Based on industry benchmarks, Bob's Farm Stores is spending more than it needs to on its purchasing process. We believe that they could save a total of $1,065,462 by implementing three strategies, namely 1) implementing a mid-tier ERP system, 2) consolidating the number of annual purchase orders through the use of blanket purchase orders, and 3) standardizing their vendor authorization process and increasing the number of authorized vendors.
Implementing a mid-tier ERP system
Our company deals with 650 different suppliers, having each hundreds to thousands of SKU's. The current manual ordering process is overwhelmed by the complexity of the supplier base which has resulted in severely inaccurate forecasts, redundant process and data entry, and increased lead time. With the implementation of a fairly off-the-shelf, mid-tier ERP system we believe that we can 1) Increase forecast accuracy, 2) Eliminate redundant processes, 3) Decrease the amount of labor required to generate and process each PO, and 4) Decrease the lead time by 4 days. Total net expected savings are $624,462.
PO consolidation through the use of BPO's
By using blanket PO's we believe that we can conservatively achieve at least a 0.5% reduction in annual materials spending per year. The risks associated with this strategy include exposing ourselves to price fluctuations (market price could drop during life of contract) and increased dependency on our forecasted demand (we may overbuy). Total net expected savings are $240,000.
Standardization of vendor authorization process
Standardization of the vendor authorization process and increasing the number of authorized vendors will decrease the negotiation and order processing time which will decrease the lead time. We expect to reduce the lead time of non-authorized vendor orders (NAVO's) by 25% resulting in a net expected savings of $240,000.
[...] A good's price fluctuation would have an impact on the timing of our purchasing and the terms of the contract. We could expect that if there were more price fluctuations, buyers would have more difficulty to estimate the demand and adopt more observational purchasing and spot buying (increases PO's). Knowledge of buyer: The buyers' knowledge plays a critical role in the order process. Buyers depend on their experiences to adjust the suggested order amounts from an ERP system and proactively aggregate PO information for the demand of all the stores. [...]
[...] We defined negotiation rate as the number of negotiations it takes in order to arrive at a price and other requirement consensus for an average NAVO. Knowledge of the market for the items being procured from the non-authorized vendors would be an asset for an Assistant Buyer going into the negotiation. From our information on the case, there is a high amount of variation between different Assistant Buyers, as far as their negotiation skills and negotiation rates are concerned. The firm has a list of 650 authorized suppliers and, owing to the traditional and fixed mind-sets the management is not very methodical in increasing this list on on-going basis. [...]
[...] It definitely has a high impact on the 4 labor costs since every PO requires a certain amount of time, which results in additional labor costs The negotiation skills of the assistant buyer will affect the cost of his labor since the more skilled and experienced he is, the less time he should need to negotiate an order. However, we only rated the impact as medium since other parameters will also take this into account. The negotiation rate also has a medium impact the cost of labor for the assistant buyer since it is related to the time spent on negotiation as well. [...]
[...] The current manual ordering process is overwhelmed by the complexity of the supplier base which has resulted in severely inaccurate forecasts, redundant process and data entry, and increased lead time. With the implementation of a fairly off-the-shelf, mid-tier ERP system we believe that we can Increase forecast accuracy, Eliminate redundant processes, Decrease the amount of labor required to generate and process each PO, and Decrease the lead time by 4 days. Total net expected savings are $624,462. Implementation Cost Estimates A decent mid-tier ERP system costs around $2,000 a seat. At 35 seats, the software license cost is estimated to be $70,000. [...]
[...] Throughout the next 50 years, the range of products sold in the co-op stores has grown to meet the needs of farmers and producers as well as catering to an additional customer base—the homeowner. While condensing their operations to the local markets in and around Utah, the co-op continued to grow and expand their feed, seed, and fertilizer production as well as their range of retail goods and supplies sold in their stores. Bob's has also continued to strive toward its goal of supplying the highest quality products available. [...]
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