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Case 2: Managing suppliers at FaastLane Ltd FaastLane Ltd manufactures motorbikes and is located in Brisbane. More than 70 per cent of the cost of the company's motorbikes consists of material and components, which are purchased from Australian suppliers. About three years ago, FaastLane introduced a comprehensive supplier evaluation system to monitor the performance of its suppliers. Each supplier was given a threeyear contract that guaranteed large orders as long as it performed according to FaastLane's strict requirements. Each supplier's performance was measured by considering its adherence to delivery schedules (FaastLane works on a justintime (JIT) system), accuracy of orders delivered, number of components rejected on delivery, and its achievements in reducing its production costs (and, therefore, its material and component prices) over the contract period. Performance in all of these areas will determine whether FaastLane renews the supplier's contract or offers the contract to another supplier. The suppliers are aware that there are many alternative component suppliers who would be eager to enter into a longterm contract with FaastLane. After holding discussions with the purchasing manager, as part of the review process, the financial controller has conducted a study to determine the full cost of dealing with suppliers. While the company uses a series of nonfinancial performance measures to measure most aspects of supplier performance, the financial controller believes that the calculation of the total cost of ownership will provide an additional perspective to viewing supplier performance. For the most recent year, the following supplierrelated activities and costs have been identified: Total Cost ($) No. of Activities Activity Order components from supplier 1,080,000 3,600 orders Receive order 5,400,000 6,000 deliveries Return reject components to supplier 23,100 33 returns Receive late deliveries 156,000 78 late deliveries Production downtime due to late delivery 1,440,000 480 hours Production downtime due to defective material 2,160,000 1,800 hours Process invoice and pay supplier 630,000 1,800 invoices Dispute invoiced amount 24,000 30 disputes Quality audit of suppliers 300,000 6 audits FaastLane obtains its exhaust systems from a four suppliers, the two most important of which are IPot Exhausts and Chroma Manufacturers. Last year, FaastLane purchased 3,000 units from Chroma Manufacturers at $200 per unit, and 5,000 units from IPot Exhausts at $190 per unit. Both suppliers provide an identical component. The analysis revealed that last year the following activities related to the two key suppliers: IPot Chroma Activity Exhausts Manufacturers Order components from supplier 130 orders 90 orders Receive order 150 deliveries 90 deliveries Return reject components to supplier 16 returns 15 returns Receive late deliveries 6 late deliveries Production downtime due to late delivery 28 late deliveries 45 hours Production downtime due to defective material 29 hours 20 hours 130 invoices 12 invoices Dispute invoiced amount 3 disputes 1 disputes Quality audit of suppliers 2 audits 1 audit Process invoice and pay supplier 34 hours Requirements: 1. 2. 3. Prepare a report for management comparing the two suppliers in which you: a. Provide a detailed supplier cost analysis and calculate the supplier performance index (SPI); b. Identify the key drivers of SPI - that is, the factors to which SPI is more responsive to; c. Consider the various criteria used by FaastLane to evaluate suppliers and for each criterion propose two performance measures that the company might use to evaluate suppliers' performance. d. Evaluation of the current situation and advise whether contracts should be renewed with I Pot Exhausts and Chroma Manufacturers; Drawing on your analysis above, but not limited by it, make a set of appropriately justified recommendations to management regarding ways of managing suppliers that would be beneficial to the company. Discuss how accounting and performance measurement systems may create challenges to supplier management. What recommendations would you make to their design to enable effective supplier management? Acknowledgement: Case adapted from LangfieldSmith, K., Thorne, H., Smith, D., & Hilton, R. W. (2015). Management accounting: Information for creating and managing value (7th ed.). Sydney, NSW: McGraw Hill. ISBN: 9781743075906 Managing Suppliers Student Name Institution Question 1 It means the components that are used to assess the relationship between the supplier and his performance about the company set goals and targets. It tries to answer how effective and efficient the vendor dealings are implemented in connection with the organization`s requirements. The SPI will assist in evaluating the reliability of the seller and help to conduct the cost-benefit comparison with other providers. Moser,(2006). The assessment will follow a series of steps which includes the following: first is to align the supplier performance goals with those of the firm. It helps to set and evaluate whether we are moving on the same track. Secondly is to determine and evaluate the approach. In this scenario, the procedure applied by both in ensuring business survival. Determining a method to collect information about the supplier is vital. The firm needs the information about performance, history, management, products and services analysis of provider, going concern and material costing. Design and develop an assessment system. It involves the use of the laid down strategies to determine whether the vendor can provide all equipment requirements, timely deliveries, quality deliveries, among others. Moser,(2006). Deploy a provider performance assessment system. It is vital especially in contract renewal to determine if the vendor is consistent in the near future to conduct the business with the organization. Another requirement is to give feedback to the seller. It will help to review their own performance and to check the areas that require critical improvements. Finally, produce results after measuring providers, as this will determine if they are in line with the firm1s goals and evaluate their performance. Moser,(2006). Question 2 In Performance management, the primary concern with suppliers to the firm. It is involved with the material requirements, the time of delivery, the number of delivery, quality of the materials delivered. The performance system will help to review the contracts of suppliers in future for renewal purposes. It is concerned with the comparison of the set targets against the output of vendors. Accounting is concerned with the costing and profitability of the firm about supplier management. In this case, the accountants are on how to check the standard costs of materials supplied against the actual expenditures. It will finally reflect in the financial statements. For a firm to perform, the cost of production should be at a manageable level since material is direct costs. Accounting challenges suppliers about cost, because as the company needs quality materials, it will charge a higher unit price which finally translate to a higher cost. Bossert (2004). As a result, the company will ultimately lead to making a decision on how it will be able to evaluate a new supplier with a lower price to cut on production costs for direct material usage, although it will have an effect on material quality. On the other hand, the suppliers' can also be affected by being faced with a situation to reduce the costs to survive in the business. Another area of challenge is on payment terms. Accounting also violates the credit terms for credit supplies. In this case suppliers are forced to find alternatives to deliver materials awaiting future payments. More so, the payments they make are partial, challenging the providers to survive in the industry. It is because the financial controller tries to divert the cash into some current investments to gain profits for the firm in the short run forgetting the significant role that suppliers do play in survival of the enterprise. Bossert (2004). Recommendations In my opinion, I would recommend that the business should always look at the importance of all stakeholders including the suppliers. In this context, the performance of the firm is to be evaluated by considering all dealings of the company to the external environment. Providers form basis for the survival of the enterprise, hence should be managed effectively. The strong actions should benefit the vendors and itself since it needs them in the long run survival. Proper payment terms should be strictly adhered to and once fall due amounts should be paid as per the credit limit. Cost minimization also does not imply that the suppliers be affected because the company is cutting costs to change providers. A good business rapport is necessary since there is a great need for one another. Case study questions Question 1 a) Management report. In this report, the emphasis is to analyze the supplier's relationship to the company in relation to the set terms and conditions of supply. Vendor analysis has been established in the excel sheet with full calculations. b) The key drivers that the supplier performance index is highly responsive to involve the time supply, the quantity of raw materials supplied, quality of supplies, methods of supply, cost of the raw materials, right quantities of the materials. Schuh, (2014). c) The criteria used by Faastlane to measure suppliers are; First, delivery of the requested order. In this case the measure is if the supplier is able to deliver the order without short supply. Again it measures the timely delivery Secondly, quality of delivered materials. In this, it is measured by the non defects in delivery. Also by the quality of output materials delivered. Audit of quality work is a key element in the case. Timely delivery. Measured by any cases of late delivery, down the time is taken in production. It is also measured by the time taken in producing output to Faastlane customers. Advice to management In this case, the management should consider delivering materials and renew contracts with Chrome manufacturers. It is because the total cost incurred in less compared to I-pot exhausts. It is $.311, 500 in Chrome and $. 558,900. Few late deliveries are seen in Chrome compared to I-pot which is 6 out of 28 late deliveries respectively. It has also shown Chrome with high quality materials since its defective ones are fewer than I-pot. 20 and 29 for chrome and I-Pot respectively. It indicates that there will be high quality output from materials of I-pot. In I-Pot the withholding tax will be less during audit work since it uses just 2 auditors as compared to 1 of Chrome. Hence I advice management to renew the contract with Chrome manufacturers. Schuh, (2014). Question 2 Recommended ways of managing suppliers Suppliers are vital for the survival of the business. It is important to manage them effectively. The method includes; Provide the regular performance review and provide feedback to them. In this case, it helps to keep track on the suppliers; it helps them to improve on their weak areas of operation. Reviews a certain whether the suppliers comply with agreed terms and conditions for supply. Feedback helps to create a good communication with suppliers. Secondly, timely payments. It is an n emerging concern that there should be need to pay debts once they are due. In this case the vendor is able to create more and deliver and provide welfare to his employees. Monetary help to boost financial position of the suppliers. In some scenario, it is important to provide non financial support to them such as advisory. Question 3 Accounting is concerned with the costing and profitability of the firm about supplier management. In this case, the accountants are on how to check the standard costs of materials supplied against the actual expenditures. It will finally reflect in the financial statements. For a firm to perform, the cost of production should be at a manageable level since material is direct costs. Accounting challenges suppliers about cost, because as the company needs quality materials, it will charge a higher unit price which finally translates to a higher cost. As a result, the company will ultimately lead to making a decision on how it will be able to evaluate a new supplier with a lower price to cut on production costs for direct material usage, although it will have an effect on material quality. On the other hand, the suppliers' can also be affected by being faced with a situation to reduce the costs to survive in the business. Another area of challenge is on payment terms. Accounting also violates the credit terms for credit supplies. In this case suppliers are forced to find alternatives to deliver materials awaiting future payments. More so, the payments they make are partial, challenging the providers to survive in the industry. It is because the financial controller tries to divert the cash into some current investments to gain profits for the firm in the short run forgetting the significant role that suppliers do play in survival of the enterprise. Schuh, (2014). Recommendations In my opinion, I would recommend that the business should always look at the importance of all stakeholders including the suppliers. In this context, the performance of the firm is to be evaluated by considering all dealings of the company to the external environment. Providers form basis for the survival of the enterprise, hence should be managed effectively. The strong actions should benefit the vendors and itself since it needs them in the long run survival. Proper payment terms should be strictly adhered to and once fall due amounts should be paid as per the credit limit. Cost minimization also does not imply that the suppliers be affected because the company is cutting costs to change providers. A good business rapport is necessary since there is a great need for one another. REFERENCES Bossert, J. L. (2004). The supplier management handbook. Milwaukee, Wis: ASQ Quality Press. Emmett, S., & Crocker, B. (2009). Excellence in supplier management: How to better manage contracts with suppliers and add value : best practices in supplier relationship management and supplier development. Cambridge: Cambridge Academic. Moser, R. (2006). Strategic purchasing and supply management: A strategy-based selection of suppliers. Wiesbaden: Dt. Univ.-Verl. Schuh, C. (2014). Supplier relationship management: How to maximize vendor value and opportunity