Procurement process in small or Micro Enterprises. Essay
Procurement process in small or Micro Enterprises.
This assignment entails the information of procurement processes and the comparison of three different organizations that we have chosen – the Minimart, Online shop and Pet item industries. Although they are all micro organisations and retailers in the supply chain, they encompass individual requirements and selection criteria of their procurement processes.
In this assignment, we will identify what are the similarities and differences in their Procurement-to-Pay process, their ‘What if” risk factors and the mitigation approach in overcoming the risks.
2. BRIEF DESCRIPTION OF ORGANISATIONS
The three micro organisations selected are namely the Mini-mart, Online Apparel Shop and the Pet Shop. Firstly, the mini-mart act as a “convenient store” located around housing estates. It takes advantage of the proximity and locality and targets the morning rush hour crowd such as the students and working adults. The mini-mart offers products like canned food, drinks, tidbits, newspapers, ready-to-go foods like packed rice, finger food and desserts.
As the mini-mart deals with highly perishable goods, the procurement procedure will be special to the industry, as they have limited shelf lives. Next, a recent trend in the fashion industry is the online shop. The online shop sells apparels and accessories that the owner source from around the world leeching on bulk discounts.
The online shop targets female consumers that enjoy the convenience of online shopping. Lastly, the pet shop sells pets and their related items such as cages, food and treats, grooming kits and toys. The main consumers will be the people who are looking for pets and existing pet owners who will need to purchase the pet’s necessities frequently.
3. POSITION OF ORGANISATIONS AND TWO MAJOR PRODUCTS IDENTIFIED All three organisations act as retailers where consumers purchase products from them directly. They directly import the products themselves from overseas or purchase from local wholesalers who import them in bulk. The focus for these three micro organisations chosen in their procurement process will be on the strategies that they make due to the limited space operating in Singapore.
In addition, the mini-mart and pet shop have limited shelf life for some of the products that they carry. The two major products we identified for minimart are the newspapers and the ready-packed food. As mentioned, the consumers are mainly working adults and students that patronize during rush hour. Items like local newspapers and ready-packed food are in high demand. The shelf life of these products are short, thus once unsold will deem the newspaper obsolete and food stale. Next, the two major products for the online shop are clothing and accessories.
The online shop needs to bring in new apparels constantly. They need to catch up with the growing demands and changing taste of the customers. A factor that contributes to these is the seasonal fashion that changes every time. Thus, seasonal demand should be included into forecasting for inventories as this would keep the company competitive.
Finally, pet item consumers would mainly look forward to daily requirement such as pet canned foods and grooming products. They are two major products that petshop need to constantly keep them in sufficient amount of inventory required when they affect the sale rates. As mentioned earlier, they are imported overseas.
4. PROCURE TO PAY PROCESS COMPARISON
The three organisations that we have chose have all followed this Procure to Pay process, however they have their differences in determining these processes. For forecasting, the online shop and the pet shop has less frequent level of forecasting their requirements due to its irregularity sales of goods which depends on seasonal demand. However, the mini-mart actually requires daily forecasting and is more volatile in their forecast. The shopkeeper take into considerations like public and school holidays before he actually consider how much to procure for the day worth of food and newspapers to sell.
For example, during weekends in the morning, crowds tend to be lesser and thus, lower in demand. For the clarification/requisition and supplier selection process, the online shop had done their clarifications virtually through online e-mails and phone calls as most of their suppliers are all overseas. The mini-mart and the pet shop actually do face-to-face meet up with suppliers to look at the real products, whether they can match their requirements before confirming the order and delivery. The approval and contract process is quite similar for both the mini-mart and the pet shop as it is done locally.
After identifying a supplier, they will send purchase order according to demand. The online shop process is slightly different as the suppliers are mainly from overseas. Once the proprietor has identified their supplier, she will travel to the country to visit the supplier to determine the product’s quality, and to establish a rapport with the supplier before giving the approval. After discussing with these three organisations, we have discovered that price is one of the key factors on how these three organisations measures the performance of their suppliers.
They will not want to see a sudden increase of their cost of products. However, there is a difference in their selection criteria. The mini-mart factors in the timeliness of goods, the petshop factors in the brand of products that consumers prefer, and the online shop focuses in the design, quality and bulk purchase discounts.
5. SUPPLIER IDENTIFICATION AND SELECTION
The similarity in requirement for selecting suppliers is the timely delivery. All three organisations, especially the mini-mart requires punctual delivery of newspapers and ready-packed food daily. They rely on the supplier’s punctuality to stock up right inventories to make items available at the right time and place for consumers. With the Fedex Strategic sourcing process (Annex B), we are able to show their differences in identification and selection of suppliers.
Profile the Sourcing Group
– Requires volatile changes of good supplies depending on the daily requirement. Thus, while setting the profile, the owner will prioritise familiarity and reliability with the supplier. – Requires volume discount.
– Timely delivery affects forecast for seasonal demands and thus, will affect their sales. – Requires volumes discounts for pets related item.
– Requires credibility and reputation of the supplier.
Select Sourcing Strategy
– Has no bargaining power over the products from the current suppliers. – Have little alternatives over suppliers as suppliers are niche and limited. – Has bargaining power when ordering goods in bulk.
– An alternative way when current supplier is unable to meet the needs, online shop owners in Singapore can go for overseas hunts to look for direct suppliers instead of normal wholesalers in Singapore. For example, Bangkok is one of neighbouring countries who is the direct supplier for apparels sold locally. – Has bargaining power due to bulk purchase ability and due to the large supplier base, it is easy to find alternative sources that can provide similar/better services. Generate Supplier Portfolio
– Has only one source for getting the newspapers due to the limited publisher in Singapore. – However, for the food supplies, the owner will look into the value added services such as packaging of the food items. This helps to save the time of re-packaging and selling to the customers.
– Every piece of apparel is packed neatly in packaging and owners do not have to re-package themselves again. They are also delivered to owner’s doorstep from overseas. This adds value to the supplier’s service. – Selects and identify suppliers with no value added capabilities. However, main selection criteria are bulk discount and price.
Select implementation path
– Very little adjustment to be done on the sourcing due to the basic business model. – Many online shops sells similar items so they look for suppliers who can provide self-manufacture services and also bulk discounts. For example, suppliers follow designs as given from online shop’s purchase order. – Increase bulk discount criteria to shrink the list qualified supplier. Major product like canned foods can be stored longer, thus, storage will not pose as a problem. Negotiate and select suppliers
– Due to the only existing publisher in Singapore, negotiating power is very limited. However, for the food supplies, reduction of price and efficiency is viable with increase in order quantity. – Base on shortlisted suppliers, they will look into the one who can compromise the most and satisfy their requirements. – With the sourcing strategy established, they will try to bargain for more bulk discount with the suppliers. Operationalize supplier integration
– Link their suppliers as a part of their operating process as timeliness is an issue for sales of goods for the mini-mart. – Long-term collaboration ensures quality and efficiency when there is mutual trust. – Will establish relationship with the supplier and also promise loyalty if the supplier maintains their quality service and discounts. However, they do not link the suppliers to their key processes. Benchmark the supply market
– Mini-marts tend to prioritise in bulk discounts and timely delivery in selection of suppliers. – By comparing selected suppliers, they will narrow down the suppliers who can provide the most efficient services and bulk discounts. – Does market comparison with other pet shops and also suppliers. They look out for cheaper suppliers and latest pet products.
6. STRESS TESTING AND RISKS MITIGATION APPROACHES
6.1 Four categories of risks identified in each organization A) Minimart
Risk Mitigation Approach
– Supplier who delivers ready-to-go food abruptly stops their supply.
– Excess inventory due to forecast error, seasonal demand, wastage in food. – Lose potential consumers who prefer food produce by original supplier.
– Sudden increase or decrease in demand.
– Acquire alternate source of supplier.
– Proper forecast to keep the right inventory level required. Delays
– Traffic jam delays the delivery of morning orders.
– Supplier delivers to wrong address.
– Miss and disappoints the morning crowds.
– Delay in displaying all the ready-food to sell.
– Increase responsiveness of Supplier.
– Look for wholesaler who can supply last minute.
– Supplier is forced to increase the price of raw materials. – Increase in Transport costs.
– Force to increase price due the spike of cost of goods or transport cost. – Having a redundant pool of suppliers to benchmark.
– Supplier’s order tracking system breaks down.
-Suppliers food processing machine breakdown
– Telephone line break down and customers cannot order via phone.
– Increase flexibility in other means of contact.
For example, e-mails, mobile phones, telecommunicating for urgent orders. – Alternate source of supplier.
For the Minimart, we have identified two key mitigation strategies to acquire alternate/redundant source of suppliers and increase responsiveness. Acquiring redundant suppliers helps to reduce disruptions, procurement and inventory risk. However, as we discuss further, the mini-mart might face the risk that alternate supplier capacity might not be sufficient to meet their needs. This will in turn, pose as a risk to their inventory. To reduce the risk of delay, we have proposed to increase the responsiveness of the supplier due to short life cycle of food products. It also helps to reduce both forecast and inventory risk.
B) Online shops
Risk Mitigation Approach
– Natural disasters like haze, tsunami happen and cause shipment delay.
– Sudden shortage production of cotton fabric and raw material for making apparels. – Excess inventory due to wrong stock count.
– Demand increases.
– Increase in prices when demand is high and low in productivity.
– Have alternate redundant source of suppliers to rely on.
– Increasing inventory level.
– Better forecast inventory due to seasonal demands.
– Stock delays that resulted from shortage of important raw material e.g. fabric etc.
– Distribution takes longer when delay from shipping companies. – Customer order fulfillment gets delayed
– Stocking up more predictable and lower cost product.
– Look for direct alternate suppliers overseas, shortens waiting time for shipping and save cost. Procurement
– Increase in production costs from supplier due to shortage in raw materials or labors.
– Shipping costs increases that was incurred from transportation companies.
– Need to increase selling price while unable to reduce waiting time required, or even higher waiting forecast.
– Customer orders gets mixed up and resulted in poor customer service. – Acquire redundant suppliers for benchmark.
– Increasing responsiveness approach to meet customer demand.
– System breakdown at overseas supplier side.
– Online shopping website breakdown locally and technical repair takes some time – Website gets infected and not able to receive customers order.
– Increase inventory level to mitigate supplier system risk.
– Increase in flexibility of point of contact.
For Online shop, the main focus was to get supplies ready when needed. Having alternate suppliers is necessary when there is delay or failure in the potential supplier. Accurate forecast is important when consumer demand is different every season. Leftover items from excess inventory could have difficulty in meeting buyers and cause wastage.
C) Pet Shop
Risk Mitigation Approach
– Local supplier has stopped supplying a hot selling product.
– Health production examined a major pet canned food product contains chemical that is not suitable for consumption. – Consumers forced to go for other alternative supplies.
– Retailers forced to absorb losses for existing inventories. – Increase in inventory.
– Have redundant suppliers.
– Supplier delay delivery of promotional item by a day.
– Supplier deliver wrong type of items and causes
– Inadequate supplies to meet expected demand.
– Severe shortage on particular items affected.
– Increase in inventory level.
– Supplier refuses the bulk discount of a certain product due to drop in purchasing volume.
– Supplier increase in price when production cannot catch up with demand. – Forced to increase price due to lesser sales of a product.
– Consumer still enjoys usual selling rates due to competitiveness at retailer side. – Having redundant supplier so that they can benchmark their suppliers to get the best competitive price. Systems
– E-order system broke down.
– Overseas supplier lose track of all orders due to system breakdown – Online web page is down and customers are not able to get information and order online. – Increase flexibility in having other source of communication like telephone or backup copy of customer’s orders.
As for the pet shop, we concluded that to gain competitiveness in pricing, they require the suppliers to issue bulk discount. Thus, they will have a few redundant suppliers to allow them to manipulate the prices between the suppliers, giving them a lower price. In doing so, it also mitigates on problems like disruption and delays as if any of the suppliers will fail on such a secondary will take the job mitigating these issues. We must understand that when they engage any supplier, they will stock in more than enough stock setting buffer and leeching on the bulk discount.
6.2 Risks Mitigation
For the above different categories of risk, there are a few similar mitigation strategies for each risk for the three organizations studied. For the risk of disruption, the key strategy for the organizations is to acquire alternative/redundant suppliers. This strategy will help to mitigate the risk of sudden stoppage of supplies. Also, it helps to reduce the procurement and delay risk.
However, we have also concluded that as these organisations are retailers, which are subjected to the supplier capacity to provide the inventory needed. As such, if disruption from supplier were to happen, the organisations might face inventory risk. Coming to risk of delay, the pet shop and online shop are able to eliminate this risk by increasing inventory level as canned food and clothes can be stored. This will also help to lower disruptions and procurement risks to the organisation.
However, for the mini-mart, the approach is different due to the short life cycle of food products and the timely delivery requirement due to daily demand. As such, it requires an increase in the responsiveness of the suppliers to ensure quality of products. For risk of procurement, we are able to conclude that all three organisations require having redundant suppliers. Mostly, for these organisations faces risk in an increase of the cost of goods and transportation cost.
As such, they require different suppliers so that they are able to benchmark their suppliers against others to get an overall competitive edge in cost saving. Lastly, for the risk of system, the organisations are facing mostly on issues like purchasing system breakdown or the organization system failure. Thus, they need to increase their flexibility in having other source of communication like telephone, mobile phones or backup copy of their own orders.
In conclusion, the above analysis on the three organisations helps us better understand the procurement process and the importance of considering such processes when it comes to reducing costs, risks and selection of suppliers. It is also concluded that all the three organisations rely in a way or another procurement strategies to ensure normal business function in serving targeted consumer demands, making them available in the right time, right place and location.
In addition, the suppliers and the three organisation’s relationship in the existing market play an important role in terms that affects the delivery to end consumers. Also, we have concluded that for micro organisations, the three most important mitigation strategies is in having redundant suppliers, and keeping and forecasting the right inventory level and having flexibility in their organisations. This will help in the organisations smooth operating process.
1. Chopra, S., Shodhi, M.S. (2004). Managing Risks to avoid Supply-Chain Breakdown MIT Sloan Management Review, 46, 1.
2. Monczka, R., Trent, R., and Handfield, R. (2005). Purchasing and Supply Chain Management, Thomson-South-Western, Third/Fourth Edition
3. Interview: Junction 168 Minimart – Mr. Tan, C.T. (2013) – Understanding the Organisation and its Procurement processes.
4. Interview: Kwong Fatt Pet Centre – Mr. Wong, K.F. (2013) – Understanding the Organisation and its Procurement processes.