Expenditures Classification: Using Information To Support Sourcing Decisions

Expenditures Classification: Using Information to Support Sourcing Decisions
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Spend CategoryAmount Thousands of US$Number of SuppliersProduction Machinery1702Maintenance2010Hardware310Sheet Metal237Electronic Components2885
The percent of spend for each category
Total amount = 170+20+3+23+288=504
Production Machinery=170/504=33.73%
Maintenance=20/504=3.97
Hardware=3/504=0.6%
Sheet Metal=23/204=4.56%
Electronic Components =288/504=57.14%
Spend category-low or high complexity
Production Machinery
Purchasing decisions are critical as they affect engineering marketing or manufacturing when seeking to meet a firm’s strategic objectives (Monczka, Handfield, Giunipero, & Patterson 2016). The production machinery is in the high complexity category since it has a huge impact on the firm’s profitability and adds value to output. The failure to procure production machinery will affect operations significantly and there are only two suppliers and if both cannot meet the required specifications this is a risk to the firm. The machinery costs $ 170, 000, which is slightly more than a third of the total money spent.
Maintenance
Maintenance can be categorized as low complexity and is part of the procurement cost and ownership. While maintenance adds value there is no concern that this would affect operations significantly like interrupting core or critical services. However, if maintenance requires specialized skills to maintain activities the costs would be higher. It is necessary to consider the value of the maintenance to operations to assess the complexity drive of procurement costs.
Hardware
Hardware has the lowest complexity, because it has the least cost at $ 3,000 and there are ten suppliers. As such, the cost per supplier is also the lowest in the hardware spend category. When focusing on the performance improvement, the cost of purchasing the hardware and the value that this has on the firm’s operations is considered. In the case of the hardware, there are low risks of supply disruption having a big impact on the value of production. Other factors to consider is when the hardware is purchased and form which of the suppliers.
Sheet Metal
While the supply of sheet metal would affect the cost price, the spend category is low complexity because of the amount spent represents 4.6% of the total purchase expenditure. There are seven suppliers indicating that the firm has better flexibility in the supply chain compared to the production machinery. Efforts to improve supplier relationship allow a firm to form more strategic sourcing (Handfield et al., 2015). Even as the supply risk is low decentralizing the purchasing process ought to be considered decisions may be considered
Electronic Componen...