Sourcing Decisions

Sourcing Decisions

MGT 300 Supply Management

The purchasing manager has provided the following information:

Spend CategoryAmount Thousands of $Number of Suppliers

Production Machinery1702

Maintenance2010

Hardware310

Sheet Metal237

Electronic Components2885

Percent of spending for spend categories

Electrical components at $288,000 constituted 57% of expenditures for the company. Production machinery was second highest with $170,000 at 34%. Sheet metal expenses were $23,000 which was 4.5%, maintenance 4% and hardware .5% of total expenditures.

High or Low complexity spend categories.

“A spend analysis is an annual review of a firm’s entire set of purchases” (Monczka, 324)

Before each spend category can be classified as either low or high complexity, we have to understand what makes up those types of markets. Low complexity markets are those that are saturated with suppliers and can produce vast amounts of materials. They operate and produce under standard specifications and can be easily substituted for another brand. In contrast, a high complexity market has only seldom companies that supply the material, at low volumes, under specific guidelines without any available products to use instead of during production. Production machinery and electric components have a particular function for the company and are not easily replaced. They are the highest in expenditure amounts and can be detrimental to operations if unavailable. The funds to ensure these items are operational always have to be available to provide there is no mission failure thus belong in the high complexity spend category. Maintenance to ensure that the equipment is operational should always be available. Companies may choose to outsource those services or hire trained personnel to keep the machine operational. Maintenance expenses are also high complexity as they require specially trained staff and ensures total functionality of the organization. Sheet metal and hardware are two of the lowest spend categories according to the information given but can be easily acquired and negotiated with multiple vendors, and there is plenty of availability. Sheet metal and hardware would constitute low complexity spending.

Risk Value Matrix

“The Risk Value Matrix provides a method of organizing opportunities based on the end value of each and the risk involved. By carefully determining which risks are worth taking and which are not, the matrix user can save himself money, time, and effort that may have been lost by making the wrong decisions” (Priority Matrix, para 1). To ensure a company’s success, managers provide that they carefully plan and prioritize spending to support operations. The 2×2 risk value matrix is composed of four quadrants in which expenses will fall. High value/ low risk is those that produce a high benefit for the company while the risk taken is minimal. High value/ High risk is those that both the risk and obtained profits are high. Love value/low risk do not provide benefit for the company and do not cause a significant amount of risk. Low value/ low risk represents the less desirable area of the quadrant that does not produce benefits for the corporation, however, elicits higher amounts of risk. The chart below depicts how, according to categories used to identify risk versus value, the provided expenses would fall.

The hardware spending category is low risk and low spending due to its availability and low cost in the market. This type of product is easy to find, the vendor is easy to replace and has the lowest expenditure. The maintenance category is the second lowest expense thus staying low in the spending amount quadrant. It is, however, higher in the risk the company assumes because maintenance is essential to the operation of equipment. Sheet metal is a bit more upper on cost however it does not represent much threat to the business because is a standard item such as the hardware. On the other hand, production machinery and electronic components are placed in the high expense high-risk category because of high cost and importance to operations. They are specific components needed for manufacturing and cannot be replaced for substitutes. Its availability is required to maintain daily activities.

References

Monczka, Handfield, Giunipero, Patt. ACP PURCHASE & SUPPLY CHAIN MANAGEMENT, 6th Edition. Cengage Learning, 2013-02-07. VitalBook file.

Risk Value Matrix. (n.d.). Retrieved April 13, 2018, from https://sync.appfluence.com/templates/risk-value-matrix/