GB570 Unit 5 Supplier Dependence Review Example

What a Five Percent Discount Buys: A Unit 5 Supplier Dependence Review of a Single Olive Oil Exporter

[Student Name]

Purdue University Global

GB570: Managing the Value Chain

Unit 5 Supplier Dependence Review

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[Date]

The company, its suppliers and every figure are composite and illustrative; the frameworks and sources cited are real.

Recommendation

Alder Quay should keep its Lisbon exporter as its main supplier, move 5 percent of annual volume to a second, pre-qualified Portuguese exporter, and raise the oil it holds in Chicago from four weeks of use to eight. Together these cost about $60,000 a year and would cut the operating profit lost in a ten-week supply stoppage from about $427,500 to roughly $71,000. A full 85/15 or 70/30 split would protect slightly more and cost two to three times as much.

Four Measures of Dependence

Dependence was measured before it was judged, using four measures.

Share of spend. One hundred percent of Alder Quay's bulk oil, about $5.89 million a year, goes to the exporter.

Share of the exporter's sales. Alder Quay accounts for about 7 percent of the exporter's sales. It is a large customer, but the exporter would survive its loss.

Time to qualify an alternative. An alternative exporter would need about nine months: two rounds of sample lots tasted by Alder Quay's panel, laboratory checks against its chemistry thresholds, a site visit, and enough time to reach a harvest, since mills sell the bulk of each crop during the winter months.

Products that would need re-matching. Six products, from the 500 ml single-origin bottle to a 3-liter tin sold to restaurants, are blended to a sensory profile that customers recognize. Each would need new trial blends with oil from a new source.

The four measures show an asymmetry. Alder Quay needs the exporter far more than the exporter needs Alder Quay. Pfeffer and Salancik (1978) describe this kind of imbalance as the source of a supplier's power over its customer, and it explains why the discount, generous as it looks, is the exporter's choice to give and to withdraw.

Concentration in the Market

The bulk market for Portuguese extra virgin oil is less concentrated than many commodity markets, with dozens of mills and several exporters. The concentration that matters here is narrower: few exporters can supply single-origin Alentejo oil in segregated tanks with full lot records, which Alder Quay's label requires. Of the exporters Alder Quay's buyer has met, three could meet that requirement, and two of them already supply large private-label programs. Kraljic (1983) would place this oil in his strategic quadrant, high in profit impact and high in supply risk, where he advised close partnerships combined with careful contingency planning rather than either dependence or constant bidding.

What the Exporter Can See

One further concern is information. The same exporter supplies the oil for a grocery chain's store-brand olive oil, sold in one of Alder Quay's two largest accounts. It therefore sees Alder Quay's volumes, its lot preferences and its price, and it sees the store brand's as well. Nothing in the contract prevents the exporter from offering the store brand oil of the same quality Alder Quay pays to reserve. This is not a reason to leave, but it is a reason to add a confidentiality and lot-reservation clause to the next contract and to avoid depending on the exporter for every lot.

What a Switch Would Cost

A full switch to another exporter would cost about $118,000 once. The components are two rounds of trial blends and panel sessions for six products, about $46,000; outside laboratory tests on sample lots, about $19,000; a qualification visit and audit, about $14,000; and grocer re-approval paperwork, label revisions and packaging reprints for the importer statement, about $39,000.

The switch would also give up the 5 percent discount, since a new supplier would start at list price, about $7.13 a kilogram. That is about $310,000 a year until a new discount could be negotiated. Together, these costs explain why the firm has stayed single-sourced.

What a Stoppage Would Cost

The scenario used here is a ten-week stoppage. Plausible causes include a contamination finding in a shared storage tank that forces the exporter to hold all shipments while tanks are cleaned and retested, a strike at the port of Lisbon, or a regulatory hold during a fraud investigation. Alder Quay now holds about four weeks of bulk oil in its Chicago holding tanks. A ten-week stoppage would therefore leave six weeks uncovered.

At current volume Alder Quay sells about 36,500 bottles a week and earns about $1.95 of operating profit on each, roughly $71,250 a week. Six uncovered weeks would cost about $427,500 in operating profit. Sheffi and Rice (2005) note that the larger cost of a disruption is often lost customers after supply returns, and here that means grocers filling the empty facings with a competitor or a store brand. The $427,500 figure therefore understates the risk.

The discount is worth $310,000 a year; one ten-week stoppage would take $427,500 and possibly a shelf.

The Options

Four options were compared on annual cost and on weeks of uncovered sales in a ten-week stoppage.

Stay single-sourced with four weeks of stock. No extra cost; six weeks uncovered, about $427,500 lost.

Split 85/15 with a second exporter. The main exporter's discount would fall from 5 to 4 percent on the smaller volume, and the second exporter would charge list price, an extra cost of about $99,000 a year. The second exporter could raise supply to about half of Alder Quay's needs within four weeks, leaving about two weeks uncovered, about $142,500 lost.

Split 70/30. The discount would fall to 3 percent, for an extra cost of about $179,500 a year. About one week would be uncovered.

Keep 95 percent with the main exporter, give 5 percent to a standby exporter and hold eight weeks of stock. The main exporter has said its discount holds above 90 percent of volume, so the extra cost is about $15,400 for the standby oil at list price and about $44,700 a year to carry four more weeks of landed oil, roughly $497,000 at 9 percent. Total about $60,000 a year. Eight weeks of stock would cover most of a ten-week stoppage, and the standby exporter, already qualified and tasting Alder Quay's blends, could fill most of the remainder. About one week would be uncovered.

When a Larger Split Would Pay

The recommended option saves about five weeks of operating profit, roughly $356,000, in a ten-week stoppage for about $60,000 a year, so it pays if a stoppage of that size happens more often than about once every six years. The 85/15 split leaves two weeks uncovered against the recommendation's one and costs about $39,000 more a year, so in this scenario it never wins. It would become the better choice only if stoppages much longer than ten weeks became likely, because once eight weeks of stock run out, a second source carrying 15 percent of volume ramps faster than one carrying 5. The likeliest cause of such a stoppage would be the exporter's own financial failure. Alder Quay should therefore watch the exporter's annual accounts and move to a larger split if its credit position deteriorates.

References

Kraljic, P. (1983). Purchasing must become supply management. Harvard Business Review, 61(5), 109-117.

Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations: A resource dependence perspective. Harper & Row.

Sheffi, Y., & Rice, J. B., Jr. (2005). A supply chain view of the resilient enterprise. MIT Sloan Management Review, 47(1), 41-48.