Centralized or Decentralized Procurement

Assignment 5

Centralized or Decentralized Procurement

Case Study

Iowa Elevators

Introduction to Supply Chain

February 2018

The submission confirmation number is cef2738d-dc04-4a8c-b4b3-e61d683ca0a0. 

Company Background

IOWA Elevators was one of the largest grain-handling companies in the United States and headquartered in Des Moines, Iowa. The company’s annual revenue stood at $2,3 billion and employed more than 2,500 people. Its two main business units were grain-handling and marketing division and farm supplies division. The grain-handling and marketing division operated 300 grain elevated in the Midwest (approximately 75% of the company’s revenue). Due to the drought, the total revenues declined by 20% from its previous year.  The farm supplies division revenue doubled over the past five years since the company invested in upgrading its elevator system in order to improve throughput and increase capacity in the key regions, a strategy to tap the company’s country elevator network. In the company’s most recent fiscal year, it experienced a loss of $11 million after taxes – a sharp decline in working capital. Management attributed its disappointing results to lower volumes in its grain-handling and marketing division. Despite its raising market share, operating margins at the farm supplies division remained flat.

Scott McBride is the Director of Purchasing for IOWA Elevators. The CEO, Walter Lettridge, has tasked Scott to present a five-year plan for the purchasing department – identify initiatives, schedules, project plans and expected costs and benefits.

Purchasing and Supply Management

Iowa Elevators has a decentralized management system. Its managers help many responsibilities and were responsible for the local market share and profitability. Purchases for elevator operations were handled locally and monitored based on spending limits set in annual operating budgets. The farm supplies division had four product managers, responsible for three main product segments: supplier selection, product mix, branding and promotion. Only change made within the last year was the addition of a travel coordinator.

Corporate Spending Analysis

Cathy Ritchie collected and organized data. The data collection focused on two questions:

1. How much money did Iowa Elevators spend with its outside suppliers?

More than 1500 suppliers, with 20 accounted for 45% of the total spend and the top five represented 35%. Top five consisted of 2 railway companies and 3 suppliers for the farm supply division for crop protection and fertilizers.

1. How much inventory did the company carry?

Farm supplies inventory were $120 million with annual purchases of $310 million.

Current Market Situation

Iowa Elevators has taken to the financial failures in recent times. The concern over the financial problem of the company led to a decision by the board of directors to make changes to the executive team. This is when industry experts were brought in Walter Lettridge the CEO and Jose Sousa the CFO. Both of worked together as a competitor of Iowa Elevators. Scott McBride is the Director of Purchasing for IOWA Elevators. The CEO, Walter Lettridge, has tasked Scott to present a five-year plan for the purchasing department – identify initiatives, schedules, project plans and expected costs and benefits. Scott has to prove that, he is not only a good executive member but also that; he can also make changes and restore the profits of Iowa Elevators.

In May, a month before Scott’s proposal, the new CEO, Walter, informed Scott he needs the company to return to profitability and he is not afraid of making major changes in how the business is run.

In the past, Scott had not proposed a cost reduction plan because he was concerned of the resistance that he might face the divisions and field elevator managers. Currently, for him to proceed with any plan he has, he needs to find a way to address the resistance to his recommendations.

Current Issues

• Surplus suppliers
• No cross-functional team
• Budgeting
• Lack of Human Resources requirements
• Organizational structure
• Inventory management

First aspect is to see what does Scott have control over. As Director of Purchasing the main concern is who are our suppliers. Currently, Iowa Elevators buys from 1500 suppliers but only 20 of these suppliers make 45% of the companies total spending. This means that, Scott has to combine only the necessary suppliers needed to increase the companies buying power. This will help the smooth functioning of the supply chain as well as the ability to obtain discounts for bulk supplies thus minimizing transportation costs.

Staffing

Currently, a group of four product managers select the suppliers and product mixes for this division, but they have other duties such as marketing and branding. Also, local elevator managers are able to choose the amount and variety of these farm supplies to their local clients.

It might be a better idea to hire employees that specialize in purchasing to focus specifically on managing the supply and inventory of this division. The job of purchasing would fall on people whose only job is to make the most strategic purchases, rather than people whose attention is split among various tasks. The right people (right qualifications), in the right place (on a team that needed their skills) and at the right time (when those skills were needed).

Teams bring together a number of people, often from different functional areas, to work on a common task. They provide superior results compared to individual efforts, improvements in quality, costs, product development and technology management. Various types of purchasing and supply management teams may be used for example cross-functional supply teams.

• Cross-Functional Supply Teams

Other aspects of Iowa Elevators need to come together as a cross functional team. The cross-functional team would consist of personnel from multiple functions focused on a supply related task. This will result in better results on the tasks, with greater benefits to Iowa Elevators as a whole at lower costs, in less-time and greater stakeholders buy-in.