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Improving the effectiveness of forward purchasing strategy at

  1. 1. Improving the Effectiveness of the Forward Purchasing Strategy at Jiangsu Aucksun Metal Co.,Ltd. By Phongwarin Buranasathitwong & Suchaluck Boonipat
  2. 2. CONTENT <ul><li>Prologue </li></ul><ul><li>Background </li></ul><ul><li>The Products and Services of Aucksun </li></ul><ul><li>Aucksun Supply Chain </li></ul><ul><li>Problem Description and Statement </li></ul><ul><li>Summary and Discussion </li></ul><ul><li>Case Questions </li></ul>
  3. 3. PROLOGUE Jiangsu Aucksun Metal Co., Ltd is a China-based company engaged in processing and logistics services of steel plates and aluminum alloy plates. The Company provides galvanized steel plates, hot-dip galvanizing steel plates, aluminum alloy plates, cold-rolled steel plates, hot-rolled steel plates, stainless steel products, electrolytic tin products and other steel plates, among others. The Company's clients are mainly information technology (IT) manufacturing enterprises. It operates its businesses principally in Jiangsu province, Shanghai and Zhejiang province, China.
  4. 4. PROLOGUE For the procurement and supply of row material, The company was founded not long ago, how to improve and manage the material flow and the associated operational process. The procurement of raw materials are not play a critical role in well-being , but also affects the smoothness and the financial performance of the entire Aucksun supply chain.
  5. 5. PROLOGUE Aucksun was register in 2002 and started operations a year later, so it’s a mid-level management and the most of employee also quite young. The core competency is focused on integrated procurement and metal material processing, value added service for IT industry which has bring future to China
  6. 6. BACKGROUND <ul><li>Location : </li></ul><ul><li>In the well-developed city of Zhangjiagang(ZJG) in Jiangsu province. </li></ul><ul><li>At the intersection of two economics zone along China’s eastern coastal line and the Yangzi River. </li></ul>
  7. 7. BACKGROUND ZJG is the city, where was ranked second among China’s top 100 cities in 2006 based on the composite social and economic index. The superb geographic location of ZJG offer the good transportation infrastructure, constituting a four dimensional transport system that includes land, rail, water and air.
  8. 8. Land: <ul><li>The highway along the coast goes across the city. </li></ul><ul><li>Only one-hour drive, a number of cities such as Shanghai, Suzhou, Wuxi, Changzhou and Nanting. </li></ul><ul><li>Two hours from Hangzhou to Nanjing. </li></ul>Four-Dimensional transportation system
  9. 9. Rail: <ul><li>Shanghai-Nanjing railway is 40 kms away in the south. </li></ul><ul><li>Xinchang railway is only a little of 10 kms in the west. </li></ul>Four-Dimensional transportation system
  10. 10. Water: <ul><li>Aucksun Metal will be expanded to include the distribution of armor plates and aluminum plates in the Yangtze River Delta and Pearl River Delta. </li></ul><ul><li>33 berths at ten-thousand tons catering for containers, steel, chemical, coal and others merchandise. </li></ul><ul><li>Handle 80 million tons of goods </li></ul><ul><li>23 routes to 40 countries, over 140 harbors. </li></ul>Four-Dimensional transportation system
  11. 11. Air: <ul><li>3 international airports nearby ; Shanghai Hongqiao airport, Pudong international airport, and Nanjing Lukou airport. </li></ul>Four-Dimensional transportation system
  12. 12. Jiangsu Aucksun Metal Co.,Ltd. <ul><li>Aucksun is established under the joint investment of Jiangsu Australia Industry Corporation and the Hong Kong Chang-Zheng, Ltd. </li></ul><ul><li>The land area is about 24,000m 2 with the construction area of 9,600 m 2 . </li></ul><ul><li>Its production and processing capacity is attainably 132,000 tons per year, processing steel production 8,000 to 10,000 tons per month and aluminum 1,000 tons per month. </li></ul><ul><li>The inventory is 30,000 tons of steel and 2,000 tons of aluminum. </li></ul><ul><li>The current number of customers is about 300. </li></ul><ul><li>The target company recorded 2010 revenue of 410.79 million yuan and net profit of 16.12 million yuan. </li></ul>
  13. 13. The organization of Aucksun General Manager Association GM Association GM Operations Dept. Business Support Dept. Manufactering Dept. Information Dept. Administration Dept. Plant & Factory Material & Supply Quality Control Production Customs Clearance Human resources Finance & Accounting Sales & Marketing
  14. 14. <ul><li>Jiangsu Aucksun Metal Co., Ltd. engages in the provision of logistics and supply chain services for information technology manufacturing companies. </li></ul><ul><li>The company’s services include warehousing, separation, processing, packaging, delivery, and related technical support services. </li></ul><ul><li>It provides its logistics services for steel sheets that are primarily used in liquid crystal displays </li></ul><ul><li>(LCDs) , printers, copiers, computers, </li></ul><ul><li>set-top boxes, and servers, as well as for </li></ul><ul><li>aluminum alloy plates,which are used in </li></ul><ul><li>notebook computer central processing </li></ul><ul><li>units, notebook computer liquid crystal </li></ul><ul><li>panel backboards, and LCD backboards. </li></ul><ul><li>The company is based in Zhangjiagang. </li></ul>Products and Services of Aucksun
  15. 15. <ul><li>To adopt a forward purchasing strategy to maintain certain level on inventory. </li></ul>Products and Services of Aucksun - Aucksun implements ERP system for supply chain management, marketing, order processing, and manufacturing operation.
  16. 16. ERP System <ul><li>ERP system use to manage inventory information , forecast the demand of downstream customers, and place orders three months in advance. </li></ul><ul><li>Materials from upstream suppliers arrive before the actual demand is received. </li></ul><ul><li>VMI (Vendor Managed Inventory) service to the downstream customers and maintains one and a half months of supply. </li></ul><ul><li>Most transportation operations are outsourced to other logistics service providers in order to focus on the company’s core competency and to reduce traffic problem. </li></ul><ul><li>The entire service cycle, the processing center is a key value-added step, bring in about 15% of the total profit for Aucksun </li></ul>
  17. 17. Aucksun’s ERP system Aucksun has a self-invented ERP system, with which the company can operate harmoniously. The reason Aucksun don‘t use these famous ERP system is that they think its own system will fit its operations more due to its own specialty. This ERP system is composed of three main parts, execution part, management part and decision-making part. These three parts make sure Aucksun run smoothly.
  18. 18. Forward Purchasing Procurement <ul><li>Purchasing goods or raw materials in excess of current needs to avail of volume discounts or to hedge against possible shortages. </li></ul><ul><li>The major objectives of purchasing are to (1) maintain the quality and value of a company's products, (2) minimize cash tied-up in inventory, (3) maintain the flow of inputs to maintain the flow of outputs, and (4) strengthen the organization's competitive position. </li></ul><ul><li>- Purchasing may also involve (a) development and review of the product specifications, (b) receipt and processing of requisitions, (c) advertising for bids, (d) bid evaluation, (e) award of supply contracts, (f) inspection of good received, and (g) their appropriate storage and release. </li></ul>
  19. 19. The Aucksun Supply Chain <ul><li>Aucksun has developed a complete supply chain that spans procurement, distribution, manufacturing, and sales </li></ul>
  20. 20. Procurement <ul><li>Aucksun provides two kinds of logistical services; </li></ul><ul><li>-Delivery of imported materials </li></ul><ul><li>-Delivery of supply materials </li></ul>
  21. 21. <ul><li>Explain by two modes for this type of service; </li></ul><ul><ul><li>(1) Regular Purchasing </li></ul></ul><ul><ul><ul><ul><li>Forecasts customer’s demand by ERP system. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Generates and places purchase order to manufacturers. </li></ul></ul></ul></ul>Procurement Inventory analysis and demand forecast Placement consolidated orders Department and contracts Earnest money deposit and letter of credit Inspection, Customs, Clearance and Shipping Barcode and storage Final Payment The regulation purchasing process
  22. 22. <ul><li>Explain by two modes for this type of service; </li></ul><ul><ul><li>(2) Spot Purchasing </li></ul></ul><ul><ul><ul><ul><li>This is occasionally used or irregular demand occurs and the steel suppliers in the market happen to have request supplies available. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>In this case , purchasing plan are made and implemented based on the production requirements and purchasing price will be the market price at the time of purchasing. </li></ul></ul></ul></ul>Procurement
  23. 23. Manufacturing <ul><li>Two main products are steel sheet and aluminum alloy sheet. </li></ul><ul><li>Need metal material in IT inductry and covered 88% of product line. </li></ul><ul><li>Make to order. </li></ul><ul><li>Keep a three-months supply of row materials as inventory. </li></ul><ul><li>There are 3 critical steps namely cutting, coiling and flattening, that take place on the plants. </li></ul>
  24. 24. Marketing and Sales <ul><li>Determining the target of customer. </li></ul><ul><li>Understanding the customer’s needs. </li></ul><ul><li>Explaining Aucksun’s capabilities and negotiating. </li></ul><ul><li>Obtaining customer requirement and expectation. </li></ul><ul><li>Provide sample products. </li></ul><ul><li>Obtaining customer’s approval and agreement. </li></ul><ul><li>Developing contracts. </li></ul><ul><li>Placing orders. </li></ul><ul><li>Processing, storing and delivering goods </li></ul><ul><li>Receiving payment </li></ul>
  25. 25. Distribution <ul><li>1. Distribution Process of Imported Material </li></ul><ul><li>2. Distribution Process of Supplied Material </li></ul>
  26. 26. <ul><li>Main row materials are fingerprint-gulvanized and hot-dip gulvanized sheets. </li></ul><ul><li>First, produced and developed in Japan, become commercialized later and have been widely use in electronic industry. </li></ul><ul><li>There are abundant supplies of these products that differ significantly among various steel manufacturers. </li></ul><ul><ul><li>Japanese supplier -- High-end customers </li></ul></ul><ul><ul><li>Korean supplier – Medium quality and price, but offer the best quality and price </li></ul></ul><ul><ul><li>Chinese supplier– Lowest price, but due to the instability of the manufacturing process and demand is small. </li></ul></ul>Distribution
  27. 27. <ul><li>In the situation </li></ul><ul><ul><li>Purchasing prices is lower than market price, so customers order is placed. </li></ul></ul><ul><ul><li>Aucksun usually adjusts the sales price to benefit for customers. </li></ul></ul><ul><ul><li>Aucksun’s imimplementation of forward purchasing method is less complex than the practices in the west. </li></ul></ul><ul><ul><li>In the long-term strategic partnership allows Aucksun and its customers to share risk and benefits. </li></ul></ul>Distribution
  28. 28. Distribution Process of Imported Material In this service, all of the materials are imported by the supliers and shipped to a domestic dock and then finally to Aucksun. Therefore, the supply and price of row materials have a big impact on Aucksun
  29. 29. Distribution Process of Supplied Material In this service, all of the materials are directly purchased by the customers and shipped to a domestic dock and then finally to Aucksun. Therefore, the supply and price of row materials have little impact on Aucksun
  30. 30. Problem Description and Statement
  31. 31. Competition within the Industry Yangtze River Delta 1980: Open Door Policy Low-quality service Price competition intense Pearl River Delta 2001: Entry to WTO “ Imported Materials Processing” Focus high technology <ul><li>Standard Higher than Pearl River Delta </li></ul><ul><li>High-Quality and Full Professional Logistic Services require by customer </li></ul><ul><li>Need business scope, technology and management capability </li></ul>Shanghai, Nanjing, Suzhou, Wuxi, Changzhou, Yangzhou, Zhenjiang, Nantong, Taizhou, Hangzhou, Ningbo, Huzhou, Jiaxing, Shaoxing, Zhoushan and Taizhou.   Guangzhou, Shenzhen, Dongguan, Foshan, Zhongshan, Zhuhai, Jiangmen, and parts of Huizhou and Zhaoqing
  32. 32. Competition within the Industry Focus on High Technology
  33. 33. Suzhou Nippon Metal Co., Ltd Invested by: Japan Nippon Steel Co., Ltd The steel sheets produced by Japan Nippon Steel Co., Ltd. Its service objectives are copiers manufacturers( such as Sharp). Competition within the Industry Yangtze River Delta Jiangsu Province Jijie Metal Co., Ltd (Suzhou) Wuxi Meifeng Metal Co., Ltd (Wuxi) Nippon Metal Co., Ltd. (Suzhou) Jijie Metal Co., Ltd Invested by: Taiwan Jijie steel Co., Ltd The steel sheets produced by Japan Nippon Co., Ltd and Taiwan China Steel Co., Ltd. Its service objectives are computer manufacturers (such as Asus) and LCD manufacturers (such as Auo). Wuxi Meifeng Metal Co., Ltd Invested by: Japan Sumitomo Co., Ltd, Shanghai Sumitomo Co., Ltd and Taiwan Meisheng Co., Ltd The steel sheets produced by Japan Kobe Metal Co., Ltd. Its service objectives are LCD manufacturers(such as Sharp, Chimei)
  34. 34. Aucksun’s Competitive Advantage <ul><li>First mover Advantage </li></ul><ul><li>One of the first full service providers in the Yangtze River Delta </li></ul><ul><li>Scale Advantage </li></ul><ul><li>- Large Asset and Strong Distribution capability </li></ul><ul><li>In 2006: shipped out 90,000 tons of goods </li></ul><ul><li>By the end of 2007, Aucksun‘s assets worth 421 million and its distribution amount reached 131,500 tons. </li></ul><ul><li>- Reduce Purchasing Cost: Increase Revenue </li></ul><ul><li>Large purchase volume and good relationships </li></ul>
  35. 35. Aucksun’s Competitive Advantage <ul><li>Client Relation Advantage </li></ul><ul><li>Long term relationship with more than 200 customers in IT industry & Fortune 500 Companies </li></ul><ul><li>Human Resource Advantage </li></ul><ul><li>Emphasis on Training and Identify Talents </li></ul><ul><li>Location Advantage </li></ul><ul><li>- ZhangJiaGang (ZJG), Jiangsu: thousand IT manufacturers in residence = enormous consumer base </li></ul><ul><li>- Transportation </li></ul><ul><li>- Rule and Regulation on Free-Trade Zone (tariff free logistic services) </li></ul>
  36. 36. Clients <ul><li>leading technology, high precision products to achieve </li></ul><ul><li>the internationally renowned IT (PHILIPS, BenQ, ASUS, etc.) </li></ul><ul><li>appliances (LG, SUMSUNG, etc.), </li></ul><ul><li>auto parts ( GM, NISSAN, etc.) </li></ul><ul><li>and other customers for high quality, high technical requirements for supporting metal.  </li></ul>
  37. 37. Aucksun’s Challenges and Problem <ul><li>Region and Distribution Capability Restricted </li></ul><ul><li>Only 1 distribution center (ZJG headquarters) </li></ul><ul><li>Lost Prospect Customer beyond 250 km distance shipping limit </li></ul><ul><li>Forward Purchasing Strategy </li></ul><ul><li>- An Unbalance between Integration and Customization </li></ul><ul><li>Failure in integrating uncertainty demand: risk pooling. </li></ul><ul><li>Customer request specific raw material which cannot be combine with other </li></ul><ul><li>- Uncertainties in Supply, Inventory, and Price </li></ul><ul><li>Raw material prices and customer’s demands fluctuate in 3 month window </li></ul><ul><li>Risk in overstock/ understock </li></ul><ul><li>Risk in financial loss/ goodwill damage </li></ul><ul><li>Capital Risk </li></ul><ul><li>Financial reserve for inventory investment </li></ul><ul><li>Limited loan channels with high interest rate </li></ul>
  38. 38. Aucksun’s Solution 1. Better Collaboration with Downstream Customer 2. Better Supply bas management with emphasis on how to deal with supply disruption solution
  39. 39. Nature of the Steel Industry In 2007, the country produced 489.2 million tons of crude steel, recording a production growth of 15.7% from the previous year, while the Chinese consumption of crude steel reached 434.4 million tons, rising by 11.9% from the previous year.
  40. 40. Ranked behind China were Japan and the U.S., with a production of 120.0 million tons and 97.2 million tons respectively. 
  41. 41. In 2007, China’s steel industry revealed signs of consolidation in a market that was previously rather fragmented, and in need of mergers and acquisitions. Within the market, the 10 leading steelmakers produced 162.7 million tons of steel products, accounting for more than 50.0% of the country’s total output. Shougang Group and Tanggang Group in North China Baoshan Iron and Steel (Baosteel) Group and Maanshan Steel Group in East China Wuhan Iron and Steel as well as the Panzhihua Iron and Steel Group in Central China
  42. 42. Nature of the Information Technology (IT) Industry <ul><li>Profitability is determined by all members along the chain, including the raw material suppliers, manufacturer, retailers, consumers </li></ul><ul><li>Capital Intensive- investment in R&D and Cost control and Risk Management </li></ul><ul><li>Simple Logistic Operations usually do not add significant values </li></ul>
  43. 43. Nature of the Logistic Industry In 2005, some 16,000 companies were registered as logistic providers Although none has more than 1.4% market share <ul><li>3PL comprised of four major groups: </li></ul><ul><li>Large state-owned enterprises </li></ul><ul><li>Medium-size logistics providers </li></ul><ul><li>Logistic divisions of large manufacturers and distributors </li></ul><ul><li>Foreign companies </li></ul><ul><li>High growth is expected in the industry </li></ul><ul><li>Customer will become more sophisticated </li></ul>
  44. 44. Nature of the Logistic Industry <ul><li>Challenges </li></ul><ul><li>Government regulations </li></ul><ul><ul><li>Localized regulation: not national </li></ul></ul><ul><ul><li>Many government sectors </li></ul></ul><ul><li>Quality of services </li></ul><ul><li>Internal Road and Rail systems </li></ul><ul><li>Transportation and Logistic Data Tracking </li></ul>
  45. 45. Logistic growth benefit IT industry <ul><li>Cost effective: purchasing raw material, inventory control, distribution, and after-sales services </li></ul><ul><li>Outsource logistic operation with Professional </li></ul><ul><li>Better service, technology </li></ul>
  46. 46. Summary <ul><li>Yangtze River Delta Competitors and Challenges </li></ul><ul><li>Value-added activities for raw material </li></ul><ul><li>Attract and Retain high quality customer base </li></ul><ul><li>Better serve customer, while reduce cost and risk </li></ul><ul><li>Logistic Model support </li></ul><ul><li>Low risk </li></ul><ul><li>High efficiency </li></ul><ul><li>Competitive IT supply chain </li></ul>
  47. 47. Case Questions Describe Aucksun’s metal procurement and delivery process. Is the chain Centralized or Decentralized? Explain the difference. Centralized Decentralized <ul><li>decision made at central location of entire supply network </li></ul><ul><li>minimized total cost at a satisfy service level </li></ul><ul><li>network generally own by single entity </li></ul><ul><li>saving/ profit allocate across network using contractual mechanism </li></ul><ul><li>centralize central lead to global optimization </li></ul><ul><li>require technology allows single point of contact </li></ul><ul><li>fewer distribution center – lower overhead cost </li></ul><ul><li>each facility identifies its most effective strategy without consider the impact on other facilities in the supply chain </li></ul><ul><li>decentralize system leads to local optimization </li></ul><ul><li>lead time can be reduce as located in the market </li></ul><ul><li>transportation cost are higher </li></ul>
  48. 48. Centralized <ul><li>Manage and Store own Inventory </li></ul><ul><li>One main location, ZNG </li></ul>Decentralized <ul><li>Outsource transportation to logistic service provider </li></ul><ul><li>Customer storage of goods in the case in Distribution Process of Supplied Material </li></ul>
  49. 49. Distribution Process of Imported Material
  50. 50. Distribution Process of Supplied Material
  51. 51. Advantages and Disadvantages of the forward purchasing approach at Aucksun. Advantage <ul><li>Potentially Reduce Cost of raw material while Gain higher Profit margin. </li></ul><ul><li>the other advantages followed by the definition. (slide 18th) </li></ul>
  52. 52. Disadvantage <ul><li>An Unbalance between Integration and Customization </li></ul><ul><ul><li>Failure in integrating uncertainty demand: risk pooling. </li></ul></ul><ul><ul><li>Customer request specific raw material which cannot be combine with other </li></ul></ul><ul><li>Uncertainties in Supply, Inventory, and Price </li></ul><ul><ul><li>Raw material prices and customer’s demands fluctuate in 3 month </li></ul></ul><ul><ul><li>Risk in overstock/ understock </li></ul></ul><ul><ul><li>Risk in financial loss/ goodwill damage </li></ul></ul><ul><li>Capital Risk </li></ul><ul><ul><li>Financial reserve for inventory investment </li></ul></ul><ul><ul><li>Limited loan channels with high interest rate </li></ul></ul>
  53. 53. Why do IT manufactures outsource the procurement of raw materials to Aucksun? What are the benefits? How would this affect the upstream material suppliers? Outsource benefit <ul><li>Reduce Cost and Risk in Inventory Management </li></ul><ul><ul><li>Management Cost </li></ul></ul><ul><ul><li>Risk in Overstock/ Understock </li></ul></ul><ul><ul><li>Risk in Demand uncertainty - failure Risk pooling </li></ul></ul><ul><li>Reduce Capital Investment </li></ul><ul><li>Focus on its core competency and strengthen image </li></ul><ul><li>Flexibility in transfer </li></ul><ul><ul><li>The ability to better react to changes in customer demand </li></ul></ul><ul><ul><li>The ability to use the supplier’s technical knowledge to accelerate </li></ul></ul><ul><ul><li>product development cycle time </li></ul></ul><ul><ul><li>The ability to gain access to new technologies and innovation. </li></ul></ul><ul><ul><li>Critical in High tech where technologies change very frequently </li></ul></ul>
  54. 54. Affect upon Upstream Supplier <ul><li>Cost </li></ul><ul><li>Reduce price due to larger bargaining power from Aucksun </li></ul><ul><li>Bullwhip effect with the faults presumption of consumer demand result in larger volume production/ overstock </li></ul><ul><li>Benefit </li></ul><ul><li>Demand guarantee </li></ul><ul><li>Larger volume of purchase </li></ul><ul><li>Selling through Aucksun – do not need processing process </li></ul>
  55. 55. Plan for improving current forward purchasing process What are key issues, difficulties, and required resources for each action step. What data and additional information are needed for further analysis and decision making? <ul><li>Risk pooling inefficiency </li></ul><ul><ul><li>Need to know re-evaluate client request on material and re-segment demand, not group everyone together </li></ul></ul>
  56. 56. What data and additional information are needed for further analysis and decision making? (Contd.) <ul><li>Potentially decrease forward purchasing time (less than three month) </li></ul><ul><ul><li>evaluate deal price with customer to better meet the price of inventory in storage </li></ul></ul><ul><ul><li>discuss with client to increase more of the storage in client ‘s warehouse. </li></ul></ul>
  57. 57. What data and additional information are needed for further analysis and decision making? (Contd.) <ul><li>Reduce Spot purchasing </li></ul><ul><ul><li>evaluate the cost of inventory storage compare to the ability to gain profit margin </li></ul></ul><ul><ul><li>from forward purchasing </li></ul></ul><ul><li>Utilize technology </li></ul><ul><ul><li>utilize the Vendor Managed Inventory (VMI) service to better communicate and </li></ul></ul><ul><ul><li>adjust client demand </li></ul></ul>
  58. 58. <ul><li>Manufacturing and Distribution center Expansion of location to other major economic zone with high emphasis on technology and high demand in the market. (Pearl River Delta, Bohai Bay Region) – reach wider customer base and supplier base </li></ul><ul><ul><li>Need to consider about </li></ul></ul><ul><ul><li>Potential market demand </li></ul></ul><ul><ul><li>Competition – their growth and weakness </li></ul></ul><ul><ul><li>Supplier and product supply volume – match quality and service </li></ul></ul><ul><ul><li>Government’s regulation </li></ul></ul><ul><ul><li>Transportation and Logistic Provider </li></ul></ul>
  59. 59. <ul><li>Centralize Transportation – rather than outsource to logistic provider </li></ul><ul><ul><li>Consider the Cost vs Benefit </li></ul></ul><ul><ul><li>Logistic on national scale </li></ul></ul><ul><li>Contractual relationship with Supplier – Backward Integration </li></ul><ul><ul><li>Shanghai Securities News, citing a company filing reported that Jiangsu Aucksun Metal intends to acquire a 45% stake in SK (Dongguan) a steel processer and distributor, for CNY 29.08 million. The proposed acquisition will increase the stake of Aucksun Metal in the target company to 75 percent. (11 APR 2011) </li></ul></ul>
  60. 60. Do you think Aucksun should adopt other procurement strategies as well? How to determine the types of purchases and/or customers appropriate for each procurement approach? <ul><li>Bottleneck Items </li></ul><ul><li>Ensure Supply </li></ul><ul><li>Strategic Items </li></ul><ul><li>Form partnerships </li></ul><ul><li>Non-Critical Items </li></ul><ul><li>Simplify and </li></ul><ul><li>automate </li></ul><ul><li>Leverage Items </li></ul><ul><li>Exploit purchasing </li></ul><ul><li>power and minimize </li></ul><ul><li>cost </li></ul>Low Low High High Profit Impact Supply Risk Kraljic’s supply matrix on purchasing strategy
  61. 61. Kraljic’s Supply Matrix <ul><li>Firm’s supply strategy should depend on two dimensions </li></ul><ul><ul><li>profit impact </li></ul></ul><ul><ul><ul><li>Volume purchased/ percentage of total purchased cost/ impact on product quality or business growth </li></ul></ul></ul><ul><ul><li>supply risk </li></ul></ul><ul><ul><ul><li>Availability/number of suppliers/competitive demand/ make-or-buy opportunities/ storage risks/ substitution opportunities </li></ul></ul></ul>
  62. 62. <ul><li>Bottleneck Items </li></ul><ul><li>Ensure Supply </li></ul><ul><li>Strategic Items </li></ul><ul><li>Form partnerships </li></ul><ul><li>Non-Critical Items </li></ul><ul><li>Simplify and </li></ul><ul><li>automate </li></ul><ul><li>Leverage Items </li></ul><ul><li>Exploit purchasing </li></ul><ul><li>power and minimize </li></ul><ul><li>cost </li></ul>Low Low High High Profit Impact Supply Risk Kraljic’s supply matrix on purchasing strategy
  63. 63. High Supply Risk and High Impact on Profit: Strategic Items Product that are crucial for the buyer while face with scarcity/ difficulty of supply Highest impact on customer experience Price is large portion of the system cost Long-term partnership with suppliers such as Strategic Alliance, Vertical Integration Low Supply Risk and High impact on Profit: Leverage Items Buyer dominate Many supplier - encourage competition in price Have large impact on bottom line & Profit Purchasing Strategy: Vendor Selections, Targeted pricing, Competing Bidding High Supply Risk and Low impact on Profit: Bottleneck Items Product that can only be acquired through one supplier Seller dominate Do not contribute a large portion of the production cost but supply is risky Ensure continuous supply is important -Long term contracts and/or carrying stock Low Supply Risk and Low impact on Profit: Non-Critical Items Product that are easy to buy with low financial impact Standardization: Simplify and Automate the procurement process Decentralized procurement policy is appropriate – no need for managerial process
  64. 64. Push and Pull Strategy Aucksun : the Push strategy mainly with its’ forward purchasing strategy Push-based supply chain: Production and distribution decision are based on long-term forecasts Pull-based supply chain: Production and distribution decision are demand driven so that they are coordinated with true customer demand rather than forecast demand Should achieve balance between push and pull strategy varies with the type of product
  65. 65. References <ul><li>Zeng, A.Z., Zhao, L. and Hou, J., “Improving the Effectiveness of the Forward Purchasing Strategy at Jiangsu Aucksun Metal Co., Ltd,” Council of Supply Chain Management Professionals Teaching Library , 2009. </li></ul><ul><li>Simchi-Levi, Kaminsky, “Designing and Managing the Supply Chain” McGrow.Hill International Edition , 2009 </li></ul><ul><li> </li></ul>
  66. 66. Thank you for your attention