company, key management policies, inventory management and so on.
Financial stability is concerned with the security of finance, whether company's finances are strong and be secure with good long-term prospects. Suppliers' reliability evaluation is to measure their promised capacity, customer service level associated with delivery on time, availability of planned maintenance, etc.
Additionally companies need to establish a performance measurement system to assess and track suppliers' performance. Ideally, this performance measurement system should be real-time and provide immediate feedback to the suppliers, so that the suppliers can understand their performance levels and improve their performance.
Furthermore Supply base rationalization is an essential step in supply base assessment, eliminating suppliers that are not capable of meeting the company's needs and focusing on a basis strategy to determine the size of supply base with consideration of risks of supply interruption, thus supply base is optimized. The 'right size' of supply base that will enable the company to reduce cost, be easier to monitor supplier performance and develop better relationships with suppliers.
Issues involved in supply base assessment for Ryanair in airline industry
Ryan Air was set up in 1985 and is one of the oldest and most successful low cost airlines of Europe. The whole strategy of Ryanair is based on the financial part, everything they decide to do with having their cost as low as possible to be the low-fares airline. The heart of the company's strategy is to provide a no-frills service with low fares designed to stimulate demand.
Ryanair's supply base
Ryanair's main suppliers include: aircraft suppliers, airport suppliers, fuel suppliers. Ryanair selects and assesses their suppliers based on the strategy of low cost. It is committed to obtaining the best value from suppliers and is affected from low to medium power of suppliers. That's the key issue involved in supply base assessment for Ryanair.
There are only two imperative suppliers of airplanes-Boeing and Airbus, as hegemony of Boeing in budget sector broken by Airbus giving Boeing less bargaining power, from low cost point of view, Boeing is main aircraft supplier of Ryanair, furthermore switching cost from one supplier to other is high which led to retrained mechanics and pilots for usage of other supplier's product.
There are two types of airports called as primary and secondary airports, primary have great power with high cost. Lower access fees at secondary and regional airports have the comparatively lesser bargaining power where Ryanair chose to operate rather than going for the main airport.
The challenges of supply base management in a global supply chain
Internationalisation is being driven by changing structures in the international economic and business environment in terms of global sourcing of raw materials, other inputs and global selling. Increasingly competitive markets, more discerning customers, globalisation of markets for inputs and outputs, shortening product life cycles and vertical disintegration have all combined to put supply chain management (SCM) at the core of the strategy development process (Sweeney 2007). Therefore international SBM is complex and different from localised SBM process.
According to Robert and Nichols Jr (2003), the key issues and challenges in SBM are:
? Need for a good cooperative relationship with supplier.
? Human factor in relationship with suppliers: trust, communication, sharing accurate information, maintaining relationships with suppliers and so on.
Challenge One: Communication and developing a good relationship with suppliers
Developing effective relationships with suppliers is hard work, especially when suppliers are located in different parts of the global. The communication is a critical factor. There is no question that face-to-face communication is best, so in many cases the company must travel to the location and visit with the supplier face to face to build an effective business relationship, this investment in cost of travel is essential. The key issues in a global supply base management focus on the need for the 'human factor' in establishing positive supplier relationships and the development of a high-performing global supply base.
Challenge Two: Cross-cultural trading and language barriers
As international challenges have happened, so supply chain architectures have become more global, however each country has its own culture, adding to language problems are cultural differences. In fact, some cases it can be serious misunderstanding if the two parties cannot speak a common language even if the terms of business are put in writing. Furthermore, cultural differences really can create challenges when it comes to negotiation.
Challenge Three: Monitor the performance of the suppliers
Outsourcing needs to be regard as a strategic choice. This has resulted in a shift away from the traditional model of 'control through ownership' towards models that are based on management and control through effective SC relationship management. Suppliers should be monitored continuously, providing feedback on performance to suppliers is important. Due to increased global sourcing, differences in time zones and working day, sometime it is difficult to contact with suppliers in other countries, so there is challenge to monitor suppliers' performance and feedback to them.
Challenge Four: Interact with government agencies
Managing supply base in a global business network, global businesses have to interact with government agencies in the various countries in which they are active. Phdscholarships in Europe (2010) points out that concerns mainly the activities of customs agencies, but can also include inspection agencies, licensing agencies, police departments, tax authorities, anti-trust authorities, and so on.
Supply base can be used as s source of competitive advantage: HP's supply base management (Anderson 2005)
Organisations will increase their focus on relationship management with suppliers and customers because of increasing global competitiveness, limited resources and the need for global reach while maintaining flexibility (Gattorna 2003).
Developing good supply relationships with suppliers that are committed to the buying company's success and to share information and resources in order to achieve competitive advantage. Nagle (2010) states that 'before, the idea of containing company costs came by 'squeezing suppliers' margins through price cuts. Now the word on the street is 'collaboration.' 'Building better relationships with supplies, with a deeper understanding of supplier cost structures and performance level can lead to improvement of the product development process, reduced risk and a faster time to market.
Based on trust and collaboration, both sides are working towards a common goal of improving the efficiency of the SC, and both gain profit in the success of the relationship, achieve competitive advantage in marketplace. It is 'win-win' situation.
HP is a very good example in turning supply base into competitive advantage. On its SBM, HP maintains control of multitier suppliers relationships and optimise inventory globally through collaboration with suppliers, as a result, HP creates value-adding on some key aspects as follows:
? Assurance of supply
? Better inventory management
? Supply chain responsiveness
? Lowers material costs
? Improves cash flow advantage
In short, SCM including supply base assessment and management is becoming a more integral and integrated part of overall corporate strategy. Critically the most important part of procurement is finding the right supplier, and the general advice is that a poor supplier causes more problems than poor materials. One of the core objectives of procurement is to ensure that a continuous supply of materials and components to maintain manufacturing operations. Assessment of suppliers should be considerable focused on ensuring continuous supply, inventory minimization, quality improvement, supplier development, and lowest total cost of ownership.
Increasingly there are some challenges in operating in a global SC environment, it is particularly critical for international organisations to develop effective relationships with suppliers and it is the key issue in SBM. Maintain positive relationships with suppliers based on collaboration, the organisations can benefit from utilizing the resources and competencies of suppliers to develop new skills and innovations, while reducing involvement in areas where there is no competitive advantage. Furthermore supply base can be used as a source of competitive advantage.
How does purchasing contribute to creating and managing supply chain risk?
As firms increasingly pursue SCM strategies in response to competitive pressures, purchasing has become an integral part of a firm's capability to achieve business goals and strategies. Essentially effective purchasing can contribute to profitability and competitiveness.
Increased globalization of businesses and the resulting competitive pressures have created a shift from a seller's market to buyer's market (Mentzer 2001). Firms increasingly respond to global competitive pressures by becoming more global themselves-looking for growth opportunities in foreign markets or buying raw materials from foreign suppliers. International purchasing is developing, as a result SC trends such as global sourcing, offshore manufacturing, outsourcing and lean sourcing continue to affect the SC, and have exposed firms to new risks, firms is continuously faced with new or changing uncertainties. These must be addressed as quickly and as efficiently as possible. Deloitte (2009) argues that 'if you have no strategies in place to manage these risks, they can have a disastrous effect on your sales, your customer satisfaction ... That's why Supply Chain Risk Management (SCRM) is important for you.'
Supplier failure and disruption of supply are concerned by companies as top risks of SC. From the purchasing point of view, the SCRM often translates to suppliers-related risk management activities.
(A) Purchasing contributes to creating supply chain risk: some factors contributing to supply chain risk
Majority of companies today strive to harness the potential of global sourcing in reducing cost. In fact, global sourcing has disadvantages that can create risk beyond benefiting from low cost. According to Wikipedia.org (2009),
Some key disadvantages of global sourcing can include: hidden costs associated with different cultures and time zones, exposure to financial and political risks in countries with (often) emerging economies, increased risk of the loss of intellectual property, and increased monitoring costs relative to domestic supply.
For manufactured goods, some key risks including long lead times, port shutdowns interrupting supply, and the difficulty of monitoring product quality. Furthermore, there are some uncertainty and problems associated with sourcing from less developed countries such as unpredictable inflation rates and exchange rates as well as the problems associated with government intervention.
The trend to outsourcing
Outsourcing raises due to organizations enhance their effectiveness to gain competitive capability by focusing on core competencies while using the third party for non-value- adding activities' (NVAs). Outsourcing is not simple or easy to create, develop and support, and it can have both positive and negative effects on key areas of the SC (Mason et al.2002). In general, outsourcing is implemented to lower the financial cost of the company.
Some key disadvantages/risks of outsourcing can be indentified including lack of management commitment due to supplier looking after the day-to-day business operations, employees reacting negatively to the initiative and resistant to change, having less control over the services that have been outsourced. One of the major risks is the failure of delivering products in time. Many a times, the cost of transferring knowledge is very expensive. Dependency on another company's financial status is a potential risk of outsourcing as well.
Focus on lean supply chain management
Lean SCM focuses on removing inventory and redundancies from the SC. A lean SC process has been streamlined to reduce and eliminate waste or NVAs to the total SC flow and to the products moving within the SC (LTD management 2004). Although this practice is efficient when the environment behaves as predicted, lean SC become extremely vulnerable for disruptions.
Nowadays, organisations have become very lean and mostly operate on a just in time (JIT) basis. Therefore the slightest disruption to any element of their SC can have devastating results.
Reduction in supply base
A supply base is portion of a supply network that is actively managed by a purchasing company. It is critical for companies to optimize the size of their supply base. A large supply base increases the fixed cost, while small supply base gives rise to the risk of supply disruption. Choi and Krause (2006) point out 'four propositions have been formulated in terms of four major areas of research within SCM-transaction costs, supply risk, supplier responsiveness, and supplier innovation. In general, reducing supply base may be used as a method in saving cost, through reduction in complexity may lead to lower transaction costs and increased supplier responsiveness, but in some cases it may also increase supply risk and reduce supplier innovation. Therefore, blindly reducing supply base may create risk and decrease the purchasing company's competitive advantages.
Single sourcing means choosing to use only one supplier when multiple suppliers exist, there is a greater risk in case of a supply disruption at the single source vendor.
Volatility of demand
The new product development (NPD) is very important activity in SC processes. The advantage of NPD is to short the time-to-market cycle. In fact, shorter product life cycles due to greater product variety and substitutes, as well as focusing on continuous innovation, flexibility and high service level, this may lead to firms have more stock than it needs, resulting in the risk of inventory obsolescence and put more pressure on the SC.
(B) Purchasing contributes to managing supply chain risk
A number of issues as mentioned above would impact the efficiency of SC and increase SC vulnerability. If there are no strategies to manage these risks, the organisations' SC might be interrupted or even collapsed. That is why SCRM is important. Deloitte (2009) has stated that SCRM includes the development of continuous strategies designed to control, mitigate, reduce or eliminate risks while keeping costs under control. According to Ariba (2009), of all the risks that affect the SC, supply risk accentuated by supplier failure has been identified as the top risk that many organizations worry about in the current economic climate.
Approaches of SCRM from purchasing points of view
? Monitoring and managing key suppliers' performance
Determining the optimal number of suppliers, identify key suppliers in the entire supply network, monitoring and managing their performance regularly and carefully. Queensland Government (2000) states that 'monitoring and management suppliers performance is important when purchasing goods or service for which there is a high relative expenditure and/or difficult to secure supply.' The main advantages of this strategy are: contributing to effect risk management, reducing transaction cost associated with purchasing, developing strategic relationships with suppliers, developing supplier capability, improving supplier performance.
? Awareness and prevention of risk
Awareness and prevention are two important faces to address for ensuring supply continuity (Brindley 2004). Creating external awareness, especially with critical suppliers, provide additional and potentially clearer view of risk factors organisations face in their upstream supply chains. Creating an awareness of risk sources allow the firms to work together towards preventing risk when possible.
? Establishing open lines of communication
Purchasing organisations establish open lines of communication with their supplier organisations, sharing and providing insight for managing supply risk and making plans for the risks can't be eliminated. Sharing information between suppliers and organisations can serve as a method preventing risk. Exchange critical information among the entire SC and network, creating plans to avoid supply disruptions.
? Supplier Relationship Management (SRM)
Managing supplier relationships effectively can achieve maximum savings and efficiencies. Developing suppliers and forming key alliance relationships with critical suppliers can create more robust SC to reduce risk.
Some other actions may be taken to manage risk:
? Understand marketing trends that may impact supply and demand
? Review supply contracts regularly
? Analyze the financial health of suppliers
? Expanding supply options through multiple sourcing
? Create supply chain process management, assurance and controls.
The risks created by purchasing in Ryanair
The strategy of purchasing in Ryanair is focusing on low cost, based on this strategy, Ryanair achieved its goal and get competitive advantage in the marketplace, but on thr other hand there are some potential risks created.
Ryanair possesses 196 Boeing aircrafts. The huge amount of money was being spent by their physical resource for the maintenance. This might harm their low cost structure. On the other hands, Ryanair tied up cash with the purchasing new aircrafts is a potential risk.
Innovative strategies focus on cost cutting.
According to Fogarty (2009), it was reported Ryanair planning to cut cost by making fliers perch on stools with seatbelts around their waists. This new product development will be created potential risk if the public doesn't buy into the new designs.
The power of suppliers
There aren't too many different suppliers of aircrafts. Boeing is Ryanair main aircrafts supplier, if some incident happened such as the strike at Boeing, which are delaying delivery of necessary aircrafts, could cause a delay in opening new routes.
Contract out of service
Ryanair contracts out aircraft handling, ticketing, baggage handling and other functions to third parties with multi-year contracts at fixed prices, limiting exposure to cost increases. Third party service outsourcing also limits Ryanair's direct responsibilities and potential disputes.
Energy and fuel costs cause of uncertainty
The fuel price fluctuations are the most key factor for airline industry.
Ryanair's fuel price fluctuation in 2010 if without any hedging operations
First-quarter, Ryanair's fuel costs rose 34 percent to 286.6 million euro. The average price of oil contracts traded on the New York Mercantile Exchange rose to $78.14 a barrel from $59.63 in the same period last year (Bloomberg 2010).
Jet fuel prices rose $10.5 dollars, or 1.5 percent, to $691 per ton yesterday (19 July 2010), according to data compiled by Bloomberg.
According the above stated data, the First-quarter fuel price is $78.14 a barrel. One ton of crude oil equals 7.3 barrels. The fuel price per ton in January 2010 to March 2010 is:
$78.14 * 7.3= $570.422
Price per ton on 18 July 2010 is: $691.5 - $10.5 = $681
Price per ton 19 July 2010 rising 1.5% is $691
As the price fluctuation time to time in 2010, according to Ryanair new (2009), Ryanair has taken advantage of the drop in fuel prices to extend its hedging programme for 2010 to 90% for the first 3 quarters at an average price of $620 per tonne and 60% for quarter 4 at an average price of $620.
Purchasing as a key function in SC initiates and controls the flow of materials from upstream into firm, strategically plans the supply side of the operation, and managing the relationships with suppliers. As increased complexity and uncertainty associated with global environment, the companies are faced with many varying types of risk. Purchasing organisation as a decision making for the firm's purchasing process is playing an important role in creating these risks.
As a strategic purchasing, firstly should identify the potential risks, then assess the implications of the top risks and creating risks mitigation options. It is critical to establish a monitor system to monitor supplies performance and development a good relationship with suppliers to reduce risk. Once the risk occurs, purchasing organisation needs to first respond to the crisis, then recover as quickly as possible to reduce its impact.