As a medium-sized enterprise (SME), the Arian Company (AC) is obliged to follow particular requirements and conduct its activity within particular frames. These frames create certain difficulties, among which there are problems interfering with regular procurement activities. The case study describes the duties of the AC new buyer who is facing some complications as a result of the lack of experience, the complexity of the product, and the need for high quality. This paper aims at dealing with these issues and underlining the key points of their solutions.
Initially, the sourcing process is one of the essential procedures in the supply chain. It is a process of researching and selecting suppliers that provide services or goods needed for manufacturing or selling procedures. A buyer is obliged to choose a supplier basing this choice on the data on a range of them. The decision can either lead to beneficial results or a severe loss of profit. Therefore, it is crucial to opt for an appropriate sourcing strategy while conducting this suppliers research and selection.
There can be various divisions of sourcing strategies that can be used by a buyer, depending on the requirements and circumstances. According to Basu, Ghosh, and Kumar (2019), sourcing strategies can be divided into international or domestic sourcing and single or multiple sourcing. International sourcing refers to a global sourcing approach that involves a high-cost country (e.g., Canada, the US, and the UK) purchasing the needed materials from low-cost, but resource-rich countries (e.g., China, Russia, and India). This strategy is typically used for cheap goods (e.g., t-shirts) or simple components that, as a result, correspond to minimizing capital investment and, therefore, are profitable. Since AC’s main focus is a product of high quality rather than profitability, this sourcing strategy is not appropriate for the company.
On the contrary, domestic or local sourcing is a strategy that includes researching and dealing with local suppliers. It provides certain benefits, such as more comfortable negotiations and transportation, since the time-zone, language, location, and mentality are the same. Moreover, local suppliers help to develop consumers’ loyalty, as people tend to be more confident about buying goods produced using local, known materials. This strategy corresponds to one of the central AC’s requirements of the high level of product quality. Therefore, this way of sourcing can be applied and used by the company.
A single sourcing strategy refers to finding one supplier to fulfill all the company’s needs. This way of sourcing corresponds to reducing supply chain costs by rationalizing, simplifying, and consolidating a supplier base. However, single sourcing can also be problematic, since finding such supplier that would provide all the needed materials and services is a complicated task. It is especially so for AC, as the type of product and the requirement of quality are demanding. Besides, a single sourcing strategy exposes a company to high risks of supply disruption. Therefore, this way of sourcing is not entirely appropriate for AC, although it can be used partially.
In contrast, one of the essential advantages that multiple sourcing has over the single strategy is many alternative sources of materials if there is a delivery disruption. Since orders in AC are usually urgent, in case of such disruption, it may be crucial to contact another supplier. Moreover, the time of preparation and delivery of materials can be optimized if divided between various suppliers. Therefore, multiple sourcing strategy is appropriate for AC and can be applied for the company’s chain supply.
Criteria for the Selection of Suppliers
While applying any of the sourcing strategies listed above, it is also essential to adhere to and balance between specific criteria in selecting suppliers, since it affects the successive steps in reaching supply chain sustainability. According to Luthra, Govindan, Kannan, Mangla, and Garg (2017), these criteria can be divided into three main categories: economic, environmental, and social criteria. Economic criteria include quality of product, technological and financial capability, delivery and service of the product, and lead time required, which are essential for AC. There are also prices, costs, and profits listed in the economic section. From the description of AC, it seems that economic criteria should be the main focu0s when selecting suppliers.
The environmental section lists such criteria as green manufacturing and management, ecological costs and competences, and waste management and pollution prevention. These criteria can be considered significant in terms of developing customers’ loyalty since many people nowadays tend to support an eco-friendly attitude. Moreover, taking into account the type of AC’s product (protective work-wear and equipment), making it ecologically sound would be beneficial for the environment.
Last but not least, social criteria include occupational health and safety systems, the interests and rights of employees, and information disclosure. The criteria listed can also be considered as ethical since all of the three sections contribute to building customers’ trust and loyalty by creating a trustworthy image of the company. Therefore, it is utterly significant to take this section into account while selecting a supplier.
Identifying Suppliers’ Financial Difficulties
Financial difficulties can be defined as a financial crisis that is a situation in which a supplier (a company) faces problems in satisfying its financial obligations (e.g., loan payments, debts). Employees in such companies are usually under remarkable stress that influences their performance, which can result in various manufacture or delivery disruptions. Therefore, it is essential to be able to determine suppliers facing financial difficulties and timely prevent all adverse consequences of dealing with them. According to Helmold, Dathe, Hummel, Terry, and Pieper (2020), there are certain “symptoms” that can be noted as signs of a company suffering a financial crisis. These signs include unclear revenue paying, having too much debt, overvalued assets, undervalued liabilities, and accounting methods change.
When a company experiences financial difficulties, it is likely to start putting fictional earnings into the reports. This symptom can be checked by reading the SEC investigations on a company posted on the official website. Besides, one of the significant financial problems indicators is borrowing too much money, which results in a company’s considerable debt. It can be observed by comparing a company’s debt ratios with those of its competitors. Thus, it is possible to make some assumptions about a company’s financial state.
Furthermore, due to overvalued assets, a company can seem to have holdings that are worth more than they factually are. In contrast, undervalued liabilities can contribute to a company creating an image as if its debt is less than it actually is. Both problems can be suspected and identified by observing the newspapers’ articles about the SEC or other state authorities questioning a company about its financial statements.
Last but not least, accounting methods change can also be considered as a signal if timely identified. The generally accepted accounting principles (GAAP) have set specific accounting rules. When a company files a report, it must be done according to these rules. Sometimes, a company can provide a comprehensive report in which it can hide some potential problems. They can be found out by reading the fine print in the section containing the financial notes.
Gaining Reliable Information about Suppliers’ Financial Difficulties
Taking into account the information stated above, it seems that one of the ways to obtain reliable data about the financial state of suppliers is researching official websites of state organizations, such as FASB and SEC. One more related approach is to study financial articles and opinions of official authorities in the newspapers and magazines. However, the information in the Media must be observed critically – it must be neutral, unbiased, and cover various points of view.
Otherwise, it cannot be fully trusted and used in a buyer’s analysis. Also, as a third way of gaining data, it is possible to find and check publicly available reports of a company. These reports can be posted on a company’s official website or stored in the archives. Then, it is significant to be able to read and analyze the reports thoroughly. In the case of AC, a relevant solution can be to delegate the responsibility of searching reliable data, studying it, and basing resultant assumptions to the analytics department. Then, the information must be given to the buyer for further decisions on the selection of suppliers.
Supply Market Analysis
Supply market analysis is a specific technique that is used to identify market traits for particular products. It provides a buyer with information that is crucial for the development of effective and successive procurement strategies. According to the Department of Housing and Public Works (2018), supply market analysis helps to gain a strategic understanding of the market, including the course of work, the competitiveness, the sustainability performance and capability, and key suppliers. Besides, the analysis helps to manage the risks by providing suppliers comparison and the probability of supply market failure. Therefore, supply market analysis is a crucial stage in the sourcing process.
Sources of Market and Supplier Data for the Supply Market Analysis
The information for the supply market analysis must be gathered carefully from various sources. One essential requirement for a buyer in this process is to remain impartial. It is possible to note that “much information can be obtained from an initial ‘desktop’ analysis,” which includes internet research combined with studying published journals (Department of Housing and Public Works, 2018, p. 10). During the examination, primary sources must be combined with the secondary ones to gain a better understanding of the market and more reliable information.
Researching secondary sources usually helps to obtain relevant background data about the market, suppliers, and connected issues. Online databases, legislation (e.g., the official website of the US Congress), Media sources, and published company-specific details (e.g., marketing materials, annual reports) can be considered as reliable secondary sources. However, the data from them must be checked and proved by the information collected from the primary sources.
Primary information sources include interviewing people with a better understanding and perception of the issues connected with the goods and services needed by a company. The examples of these people are suppliers, end-users of a company’s products, and quality assurance auditors. A well-planned interview with representatives of these groups is likely to provide more current information and to be more useful than several hours of researching secondary sources.
In the case of AC, the buyer can organize and conduct interviews with her key suppliers in order to gain reliable information about their previous and current positions. Besides, she may negotiate with the previous buyer to collect more background information. Moreover, it is possible to conduct a survey among companies and their employees who use protective work-wear and equipment produce by AC.
Legislative and Ethical Requirements for an SME
Business ethics is a set of rules that all members of an organization must follow. The company, as a legal entity, also has to follow these rules. According to Van Landuyt, Dewaelheyns, and Van Hulle (2016), there are three main categories of business ethics: workplace ethics, deontology, and social responsibility. The primary rule is that organizations must follow the laws of the Constitution that are connected with their industry. Otherwise, disobedience to these laws may logically result in a criminal offense. Therefore, this primary rule is essential to be considered by AC as well.
What is more, according to current business ethics, every company should provide equal opportunities for every worker. In other words, the administration should be unbiased towards either all employees and also applicants. The latter should be interviewed with no regard for their age, appearance, and sex. Thus, only abilities and skills should be estimated and used as a basis for making a final decision.
Basu, P., Ghosh, S., & Kumar, M. (2019). Supplier ratings and dynamic sourcing strategies to mitigate supply disruption risks. Decision, 46(1), 41-57.
Department of Housing and Public Works. (2018). Supply market analysis. Web.
Helmold, M., Dathe, T., Hummel, F., Terry, B., & Pieper, J. (Eds.). (2020). Negotiations in Companies with Financial Difficulties. In Successful International Negotiations (pp. 201-213). Cham, Switzerland: Springer.
Luthra, S., Govindan, K., Kannan, D., Mangla, S. K., & Garg, C. P. (2017). An integrated framework for sustainable supplier selection and evaluation in supply chains. Journal of Cleaner Production, 140, 1686-1698.
Van Landuyt, Y., Dewaelheyns, N., & Van Hulle, C. (2016). Employment protection legislation and SME performance. International Small Business Journal: Researching Entrepreneurship, 35(3), 306–326.