Spartan Heat Exchangers: Purchasing and Supply Management

Introduction

After a SWOT analysis it seems our strengths no longer provide the same advantages. Spartan’s strength of providing our clients with customized heat sinkers based on their specifications is no longer what the aggregate market demands. There is a strong threat from Korea because of its “low cost base, competed primarily on price” (McGraw Hill, 2018) and Europe who is “standardizing their product lines to a few high-volume products…” (McGraw Hill, 2018) Spartan Heat has realized new threats that include competitive pricing and changing customer demands. In order to meet the new targets the Materials Department is suggesting reducing the number of suppliers, implementing just-in-time inventory, outsourcing part production, and sourcing materials internationally.

Reducing the number of suppliers

Our current model, consisting of customization, requires that we source materials from more than 350 suppliers. By standardizing our products, we can reduce the number of suppliers to an elite few. My first recommendation is to find the elite few by ranking our current suppliers based on their lead times and their ability to meet our quality agreements. Following this, we will renew contracts with suppliers who show a consistent level of performance and eliminate suppliers who show a history of excessive lead times and low-quality products.

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We currently have “3.5 million worth of inventory in the form of both raw materials and work in progress. Raw material constituted approximately 40 percent of the total [inventory]”. Forty percent of 3.5 million is 1.4 million in inventory that consists of raw materials. It is possible that after standardization of our products there may be an inventory of materials we no longer require to fulfill our product orders. Liquidation of these unnecessary assets is my second recommendation.

Just-In-Time inventory system

The implementation of a just-in-time inventory system may be effective in reducing on-hand inventory. The implementation of this system would include a capital investment to increase our information technology capabilities. “Manufacturing operations regularly complained about material shortages and stockouts, and regular inventory audits indicated significant discrepancies with inventory records on the company’s computer system” (McGraw-Hill, 2018) In order for just-in-time to be most effective it is imperative that inventory data be as accurate as possible. Adding an effective inventory management software is my third recommendation. “The core function of any such program is to track products at every level, including monitoring inventory of incoming items, rotating goods based on expiration dates, and prioritizing products based on their value to [the] company.” (bmmagazine, 2019) Adding these types of capabilities to our existing processes adds a level of clairvoyance we have not had Specifically, understanding our inventory and having the minimum amount of materials required to produce the orders for any given time period will increase inventory turns and reduce the cost of materials by decreasing the costs of inventory storage and inventory maintenance.

Outsourcing the production of parts

Changing from a job shop to a flow operation may require the outsourcing of part manufacturing. By outsourcing part manufacturing, we can “decrease our labor costs and access a larger talent pool”. (Forbes, 2017) The need to have employees whose function is to manufacture custom parts would no longer be needed. Therefore, we can reduce our labor force, cutting labor costs. Furthermore, by completely outsourcing part manufacturing our manufacturing plant can focus solely on the assembly of products. There is risk associated with outsourcing due to a lack of control in the production of these parts. Building a strong relationship with the suppliers responsible for the production of our parts is imperative. This affects our suppliers because instead of seeking raw aluminum we will be seeking completed parts.

Supplier cost reduction

Suppliers generally do not overprice because of competition. If a firm chooses to overprice, competitors can potentially steal their clients through lower pricing. Competition will be a driving force when seeking a 10% price reduction from suppliers. Therefore, we will take a global approach when seeking our future suppliers. Potentially sourcing materials from outside of the United States. Employing a Procurement Consulting Firm could serve to benefit this recommendation. These firms have a better knowledge of international trade, which international companies can be trusted, and tariffs. Consulting these experts could yield us the 10% reduction we are seeking.

Conclusion

There will be many challenges faced when implementing this proposal and it will not be easy to make these changes. However, this strategy strives to achieve companies goals to rebuild its competitive advantage. By reducing our suppliers through a systematic approach to evaluate their prior performance for an indication of future performance. It is possible to achieve faster lead times from our suppliers. Furthermore, by implementing technological improvements to the inventory system we can make better forecasts of our inventory needs. Through continued improvement we may be able to achieve a just-in-time inventory system increasing inventory turns and reducing the cost of materials through decreased storage and inventory maintenance costs. Outsourcing the production of our parts and focusing on the assembly of products could allow for faster completion. Finally, sourcing our materials internationally could allow for a 10% reduction in prices from suppliers. By sourcing our products internationally price competition is higher based on the nation’s availability of that resource, labor costs, and many other factors that allow for cheaper production than that of a United States firm. However, at this time I cannot commit to a 10% reduction in prices from suppliers but will begin consultation immediately. By implementing all of these suggestions it is potentially possible to cut lead times from 14 weeks to six weeks.

Works Cited

• Johnson, P. F. (2020). Purchasing and supply management.
• Business Matters. (2019, May 28). Reimagining inventory management with new technology. Retrieved January 19, 2020, from https://www.bmmagazine.co.uk/business/reimagining-inventory-management-with-new-technology/
• Patel, D. (2017, July 17). The Pros And Cons Of Outsourcing. Retrieved January 19, 2020, from https://www.forbes.com/sites/deeppatel/2017/07/17/the-pros-and-cons-of-outsourcing-and-the-effect-on-company-culture/#4e91052a562d