Faculty of Technology, Engineering and the Environment MSc in Project Management Operations and Supply Chain Management Procurement Case Study – Supply Chain Management STUDENT NAME : STUDENT ID NUMBER : LECTURER : DATE OF SUBMISSION : Declaration of originality STATEMENT ON PLAGIARISM Name Course MSc in Project Management Unit Title of Coursework Individual Coursework I, the undersigned, confirm that I have read and understood the statement about plagiarism which is outlined in the students’ handbook and module guide. I testify that the work that I have submitted accompanying this sheet is wholly my own, and that any quotations or section of text taken from the published or unpublished work of any other person is duly and fully acknowledged therein. Signed Date submitted   Table of Contents 1.0 Overview of the current scenario and the current problems being encountered 1 2.0 Plan to include Optimisation Operations 2 3.0 Framework for the Current Cost Allocations 3 4.0 Pricing Point of Product 4 4.1 Pricing Objective, Policies and Strategy 4 4.2 DB’s Discounts Policy 6 5.0 Vendor Rating System (Supplier Selection) 7 5.1 Main Criteria for Vendor Evaluation 8 5.2 Vendor Rating Methods (Suppliers’ Evaluation Methods) 9 5.3 Using 10C’s of Supplier Selection 10 6.0 Inventory Control Methods 10 7.0 Implementation Plan for new framework of distribution system 13 8.0 Recommendation & Conclusion 14 9.0 References 15   1.0 Overview of the current scenario and the current problems being encountered The given case scenario based on the manufacturer of consumer beauty supplies and Cosmetics Company across the U.S named Dream Beauty (DB) which is located in Money City, Nevada. The company services their customers with the average of three-day total order fulfilment cycle focusing on four main areas. Recently, the company peak their highest annual sale volume as their first time and then the company elected the supply chain vendors among the different suppliers. Management considered that the higher amount of sale volume could increase a supply chain cost. Then, the supply chain cost is a factor to consider and DB doubted on the other factors that is still existed in selecting different suppliers. There have three different channels to supply their products to customer. They are retail store (direct) with 50% sales volume, convenience stores with 30% sales volume and mass merchants with 20% sales volume. All these three channels are taking fully responsible of their profits. From DB sales, product of cost of goods sold (COGS) takes 40% of sales. Therefore, the high of COGS is effecting on the company’s profitability due to the supply chain related cost as a current faced problem. All the products from DB are delivering from the distribution centres across the U.S. using the three-day fulfilment cycle. In this distribution, there have labelled and unlabelled processes. All the orders of Retail and convenience store are distributed as an unlabelled DB’s products while the orders for mass merchants are labelled products. Therefore, the company bought the labelling machine and depreciates that equipment with the straight-line basis for five years. So that, the labelling cost is the another issue to reduce before distribution to mass merchant. The DB Company has a discount policy in the product distribution of all 3 channels during 30 days. All the products from these channels are sold on credit shown in company’s cost accountant report. Only the retail stores pay according to the company’s discount invoiced policy. The payments of other channels are not attention to the discount policy. Therefore, the ineffective discount policy is the another problem of DB’s invoice. Packaging cost is not related with any size of DB’s products. To meet the level of service in three-day fulfilment cycle, the company needs to maintain the inventory safety stock for packaging the ordered product. The logistics-related cost of three channels is required to allocate according to the relative percentage of sales volume. The shipping order percentage is different according to the required volume of different channels. Therefore, poor packaging system is also the another problem to consider in the distribution of DB’s products. 2.0 Plan to include Optimisation Operations The objective of supply chain optimization is to develop the better performance from the entire chain of business process. According to Teixeira (2014), DB is required the efficient supply chains management to compete the global markets in order to reduce the operational cost in supply chain system, increase the customer service level under the DB’s current economic condition and maximizing the company’s profit margin. Supply chain system is very important especially for cosmetic products because of the sensitive raw material, complex production process and changing environment as high customer expectation (Severins, 2016). DB has higher business demands and increase in business complexity between customer, process and technologies. Therefore, the innovation of DB’s supply chain policy should be collaborated between partners, distributors and suppliers. According to Marieke (2016), the optimization of supply chain system is used to minimize the operational cost of supply chain process and it can also vary according to the product volume, supply chain cost, profitability, market share and stock, currency change, cash, tax and CO2 emission. As an example of cost reductions and quality improvement, Estée Lauder (EL) cosmetic firm is the well-known company among the cosmetic industry according to their benchmarking system on supply chain performance based on the changing needs of their business (Morgan, 2015). According to the given scenario, DB is also facing the higher supply chain cost problem. Hence, the effective optimization is required to install in DB’s operating system. DB’s management team needs to plan the optimization process of supply chain system. In 2014 of USAID, these optimization processes can be analysed by three ways such as supply chain design, networking optimization, and transport optimization. For the given scenario, the implementation of enterprise resource planning (ERP) system can cover these three area of required optimization. ERP implementation is not only covered these areas but also helped to eliminate high cost paperwork inaccuracies or errors, to accelerate the information distribution and cooperation, and to improve the quality and efficiency of strategies (Winman ERP, 2016). Therefore, DB will use ERP system for the cost reductions and quality improvement with their business operation system. ERP systems can make cross-functional integration in business and this function can help to communicate efficiently with each other. The fully ERP operation can integrate the relationship between suppliers and/or vendors and customers (Gupta, and Kohli, 2004). From this ERP implementation, DB’s information system can give more success in supply chain process, increase connectivity with customers and more business profit. 3.0 Framework for the Current Cost Allocations ERP system is very expensive to install but the operational cost of the DB’s business can reduce by using ERP system. As a manufacturing industry, the current cost allocations can change from direct labour hour to machine labour hours moving to the activity based costing system (Averkamp, 2016). Therefore, in DB’s supply chain operation, the higher manual labour cost in DB’s current operation can be replaced with lower computerized labour cost by using ERP system with activity based costing system. This system can also be considered in labelling cost. In this scenario, the supply chain process is unreliable within three distribution channels. DB’s management want to make more profits so that, the supply chain cost is the another factor to reduce the operation cost. Based on the activity-based analysis for DB’s three distribution channels, the calculation can be done by following table 1. Table 1: DB’s activity based analysis on 3 distribution channel. (000') Segment Retail Convenience Stores Mass Merchants Total Sales $65,000 $39,000 $26,000 $130,000 COGS $26,000 $15,600 $10,400 $52,000 Gross Margin $39,000 $23,400 $15,600 $78,000 Ordering Costs $2,777 $6,944 $277 $10,000 Packaging Costs $3,200 $4,400 $400 $8,000 Labeling Costs $0 $0 $2,000 $2,000 Delivery Costs $8,333 $20,833 $833 $30,000 Total Logistics Cost $14,310 $32,177 $3,510 $50,000 Segment Profit $24,688 -$8,777 $12,089 $28,000 % Contribution 38% -23% 46% 22% According to Table-1, convenience stores have faced distinctive loss in terms of supply chain related costs while calculating activity-based costing analysis. The logistic-related cost is the main issue for supply chain related cost in DB’s convenience store distributions. For the evaluation of current cost allocation, DB’s supply chain cost can reduce by using ERP system with activity based costing system and redesigning the supply chain system in convenience store distribution. 4.0 Pricing Point of Product In 2016, the cosmetic industries in the United State take 62.46 billion U.S. dollars revenue (Statista, 2016). The cosmetic market is emerging in worldwide with many competitors. Therefore, the pricing point of product is the main thing to consider in the DB’s cosmetic industry by using pricing basics, objectives and pricing strategies. There are two major pricing basics for DB’s business operation. The first one is about to make the business profit and the second is comparing the DB’s product with the competitors in the market position. 4.1 Pricing Objective, Policies and Strategy Determining the pricing objective is the primary thing to consider in DB company to give the direction of the whole pricing process of the DB’s products. Therefore, the DB’s pricing objective are as follow (NetMBA, 2010). • Current profit maximization which is approaching the product’s higher profit by determining the price and output level of operation in a short run or long run process. • Current revenue maximization which is 100% selling the manufactured product to the customer not depending on the profit margins but it can increase the market share and reduce the cost. • Maximize quantity which is only focusing on the number of product sold or customer served by reducing the long-term costs based on the experience curve. • Maximize profit margin which is the pricing up of product to get the higher profit by reducing the product quantities. • Quality leadership which is setting the suitable price to signal the high quality by making the product as their quality leader. • Partial cost recovery which is recovering the business expenditure from the required part of the business • Survival, which indicates the selected price, can cover the market decline and overcapacity of the business. Survival is the first priority than profit in the considering the temporary market. • Status quo is seeking the stable price maintaining the business profit level in order to keep away from the price wars. DB can get the higher profit and greater market share through the systematic pricing policies and strategies in the long-term successful plan. The pricing policy of the company is setting the product’s price based on the costs, value, demand, and competition while pricing strategies is getting the company’s strategic goals by adjusting the product price (Heil, 2016). There are various ways to develop the profit margin and market share from the pricing objectives by using several pricing methods such as cost-plus pricing, target return pricing, value-based pricing and psychological pricing (Allen, 2016). In the given scenario, DB company is not approaching in setting their product price by using cost-plus pricing, target return pricing, and psychological pricing because DB’s product are not depending on the competitor price and customer demands to meet their pricing point. Therefore, the value-based pricing is the proper strategy to meet the DB’s unique value of three-day fulfilment cycle. This is also one of the most profitable pricing strategies. Value-based pricing aimed not only generate the customer satisfaction but also making greater sales with discount (Heil, 2016). Based on the customer satisfaction, this pricing strategy can lead higher DB’s sale volume. Hence, DB can gain more profitability with this setting price strategy by delivering new DB’s products and services to the customers with their satisfaction in a win-win situation. 4.2 DB’s Discounts Policy There is an ineffective discount policy while DB is distributing their product to 3 channels. Therefore, some several types of discounts can use in DB product such as quantity discount, cumulative quantity discount, seasonal discount, cash discount, trade discount, and promotional discount (NetMBA, 2010). Discount policies are used to care about DB’s customers and are always looking for ways to offer them the best value for money. DB’s quantity discount will arrange when the customers purchase a lot of quantities of their product and DB’s cumulative quantity discount will need to consider basically on resellers and other middleman when they purchase a lot of quantities over time. The large individual orders from resellers and other intermediary will not take into account in cumulative quantity discount. Based on the U.S seasons, the seasonal discount will also need to consider in the sales system. This seasonal discount can arrange on any time or any day and this discount will not limit on the time and duration but it is based on the inventory stock such as very new products and very old products. DB’s Cash discount can be also available when the customers pay their bill within the specified date. To maximize the profit, DB company will use trade discount by reducing their retail price when it sells to the resellers within 3 channels than the end customers. To stimulate the DB’s sale volume, the promotional discount is also need to apply in the company’s discount policy. By these discounting policies, DB can get better result in three distribution channels. 5.0 Vendor Rating System (Supplier Selection) In the given case scenario, the company do not mention about the vendor rating system or supplier selection system in detail. At that time, there has a question to discuss the vendor rating system of DB’s supplier selection. It is about the process for vendor to monitor the DB’s products. Selecting the vendor is also important for the quality of product delivered to DB’s customers. This case mention that the company has different suppliers to select DB’s supply chain process. According to this supplier selection problem, DB has to develop their vendor rating system to choice the proper suppliers. Within company’s three-day fulfilment cycle policy, the company needs to identify and evaluate the just-in-time concept of vendor’s performance such as delivery, lead time, quality, price, or some combination of variables. The supply chain cost is the main issue to reduce in company’s three distribution channels by analysing the competitors’ market situation and DB’s operations. DB is selecting their vendors based on their defect-free just-in-time delivery for all of the DB’s products. Therefore, the DB’s potential supplier must fix with DB’s requirements and DB will require undertaking the supplier developing procedure by focusing on the buyer-supplier relationship. The process of supplier evaluation for the supplier relationship management can be described in the following figure 1 which is started from the request for information (RFI) step to select the right supplier. Figure 2. Supplier evaluation in Supplier Relationship management (SAP, 2013) In the process of supplier selection, the DB will be the focal company that needs to satisfy the external and internal entities to produce the sustainable product in a sustainable supply chain. Supplier evaluations and selecting the proper supplier are the main thing to consider. The comprehensive overview of supply chain process is as shown in figure 2. Figure 2: The supplier selection framework for supply chain management (Molamohamadi, et al., 2013) 5.1 Main Criteria for Vendor Evaluation Based on the supplier selections framework, the performance of vendors/suppliers can measure mainly in the area of pricing, quality, delivery, service (see in table 2) (Smith, 2014). Table 2: Main Criteria for Vendor Evaluation (Inman, 2016) Pricing Quality Deliver Service • Competitive Pricing • Price Stability and Accuracy • Adequate advance notice of price changes • Cost sensitivity and Billing • Compliance orders • Specification Conformity • Reliability and its’ repairs • Durability, Support and Warranty • Latest Technology for product or service • Actual or Promised Date/Time • Contracted Quantity • Lead time for deliveries • Packaging and Documentation • Professional representatives • Inside sales • Technical support • Emergency support 5.2 Vendor Rating Methods (Suppliers’ Evaluation Methods) There are three fundamental models to identify and evaluate the vendors (suppliers). They are categorical model, weighted-point model and cost-ratio model (Gupta, 2011). Categorical model: This method does not provide any detail insight for the suppliers’ true performance. Therefore, the advantages of using this model are easy to implement, minimal data requirements, different personnel contribution, good for firms with limited resources and low cost system. In the other hands, there has some disadvantages such as least reliable, less frequent generation of evaluation and most subjective and usually manual. This model is used when the firm is small or in the process of developing an evaluation system. With this model, vendor can be classified as preferred (+), unsatisfactory (-), or neutral (O) ranking (Gupta, 2011). Weighted-point model: This is very flexible model in many organizations with the reliability and moderate implementation cost. As the advantages of this model, there has flexible system, allows supplier ranking, moderate implementation costs and combines qualitative & quantitative factors into a single system. Tends to focus on unit price and requires some compute skills are the disadvantages of weighted-point model. Most firms can use this model. Therefore, vendors can identify as excellent, acceptable, normal, and unacceptable with the percentages (Gupta, 2011). Cost-ratio model: This model is using in large firms or firm with a large supply base. This model has some advantages such as providing a total cost approach, identifying the specific areas of supplier’s non-performance manner, allowing the objective of suppliers ranking and providing the greatest potential for long-range improvement. Cost accounting requirement, most complex implementations, high costs and computer resource requirement are the disadvantages of this system (Gupta, 2011). Different models have different pros and cons by adjusting their simplicity and accuracy. The selection of suitable method is important to know for DB and which model will be the best approach is the main thing to consider for DB’s product. Based on the different supplier evaluation model, Dream Beauty is more appropriate with the weighted-point model due to their allowable implementation cost and flexibility. 5.3 Using 10C’s of Supplier Selection This 10Cs of supplier selection is creating by Ray Carter to identify the right suppliers with 10Cs can describe as follow (SafeSourcing, 2016). 1. Competency – The suppliers have to deliver the required materials to the contracted firm. 2. Capacity – The supplier need to flex an adequate capacity (such as equipment, human resources and materials) to the contracted firm. 3. Commitment – The supplier should have the commitment to sustain the suitable quality performance as a key factor in the business process. 4. Control – The supplier is able to control their policies and procedures to ensure their consistency in the business performance. 5. Cash – The supplier must have the good image in financial standing. 6. Cost – The supplier’s cost must be competed to the other competitors. 7. Consistency – The supplier need to ensure that they have the adequate procedure with their high quality products and services. 8. Culture – The supplier need to share the same cultural value with the contracted organization to avoid strains in their future relationship. 9. Clean – The supplier mush has the appropriate sustainability policy in their organization. 10. Communication – The supplier need to confirm the way of communication with their contractor that is available as ICT software and applications between firms and suppliers. To match with the DB’s organisation needs and values, DB will use 10C which can identify the right supplier in supplier selection. 6.0 Inventory Control Methods The objective of inventory control is required to deliver the right goods on hand to the customer, to avoid stock-outs, to prevent shrinkage such as expired or theft, and to provide proper accounting to the company. The reason for this required inventory control is that it balances the stock of the sales and demands, plans for market winner and increase sale volume, secures the rate of stock turnover on every item, reduces the expenditures and markdowns, and sustains the company’s reputation for their products. According to the given case scenario, the total carrying cost of inventory is about 15 percent of total average annual inventory within three-day fulfilment cycle. In the inventory control system, the lower the inventory cost is the better the manufacturing business. Therefore, the better inventory control system is required to install according to the DB’s three-day fulfilment cycle. There are many types of inventory control systems according to their growing market demands and complexity of business processes in this cosmetic industry. They are ABC method, two-bin method, three-bin method, fixed order quantity, fixed period ordering, just-in-time, and vendor managed inventory (see in table 4). Table 4: Types of Inventory Control Systems (Suresh, 2014) ABC Method (Pareto Principle) Common used in retail industry and coupled with other method. This method is used to control raw material components and work-in progress Inventories in the normal course of business. Inventory classification technique based on the assortment plan of sales and contribution. In this method, top 20% to 80% of products (named 80/20 rule) are considered as class A which is very important (Dowling, 2014). Class B is for middle important and Class C is for least important. Two Bin Method This is a simple method normally used in warehousing with two locations or bins. The method is supply system from one bin to another which mean the stock is cycling batch-by-batch. Stock availability is based on reorder lead time to ensure the availability of enough stock. Main bin is supported by reserve bin. Three Bin Method It is a common method in Kanban system (Japanese manufacturing system). Similar to two bin system and adding the third bin process at supplier’s location. When the reserve bin is supported to the main bin, is empty, the third additional bin (supplier bin) will replenish the required orders to the reserve bin. There will also available Kanban card tracking movement of inventory.   Fixed Order Quantity This is used to avoid ordering mistakes in auto replenishment of goods and ensure regular replenishment of existing products. Fixed amount can order only one time for one item in this method. Minimum and maximum stocking capacity should be calculated for this method based on the space allocation and sales trend. Fixed Period Ordering This is a fixed time interval by placing every order for one item. Mostly in small format stores such as pharmacies and grocery stores. Just In Time (JIT) JIT is used to increase the inventory turnover rate, to reduce the inventory holding cost and focus on exposition of unwanted or dead inventory held by retailer or manufacturer. This is suitable for manufacturing organisation (generally not used in retail industry) and also available Kanban card tracking movement of inventory in this method. Vendor Managed Inventory Stock keeping unit (SKU) directly by the supplier. Vendor replenished the inventory based on the regular intervals of sales. The retailers provide the shop space and the vendor charged a consignment rate on every product sold at the location. The ownership of items from sales and inventory will be by the supplier. According the DB’s three-day fulfilment cycle, Just-in-time type of inventory control system is the most suitable system to install in DB’s business process. Therefore, by using this JIT system, the DB’s business process can reduce the current labelling cost and overcome the poor packaging system. In this Just-in-time system, there are three types of inventories need to efficiently arrange in the DB’s manufacturing business. They are raw materials, Work-in-process or semi-finished goods, and finished goods (Kokemuller, 2016). • Raw materials: Inventories provide insurance in case of delays in deliveries from suppliers. • Semi-finished goods or Work-in-process: Inventories can maintain in case of the workstation cannot work because of a failure or other reasons. • Finished goods: Inventories maintains for unsuspected fluctuations of demand. There have main benefits for JIT inventory control system as follow (Bowersox, et al., 2013). • Funds are associated with inventories can be expended in elsewhere. • The Area for inventories storing can utilize more efficiently than the same size of previous available area for other more productive uses. • The amount of time can reduce by resulting in greater output and higher response rate to customers. • Reduce the rate of defect can result in less waste and higher the rate of customer satisfaction. 7.0 Implementation Plan for new framework of distribution system In business process, distribution systems are difficult to successfully implement due to the reason of handling both concurrency and failure between the vendors, suppliers and customers. For the implementation of business process, there are four key factors to upgrade the DB’s existing supply chain system to stay competitive with their unique value of three-day fulfilment cycle. These four key areas are very important for successful supply chain collaboration implementations. They are internal staff for management change, schedule for success implementation, systems choices, and supplier participation. These four key areas are used in many ERP integrated company (Riffel, 2015). For the implementation of DB’s business system, the internal staffs are the front line employee for actual executing a process and conducting the everyday work. Therefore, the top management level should be prepared some upgrading plan for their internal staffs by communicating and pre-planning. DB should also prepare their staff by supporting a lot of IT-knowledge base training for their internal capability and performance. So that the realistic and detail problems of DB’s business can be detected according to the requirement of DB’s employee. The new implementation system of DB company should be scheduled with a realistic progress such as scheduling the scope, time, and resources. Poor planning can cause a failure of implementation system. By planning the upgrading business process, DB can get the positive momentum of implementation project such as schedule on time, meet DB’s milestones and produce more stable result from company gradually. The another factor is the choice of implementation system. For this scenario, the running system will be SAP ERP system. So that, the strong IT team should be created because the system is very expensive and it is needed to maintain by this team. So that, this IT team can also help to set up and sustain the connectivity between DB’s ERP system and third-party solution without any delay. The last thing for this implementation is the supplier participating. Their participation and acceptability are directly connected to the success of business process. Therefore, DB should make sure the system easy to use and adds value for suppliers. By this ways, the transaction-based vendor-customer relationship can be benefit DB’s business from partner-to-partner relationship. By this way DB can reduce the cost by taking care of their quality, support and commitment in the long run of business. So that, both sides of business can feel the dependencies of each other more than a means to an end. 8.0 Recommendation & Conclusion As DB’s unique value, their three-day fulfilment cycle is very important to the company. So, the operations and supply chain management is more crucial to them. Therefore, this report will recommend DB to implement ERP system, activity based costing strategy, redesigning DB’s pricing policy and discount policy with value-based pricing strategy and JIT strategy and new vendor selection framework. From this integrating system, DB can overcome the current business problems of selecting different suppliers, supply chain related cost, ineffective discount policy and poor packaging system. In conclusion, DB should consider all the area of company requirements with different perspective to reduce the overall costs and maximise their business performance. These proposed extensive plans and strategies will demonstrate the perfect business layout of DB’s manufacturing and supply chain system for the future performance. Therefore, Dream Beauty company should consider these areas to maintain their operation and prevent the negative impact on their profitability.   9.0 References • Allen, S. (2016) The New Business Owner's Guide to Pricing Strategy: How much should you charge for your product or service? [online] 9 June 2016. available from < https://www.thebalance.com/the-new-business-owner-s-guide-to-pricing-strategy-1201235> [17 August 2016] • Averkamp, H. (2016) What is Cost Allocation? [online] available from < http://www.accountingcoach.com/blog/what-is-cost-allocation> [15 August 2016] • Bowersox, D., Closs, D., Cooper, B. 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