Sabor Internaional Case Study
Current State Sabot has been informed by all 3 of its suppliers of a potential supply shortages in he market for Macron”, a critical component for Saber’s air filtration units. Saber’s products are air heating and cooling systems, however, there is a growing demand for Macaroni filters, not only with new installations of these systems, but as retrofits as well. Macron” filters are not only more technologically advanced than its next best substitute, which Is the electronic alarm cleaner, but Is also cheaper to Install and require less frequent maintenance.
Currently, Saber’s requirements are met with quarterly, semi-annual or annual contracts.
However, Saber’s suppliers have renowned that they will no longer guarantee supplies based on the current supply practice, in the event of a market-wide shortage of the product. Saber’s suppliers have all proposed long term contracts as a solution but Ray Soles, Saber’s UP for Supply Chain, Is not keen to deviate from current practices. Ray has heard rumors that a much lower-cost substitute could possibly be developed In a few years’ time and suspects that his suppliers wanted to tie Sabot down with long term contracts as a result.
Problem Statement We note 2 key issues with regard to Saber’s current purchasing situation. Firstly, Sabot Is highly dependent In terms of knowledge and capacity, on Its vendors for a strategic component. Knowledge: Macaroni is patented and must be produced under license from Bill Chemical.
Ray does not have much knowledge on the actual manufacturing process. Capacity: Ray has heard that Increases In capacity are expensive, we can therefore conclude that start-up costs would be a very high. The supply of 2 of 3 components of Macaroni are relatively stable, there is no mention of the 3rd component and we assume otherwise. Strategic component: Since the process of incorporating Macaroni into air filtration units was developed and patented by Sabot Inc. , it is likely that Sabot had invested significantly in the R&D of this product.
O Macaroon is required for Saber’s patented air filtration units which accounts for 9% of total sales, and demand Is still growing. O Macaroon filters are not only popular wilt new Installations AT Isadora, out also wilt retrofits AT tenet older systems. It is likely that demand of Saber’s air systems is closely linked with the demand for Macaroni filters.
Therefore any disruption to the availability of Macaroni liters could potentially impact the sales of Saber’s core product. The financial impact could very well be more than the 9% of total sales volumes.
O There are currently no other substitutes for Macaroni in the market. Secondly, There is a lot of uncertainty in the long term demand for Macron”. While the demand for Macaroni filters is expected to remain stable “for years to come”, as the Macaroni filters will need to be replaced every 6 months, the requirement for Macaroni by Sabot remains uncertain. Rumor has it that a much lower-cost substitute could be developed in a few years’ time.
Saber’s suppliers may be using Eng-term contracts as a means of passing on the risk of obsolescence to Sabot.
Theoretical Framework In his article, Garlic talks about purchasing as a critical management area with a significant impact on a company’s bottom line. We use his 4-phase approach to analyze Saber’s position in order to propose appropriate supply strategies. 1) Classification This stage deals with the assessment of supply risk and profit impact. Garlic assesses supply risk in terms of availability, number of suppliers, competitive demand, make-or-buy opportunities, storage risks and substitution possibilities.
Based on our analysis in the earlier section, we have noted the high supply risk and high profit impact of Macaroni for Sabot. This would place Sabot on the Strategic quadrant of the Garlic matrix as shown below.
Leverage Strategic Non-critical Bottleneck Profit Impact Supply Risk Figure 1: The Garlic Matrix (Karachi, 1983) 2) Market Analysis During this stage a company compares its own strength as a customer to the bargaining power of its suppliers. Company systematically reviews the supply market to check it for the availability of required items or materials in terms quality, quantity ND relative strength of existing vendors.
Along with supply market assessment a company analyzes Its own needs Ana supply lens to nave a clear Idea auto getting the kind of supply terms it wants. Purchasing portfolio evaluation criteria is designed for these purposes and helps to accurately assess all the necessary criteria for right supply decision making. We extracted the following table from Garlic’s article and assessed the strengths of both Sabot and its suppliers.
Purchasing portfolio evaluation criteria Supplier strength Saber’s Suppliers’ Strength Company strength Saber’s Strength .
Market size versus supplier capacity No information on market size, however Bill Chemical holds the patents and we therefore expect their capacity to be significant with regard to market size. Purchasing volume versus capacity of main units Saber’s purchases currently account for 23% of the total capacity of it’s 3 suppliers and 25% of Bill Chemical’s total output. See appendix. 2. Market growth versus capacity growth Increases in capacity are expensive.
Demand growth versus capacity growth Demand is being forecasted to grow at an annual rate of 20% for the next 3 years. 3.
Capacity utilization or bottleneck risk Unknown Capacity utilization of main units Expected to increase 4. Competitive structure Monopolistic in structure. Bill Chemical holds the patents to Macaroni.
Market share vise-a’-vise main competition 100% – Sabot holds the patents to Macaroni filters 5. ROI and/or Rockbound. Assumed high for Bill Chemical due to patents. Profitability of main end products High 6. Cost and price structure Unknown Cost and price structure Cost of Macaroni averages at about of selling price.
See appendix. 7. Break-even stability Unknown Cost of non-delivery Very high.
Macaroni filters count for more than 9% of annual sales volume. Could potentially affect sales of Saber’s primary product 8.
Uniqueness of product and technological stability New, high-tech product. Could be destabilize by introduction of much lower cost alternative in a few years. Own production capability or integration depth Possibly none. Barriers to entry include high start-up costs, licensing 9. Entry barrier (capital and know-how requirements High – Bill Chemical holds the patents to Macaroni.
Increases in capacity are expensive. Entry cost for new sources versus cost for own production Equally high. 0. Logistics situation Unknown, Assume no issues. Logistics Unknown, Assume no issues.
3) Strategic positioning Where the company positions the material that was classified as strategic during the phase 1 . This phase also helps to identify areas of opportunity or vulnerability, evaluate supply risks and obtain the basic thrusts (exploit, balance or diversify) for the needed items. In this case, we know that Sabot does not play a dominant role. We note the tone of the email from Bill Chemical given in the case material to be that of a dominant one, dictating the terms of the meeting and cautioning non-delivery.
We acknowledge that this could also signify desperation on the part of Bill Chemical to tie Sabot down too long-term contract. While we cannot quantify if Saber’s strength is medium or low with regard to its suppliers, the diversified approach is not a plausible one due to high barriers to entry.
Therefore, we concur with the Dalliance approach. 4) Action plans The fourth phase involves mapping out action plans to secure long term supplies. We will discuss this in the following section in relation to Sabot. Alternatives available to Sabot A comparison of the proposals from the 3 suppliers:
Supplier Duration Terms Quantity commitment (pounds) Price per unit Price Review period Bill Chemical 5 years Take-or-pappy,OHO – annual increase of $50 (subject to energy, raw materials & labor) Quarterly Wharton Inc. 2 years Take- or-pay 10,000 $50 (subject to energy, raw materials & labor) Quarterly G.
K. Specialties Open Contract can be dropped anytime by either party 12. 5% of Saber’s annual requirements (currently 4,800)$56 (subject to inflation, energy, raw materials & labor) Semi-annually Risk Assessment of each contact: Strategy Flexibility Cost Supply Risk Financial Risk Other issues Contract with Bill
Chemical Most inflexible – 5 years with take-or pay commitments Cost fixed at $50 per unit for 5 years but subject to energy, raw materials & labor Low – sufficient capacity, holds patents to Macaroni High -if lower-cost product becomes available within the 5 years, Sabot will be tied down to the higher cost component Strengthen partnership with Bill Chemical who is also a long time supplier of other raw materials to Sabot Contract with Wharton Inc. Inflexible – 2 years with take-or pay commitments Cost fixed at $50 per unit for 2 years but subject to energy, raw materials & labor
Med – Wharton manufactures a variety of other Macaroni products, in the event off shortage, Wharton may not be able to meet UN-contracted requirements by Sabot Low Contract with G. K. Specialties Flexible – can be dropped at any time by other party Highest per unit cost of $56 and subjected to inflation, energy, raw materials & labor Very high – contract can be dropped any time by supplier, manufactures other Macaroni products, in the event of a shortage, Saber’s supply would likely be affected Low Alternatives: 1.
Single sourcing – long term contract with Bill Chemical 2.
Dual sourcing – long ERM contract with Bill Chemical and Wharton Inc. Or G. K. Specialties 3.
Contracts with all 3 suppliers 4. Status Quo – ruled out because of significant supply risk. 5. Negotiation of contracts Recommendation Based on our analysis using Garlic’s model as our framework, a balanced approach is the direction to take with regard to Saber’s purchasing situation. We propose ten Toweling actions wilt n tens In mall: 1.
Contract wilt 11th chemical Bill is the dominant supplier and holds the patents to Macaroni. Bill Chemical is also a longtime supplier of other raw materials to Sabot.
Therefore, we see strengthening the strategic partnership with Bill Chemical as a necessary step in maintain certainty in the supply chain. With the possibility of a much lower-cost substitute being developed in the market, however, 5 years may be a long time to commit. We recommend that Ray Soles negotiates the duration of the contract to a relatively shorter one, like what Wharton is proposing. Should Bill Chemical remain firm on this, Ray should work on a price negotiation – reducing the unit cost and/or extending the review period to that of annually, rather than quarterly.
. Contract with Wharton Inc. We agree with the direction and rationale that Ray has taken so far with regard to multi-sourcing. Maintaining the relationship with Wharton is strategic in mitigating supply risks. The length of Warrant’s contract is relatively short and would also translate to some stability in the supply chain, therefore Sabot should engage in the proposed contract with Wharton. 3.
G. K. Specialties G. K. Specialties is proposing a higher unit cost than the rest. We do not see a basis for accepting the higher cost proposed by G.