Designing optimal supplier management system
There is a relevant problem of organizing supply functional area of a company and its supply chain. The most complicated procedure is to arrange the basis of company permanent suppliers which depends on the precise supplier evaluation and selection. The problem is to reveal the ways of supply procedures efficient organization to ensure a company sustainable development. Therefore, there is a reason to suppose that the procurement functional area is the principal one for a company and by coordinating it efficiently the company may attain total costs reductions. Applying of expedient methods allows to reorganize the supply function of a company in order to improve it. Nevertheless, even though a lot of prevalent methods are performed in literature, it is necessary to specifically regard company internal circumstances and demands, and combine methods correctly when it is required, to reform its procurement system. In the following research, ABC-analysis, Key Performance Indicator and Weighted-Point methods will be applied. As a result, the current purchasing system of the company under research will be inquired and improved, providing the comparison of the previous purchasing system and the renewed one. Furthermore, it is expected that the total costs level will be reduced after the reorganization process. Thus, this research is an example of supply system weaknesses revealing and its reconstruction by using a combination of appropriate prevalent methods, which might be successfully followed by other companies.
Nowadays, the management of relationships between suppliers and companies-buyers are receiving more interest and becoming more widely discussed.
Background of the Study
Currently, procurement role is changing significantly in comparison with its function and its regard in the past. Before, procurement function was to provide the availability of products and services in time involving the responsibility for transactions processing. Its activities were under manufacturing function. Due to 1980s economic developments companies started recognizing the procurement contribution to cost-out targets reaching and price reduction. Nevertheless, the procurement still did not have enough collaboration and cooperation with other functions of business. Later, with the Total Cost of Ownership concept emerging, procurement became an operation that is lead by cross-functional teams in a company. Moreover, procurement became more important strategically while its recognition also rose and it became a separate functional area. Now procurement is both aimed at price reductions and is an important tool to optimize total lifecycle costs as the procurement costs hold about 60% of total cost for most companies [3, 8].
There is an increasing problem of choosing appropriate suppliers and, as a result, problem of organizing the supply system in an efficient way. The main research question is to find out what are the ways of efficient supply system organization and to what extent the whole company sustainability depends on the supply and procurement functional area. Despite the fact that the debate about the most substantial functions of business, supply chain, and its influence on costs reductions continues, company sustainability and total costs level has a direct dependency on its supply system as supply functional area is the fundamental one for companies. There are some prevalent methods to organize procurement processes in an efficient way that may be used to improve the current supply system of an enterprise.
There are 3 following objectives that will be resolved in the study:
- Determine the role, tasks and major aspects of supply functional area of a company or supply chain, especially procurement activities;
- Clarify the ways and the criteria of supplier evaluation and selection;
- Research the procurement system and algorithm of a selected company and improve it using selected methods.
Delimitations of the Study
The study will be limited by the company Ahlers, which supply system will be researched and optimized in specific aspects.
The procurement function is directly connected with supplier evaluation, selection and concomitant supply relationship management (SRM). This function influences the entire logistic supply chain and is currently being researched . Most companies substantially depend on their suppliers, and on effective supply relationship management. SRM is a key perspective for companies to provide secure and constant deliveries in a modern competitive environment, reduce costs and the unit price. Therefore, supply function might be called fundamental for an enterprise. To organize supplies effectively and to ensure long-term relationship with suppliers, it is necessary to find efficient methods for this relationship to be profitable for both sides.
Definition of Terms
Purchasing is a term used to refer to the group of integrated relative functions, which joint objective is to supply a company with indispensable and efficient materials or services . The SRM term could be defined as planning, implementing, controlling and developing company relationship with actual and potential suppliers involving supplier assessment, selection, and integration . Supplier selection is known as the process of researching and assessing potential suppliers with certain criteria .
The paper firstly gives a review of investigated literature. Then it describes main methods and gives proposed results. The last section provides a brief conclusion and reference list.
The further part of the project is meant to investigate theoretical studies describing the role and content of purchasing, SRM and more detailed supplier selection process. As it is known, supplier selection can be identified as the most important activity of any company purchasing department. In considerable amount of literature purchasing is recognized as a function that comprises several strategically oriented activities [3, 5, 12]. Two groups of activities are strategic sourcing and operative procurement. The first group involves three operations: supply planning, then search for suppliers, supplier selection and contracting. The second group of operative procurement comprises material orders processes, deliveries and transactions for delivery . However, Schiele (2019) does not take into consideration further supply responsibilities such as receiving, verification, warehousing and inventory control, packaging, transporting and release.
Johnson (2019) points at the strategical responsibilities that comprise purchase planning, long-term business relationships with the suppliers, searching for cost reductions feasibility, new technologies and current trends in a supply market.
Many studies have found that company purchasing activities usually involve the following standard processes: recognition of the problem existing and development of its specification. The next step of purchasing is searching for suppliers and composing the suppliers list. Afterwards, there is a need for potential supplier assessment according to quality and cost requirements in order to make the proper selection. The last step is a purchase process that includes agreements and contracts with the chosen suppliers along with delivery of the products and payments [2, 5]. Thus, planning of supply and supplier selection processes are considered as the essential basis of the whole supply function in a substantial amount of literature.
In 2009, Beil pointed at the importance of discovering new suppliers in today’s competitive economy along with existing partnerships development. The author considers this question as an important factor for any company to effectively exist and covers the question entirely in his publication. Constant investigation of supplier market is a required part of purchasing department operations. Generally, previous suppliers that cooperated with a company in the past are consulted initially. However, searching for new suppliers is important due to the fact that there might be suppliers that are superior and higher-ranking to the buyer-company according to some defined criteria. Finding a qualified supplier that corresponds to all requirements of the company is a sophisticated process because of the necessity to verify and control the ability of each potential supplier to follow those requirements.
It is necessary to notice that the basic aim of Supplier Relationship Management is to develop the collaborative relationships with key suppliers that makes the biggest value for a company, or which products are the most necessary for the organization to achieve its objectives and goals . Moreover, SRM is an approach that comprises evaluation of supplier contributions and comparing it to the contribution level that they can make. The primary reason to provide this comparison is that the maximization of supplier performance directly influences the company performance .
According to Hoek (2013), SRM has a focus on growth, development and value-creation with a limited quantity of a company key suppliers that is based on open and trust relationships, and profit for both sides. The author determines leverage of supplier capabilities, ensuring on cost reductions and improvement of supply security as the basic SRM targets.
In an investigation into supplier selection, Harju (2010) found that supplier evaluation process consists of creating criteria that follows company needs and requirements and potential suppliers characteristics investigation according to that criteria. Then the characteristics of suppliers are compared to the established criteria while all schedules and specifications should be set at the same time. To choose the right supplier, purchasing department managers usually assign weight to the criteria due to its importance: the most influencing and considerable criteria is the heaviest one, while the least important one has the smallest weight. Delivery on-time, quality control, location of the supplier, pricing for the products indicators might be chosen as the potential selection criteria, which should be precisely determined by the buyer-company. Afterwards, these criteria need to be grouped and weighted as grouping usually helps to identify the most important and considerable criteria and simplifies the selection process.
In a study that set out to determine the main aspects and methods for supplier selection, Beil (2009) distinguishes creation of supply base as one of the important aspects in potential suppliers selecting. Those suppliers who were investigated and passed all qualification requirements of the company-buyer might be listed in a supply base. Mostly if the buyer reorders certain items every recurring time-period and uses short-term contracts, then there is a need to create a supply base with pre-qualified suppliers who will compete for the contracts. The supply base may be also used with long-term contracts for some concrete items in case when a supplier from the base is able to provide the buyer with different items. Then the suppliers might likewise compete for the long-term contract of a certain product supply. Thereby, supply base is a tool to reduce time cost for supplier verification and to develop standardized contracts and conditions for pre-qualified suppliers. This optimizes administrative processes in contracts signing.
There is a wide volume of published studies and literature describing different methods of supplier evaluation and selection. Several authors distinguish the following methods: categorical method, cost-ratio method, linear method and AHP method [7, 9, 11]. Categorical method comprises each supplier performance classification in a certain area, which is defined in a list of performance variables accordingly. A company-buyer creates a list of performance factors for each potential supplier and then evaluates suppliers in each area using, for instance, good, neutral and poor. Afterwards, the supplier with the best score might be chosen. This method is usually considered as inexpensive and easy to implement type of supplier evaluation.
Cost-Ratio method uses cost analysis to evaluate potential supplier performance. The total cost calculation consists of selling price and buyer’s other organizational costs such as delivery and purchase service components. The supplier with the lowest cost is the mostly preferred supplier . However, the disadvantage of the method is that it requires a lot of financial information .
The third method is widely used nowadays. Linear averaging or Weighted-Point method, involves concrete quantitative factors of performance. The most widely spread factors are delivery, price and quality. The factors might be weighed differently due to top management judgments. Then the individual rating should be given for each supplier and factor respectively [11, 14]. Afterwards, all scores for each factor are being summed, that allows to determine the ratings. At the end, each rating is multiplied by its factor weight and the numerical rating for every supplier is performed.
Patil (2016) broadly describes all currently used methods of supplier evaluation and selection in his publication and gives some examples for its better comprehension. The author considers AHP method as the most accurate method for selecting suppliers. The AHP uses a multilevel hierarchical structure of four levels: goal, then criteria and sub-criteria, and alternatives. The set of pair-wise comparisons is used for some paired criteria and then the weights of each criteria can be determined, by these weights and criterion a supplier assessment system is built.
Some companies, as the investigated international logistic organization Ahlers Rus in St. Petersburg, do not have a properly developed supplier system and thereafter SRM. Thus, the company Russian St. Petersburg affiliate will be investigated and optimized in certain aspects in this study. The branch office has a need to make purchases and organize supplies in a proper way to maintain the company work because present system has its disadvantages. St. Petersburg branch does not have a developed and organized permanent supplier base. Nevertheless, the company needs to order new materials and therefore there is a constant need to search for new suppliers, selecting them and making new contracts. The revise and optimization of old supply and purchasing system through finding appropriate methods for supplier selection and creating a permanent supplier base would be beneficial for Ahlers Logistics in St. Petersburg.
Even though many methods of supplier evaluation and selection are performed in literature, companies such as Ahlers find it complicated to use them correctly because of the need to take into consideration company own internal and organizational conditions and factors and to combine existing methods in a proper way when necessary, to create the appropriate purchasing system. Thus, to fill the specified above gap, a combination of certain methods for the revision, development and further optimization of supplier selection system and Supplier Relationship Management of Ahlers in St. Petersburg will be proposed in the present research.
In the following part of the proposal specific methods for this investigation will be discussed and the stages of its appliance for certain data will be reported. The data of Ahlers company in St. Petersburg, especially its purchasing department, will be performed and analyzed in the study.
In order to use indicated methods it is necessary to acquire sufficient data from the company which purchase system is being optimized. Initially, the range of goods that are being ordered for the last year should be gained in procurement report. Thereafter, it is necessary to find out which items or positions from the year report are permanent and which ones are single one-time purchases. Furthermore, it is required for this research to gain the list of suppliers that the company has been contracting for the last year. This information will be received from the contracts base of Ahlers procurement department. Moreover, the research highly depends on the requirements for each purchase item and each potential supplier respectively that will also be received from Ahlers database. This information is needed in order to create KPI and determine further criteria for supplier assessment and selection procedures. It is recommended to reveal the most frequently ordered products that make the highest costs for the enterprise and focus the investigation on this specific group of items. All the required data will be obtained from the Ahlers company purchase department as the aim of this study is to optimize supply and purchase system of Ahlers in St. Petersburg.
Firstly, the procurement report of the period under consideration will be analyzed. A rationalization method that can be applied in a sphere of any company is ABC analysis. It is prevalent and widely used in enterprises and will be used in this study as it is highly informative and not time-consuming. With this analysis it is possible to classify the resources of a specific company and reveal the positions that have the most impact on the total company expenditure. The method is based on the Pareto Principle, according to which only 20% of examined items make the 80% of the overall value for the company, for instance. With ABC analysis the items from the procurement year report will be sorted by its costs into three further categories, which are A, B and C groups . The study will focus on the critical positions of the first category A as, according to this method, they are considered as the most valuable items of the company procurement list and optimization of these goods purchasing might highly reduce the total costs.
According to the requirements of the company for ordering those items that are appeared to be at the category A and the requirements for the potential suppliers of mentioned items, KPI measures will be created. The suppliers whom the company has been contracting to order materials from this category should be reviewed and then using Internet research and open companies data bases new potential suppliers should also be detected for the further investigation. Then Weighted-Point method, that was described in a previous part of the study, will be used. This method was chosen because it is possible to combine it with KPI where the concrete Ahlers KPI factors will replace standard quantitative factors of performance. Furthermore, the factors might be weighed alternatively according to the company’s requirements, which is principal in this study. Then the factors will be weighed, and the individual rating will be produced for each supplier and KPI factor respectively. As a result, numerical rating for every supplier is going to be performed, revealing if the new detected suppliers might replace existing ones.
Results will confirm that although there are still different views on the most significant and fundamental functional area of a supply chain, that might also effectively reduce the costs, proper organization of a company supply system has a major influence on a company sustainable development, as the supply is the basis of any enterprise operation. Moreover, using described methods it is possible to reorganize or improve company current supply system to make it more effectual and less time and cost-consuming.
By revealing the processes and goals of the procurement function and investigating the methods of supplier assessment and selection procedures, the primary role of supply and procurement and their high impact on a company sustainability will be established and proved. Furthermore, by investigating Ahlers procurement system and applying specified methods for its revision and reorganization, the purchasing system of the company will be improved.
The results of the research will be proposed in Excel tables and various graphs. It is expected that the result will show the comparison between the previous Ahlers supply system and the improved one. It is going to be established to which extend was the former system inefficient and costly and how will the costs reduce after the renovation. The renewed algorithm of supplier evaluation and selection and the new suppliers will be suggested to the investigated company. Moreover, further recommendations in Supply Relationship Management with the recently detected and selected suppliers and the new supplier system will be given for the Ahlers purchasing department. This research might be helpful in the future for other companies to reform and improve the procurement function.
This project proposal confirms the current significance and relevance of the supplier selection problem and the problem of proper and profitable organization of any company supply system. It is established in the study that purchasing function is the basis of company sustainable development and is an effective tool for total costs reductions. Thus, the supply function, particularly purchasing activities, require conforming organization and management.
The study determines the role and key aspects of supply processes and reveals the significance of purchasing activities in a company or a supply chain. Furthermore, principal methods of the sphere are indicated in the paper. There are some widespread methods for simplifying and increasing the effectiveness of supplier evaluation and further supplier selection procedures. Moreover, by applying them, enterprises might review and reconstruct their procurement system or purchasing algorithm if necessary. Specific methods for analysis of procured products nomenclature and subsequent supplier selection, such as ABC, KPI and Weighted-Point method, are represented in the present study.
The research is limited by Ahlers company in St. Petersburg. Thereby, during the investigation process the company purchasing algorithm is being inquired and revised according to all revealed weaknesses. In order to improve the supply and especially purchasing system of Ahlers in St. Petersburg the adverted methods are being used. At the end of the investigation procedure, the procurement system is expected to be reformed and the total costs reductions will certainly be represented in comparison with the previous system costs.
Using proposed methodology, renewed purchasing algorithm and supply system in general, Ahlers company might reduce its total costs and increase the efficiency of their purchasing operations and processes in the future. The research can be repeated for other enterprises procurement systems providing that those companies own internal requirements, conditions and circumstances will be considered.
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