Executive Summary
The following paper is a presentation of procurement strategies as well as procurement tools within a selected organisation in the logistics industry. The paper begins with a detailed profile of the procurement process and function in the organisation as informed by a number of documents on the company obtained through relevant databases over the Internet. The paper also includes an analysis of the research materials in an attempt to establish solutions to some of the challenges in the company’s procurement configuration.
The findings of research into the company’s procurement process establish that even though the company has invested in a number of techniques to facilitate the same, several challenges still exist. These challenges include the absence of a clear outline of the procurement strategy in the organisation and a detachment of the several units and departments involved in procurement, thus causing delays and inefficiencies.
In addition to the above problems, there is an apparent disconnection between customers and the production process, thus causing delays in the final product reaching the intended consumers. This paper covers several sections that allow easy interpretation of the procurement process in the selected organisation.
It begins with a background of the organisation with the inclusion of the several changes in its procurement functions. The presentation of a detailed strategy and operations in the firm follows before concluding with the recommendations section. The selected company is United Parcel Services (UPS).
Background of UPS
UPS was founded in the 1907 and it has grown from its original coverage of the US to cover more than half of the globe courtesy of having services in over 200 countries around the world. With its headquarters in Atlanta, the company has been the leader in package delivery with millions of parcels and documents being delivered daily. The company has also grown in revenue over the period it has been in existence and it is listed in the New York Stock Exchange (NYSE).
The company has presence in all the continents with coverage of almost all the regions of the world. There is also diversification in the company, which allows easy courier and distribution functions in the industry. The major divisions formed since its inception includes the UPS Mail Innovations, UPS TeleService, UPS Aviation, UPS Air Cargo, UPS Capital Corporation, and UPS Professional Services among others. These have constantly changed over the years with the functions remaining within the organisation and addition of others.
The company uses its characteristic brown fleet of vehicles and aircrafts to deliver parcels and packages. According to the UPS Supply Chain Solutions (2012, p.9), ‘the company spent billions of dollars in a state-of-the-art tracking system and in the investment of some of the latest technologies in the industry’. The update of its technological capability is also reported to cost it more than the operation of the aircrafts and the courier vehicles.
For a proper analysis of the company’s performance, the operations can be grouped into domestic package that the company runs in the US, International package for its international market, and the non-package sectors.
A historical performance index reveals that the organisation has a performance of approximately $24 billion in 2002 revenue for the domestic package: $4.7 billion in international trade and $2.7 billion in revenue for the non-package section. This performance was an improvement in revenue from the previous year’s performance where all the sections recorded lower revenues.
However, by the year 2012, the company had grown to a total of US$ 54.1 billion, with an operating income of US$ 1.343 trillion and a net income of US$ 807 million (UPS Supply Chain Solutions 2012). The company has also grown from employment of handful employees to have over 397,000 employees in all the branches worldwide (UPS Annual Report 2012). The company also has over 8.8 million customers worldwide, who are served by the over 70,900 retail outlets in different parts of the world.
There are also over 100,000vehicles forming its delivery fleet (UPS Annual Report 2012).Some subsidiaries have also been added to the original components of the organisation. The company has expanded its operations with the domestic market still constituting the largest share of its operations. However, in the recent past, the company has set to strengthen its international presence with the opening of several new branches across the world and introduction of the Internet-based trade.
Analysis of UPS’s Procurement Function
In the process of procurement, an organisation should ensure that the acquired goods and services are appropriate with the best cost attainable and in the appropriate quantity, location, and time. UPS has a basic procurement process utilised by most organisations, which takes the standard route with the customers being the final recipients of the products and suppliers being at the beginning of the chain.
In this section, the main areas of focus in the procurement process for UPS are global sourcing, supplier and collaboration, e- procurement and information, and cost reduction systems.
Global sourcing
Global sourcing is an important part of any organisation and especially that of the size of UPS. According to Quintens et al. (2006), international purchasing cannot be excluded from any organisation that has the desire to succeed at the international front. UPS has set up effective measures of global sourcing, which contribute to its current state of success globally. Wynstra et al. (2003) posit that there is a need to integrate the purchasing process and product development.
Some researchers have suggested that outsourcing leads to negative effects on the performance of a company, but this aspect is dependent on the specific industry (Dabhilkar et al. 2009).Alternatively, if outsourcing is applied with the right initiatives, there is a high probability for positive results. In the case of UPS, global sourcing contributes significantly and the same has grown exponentially over the last decade as domestic competition increases.
UPS has also applied strategic purchasing methods in these levels, with global sourcing being a key pillar of the strategies. Paulraja et al. (2006) classify strategic purchasing into three basic levels. The company has managed to integrate the supply activities between the organisation’s customers and the external suppliers who form the largest part of global sourcing in many organisations (Paulraja et al. 2006). UPS recognises the importance of global outsourcing, which has been placed central to its procurement strategy.
As Trautmann et al. (2009, p.205) state, ‘companies engage in global sourcing for a variety of reasons, not just to achieve economies of scale’. Some of the reasons of global outsourcing as recognised in UPS include the sharing of knowledge and the provision of the organisation with the best practices in its engagement with customers (Monczzka et al. 2002).
Danese (2013) also stresses the importance of global outsourcing, as it improves the performance of any organisation that is in a position to establish itself in this field. UPS has made clear policies on outsourcing and specifically global sourcing. Through these policies, the company has been in a position to achieve international cooperation and partnerships and the same translating to improved returns and ease in the logistics industry.
Supplier and collaboration
UPS has collaborated with a number of companies, both in the past and recently, with some examples being companies such as IBM and Oracle. This move has enabled to company to ease its international and local presence with outlets for its services increasing with such partnerships. The collaboration has also seen the company take on the Internet space and diversify its services to the specification of the customers.
Researchers have established a relationship between the successes of a company with the collaboration that it can achieve in the industry that it is situated. According to Claycomb and Frankwick (2010, p.256), some of the benefits include ‘information exchange and conflict resolution mechanisms’.
However, others have reported negative effects of collaboration between companies with the suggestion that organisations should strive to be specialised in only one sector (Weele 2010). Given the logistics in the industry that UPS is located, collaboration is a significant part of existence and this view has informed the collaboration with suppliers and distributers.
Supplier collaboration is also a significant contributor to cohesion within an organisation (Daspit et al. 2013; Lysons & Farrington 2000), and UPS enjoys the same since its inception. The company has also managed to build trust between it customers and its suppliers with little negative incidents in its procurement process being reported in the period it has been in existence.
In a study that examined the effects of trust between organisations in the supply chain, Stuart et al. (2011) proved that basic trust is necessary for effective collaboration. Collaborative networks are also important in the industry and UPS has built a large network in the courier industry where its service can be found in many parts of the world.
Relational marketing literature also emphasises on the importance of building collaboration amongst companies (Stanko et al. 2007), and thus UPS has entered into partnerships with key industry players to ensure that competition is reduced and bridges built. Over the past decade, the company has proceeded to acquire a number of related companies to expand her territories. The culture of organisations is also important to consider, as some of these organisational cultures may influence the outcome of collaboration.
Claycomb and Frankwick (2010, p. 252) support this view by stating that some of the important aspects of a partnership in any industry ‘include information exchange and conflict resolution mechanisms’. Some of the issues that have arisen in the procurement process in UPS have emerged from failure of mechanisms set in place to ensure easy flow of information between some of its partners.
Despite the support accorded to the supplier collaboration with an organisation, some researchers state that supplier involvement in the process of procurement and product development may be harmful to an organisations performance (Wynstra et al. 2001).
The researchers continue to state that few of the organisations have thus ventured in to the involvement of suppliers in their production process (Wynstra et al. 2001). Interestingly, UPS has continued to experience growth in the presence of collaboration with its key suppliers over the last century of existence.
E- Procurement and information
UPS has invested in e-commerce in a number of ways. The company remains the first in the industry to utilise the Internet as a tool in its procurement process after investing billions of dollars every year for the last number of decades.
The investments into cyberspace and information technology have exceeded the operational costs for the vehicle delivery and the air delivery services. As Qrunfleh and Tarafdarstate (2013) posit, information system in the current century is inseparable from the supply chain and application of the same in any supply chain can boost its performance.
The company has a number of uses for e-procurement. Cisco, which is an affiliate company of UPS, is reported to sell approximately 90 percent of its products online with the special requests and specifications being made the same way (UPS Supply Chain Solutions 2012). The clients are also allowed to easily check the product quality and test it via the same route, thus allowing them to confirm the details of delivery.
The clients can now perform transactions at any time of the day and night, and UPS is notified of its product status through the same mode (UPS Supply Chain Solutions 2012). The company then uses the Internet to crosscheck the details of the orders and then due process is followed to the appropriate customers.
Another example of the Internet use by UPS to link clients and provide efficient services is that of ScubaToys.com and its interaction with UPS OnLine (UPS Supply Chain Solutions 2012). The company is in a position to deliver the toys in a matter of hours to the rightful customers with shipment to different times only taking a number of days.
The companies have managed to use the Internet to link the supply and customers directly, which facilitates trade and profitability. The payments for the services are also made electronically and clients can track their orders using a mobile phone software application called UPS Mobile (UPS Supply Chain Solutions 2012).
The healthcare sector is a key part of UPS, which forms an integral part of its supply chain. With growing concerns over the safety of the supply chain, UPS has moved to ensure that the industry is safe by initiating measures aimed at temperature control and safety of medical appliances and drugs during transit. The Arizona State University (ASU) is also a beneficiary of the UPS Store, which is a franchise of one of UPS subsidiaries.
The institution had a challenge of safely delivering mail to its large body of students before the company simplified the process and used technology for the same. The institution can now keep track of the mail.UPS, through its Customer Solutions section, also offered solutions to the challenge of goods damaged during transit for Plow & Hearth. UPS was in a position to develop an economical solution to ensure that Plow& Hearth customers were satisfied. They were also in a position to reduce transport costs and increase returns.
Greve and Davis (2012) also offer solutions to some of the logistical problems that companies face and they use the model of UPS as an efficient logistical company. Vivo Technology, which is a company dealing in laptop parts, also had challenges with the efficient delivery of the parts to the markets and UPS offered solutions to the company by ensuring improved delivery efficiency.
Cost reduction systems
UPS has invested in a number of ways to ensure that the costs of doing business are reduced. Proper procurement strategies are some of these measures and the company has managed to stay competitive. As Glock and Hochrein (2011, p.173) state, ‘purchasing organisation is important for the competitive success of the purchasing department and the firm’. UPS has ensured that the purchase of the relevant services and goods in its line of trade are properly done. One of the measures applied is the use of e-commerce as highlighted above.
Another of these measures is the collaborative effort put in place, thus ensuring that it is in a position to attract other likeminded companies towards the goal of efficiency. Anderson and Katz (1998, p. 1) support this assertion by noting that the ‘cost of cutting alone has been a disappointing means of improving profits’.
Svahn and Westerlund (2009) also established the use of collaborative networks as another way or reducing costs in the operation of companies. UPS has invested in cheap ways of transporting and delivering documents and parcels, and these methods include bulk shipping and chattered flights. The services have ended up being cheaper and competitive with the resultant goods being affordable. Karjalainen (2011) also states that such means of reducing pricing is the most effective.
Recommendations
Prioritisation of procurement process – There are a number of possible recommendations for UPS in its procurement process. The first one is that the company should attempt to redefine its organisational structure to ensure that procurement is made a priority. A representative of the same function should be appointed to handle the department, and this individual should be answerable to the CEO and the Board members only. The strategy will ensure that the procurement process in the company is swift and efficient.
Close supplier involvement – UPS should ensure that the suppliers are involved directly in the development of any new services and [products. To this effect, a supplier development team should be formulated, with the functions including quality assurance for the suppliers.
Effective supplier interaction will see the company rank among the most successful in the industry. The team should also facilitate knowledge sharing between the suppliers and the company’s clients. This will provide them with the opportunity to interact with the procurement process, increasing returns for the company.
Industry Takeover – The company also needs to show more collaborative efforts with the smaller companies in the industry. The other way to ensure collaboration with suppliers is through appropriate service provision where the company offers reduced charges for customers of certain organisations if they use UPS delivery systems.
This aspect would increase the volume of trade that the company handles, thus increasing the profitability. One other way that the company has a chance of improving collaboration in the industry between it and other companies is through the promotion of services offered by these partners and engaging in joint product marketing.
In the use of e-commerce, the company has demonstrated certain strengths; however, a number of recommendations are plausible. One is that the company should enable full electronic payments for all its customers, as this move would allow more accountability and price controls. It would also reduce some of the operational costs incurred through increased staffing to take care of the manual financing still evident in the organisation.
The company should also rebrand its website and ensure that customers have access to the various services through the website. Customers should also be in a position to predict the delivery time of products through information provided over the website. UPS should also keep up with technology through investment in the latest communication systems in the market with the creation of more mobile applications to facilitate transactions.
In the cost reduction strategy, the company should diversify the products and series that it offers to complement each other to ensure that they are in a position to cut the operational costs. An example is the airline industry that the company invested in, which has allowed it to transport more parcels at a cheaper price.
The company should also invest in cheaper transport means for its packages and parcels by investing in cleaner technologies such as the electric propulsion system. In a bid to reduce operational costs, the company could also shift its operations from the United States to areas where there is cheaper labour such as the People’s Republic of China.
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