Measuring Performance Systems in Supply Chain
Measuring Performance in the Four Key Dimensional Areas of Supply Chain
Purchasing Materials Costs
Measuring purchasing performance is a significant part of procuring departments in supply chain management. The purchasing department plays a pivotal role in the supply chain of a company. A reduction in the general cost of raw material and the services offered within an organization has the potential to affect the company operations (Galkin et al. 1190). Therefore, an organization can take advantage of cost reduction in the raw material to competitively price its finished products or services in the market (Prajogo et al. 226). This leads to a competitive advantage in the industry of operation. Therefore, the obvious performance measure in the department would arise from the amount of money the company saves from the raw material compared to the increased sales of its finished products.
Given that price fluctuations are always witnessed in the markets and controlled from sources or factors that are beyond the control of the company, it is important that purchasing material cost performance is measured from other alternative spectrums. This means that inventory turnover ratios can be used to measure the frequency at which the inventory is used over the period (JerutoKeitany, Pauline, and Salome Richu 9). Hence, this aspect subsequently influences cost savings on associated costs brought about by the market fluctuation of prices. Cost saving is an important measurement factor since it explains the extent of the competitiveness in the price of raw material procured in the department. Cost savings can be achieved when a new supplier is identified or a new contract is signed by the vendor or when a relatively cheaper method of transport has been identified in the company.
Improved quality of raw material either sourced from a new supplier or an existing one through renegotiation influences the company’s operations. This is often reflected in the reduction of waste in the manufacturing process as well as in the production resources (Milewski, Dariusz 120). Quality products are important in every organization since they control the firm’s visibility in the industry (Shin et al. 4). When an organization produces quality products in the market, it gains competitive advantage through product leadership within the market, which positively enhances profits.
The transportation of raw material is a major cost item in the general organizational supply chain. Transportation costs and other charges like warehousing and storage usually influence the final price of the commodity (Milewski, Dariusz 120). Negotiation with a number of carriers to reduce the costs of transporting material is a significant performance measure point within a department (Eliasson et al. 419). Similarly, some transport and logistics companies have developed competitive products, leading to free warehousing and storage within a specific period if they are contracted to offer the transportation services. The exploitation of such opportunities in the shipping companies is an advantage for the firm.
The nature of the relationship between two organizations is defined by the aspect of their business engagement. The relationship can be measured through the level of agreements and the quality of business engagement between the companies. The effective management of organization through a centralized purchasing system can assist in measuring the quality and efficiency. For instance, a purchasing clerk can specialize in paying for a particular supplier, especially in cases of large multinationals. Indeed, this would add value to the company since quality and efficiency of the transactions would be attained because they are managed from a centralized point. Similarly, centralizing the purchasing systems brings about a higher control over the purchasing processes.
Improving Performance in Supply Chain Systems
Purchasing Materials Costs
Organizations have specific methods of payment used to manage their payment systems. The efficiency of those compensation approaches used to pay for raw materials will yield effectiveness in the company. The introduction of e-procurement systems, EDI, Vendor managed inventory or the pay on receipt systems can considerably reduce costs while increasing effectiveness and efficiency. Therefore, this can be an important measurement factor in the supply chain. Accordingly, the internet and E-commerce is changing the way material purchasing is done on the global business platform. E-procurement or e-purchases have the ability to improve material acquisition to a considerable level (Kasasbeh et al. 6). Similarly, the use of E-procurement reduces the operational costs incurred in the payment platform, delivering higher efficiency levels.
There has been a common perception in supply management that improving product quality induces higher operational costs. However, flexible automation tools have been considered for adoption to increase production and impact positively on the quality of the product. Tian, Feng, and Sean explain that the implementation of automation has a higher value of return on investments associated with flexible automation schedules (42). Robots have also been considered in the supply chain products quality automation in several multinational value chains (Dachs et al. 3). Though considered expensive, robots have the potential to improve products quality and expected quantity due to the fast and efficient methods of arriving at the final product. Therefore, automation brings in cost-effectiveness and efficiency in the operations.
Purchasing logistics is the focal point of the processes in supply management. Worth noting is that the process influences overall cost in an organization. Cost reduction, therefore, is one of the most important functionalities of the procurement department. Development of stronger risk management policies with the ability to mitigate threats in the procurement process is a key factor towards improvement. This includes ensuring all the members in the production processes are informed of the policies that would lead to effective execution.
Developing performance indicators help in understanding the gray areas in purchasing logistics thus leading to better improvement. When performance is measured on set out metrics, deliverables are easily rated for improvement in the supply chain. Therefore, the indicator development helps in the evaluation and thus should be conducted on an ongoing basis. Accordingly, the outsourcing of procurement functions increases productivity in the value chain. The outsourcing of purchasing logistics to more efficient and better prepared third party organization increases efficiency in the department. This includes enlisting the support of professional consultants since their unbiased perspective solidly anchored on knowledge perspective and experience in the relevant field can be helpful in the organization.
Supplier management among other partner organization forms the platform on which every business in the supply chain is set. After the process of identification of suppliers and securing contracts, it becomes incumbent upon the organization to set an operational framework that is beneficial to the business. To ensure improvement in this sector, an evaluation mechanism is important to set up the quality assurance models in the organization. Such factors include the quality and quantity of suppliers for a particular organization, on-time deliveries, costs, and other intangibles.
Other models of ensuring the improvement of quality include ascertaining supplier performance through certification from several professional bodies. It is important to note that the supplier certification ensures the sourced organization have the commitments to supply certified quality and operates within a professional framework. The agreeable relationship with the supplier has the potential to attract better price negotiations for the requested supplies and improved delivery schedules that lead to better and improved work processes.
Coles – A Retailer in Australia Sourcing a Dairy Product Case
To ensure smooth operation in the supply chain process, flexible material sourcing is vital since it guides the pathway to efficient and quality products (Kendall et al. 10). Zhang et al. explain that research and development plays a key role in the supplier identification for the material and services supply since every destination and jurisdiction has its own varied dynamics (18). The aspects that exist in such locations have the capability to impact on the quality and the price of the final products for the business.
Risks Associated with the Purchasing process Related to New Zealand
New Zealand is the highest exporter of milk globally. The dairy industry of New Zealand is well established to build better delivery systems and supportive infrastructure. The outsourcing form can be described as nearshoring. Some of the likely risks that Coles Australia is likely to face when making purchasing decisions include political and economic differences. Even though Australia and New Zealand are close business partners, operating on robust free trade treaty agreements, the countries have varied political playfields that influence the nature of the business decision-making process.
Therefore, purchasing and procurement managers of Coles are likely to be affected by the risk of price fluctuations and the variance in the money market. It is similarly possible that the purchasing process will have challenges due to distance and the variance in between the currency markets of the two countries. Additionally, the identification of quality and competent suppliers could face difficulties due to distance and trans-border challenges. This could imply that Coles has to set up a coordinative office in NZ to take care of supplier identification and discuss aspects related to quality and timely deliveries. This will comprise the coordination of the shipping companies and their costs, including charges of storage and preservation since dairy products are highly perishable (Johnson et al. 5553).
Therefore, it is important that Coles Australia conducts due diligence on all its purchasing systems to reduce systemic errors or weaknesses for the smooth flow of the purchasing processes. Zhang et al. explain that it is better to ascertain if an offshore supplier has a lower risk rather than how competitive the prices proposed maybe. Thus, by ensuring that the suppliers are not entirely focused on the risks involved, a more stable value chain would be achieved (4). Through the effective management of global sourcing and purchasing systems, organizations will make significant savings and maintain the close relationship with global outsourcers.
The possible solution to the likely risk between Australian and New Zealand is the implementation of E-procurement suites into the supply chain process. The e-procurement will ensure the integration of purchase and payment of the best practices recognizable between the two nations. Multinational corporations are using e-procurement tools to systematically manage the flow of business documentation through automation of the entire process of business (Clemons et al. 433). Similarly, the electronic transmission of purchasing documents to the suppliers can help achieve higher efficiency level. The e-procurement and e-purchasing systems will help in the eliminating paperwork and hence reduce the time required between need recognition and the provision of an order. The most significant advantage, however, lies in the fact that e-purchasing systems employed between the two partners will minimize the time spent by the purchasing personnel. Therefore, there will be less time in processing purchase orders and invoices thus spending considerable time focusing on value addition activities for their companies.
Risks Associated with the Purchasing Process Related to Bangladesh
The potential risks likely to be experienced by Coles for the supply of dairy products from Bangladesh are linked to distance and political stability. The distance between Bangladesh and Australia is vast and the outsourcing systems can be defined as offshore. Cole’s managers are likely to experience risks related to the variances between the technological applications and the preparedness by the farmer to embrace the virtual payment system. Herath, Tejaswini, and Rajiv Kishore explain that offshore sourcing is often coupled with challenges such as asset specificity issues. Therefore, this challenge may initiate a modification process to accommodate support to the clients so that they can invest in hardware and equipment, which may be an added cost to the company (313). This is likely to be the situation between Coles and suppliers in Bangladesh.
Bangladesh is one of the poorest countries of South East Asia block and experiences higher political volatility. Therefore, the economy is characterized by fluctuations of its currency and the general GDP of the country. This is likely to interfere with the purchasing arrangements at Coles and the cash flow projections within its financial systems (Herath, Tejaswini, and Rajiv 314). On the other hand, the majority of small-scale dairy farmers in Bangladesh expect simplified payment systems, which might force the company to procure expensive purchasing systems. Therefore, this will include handling of higher liquidity since the majority of poor Bangladesh dairy farmers are not linked to formal commercial banks or to any global wired payment infrastructure. Language limitations will, however, be part of the greater risk. Hence, this will imply that Coles will spend considerable amounts in hiring local and resident executives or company representation with local language advantage to initiate discussion and agreements with the dairy farmers of Bangladesh on behalf of the company.