Procurement and Supply Chain Management - Case Study On Laburnum Group

Introduction 

Laburnam Group was established in 1920 and is now listed as one of the largest companies in Australia. The company was initially registered as the Victorian Farmers’ Cooperative, but now deals in energy, clothing, chemicals, industrial products, etc. Most of the profit that the company generates comes from Sapphire Energy and AusCotton. The two sectors, however, are currently facing severe problems pertaining to procurement and supply management. Since these two companies maintain a lead in energy and clothing sectors, they must be analysed thoroughly. 

Sapphire Energy 

Effectiveness of the Current Ordering System

The responsibility of procurement of 1/0 AWG aluminum triplex cable lay with the Eastern Power. Easter Power has a contract with Sapphire Energy. 155,000 meters of cable is required for the increasing service needs. $1.35 is the cost of every meter of the cable. The annual requirement is to be divided into twelve parts, as per the contract between Eastern Power and its supplier. Therefore, the one twelfth of the aggregate annual requirement will be taken on a monthly basis. This agreement between the Eastern Power and its supplier was developed to reduce the lead time. 

Had this agreement not existed, the lead time would have gone up to 12 weeks (Doorasamy, 2015). Sapphire Energy is Eastern Power’s customer. The price of cable is fixed with no discounts. 4500 meters is the minimum quantity that can be ordered. Inflexibility of the supplier is the primary challenge. The supplier does not offer discounts and accounts for surcharges. For instance, inventory carrying the cost is about 10% of the purchase price. When the purchase requirement hits up to 90,000 meters for a given year, the inventory carrying cost becomes enormous. An ordering cost of $50 is also charged to each shipment. This hinders the efficiency of the ordering system by casting a significant impact on the financial budget. Efficiency of the business is likely to be determined by its inventory management system. 

Improvements in the Current Ordering System

If certain changes are introduced into the contract, the current ordering system may be improved. If the inventory manager or controller manages to reach an agreement with the supplier about discounts on bulk orders, the existing ordering system may be improved (Mercuri, 2007). This will allow the company to cut down on some of its costs and the sales are likely to increase, reducing the carrying cost. The storage capacity of the Eastern Power storeroom should be expanded. This is because the existing capacity of the warehouse can only accommodate 90,000 meters of cable when the demand is expected to increase to up to 155,000 meters in the following year. 

Besides, the terms and conditions, and other policies regarding the minimum ordering quantity of cable must be removed. There should be no restrictions pertaining to the minimum order quantity because Easter Power has to pay 10% of the purchase price anyway. Therefore, discontinuing the policy of ordering 4500 meters of cable at minimum shall improve the current ordering system. Working on inventory management is likely to improve the current ordering system. A problem is associated with shipment costs of $50 alongside the inventory charges of 10%. As per the agreement, at least 4500 meters of cable are to be ordered and 5 days will be needed to implement them. Since the carrying cost is $1.35 per meter, Sapphire Energy must reduce its inventory cost. The current carrying cost is rather unfeasible. The cost shall decrease if the number of carrying units are reduced.