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Pacific Systems Case

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    What is your recommended sourcing strategy in this case? Please support your decision with quantitative and qualitative evidence gathered during the case analysis. Also, present your plan to reduce any risks associated with your sourcing decision. Pacific Systems Company should single source their DVD drives and build a good relationship with the chosen supplier. Not only computer industry is hungry for DVDs, other electronic sectors such as home entertainment devices are competing for this item too, making lack of supply a major issue.

    If Pacific Systems wants to guarantee supply in such environment, it would be a good idea to create a single source strategic alliance with a long-term contract (2 years), renewable according to satisfaction parameters. Other major requirement of Pacific Systems is that suppliers can increase supply components by 25% within 4 weeks a change in market conditions, which is more possible in this type of relationship. Additionally, open communication in closer and long term relationships often lead to less delivery and quality issues, which is another critical point for PSC. . This case provided the data necessary to perform a cursory supplier financial analysis. In reality, cross-functional sourcing teams must often obtain this data during their assessment of potential suppliers. Discuss possible sources of supplier financial information. What may impact a purchaser’s ability to obtain supplier financial data? There exist sites and organizations that provide financial information divided by regions, UK, Euro zone, North America, Australasia etc. Some of the sites are subscription based, whereas some are free or pay-as-you-go.

    On the other hand, if a company trades on the stock market, the financial information is public therefore is free and easy to get. These sites could be company registry offices, company information sites, global information sites, discussion forums and rumors sites and commercial credit information suppliers. These are some of the most important financial information sources: UK: * Companies House: for any public or private limited company accounts in the UK * Northern Ireland Company Registrar * The Institute of chartered Accountants of England & Wales (ICAEW) Euro zone: Kreditschutzverban – Austria * French Intellectual Property Organization * Handelsregister – Germany * Central Mercantile Registry – Spain * Bureau van Dijk’s Ruslana database – Russia/Ukraine North America, Australasia, South Africa: * SEDAR – Canada * Securities & Exchange Commission (SEC) – USA * Corporate Registrations by state * Australian Business Register (ABR) * Companies and Intellectual Property Registration Office of South Africa The most important factors that affect the purchaser ability to obtain financial information of a company are the Level of the Relationship and the Volume dealt with.

    If the relationship is really close, it will be easier to talk or ask questions about topics, which the supplier is not comfortable with, financial situation in this case. Moreover, if volume that the purchaser is trying to buy is as big as the capacity of the supplier or the buyer’s capacity, financial information has to be shared since future of the business and companies’ integrity and future are putting at risk. 3. A sourcing decision of the magnitude highlighted in this case requires a serious commitment of resources and time.

    Do all sourcing decisions require similar commitments of time and effort? If not, describe the types of sourcing decisions that justify this effort. Describe the types of sourcing decisions that do not justify or require the level of effort and analysis required in this case. Not all sourcing activities require nor should require the same amount of effort. Sometimes, it doesn’t pay off to spend a lot of time sourcing, negotiating the best terms or finding the best price in the marketplace for an item that is not important to our customer and that doesn’t even represents a significant part of the costs.

    Therefore, the first type of sourcing activities that can require this significant amount of time and effort are those that have an impact on (or that are critical to) our customers. The second type of sourcing decisions that are worth spending time and money are those that involve commodities that pack significant amount of costs. A rule to approach this is the 20/80 rule; which means we can focus on the 20% of items that represent the 80% of our costs. 4. How important is the issue of supplier capacity in this case?

    How did your group evaluate supplier capacity? What level of attention or importance should supplier capacity receive during the sourcing decision? Why? The capacity of the supplier is critical for Pacific Systems since DVD driver is one of the key parts of a PC that eventually could only be substituted by inferior technology. We have evaluated the capacity by visiting the facilities, checking the production lines, and going through quality, delivery and used capacity ratios.

    The capacity to increase delivery quantities of a supplier within short lead times is important as the buyer may be uncertain about their exact quantity needs over the life of the contract. This is particularly important for long-term contracts. Although Pacific Systems has already forecasted certain units, unforeseen market events might change the amount of units needed and therefore a further capability analysis is always necessary in order to make sure that the suppliers fulfill the requirements. 5.

    Supplier selection decisions, such as the one presented in this case, usually require many weeks or months of analysis and discussion before reaching final agreement with a supplier(s). Creatively identify ways that the buying company can shorten the time from recognition of a purchase need to reaching agreement with the selected supplier. (Hint: Consider performing certain required activities concurrently or in anticipation of a purchase requirement). Competitiveness customer pressures are demanding lower cycle times in all business activities.

    The sourcing process is one of them and many approaches can be undertaken to reduce the cycle time for this operation. Although having a process map of the suppliers evaluation and selection process, with time and costs, is a good start to learn how to improve it; a company can also integrate its purchasing people with its internal customers so they can actually anticipate purchasing demands. This can be achieved through the physical co-location of the departments or with the use of online tools.

    Another tool that can be developed over time is to collect and maintain a pool of information about potential suppliers, performance history, details of current contracts, expiration dates, expected forecasts for purchased items and other information that fastens the selection process. Additionally to his, a company can develop a list of preferred suppliers based on their highest performance suppliers. Other tools that can help to increase the speed of the process are looking for external support, such as consultants, software and knowledge providers.

    These tools include supplier’s financial data, business background, payment trends and overall risk score. On the software side, many providers offer full suites for supply management from reverse auctions to process automation. All these tools can help to reduce the cycle time either by anticipating the process need or automating and easing the activities involved in the process. 6. The issue of single versus multiple sourcing is an important consideration during supplier selection.

    Using the following table, identify the potential advantages and disadvantages of single and multiple sourcing (not only as they relate to this case). Single sourcing strategy We have more leverage to negotiate and it is also easier to decrease the setup and operation costs associated with purchasing, such as tooling cost, administration cost, transportation cost and labor cost. Another advantage of single sourcing is the long-term business relationship maintenance therefore, control for quality and production and information sharing will be better.

    The main disadvantage of single sourcing is it higher level of risk of supply disruption as too much dependency lies on a supplier. Moreover, small size suppliers add difficulties for entering new markets as they might not have the capability to operate there. Multiple sourcing strategy The main advantages of a multiple sourcing strategy are spreading risk through acquiring adequate supplier capability to fulfill sharp increase demand and avoid supply shortage. Multiple sourcing can enhance insurance against failure at one supplier as a result of fire, strikes, quality, delivery problems and so on.

    The disadvantages of this kind of sourcing, as contrary than single sourcing, are that tooling cost, administration cost, transportation cost ad labor cost will proportionally be higher. Moreover, long-term partnership and information sharing with suppliers will be more difficult than in single sourcing. 1. Develop a process that provides a logical order evaluating the market data and reach a recommendation regarding how to proceed with the supplier selection process. For example, the first step of this process may include organizing the data in a logical formal.

    Subsequent steps should follow from the organization of this data, and may also include additional information that is needed to make an informed recommendation, as well as the sources of information that may be available to do so. Present this process in the form of a flow chart with key decision points clearly identified. The sourcing process flow chart is shown, from detection to implementation, followed by a market evaluation flow chart that should be used in the ‘How? ’ section of the sourcing process. This second flow chart is used to concentrate the data for all the suppliers and to make an assessed decision. 2.

    Perform various analyses designed to support the supplier evaluation and selection decision. These analyses, with supporting worksheets or templates provided, include * Financial Risk Analysis SureTech is the most profitable with the highest net-income as well as ROE. E-Drive is the only company, which can compete with these ratios. Also, we have to take in to account that although Suretech is the smallest company, it is new and it is growing therefore these ratios might change in a short-term period. It is normal that as a company grows, profit ratios and RoE go down while debt goes up until it stabilizes to a certain level.

    Additionally, the business type of Elecom; with mass production and large orders, makes it acceptable to have only a 2% profit margin (the same margin as some big retailers). Additionally, the expected good behavior of the DVD market make us to not worry about this, as if there was an unlikely DVD market shift, Elecom would have low capacity to absorb it in its margins. We further do not worry about Suretech’s size as they are in a good enough financial position to invest and widen its production capacity in case we sign a contract with them; its payable days are also a good sign of health.

    However, both Elecom and Suretech inventory turns are higher than the others and E-Drive payable days are quite high. | Elecom| Suretech| E-Drive| Park| Asset turnovers| 1. 32| 1. 57| 1. 64| 1. 38| Inventory turnover| 5. 20| 5. 43| 9. 06| 7. 01| Payable days| 49. 24| 29. 45| 59. 48| 46. 36| Leverage| 2. 58| 2. 03| 2. 28| 2. 09| Return on Equity| 0. 07| 0. 22| 0. 17| 0. 10| Long-term Debt to Assets | 0. 25| 0. 16| 0. 17| 0. 17| Long-term debt to Equity | 0. 65| 0. 32| 0. 39| 0. 35| Current Ratio| 1. 22| 1. 34| 1. 35| 1. 13| Profit Margin| 0. 02| 0. 07| 0. 05| 0. 03| * Total Cost Analysis

    When we add all the unit costs it seems that the cost is really different to the quoted unit price the suppliers first offered. For example, Elecom Technologies offered the lowest quoted cost but the total unit price is the second highest. E-Drive had the lowest total unit price and also the lowest delivery non-conformance costs. This is the typical case when final total costs are similar for items sourced between around the globe and the US. Assuming an uniformed weekly demand of 9615 units for the first year, and after splitting tooling costs between the two years, inventory costs are calculated at a 18% annual cost of their quoted price.

    For this, it is considered a 2 or 4 weeks of permanent stock, plus the weighted average stock of supplier’s delivery lead times. That means that if a supplier serves us within every 4 weeks (monthly) our average inventory would be 2 weeks plus the safety stock; all tof this has been taken under consideration for the final cost. | Elecom| SureTech| E-Drive| Park| Quoted Price| $ 127. 00| $ 144. 00| $ 140. 00| $ 132. 00| Transportation| $ 18. 00| $ 6. 00| $ 14. 00| $ 18. 00| Tooling| $ 2. 73| $ 3. 18| $ 2. 95| $ 2. 50| Duties/Customs| $ 9. 0| $ -| $ -| $ 9. 50| Insurance| $ 2. 00| $ 1. 50| $ 3. 00| $ 3. 50| Inventory| $ 0. 88| $ 0. 25| $ 0. 03| $ 0. 91| Safety stock| $ 1. 76| $ 1. 00| $ 0. 97| $ 1. 83| Receiving and inspection| $ 4. 50| $ 4. 00| $ 3. 25| $ 2. 25| TOTAL| $ 166. 36| $ 159. 93| $ 164. 21| $ 170. 49| However, this approach doesn’t take into account the errors and deficient parts we may receive and it is supposed that suppliers will absorb its costs. Supplier Evaluation and Selection Analysis First of all, we have done an overview of each company in order to go through general advantages and disadvantages and have an idea of the potential supplier. Elecom: It is the largest of the suppliers and it is located in Japan. They offered a low-cost in the industry and they do not usually deal with small buyer such as Pacific Systems. Due to this fact, strategic relationships might be problematic because they would have no interest on us as a potential investment. This happened during the plant visit.

    The manager guiding Pacific Systems left the tour in order to answer some call from a bigger company. SureTech: It is a new company in the industry and because its small size, the contract with Pacific Systems will be the largest in its history. They might not have the resources to grow as fast as Pacific Systems thinks the market would do. Also, the plant is old and small compare to other facilities, which might lead to down time the production. On the other hand, innovation and reliability are the key factors, which define SureTech. All the employees seemed really motivated and energetic, which will help in a possible alliance.

    E-Drive Systems: One of the best characteristics of this supplier is that it is located tem miles from Pacific Systems’ facility. The delivery system is based on this fact and they offer a two-day delivery time. They seemed really open and willing to communicate actively. However, recently they had some quality problems with some shipments. The amount of returns caused delays, which made the manager be really busy. Moreover, a clicking noise is appreciated while the driver is in used however the manager of E-Drive that the problem will be solved soon. Park Technologies This supplier is located in Korea.

    Pacific Systems notices that all employees in the facility knew each other and the manager claimed that he knew every single name of his employees. One of the best things that Pacific Systems liked was the extensive testing process all the products must suffer before being approved. This is the first time Park Tech. Might do business with a North American company so they do not have any staff or facilities located in the US, this could be a big problem. However the 2 biggest barriers that Pacific Systems is evaluating are the geographical location and the instability of Korean government.

    Here we have a table with specific data each supplier has provided: | Elecom Tech. | SureTech Co. | E-Drive Sys. | Park Tech| Current installed capacity| 98%| 92%| 96%| 92%| Tooling costs| $3 million| $3. 5 million| $3. 25 million| 2. 75 milion| Ramp-up time| 4 months| 5 months| 4 months| 4 month| Delivery lead time| 8 weeks| 3 weeks| 2 weeks| 10 weeks| On-time delivery record| 95% on time| 97%| 99. 50%| 99%| Quality| 9500 PPM defects| 10500 PPM defects| 7500 PPM defects| 4000PPM defects| Frequency of shipment| Monthly| Weekly| Eevery other day| Monthly| Denomination of contract| Yen| Dollars| Dollars| Dollars|

    Also, all the potential suppliers are evaluated based on the supplier scorecard. Data is taken from each supplier in order to determine whether the category and subcategory are failed, fair, good or very good. After scoring each category and multiplying by their weights, they are added and we determined a final scored. These are the patterns in order to make the evaluation: Scores * Does not meet expectations: 1 point * Meet expectations: 2 points * Exceeds expectations: 3 points Weights * 1 = Low to 5 = High This is how we are going to evaluate the suppliers: Preferred: 120-150 points

    Acceptable: 75-119 points Unacceptable: 0-74 points SureTech| Points| Weight| Score| Cost: Quoted Price| 1| 3| 3| Cost: Total Cost| 3| 5| 15| Delivery: Lead time| 3| 4| 12| Delivery: On time record| 3| 4| 12| Delivery: Frequency of Shipment| 3| 2| 6| Quality: Parts per million defects| 1| 5| 5| Capacity: % of production| 1| 4| 4| Risk: Denomination of Contract| 5| 1| 5| Risk: Political Risk| 5| 2| 10| Ramp-up time| 1| 1| 1| | Total Score| 73| Elecom| Points| Weight| Score| Cost: Quoted Price| 5| 3| 15| Cost: Total Cost| 1| 5| 5| Delivery: Lead time| 1| 4| 4| Delivery: On time record| 3| 4| 12|

    Delivery: Frequency of Shipment| 1| 2| 2| Quality: Parts per million defects| 3| 5| 15| Capacity: % of production| 5| 4| 20| Risk: Denomination of Contract| 3| 1| 3| Risk: Political Risk| 1| 2| 2| Ramp-up time| 1| 1| 1| | Total Score| 79| E-Drive| Points| Weight| Score| Cost: Quoted Price| 3| 3| 9| Cost: Total Cost| 5| 5| 25| Delivery: Lead time| 5| 4| 20| Delivery: On time record| 5| 4| 20| Delivery: Frequency of Shipment| 5| 2| 10| Quality: Parts per million defects| 3| 5| 15| Capacity: % of production| 3| 4| 12| Risk: Denomination of Contract| 5| 1| 5| Risk: Political Risk| 5| 2| 10|

    Ramp-up time| 3| 1| 3| | Total Score| 129| Park| Points| Weight| Score| Cost: Quoted Price| 3| 3| 9| Cost: Total Cost| 3| 5| 15| Delivery: Lead time| 1| 4| 4| Delivery: On time record| 5| 4| 20| Delivery: Frequency of Shipment| 1| 2| 2| Quality: Parts per million defects| 5| 5| 25| Capacity: % of production| 5| 4| 20| Risk: Denomination of Contract| 5| 1| 5| Risk: Political Risk| 1| 2| 2| Ramp-up time| 1| 1| 1| | Total Score| 103| Supplier Evaluation Decision: The data and the facts suggest that the best supplier, which Pacific System should work with, is E-Drive Systems.

    It is the only supplier which scored in the Preferred range. Its quoted price and capacity seem average and the PPM defects look the same as other suppliers’. Its estimated price was the lowest and that is one of the most important things when evaluating a supplier. The capacity does not seem a problem for E-Drive and volumes requirements will be regularly fulfill. Their quick lead time and their every other day delivery would allow for smaller orders and less inventory costs. On the other hand, there some concerns that Pacific System should focus on in order to lower risks.

    The clicking noise mentioned above is one of this. Although they claimed that the problem is going to be solved soon, they have to define what soon is because the ramp up time they offered is 3 months. Finally, there are no political issues like in Korea to be concerned due to the fact that E-Drive’s facilities and headquarters are located in the US. Also, the distance from Pacific System’s location and E-Drive facility is close enough so if eventually an inspection is required, it will not be any problem of transportation. In conclusion, E-Drive is the best supplier overall and Pacific Systems should choose it. Sourcing Risk Management Plan Sourcing decisions invariably involve risk. This analysis requires each group to (1) identify the potential risks associated with a sourcing decision, (2) assess the possible magnitude of each risk to operations, and (3) identify ways to manage or reduce risk exposure. Potential Concern Area| Risk or Concern| Risk Reduction Plan| Management Capability| Labor strikes. | Two weeks safety stock. Close relationship; ask to be notified to increase safety stock in additional one or two weeks in a 50% ownership (share risk). | Delivery Performance| Supply disruption.

    Shipping problems. War, geopolitical issues. | Two weeks safety stock. Closeness to supplier’s facility. Insurances in case of problems. | Quality Performance| Increment in defective parts. | Make supplier pays for costs associated with quality failure (reverse logistics, replacement, etc. ). | Process Capability| Machinery breakdowns. | Make sure supplier have contingency plans. Develop alternative supplier list. | Capacity| Not able to accomplish our levels of demand. | Two weeks safety stock. | Cost| Cost increases due raw material increases. | Track our supplier cost drivers.

    Have contingency budget. | Technical Ability| They unable to introduce new technologies to production line. | Look at supplier’s record when introducing new technologies. Check supplier’s investment in R&D. Commit supplier’s money to production improvements. | Logistics| Inventory inaccuracy. Warehousing issues. | IT Systems to improve metrics. Insurances in case of problems. | Financial Issues| Supplier goes out of business. | Fair price for both parties, financial analysis. | Other Commercial Issues| Decay in our customer’s demand. | Flexible sourcing agreement| 7.

    The issue of short versus long-term contracts is also an important consideration during supplier selection. Using the following table, identify the potential advantages and disadvantages of short and longer-term contracts (not only as they relate to this case). Long-term contracts: Advantages: * Assurance of Supply; clearly defined and mutually beneficial agreement. * Access to Cost/Price Information; long-term contract allows buyer to have access to more detailed cost and price information. * Volume Leveraging; the buyer can leverage his or her enhanced position to drive the supplier toward a higher rate of performance improvement. Supplier Receives Better Information for Planning; scheduling information so production efficiency improves, better projections of volumes and delivery dates allow the supplier to better budget the flow of funds and investments stemming from the expectation of continued future volume. Disadvantages: * Supplier Opportunism; risk that the supplier will become too complacent and lose motivation to maintain or improve performance as the contract progresses * Selecting the Wring Supplier; risk of not recognizing the best supplier during the supplier selection and choosing a worse one. Supplier Volume Uncertainty; there are many why the volume agreed with the supplier might never be achieved. * Supplier Forgoes Other Business; limitation of supplier’s ability to service the buyer’s competitors might lock the supplier out of several profitable business opportunities. * Buyer is Unreasonable; the risk of extraordinary demands from the supplier once the contract has been executed. Short-Term contracts: Advantages: Option of Supplier Changing; if the supplier chosen does not fulfill the buyer’s requirements since the contract is short-term the buyer will have the opportunity to change the supplier and not be attached to a bad wrong supplier long time. * Motivation and Performance Maintaining; there no chance to the supplier to become complacent and not to do its job because the short time. * Volume Certainty; a short-term contract usually implies smaller volumes that long-term contracts so the risks why a volume might not be achieve in long-term contracts decrease when short-term contracts are executed.

    Disadvantages: * Lack of Relationship; no opportunity for creating joint value between the contracting parties. * Bad Quality of Information Sharing; due the lack of time to execute the contract, it might exist a risk in not sharing enough information. * No Chance to Increase Rates; due to the lack of time it is really difficult that the buyer can require the supplier to increase its rate of progress up the learning curve and pass along the savings to the buyer at an accelerated rate. 8.

    Consider the following statement: Supplier evaluation and selection, which is really a process of risk management, is one of the most important activities performed today. If your group agrees with part or all of this statement, provide arguments and evidence as to why your group agrees. If your group disagrees, provide arguments and evidence as to why your group disagrees. We agree both with “is a process of risk management” and “is one of the most important activities performed today” as they relate to supplier evaluation and selection process.

    It is a risk because, in the moment a company starts sourcing globally, they tend to lose control all over its processes and they get exposed to global threats they didn’t involved into when they sourced locally. Those risks include on time delivery; subject to 3P providers, weather, labor issues, terrorism and natural disasters. Product quality, as we lose control over the process. Schedule and budget issues, if the process is not as controlled as internally. Supply interruption (or supplier’s supplier interruption) due bad financial positions. All this risks cannot be avoided, but they have to be analyzed and managed by the company. Extracted from: Identifying risk issues and research advancements in supply chain risk management. Christopher et al. , 2011| To defend the “one of the most important activities performed today” we will appeal, additionally to the risks of choosing wrong our partners, to its advantages. Companies normally outsource because they can operate with lower costs, can access new technologies or markets; they can produce with better quality, higher speed or higher flexibility and also there might be advantageous political and environmental regulations. 9.

    Instead of conducting supplier evaluations through formal assessment, some firms rely on product samples as a means to validate supplier capability. What are the risks associated with relying only on supplier samples when making a supplier selection decision? How can a company minimize this risk? If we are evaluating a supplier just based on the samples they have sent us, we are evaluating the best products that they make, anabolic ones. If we were the supplier and a buyer wants to evaluate us with some samples, we would pick the products with the best quality and better manufacture.

    However, this cheap approach will give few or none information about our supplier‘s processes, quality standards, manufacturing technology, financial viability and, to sum up, any information related to the risks involved in sourcing. In our opinion, visiting the supplier’s facility is a must done step in a supplier evaluation processs, although sometimes there are several barriers like geographical location. Moreover, it would really difficult to establish any kind of relationship with the supplier.

    The first approach someone can do towards a possible relationship or alliance is know who he/she is going to work with the fact of visiting the facility and meeting the managers of the supplier company helps in order to build such possible relationship. The best way to reduce risk or conduct a more realistic approach with evaluating only the supplier product samples would be to obtain market samples instead of obtaining them from the supplier, which may have enhanced the item. We also recommend asking other customers (non competitors) what do they think of the supplier under evaluation, its quality, delivery times and so on.

    Despite all said, for minor parts which neither are critical to our customers or the product and nor represent an important part of the costs, it would be a valid approach as exposed on question 3. ——————————————– [ 1 ]. Outsourcing—A Risk Management Perspective © Copyright 2005 by ISACA® Inc. , formerly the EDP Auditors Association. All rights res erved. ISCATM Information Systems Control AssociationTM [ 2 ]. Identifying risk issues and research advancements in supply chain risk management (Christopher et al. , 2011)

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