Strategy: Volume Consolidation With Limited Suppliers
Volume consolidation with limited suppliers is an imperative step towards the acquisition of an effective procurement strategy for an organization. It involves employing the services of a limited number of suppliers. That is, an organization halts the use of services from multiple suppliers and identifies fewer (or limited) suppliers it can successfully work with. Volume consolidation through limited suppliers is a procurement strategy with the potential to increase an organization’s savings from a procurement activity. According to Bowersox, a consultancy firm did a study on this procurement strategy and discovered that savings from purchasing the price of supplies and other costs range from 5% to 15% (2009, p.78). To understand how such savings are achievable it means we have to explore the rationale behind volume consolidation. The rationale underlying volume consolidation creates a symbiotic relationship between the supplier and the buyer organization. The supplier benefits in several ways. First, there are improvements in the supplier’s economy of scale resulting from the distribution of fixed costs over larger volumes of output. Secondly, the supplier is more empowered to invest in his business to improve capacity and the quality of service. On the other hand, the buyer organization benefits from increased bargaining strength and improved services from the supplier.
A firm should employ the services of more than one supplier as using one supplier presents many risks for the firm (Bowersox, 2009, p.78). Consider a firm using a single supplier, it means that in case the supplier encounters disruptions in his operations then the firm will have to halt production. A halt in production is usually very costly to a firm considering the type of equipment the firm uses. It is advisable that a company that uses the services of a single supplier develop a contingency plan just in case something goes wrong Bowersox, 2009, p.78).
Make-to-plan (MTP) or make-to-stock (MTS) manufacturing strategy is characteristic of industries that seek to exploit economies of scale that result from long production runs (Bowersox, 2009, p.88). The logistical requirement for an industry working with an MTP strategy is a warehouse to store finished products. Alternatively, industries, which work with a make-to-order (MTO) manufacturing strategy, seek to tune their products to suit customer specifications (Bowersox, 2009, p.88). The logistical requirements for industries working with an MTO strategy are the acquisition of temporary storage and transport for the produce.
The total cost of manufacturing comprises production/procurement costs, inventory warehousing costs, and transportation costs (Bowersox, 2009, p.88). The total cost of manufacturing is impacted by the manufacturing strategy employed by a firm. An MTP strategy is associated with high inventory and warehousing costs, low manufacturing and procurement costs, and low transportation costs. On the other hand, an MTO strategy is associated with high transportation costs and high manufacturing and procurement costs that are offset by low inventory and warehousing costs.
A company switching from an MTP to an MTO strategy will tend to have increasing manufacturing and procurement costs. The reason behind this is that in an MTO strategy the production is tuned to accommodate customer specifications, this accommodation attracts a raise in the cost of manufacturing and procurement. On the other hand, inventory costs will tend to reduce any move from an MTP strategy to an MTO strategy. The reason behind this is that the MTP strategy requires a relatively higher inventory of finished goods in comparison to the MTO strategy (Bowersox, 2009, p.88). The relatively less inventory in an MTO strategy is what reduces the cost of inventory.
According to Bowersox Just-in-time techniques (JIT) are also referred to as just-in-time purchasing or just-in-time delivery (2009, p.91). Bowersox further continues to point out that these techniques time-phase activities to ensure that raw materials and components arrive at the manufacturing point in time for processing (2009, p.91). This eliminates delays in the manufacturing process, which are otherwise very costly to a firm. JIT operations are done under the context that, demand for a commodity is dependent on its production schedule (Bowersox, 2009, p.91). To minimize inventory levels by depleting reserve stock, it is necessary that requirements be determined about the finished product and that these requirements are aligned with the production schedule.
For successful JIT operations, a firm must identify suppliers who demonstrate high levels of consistency and quality in their services (Bowersox, 2009, p.91). This is because such suppliers deliver raw materials and components that can be directly input into the manufacturing process. Logistic performance is also crucial to successful JIT operations. This is because proper logistical performance eliminates or reduces the need for buffer stock of materials (Bowersox, 2009, p.91). Setting up proper logistics will include the identification of credible suppliers who do deliver supplies in time and do not strain the production process. Remember that in Just-in-time operations that the raw materials and components should be delivered at the processing point in time immediately. Therefore, it is important that the logistics properly function. Thus, for JIT operations to succeed, it is therefore important that suppliers and manufacturers have close cooperation and proper communication (Bowersox, 2009, p.91). In JIT operations, manufacturing firms attempt to gain without necessarily having to be tied in the ownership of raw materials (Bowersox, 2009, p.91).
Bowersox, C. (2009). Supply chain logistics management (3rd ed.). New York: McGraw Hill.