Hi, could you tell me:

1) what it means by the key drivers of SPI

Microsoft Word - Week 08 Managing Suppliers.docx

2) 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?

Thank you :)

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