Sabor Internaional Case Study

8 August 2016

In this case study, we review Sabor’s current position with regards to its supply source of Macronil, the main component for its air filtration units. We evaluate this using the Karljic matrix and his 4-phase methodology (Kraljic, 1983) as our theoretical framework and analyze the options available to Sabor Inc. using the case information and data provided. We then conclude with our goal of offering viable recommendations to Sabor, given the constraints, to better Sabor’s purchasing position in this situation. Current State

Sabor has been informed by all 3 of its suppliers of a potential supply shortages in the market for Macronil, a critical component for Sabor’s air filtration units. Sabor’s products are air heating and cooling systems, however, there is a growing demand for Macronil filters, not only with new installations of these systems, but as retrofits as well. Macronil filters are not only more technologically advanced than its next best substitute, which is the electronic air cleaner, but is also cheaper to install and require less frequent maintenance. Currently, Sabor’s requirements are met with quarterly, semi-annual or annual contracts.

Sabor Internaional Case Study Essay Example

However, Sabor’s suppliers have forewarned that they will no longer guarantee supplies based on the current supply practice, in the event of a market-wide shortage of the product. Sabor’s suppliers have all proposed long term contracts as a solution but Ray Soles, Sabor’s VP 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 Sabor down with long term contracts as a result. Problem Statement

We note 2 key issues with regard to Sabor’s current purchasing situation. Firstly, Sabor is highly dependent in terms of knowledge and capacity, on its vendors for a strategic component. •Knowledge: Macronil is patented and must be produced under license from Bilt 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 Macronil are relatively stable, there is no mention of the 3rd component and we assume otherwise.

•Strategic component: oSince the process of incorporating Macronil into air filtration units was developed and patented by Sabor Inc. , it is likely that Sabor had invested significantly in the R&D of this product. oMacronil is required for Sabor’s patented air filtration units which accounts for 9% of total sales, and demand is still growing. oMacronil filters are not only popular with new installations of Sabor’s, but also with retrofits of their older systems. It is likely that demand of Sabor’s air systems is closely linked with the demand for Macronil filters.

Therefore any disruption to the availability of Macronil filters could potentially impact the sales of Sabor’s core product. The financial impact could very well be more than the 9% of total sales volumes. oThere are currently no other substitutes for Macronil in the market. Secondly, There is a lot of uncertainty in the long term demand for Macronil. While the demand for Macronil filters is expected to remain stable “for years to come”, as the Macronil filters will need to be replaced every 6 months, the requirement for Macronil by Sabor remains uncertain.

Rumor has it that a much lower-cost substitute could be developed in a few years’ time. Sabor’s suppliers may be using long-term contracts as a means of passing on the risk of obsolescence to Sabor. Theoretical Framework In his article, Karljic 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 Sabor’s position in order to propose appropriate supply strategies. 1)Classification This stage deals with the assessment of supply risk and profit impact.

Karljic 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 Macronil for Sabor. This would place Sabor on the Strategic quadrant of the Karljic matrix as shown below. Leverage Strategic Non-critical Bottleneck Profit Impact Supply Risk Figure 1: The Karljic Matrix (Kraljic, 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 and relative strength of existing vendors. Along with supply market assessment a company analyzes its own needs and supply lines to have a clear idea about 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 Karljic’s article and assessed the strengths of both Sabor and its suppliers.

Purchasing portfolio evaluation criteria Supplier strengthSabor’s Suppliers’ StrengthCompany strengthSabor’s Strength 1. Market size versus supplier capacityNo information on market size, however Bilt Chemical holds the patents and we therefore expect their capacity to be significant with regard to market size. Purchasing volume versus capacity of main unitsSabor’s purchases currently account for 23% of the total capacity of it’s 3 suppliers and 25% of Bilt Chemical’s total output. See appendix. 2. Market growth versus capacity growthIncreases in capacity are expensive.

Demand growth versus capacity growthDemand is being forecasted to grow at an annual rate of 20% for the next 3 years. 3. Capacity utilization or bottleneck riskUnknownCapacity utilization of main unitsExpected to increase 4. Competitive structureMonopolistic in structure. Bilt Chemical holds the patents to Macronil. Market share vis-a’-vis main competition100% – Sabor holds the patents to Macronil filters 5. ROI and/or ROCUnknown. Assumed high for Bilt Chemical due to patents. Profitability of main end productsHigh 6. Cost and price structureUnknownCost and price structureCost of Macronil averages at about 20% of selling price.

See appendix. 7. Break-even stabilityUnknownCost of non-deliveryVery high. Macronil filters account for more than 9% of annual sales volume. Could potentially affect sales of Sabor’s primary product 8. Uniqueness of product and technological stabilityNew, high-tech product. Could be destabilized 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 requirementsHigh – Bilt Chemical holds the patents to Macronil.

Increases in capacity are expensive. Entry cost for new sources versus cost for own production Equally high. 10. Logistics situationUnknown, Assume no issues. LogisticsUnknown, 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 Sabor does not play a dominant role.

We note the tone of the email from Bilt 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 Bilt Chemical to tie Sabor down to a long-term contract. While we cannot quantify if Sabor’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 balanced 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 Sabor. Alternatives available to Sabor A comparison of the proposals from the 3 suppliers: SupplierDurationTermsQuantity commitment (pounds)Price per unitPrice Review period Bilt Chemical5 yearsTake-or-pay25,000 – annual increase of 20%$50 (subject to energy, raw materials & labor)Quarterly Warton Inc. 2 yearsTake-or-pay10,000$50 (subject to energy, raw materials & labor)Quarterly G. K. SpecialitiesOpenContract can be dropped anytime by either party12. 5% of Sabor’s annual requirements (currently 4,800)$56 (subject to inflation, energy, raw materials & labor)Semi-annually

Risk Assessment of each contact: StrategyFlexibilityCostSupply RiskFinancial RiskOther issues Contract with Bilt ChemicalMost inflexible – 5 years with take-or pay commitmentsCost fixed at $50 per unit for 5 years but subject to energy, raw materials & laborLow – sufficient capacity, holds patents to MacronilHigh –if lower-cost product becomes available within the 5 years, Sabor will be tied down to the higher cost componentStrengthen partnership with Bilt Chemical who is also a long time supplier of other raw materials to Sabor Contract with Warton Inc.

Inflexible – 2 years with take-or pay commitmentsCost fixed at $50 per unit for 2 years but subject to energy, raw materials & laborMed – Warton manufactures a variety of other Macronil products, in the event of a shortage, Warton may not be able to meet un-contracted requirements by SaborLow Contract with G. K. SpecialitiesFlexible – can be dropped at any time by other partyHighest 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 Macronil products, in the event of a shortage, Sabor’s supply would likely be affectedLow

Alternatives: 1. Single sourcing – long term contract with Bilt Chemical 2. Dual sourcing – long term contract with Bilt Chemical and Warton Inc. or G. K. Specialities 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 Karljic’s model as our framework, a balanced approach is the direction to take with regard to Sabor’s purchasing situation. We propose the following actions with this in mind: 1. Contract with Bilt Chemical

Bilt is the dominant supplier and holds the patents to Macronil. Bilt Chemical is also a longtime supplier of other raw materials to Sabor. Therefore, we see strengthening the strategic partnership with Bilt 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 Warton is proposing.

Should Bilt 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. 2. Contract with Warton Inc. We agree with the direction and rationale that Ray has taken so far with regard to multi-sourcing. Maintaining the relationship with Warton is strategic in mitigating supply risks. The length of Warton’s contract is relatively short and would also translate to some stability in the supply chain, therefore Sabor should engage in the proposed contract with Warton. 3. G. K.

Specialities G. K. Specialities is proposing a higher unit cost than the rest. We do not see a basis for accepting the higher cost proposed by G. K. Specialities. Also, the flexibility of this contract does not translate into any benefit for Sabor in terms of assurance of supply. We suggest that Ray continues to engage G. K. Specialities however, for strategic reasons i. e. the mitigation of supply risk with the condition that price is comparable with the other 2 bigger players. References Kraljic, P. (1983). Purchasing must become supply management. Harvard Business Review, 109-117.

Table 1 Assumption 1. The marketing forecast is accurate- sales increase 20% in next three years; and the demand for real material increase 20% per year. Company Capacity (in pounds)Purchase (In Pounds) Y1Y2Y3Y4Y5Y6 Bilt Chemical80,0005,00010,00020,000 Warton Inc40,00003,0008,000 G. K. Specialties20,00004,000 Purchase Volume (pounds)5,00013,00032,00038,40046,08055,296 Unit price ($/pound)394244505051 Purchase cost ($) 195,000546,0001,408,0001,920,0002,304,0002,820,096 Table 2 Forecast the unit price for next 2 years (Logarithmic Regression Analysis) Y1Y2Y3Y4Y5Y6

Unit Price39434450 Y5=$50 Y6=$51 Table 3 Purcument percentage from each supplier. Nearly 90% of materials buy from Bilt & Warton in Y3; Bilt & Warton are very important vendors for Sabor. Company Capacity (in pounds)Purchase (In Pounds)Weight Y1Y2Y3 Bilt Chemical80,0005,00010,00020,00063% Warton Inc40,00003,0008,00025% G. K. Specialties20,00004,00013% Total140,0005,00013,00032,000 Table 4 The purchase from Bilt increased significantly in last 3 years account for 6% to 25% of its production capacity. Sabor is an important customer for Bilt.

Company Capacity (in pounds)Purchase (In Pounds)Weight Y1Y2Y3Y1Y2Y3 Bilt Chemical80,0005,00010,00020,0006%13%25% Warton Inc40,00003,0008,0000%8%20% G. K. Specialties20,00004,0000%20% Total140,0005,00013,00032,000 Table 5 Cost of Marconil Vs. Sales Analysis SalesCost of MarconilRM Cost/Sales Y11,100,000195,00017. 73% Y22,900,000546,00018. 83% Y37,200,0001,408,00019. 56% Y48,640,0001,920,00022. 22% Y510,368,0002,304,00022. 22% Y612,441,600 2,820,09622. 67% Table 6 Capacity (in pounds)Purchase volumePercentage Y180,0005,0006% Y280,00010,00013% Y380,00020,00025% Y480,00038,40048% Y580,00046,08058%

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