Procurement Evaluation Report (3500 words) - Omara Pty Ltd
Omara Pty Ltd, based in France, is the European market leader of solar panels producing 1.5 million solar cells and 100,000 glass sheet casings per year, 80 percent of which are exported. Purchase costs range from 50 percent of production costs of solar cells and 65 percent of production costs of glass sheet casings. Omara's managers believe that the company is still too vertically integrated and would be willing to further outsource some activities and concentrate more on their core competences. However, the productivity, volume and specificity of parts work as entry barriers and past attempts to find suitable external suppliers have failed.
Omara ’s supplier base follows two main principles:
In the last 2 years, they have drastically reduced their supplier base whereas in the past, they multi-sourced from two or three suppliers for each of the supply areas. Almost all parts sourced are customised according to Omara’s strict specifications. Hence suppliers must be able to meet quality, logistics, manufacturing and development capabilities.
Omara expects its suppliers to perform a mix of direct and indirect functions. Omara emphasises on factors such as quality, price, flexibility (ability to adjust to frequent changes in ordering plans, and products’ specifications), and continuous sourcing. All of these are identified in the literature as direct functions, such as quality, cost reduction and safeguarding. But besides these functions, Omara also expects its suppliers to be "able to assist in the parts development", to "proactively produce and suggest new solutions in terms of product specifications, materials or processes”, and to be able to “develop a vision of the business, of the complementarities, rather than just of the product or of the manufacturing”. All of these factors require the use of indirect capabilities, the competence to relate to other parties, and to produce innovative solutions that frequently arise from network connections.
Dyadic relationships and interfaces
In general, Omara’s relationships with its suppliers tend to be long lasting and positive. Despite their stability, the activities, resources and interfaces with suppliers have been weakening over the past 12 months, especially due to Omara’s changing sourcing strategy and the expectations for suppliers’ direct and indirect capabilities. Omara actively tries to shape the capabilities of suppliers with managers asking them to do new things, forcing them to invest in better resources and structures, having a more professional attitude, placing big volume orders, and encouraging them to find new sub-suppliers.
The evolution of suppliers’ capabilities is a cause/ effect of changing interfaces with suppliers. Restructuring activities and processes, investing resources and stimulating suppliers to assume a greater share of development and production activities seem to have clear benefits according to Omara. As the procurement manager puts it, “we have a limited team of people, we cannot do everything and, clearly, without our suppliers we would be unable to constantly introduce new products”. He stresses that suppliers’ contributions are highly valued where some suppliers have provoked product changes with a huge impact on costs and are important factors in reinforcing existing relationships.
More recently, Omara has transferred and outsourced some assembly activities to two suppliers and, consequently, parts that were previously delivered to be assembled by Omara must now be delivered to these two suppliers. Omara’s role is limited to the negotiation phase, in order to make the direct supplier fully responsible for the management of the relationship with these two suppliers.
Omara appoints some suppliers’ suppliers of raw materials (i.e. they dictate who their direct suppliers should source from). Suppliers of raw materials, especially plexiglas, are giant companies such as ThyssenKrupp, Viscom and BASF. Negotiations are held (on behalf of the direct suppliers) at CEO level, where the orders from Omara’s direct suppliers are consolidated, allowing for substantial price reductions. In other cases, material specifications leads to a single potential source, leaving Omara’s suppliers with no alternative suppliers. This is the result of technical considerations, as in some cases, materials used are crucial for the quality and safety of Omara’s products and are previously defined in the process of certification of the solar panels. In both cases, direct suppliers are strongly advised to buy from the appointed suppliers but other sources must be approved by Omara (regarding product quality, functionalities and price).
Nevertheless, Omara encourages its suppliers to develop their own client networks. The procurement manager explains that they want them to know different markets, new technologies, new parts and different types of demands, because there are always synergies to be found when a supplier has more than one client. Synergy is one of the reasons Omara actively seeks knowledge about their suppliers’ networks. Suppliers are formally asked to provide information about their clients and corresponding sales shares. This allows Omara to check its positioning as a “privileged client” in each supplier’s portfolio of clients. Knowing the structure of its supplier’s suppliers is important because Omara exerts a strong control over suppliers’ networks through the specification process, where both function and composition of the parts are detailed.
Given the facts of the case, prepare a procurement evaluation report. You are required to describe and critically evaluate the supply strategy adopted by Omara Pty Ltd. Apply relevant models or theories where appropriate (e.g. Procurement lifecycle model, Kraljic Procurement model, buyer-supplier relationships, power-dependence theory, etc) to enrich your discussion. Finally recommend a strategic plan on how the organisation could improve its procurement strategy to become more effective and competitive.
You are required to use at least TEN sources of references including at least SIX journal articles. The preferred method of referencing is the Harvard Referencing system within context. An omission to include the required journal articles or incorrect use of the Harvard referencing system will result in a failure for the Referencing component.
In order to develop supplier management activities one organization needs to elevate relationship with its suppliers. This also can help a company to increase present procurement operation of the organization. Even while following a precise and effective supplier management strategy that is based on principles of rationalization and localization, Omara is facing several issues with efficient in procurement operations. Presently Omara is facing problems in its supplier management process that restricts the company to include external suppliers in the production operation. A key observation is that Omara encourages its suppliers to develop their present business. Motivation of Omara behind this is to focus on technical approach of production and realization of market trends. However, in order to achieve this Omara always pressurize its suppliers to provide the details of their network and demand strategic suggestion for increasing the rate of market growth. Although Omara tries to maintain dyadic relationship with its suppliers, since last 12 months this relationship is worsening due to this huge pressure of made by the company on its suppliers.
In order to develop the relationship with suppliers and improve present situation of procurement operation, this company needs to forsake the needs of indirect capabilities of its suppliers. On the other hand, according to Kraljic model of procurement, this company needs to implement market research strategy to achieve the aim of elevating its internal procurement process. This can help the company to reduce its cost of production and elevate level of its market competency. Moreover, in order to whittle down a number of problems associated with quality management process of supplier activities, Omara needs to include benchmarking operation in its procurement process. The study recommends that the company should focus on increasing its supplier base and eliminating the need of indirect capabilities. These initiatives along with tailoring relationship with suppliers and considering a detailed purchase research and measurement will help Omara to improve relationship with suppliers reduce the cost of operations and avoid any redundancies occurring due to improper or inefficient management of the procurement operations of the organization.
Omara is a solar cell manufacturing company of France and this company is trying to develop its present procurement operation by increasing numbers of external suppliers. The present report is based on the need of elevating the effectiveness of procurement operation in a company to improve and maintain long-term cordial relationship with its suppliers. The report provides a brief description of present situation of Omara's supplier management strategy by which effectiveness of this strategy can be recognized. Furthermore, this report provides the idea related of theoretical implication of present supplier management strategies of Omara. A detailed analysis of any situation must lead to some conclusions and possible recommendations to improve the situation. Therefore the current provides some practical recommendation that can be considered for mitigating the present supplier management issues of Omara.
Supplier management strategy of Omara Pty Ltd. is precise and effective. The supplier base at the company is based on two key principles of rationalization and localization. The company always tries to develop supply orders by consolidating all types of existing resources in order to minimize the cost of materials. According to Kumar et al. (2014, p.136) managerial operations related to the supplier base can provide a company the benefits of developing sustainability of business. In order to make supplier base management more precise, an organization needs to update its supplier base in a timely manner. Omara always updates their supplier bases accordingly and tries to classify the orders in different groups by which order placing can be developed in more reliable manner. As stated by Cerruti et al. (2016, p. 925) the sole responsibility of Supply manager is to develop proper supply base to shortlist the suppliers accordingly.
Short-listing of suppliers can be based on capabilities of the suppliers or it can be on provided price rating of suppliers. Omara Pty Ltd. maintains database according to the locality of operation and this helps this company to reduce the price rate of their material. As stated by Robin and Bengtsson (2015, p.1297) suppliers can be divided in three categories namely domestic, regional and global suppliers. Local suppliers always seek to include different types of innovative ideas in the business and product development. This helps to promote business in competitive market. In order to develop innovativeness of the products, Omar Pty Ltd. always tries to seek local suppliers, as these suppliers can provide necessary suggestion for developing the business of this company.
Moreover, as commented by Heydari and Norouzinasab (2015, p. 536) local suppliers can increase the speed of delivery process by which time management of production process can be made more effective. This can help a company to increase consumer satisfaction level. This in turn can help company to enhance brand image in competitive market. Omara by developing the database of local suppliers tries to increase speed of delivery process, which helps this company to elevate its brand image in competitive market of Australia. However, this company has reduced its supplier’s base in a drastic manner and now this company is dependent on only 2-3 suppliers, which is influencing the production quality along with manufacturing process negatively.
Omara Pty Ltd. develops solar panel by maintaining the level of quality and in this regards this company provides certified products to its customers. As a result, this company tries to prefer quality of raw materials. This company places orders for raw materials to different renowned companies such as ThyssenKrupp, BASF. As commented by Caldwell & Howard (2014, p.280) it can be stated that different renowned and large companies provides the assurance of quality which can help a company to enhance the quality factor associated with the production. Hence, Omara will be able to develop quality of production with the help of these giant supplying companies.
This company always tries to encourage their suppliers to develop effectiveness of operation. Procurement managers of Omar always try to modify the existing internal operation of suppliers according to the technological update and market trend. As stated by Roehrich et al. (2014, p.700) it can be stated that strategic communication can help a company to enhance the relationship with suppliers. Omara also tries to gather information about network of suppliers by which this company tries to develop idea about synergy of different supplying companies. According to Pradhan & Routroy (2016, p. 783) it can be stated that the supplier network can help a company to forecast the market risk more precisely. Hence, consideration of the supplier network in the evaluation process of supplier activities can be considered as beneficial for Omar.
In order to make proper selection of the supplier Omara Pty Ltd. considers the direct as well as indirect operational function of suppliers. According to Cerruti et al. (2016, p.916) it can be stated that supplier selection can help to elevate the business strategy and the activities related to supply chain. Omar always seeks those suppliers maintain the quality of the products in a reasonable price and provides the flexibility in order placing process. According to Nordigården et al. (2014, p. 979) flexibility in the supplier capacity can help a company to include diversity in the products. Most of the companies prefer flexible capacities of its suppliers for competitive advantage. This can help a company to increase its reputation in global market. On the other contrary, Omara also seeks those suppliers, which can provide this company proper advice related to the business strategy to elevate the operational quality and effectiveness of the business operations. As commented by Obayi et al. (2017, p. 353) it can be stated that strategic opinion from suppliers can help one company to elevate its business in global market. This is because strategic opinion from the suppliers can help a company to assess current trend of market and make decision related to the production accordingly.
Omar always tries to maintain dyadic relationship with their suppliers, which helps this company to maintain transaction of strategies with its suppliers. As opined by Nordigården et al. (2014, p. 279) it can be stated that dyadic relationship can help one company to access intellectual and strategic resources of different suppliers. This in turn can help one organization to increase its present cultural diversity and knowledge bases. Hence, this process can be considered beneficial for the Omar. However, from the present situation of this company it can be observed that this relationship is worsening due to O'mara's needs of direct as well as indirect capabilities related to suppliers. Hence, in order to retain the effectiveness of its supplier management process this company needs to develop elevated relationship with its customers by reducing the expectation level on its customers.
Another major reason behind this kind of dependency on suppliers of Omara is limited human resource. As commented by Pradhan & Routroy (2016, p. 783) dependency on the suppliers can be considered as an inevitable factor by which one organization can increase effectiveness of its operation. With the help of strategic collaboration with supplier companies, one organization can elevate quality of its strategic performance. Hence, Omara by increasing the level of supplier dependency this company will be able to increase effectiveness of its present market strategy. Nordigården et al. (2014, p. 979) added that supplier dependency also can reduce the level of risk related to the operation as any upcoming shortfall of the market can be forecasted with this and this in turn can help to reduce the risk related to abrupt fluctuation of production process.
Expenditure of a manufacturing company covers many areas and each of these areas has to be managed properly. One of the problems emerges because of diverse nature of transportation methods. Costs on various field needs to be optimized. Kraljic's model helps one company to analyze the problems related to purchasing in optimized manner.
Kraljic's purchasing model proposes purchasers the procedure by which a purchaser can maximize supply security and reduce expenditure simultaneously. Kraljic’ model prioritize purchasing before management. Kraljic’s model can be divided into four steps:
Purchase classification starts with classification of all commodities, services, products and components so that one company can buy necessary materials in an optimized manner so that buyer and suppliers both are benefitted.
Supply risk becomes high if there is scarcity of raw material. Less availability of raw material can be manmade or happened due to natural disaster. This is the time when delivery logistics become difficult and disruption in supply can happen. Scarcity in supply can happen when suppliers are few.
Profit impact becomes high at the time when materials add significant value into an organization's output. Profit makes a high proportion in output and because quality matters greatly here.
The product classification matrix shows four different types of items that can be purchased by a company.
Figure 1: Kraljic’s matrix of items classification
(Source: Lo, 2014, p. 8)
Strategic Items impact a company profile so easily, however it also possess high supply risk ass strategically valuable items is not only strategic for one firm within one industry, same item is strategic for other firm of same industry. These items get attention from most of the manager of various companies. As the items poses high supply risk , therefore these items need to be constantly monitored for development long-term supply relationship, contingency planning, as well as preferably manufacturing rather than buying the same material, if deemed necessary. For Omarar Pty Ltd., it is necessary raw materials such as steel, iron, solar cells for manufacturing purpose.
These types of products impact company profile easily however possess low supply risk. For Omara Pty Ltd. necessary manufacturing instruments are leverage items.
These types of items are off low profile impact and high risk. Lack of resources or suppliers contributes to the part
These types of items are not deemed necessary for any company and therefore it is optional for Omara Pty Ltd.
Kraljic’ model predicts that market analysis is to be done on basis of Porter’s five forces. Kraljic model dictates that Omara Pty Ltd. needs to analyze political and economic factor of European market very closely as Brexit is, becoming close, political factor will heavily affect business of Omara Pty Ltd., a French solar cell manufacturing company. As economic downturn has affected whole Europe, this factor also needs to be analyzed thoroughly. As a solar cell manufacturing company, they are already supporting environment and therefore there is no need of change in ecological factor. As per as the quality of the solar cell is concerned Omara needs to implement more advanced photovoltaic cell made of Germanium (Ge) or made by compound semiconductor. Socially there items are acceptable as their items supports green technology.
The products identified in first step of the model (purchase classification) and the market analysis is necessary for strategic positioning for Omara Pty Ltd. The purchase portfolio matrix is given below:
Figure 2: Kraljic’ matrix of positioning
(Source: Kumar et al. 2014, p. 136)
This process ensures to apply maximum purchasing power to secure quality goods and a long-term contract. For Omara, it will be semiconductors, which are necessary for manufacturing solar cell.
This ensures that expenditure of Omara lies within a feasible range. Optimization technique is used here.
Alternate implementation of compound semiconductor is preferable than one extrinsic semiconductor.
Action plans needs to be taken after analyzing above steps.
Product life cycle detects lifetime of products. A company needs to choose and manufacture long lasting product as this minimizes cost and therefore contributes into sustainability of a company. The graph of product’s life cycle is shown on the following Gaussian graph:
Figure 3: Product’s life cycle management
(Source: Muhammad et al. 2017, p. 1060)
This stage is associated with introduction of new product in market and therefore this stage is synonymous to promotion. When Omara Pty Ltd. introduces new products in market say a new efficient solar cell with high longevity, it will require promotional event to make public aware about the new product, its features and cost.
This stage shows high volume sales after receiving lots of appreciation from customers. in this stage Omara Pty Ltd. needs to perform carefully as this stage requires manufacturing at a huge rate and therefore caution is about to be taken in quality of product. The threats also arise from competitors as after appreciations of product competitors enter the market with similar products but at low cost.
This is the saturation stage where number if consumer of same product no longer increases. On other perspective, this stage represents the limitation of product and its reduction in appreciation (Johnson and Flynn 2015, p. 35). Therefore, Omara Pty Ltd. needs to design their product in such a way that this sage comes at last and lifetime of this stage needs to be short compared to growth stage.
At this stage, the product completely loses its value in market. This stage is unavoidable however; it needs to be of shortest span. Omara needs to develop more advanced product before a product reaches into final stage.
Demand and supply form basics of dependency (Lutze, 2017, p. 1059). Adequate supply is required to fulfill demand of customer. If that does not happen inflation happens. Therefore, manufacturing of solar cells by Omara needs to be in adequate amount so that customers do not turn back in unsatisfied manner. From Omara’s end, suppliers of semiconductors and other necessary ingredient needs to be flawless otherwise complexity will arise.
Figure 4: Power and Dependence Model
(Source: Created by author)
Omara is highly dependent on its suppliers especially suppliers of semiconductors. Proper relationship needs to be maintained with suppliers so that supply crisis does not arise.
The leadership of Omara Pty Ltd. needs to be strong so that employees are willing to get to work even when they are not told and their contribution is full.
This stage is directly related with seller-buyer relationship (Kim et al. 2015, p. 47) Cost needs to be optimized so that customers of all financial level can buy Omara’s products.
Purchasing research can help Omara to determine different rates of raw materials and in turn, this can help to select the best price of the raw materials. As stated by Revilla and Knoppen (2015, p. 1420) value analysis can help one company to reduce cost of production simultaneously this process also helps one company to increase the quality of the production. Moreover, value analysis process by incorporating value engineering helps one organization to determine different possibilities of cost reduction. Purchasing research also helps one organization to elevate the process of supply by increasing the effectiveness of its supplier management activities. Omara with the help of purchasing research will be able to increase the effectiveness of its procurement process and with this company will be able to reduce the cost of the production.
Omara needs to evaluate the performance of suppliers in this regard to determine effectiveness of suppliers. In this regards this company can consider the growth of this supplier company in global market. This will help Omara to determine appropriate supplier for procurement process. As proposed by Revilla and Knoppen (2015, p. 1413) it can be stated that performance evaluation of supplier company is necessary for determining effectiveness of the supply process of this supplier company. With the help of performance evaluation Omara will be able to develop proper planning of supplier. This can help Omara to manage the activities related to suppliers. Performance evaluation also can help one organization to determine the operational effectiveness and capability to fulfill the requirement of the company. Hence, with the help of effective performance evaluation one company will be able to impose expected responsibilities on its supplier company.
Omara also needs to include benchmarking process to elevate the relationship with supplier through measuring its efficiency using metrics such as employee retention rate from supply management group. As stated by Pradhan and Routroy (2016, p. 783) benchmarking process can help one organization to find out the quality problems associated with supplier activities. Benchmarking can help one organization to realize current position with identifying the areas of improvement. This process on the other hand provides the planning, which can elevate procurement process of an organization through managing the areas of concern. In order to enhance effectiveness of the procedure of operation, Omar needs to include benchmarking metrics. This can help Omar to understand the performance, in respect to the assumptions and expectations, which can in turn help the company to take decision that can be incorporated to enhance its efficiency. Benchmarking process also helps one organization to realize problems associated with MIS system. Hence, with the help of benchmarking process Omara Pty Ltd. will be able to increase effectiveness of its procurement process.
Omara needs to maintain tailored relationship with its customers for elevating mutual trust. As commented by Caldwell and Howard (2014, p. 275) tailored relationship can help one organization to fulfill the needs of the production. Tailored relationship with suppliers can help one organization to access the benefits of synergy more reliably. Hence, instead of dominating supplying companies one organization needs to develop tailored relationship with its suppliers. This can help organization to increase the growth rate rapidly. Omara with the help of tailored relationship can access valuable suggestion from different supplying companies related to the latest trends and upcoming technologies in the field of solar cell. This in turn can help Omara to increase the sustainability of business. Application off the tailored relationship also can help Omara to mitigate different disputing issues with its partners by which this company will be able to elevate the level of its strategic market planning. On the other hand, it can be stated that with the help of tailored relationship Omara will be able to increase faith. Hence, it can help Omara to elevate the effectiveness of its procurement process.
In order to develop market competency level Omara needs to increase its supplier base. As opined by Thomas et al. (2015, p. 807) dependency of few suppliers can increase operational risk of a company, which in turn can make negative impact on the production process. Furthermore, dependency of local suppliers can be considered as another major operational risk of this company. Although local consumers can provide innovative ideas to Omara but it can restrict diversity level of production. In this case, consideration of different renowned companies can help Omara to fulfill its needs by considering quality of the products. Moreover, by increasing the supplier base this company can make proper analysis of rates of raw materials. It can help Omara to dwindle down production cost, which in turn can help this company to increase market competency level.
Omara considers direct and indirect capabilities of suppliers, which make negative impact on supplier relationship of this company. In order to subdue this issue this company needs to forsake consideration of indirect capabilities of suppliers in its supplier selection process. This can help to elevate relationship between supplier companies and Omara by which this company will be able to develop effectiveness of its procurement process. As suggested by Patras and Banacu (2016, p. 115) requirement indirect capabilities of suppliers make negative impact on production process by worsening the relationship between a company and its suppliers. Hence, this can help to develop strategic approach related to procurement process of Omara.
From the above study, it can be concluded that presently Omara is facing problems in maintaining relationship with its suppliers due to high demand of this company. According to the present scenario of Omara it can be stated that although Omara tries to encourage its suppliers Omara pressurizes its suppliers to reveal their networks and to develop their growth rapidly. In many cases, suppliers are unable to fulfill requirements of Omara, which can be considered as one of the major issue related to supplier’s relationship of this company. From the above study, it can be concluded that Omara has reduced its supplier’s base significantly and facing issues related to dyadic relationship with its suppliers. In order to mitigate these issues from business this company needs to consider market research in order to reduce the cost of production. This can help Omara to enhance its brand value in market by increasing customer satisfaction level. Omara also needs to implement tailored relationship by which this company will be able to elevate the relationship with its suppliers.