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Procurement

Executive Summary

The report has explored the procurement problems facing Katsand Wines, considered potential solutions and recommended the best alternatives for implementation. The procurement problems relate to grape supplies, raw materials, inventory management, export contracts, transportation, and contract grape crushing and winemaking. The best alternative among the solutions for the grapes’ problem is to purchase them, despite the smoke effect but at a low negotiated price. The overall solutions for the materials include renegotiating with current suppliers for additional supplies, seeking new suppliers to diversify sources and risks inherent in them. The solution to the inventory management problem is to use the sales department as the primary data entry point and sales data to determine the right quantities of raw materials. The renewal of the Beijing Wines’ contract is the best solution to the issue of export contracts because it will help the company maintain a valuable customer and derive maximum value at the least possible cost. The solution to the transportation issue is to engage new contractors in the short-term to sustain operations and allow the old transport supplier to recover from the impact of the bush fires. Maintaining relationships with the current suppliers is critical to Katsand’s sustainability. The grape crushing and winemaking’s solution is to choose the right volume at the right price without jeopardising Katsand’s ability to continue with its operations. The price determination will require negotiation to ensure it is charitable yet profitable for the company. 

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Introduction

Katsand Wines is a winery that manufactures premium table wines for both domestic consumers and export markets in China, Hong Kong and United States. The 2020 vintage year looked promising before bushfires and the outbreak of coronavirus. Bush fires in Australia interfered with grapes and thus hindered the company’s ability to fulfil its contractual agreements with customers. The coronavirus also affected Katsand Wines by disrupting the global supply chain. The bush fires and the outbreak of coronavirus thus created several problems for the company as highlighted below:

  • Grape Supplies
    • Smoke affected grapes
    • Lower than expected yields from Katsand Vineyards
    • Raw Materials
      • Yeast- low inventory and need for next day delivery
      • Sulphur- the pending coronavirus status is a potential shortage problem
      • Bentonite- is out of stock and relies on single source supplier
      • Oak Barrels-the inventory is low and no supplier relations exist
      • Glass Bottles- the single source reliance can lead to shortage
      • Labels –inventory level for Chinese exports is low and the single source office has shutdown
      • Inventory Management- it is basic and depends on manual data entry, which creates discrepancies
      • Export Contracts- The expiry of Beijing Wines’ contract
      • Transportation
        • Inhibited grapes’ delivery to the winery
        • Limited delivery of wines to contract clients, foreign and domestic customers
        • Contract Crushing and Winemaking- has potential to disrupt Katsand Wines’ production activities

The problems are critical because of the prevailing conditions in the world. The coronavirus pandemic has limited sourcing options and transportation. The ability of Katsand Wines to deal with the problems without disrupting operations will determine its resilience and ability to remain sustainable. Addressing the identified problems should be the company’s priority because it has potential to help it survive the current challenges and sustain its operations.

Potential Solutions

Grape Supplies

First, Katsand Wines can take the grapes the smoke damaged but renegotiate price with the suppliers. According to Lysons and Farrington, negotiation within procurement procedures aims to create a win-win outcome for all the parties. Lysons and Farrington argue that supply managers have discretion to determine fair pricing. Deciding to take the grapes is a critical step that can help Katsand Wines to build and sustain relationships with the suppliers. Sinha and Swati (2014, p. 8) argue that a relationship based procurement focuses on the long-term outcomes and aims to retain suppliers. Therefore, the decision to purchase the grapes has strategic benefits.

The second potential solution is to seek a new supplier to fill the gap created by the destruction of Katsand Vineyards. The supply shortage created by the vineyard’s unavailability can affect the company’s ability to meet its demand and satisfy contractual agreements with customers. Seeking an alternative supplier and developing relationships will help ensure the best quality grapes in the next 5 to 8 years.

Raw Materials

The potential solutions to the yeast problem include seeking additional supply volume from the existing supplier and looking for a new local supplier. Lysons and Farrington assert that existing suppliers are preferable to new ones because of they understand quality, delivery schedules and cost requirements. A local supplier is ideal because the company requires next day delivery. According to Tate et al., proximity to raw materials is a benefit that corporations consider when making location decisions. Therefore, the proximity of the supplier to Katsand Wines will ensure prompt delivery of yeast and avoid production disruption.

The potential solutions to the sulphur supply problem include seeking an alternative supplier in the short-term and diversifying suppliers in the long-term. Although the inventory level is high, the pending coronavirus status has potential to limit supply. Seeking an alternative supplier with ability to deliver promptly is an ideal proactive approach that may save the company from operational shutdown. A supplier with capacity for immediate delivery is attractive because just-in-time delivery is a trait of excellent procurement. Procurement risk and possible mitigation measures are some essential factors that a company needs to consider when selecting suppliers. As such, diversifying suppliers is one way of minimizing risks by spreading them among several sources

The potential approaches to the problem of Bentonite supply include looking for an alternative supplier and diversifying the supplier base. The alternative supplier needs to be local to ensure speedy delivery, since the raw material is out of stock. According to Lysons and Farrington, a procurement policy considers affordable value in ensuring success for a project. The diversification of suppliers can ensure affordable value by helping the company avoid costs related to disruptions emanating from shortage of raw materials.

Katsand Wines should consider seeking suppliers of oak barrels in the United States and Germany for the short-term and establishing multiple contracts with suppliers in the long-term. The short-term solution is to ensure operational continuity, since that is an essential role of procurement.  Lysons and Farrington argue that desirable suppliers are dependable in their ability to meet schedule and quality requirements. The long-term approach is thus to establish dependable supplier relations.

Renegotiating for additional volume in glass bottle supply and increasing the number of local suppliers are the potential solutions to deal with the glass bottle problem. It is easier to seek additional supplies than to look for alternative suppliers. However, increasing the number of local suppliers is essential to create a buffer for the company in case one supplier is incapacitated.

In-house production for the domestic market and requesting government assistance in establishing relations with new suppliers in China are potential solutions to the labels’ problem. Since the domestic offices are not operational, making the labels in-house can help deal with the low inventory levels. Lysons and Farrington argue that one of the drivers for purchasing overseas is to satisfy offshore clients’ need for local content. Government help in seeking alternative suppliers in China is thus vital because Chinese label makers have the best knowledge of consumer needs and preferences in the country.

Inventory Management

Using an enterprise resource planning system (ERP) and sales reports as the basis of inventory management are the potential solutions to the inventory management problem. An ERP is effective in inventory management because it increases inventory accuracy. Making the sales department the custodians of data entry into the inventory management system can minimise discrepancies. The sales team uses sales reports, which reflect demand. Their entries should then guide those procuring raw materials on the quantities to purchase, which can minimise errors considerably.

Export Contracts

Potential solutions to the export contract problem include negotiating for the Beijing Wines’ contract renewal and letting the contract expire to focus on the remaining contracts. The renewal of the Beijing Wines’ Contract would be a cost-effective way of gaining customers because attracting new ones is tedious and expensive. Allowing the contract to expire would refocus the company’s wine supplies to the remaining clients without the need to minimise the quantity of supplies to each export customer.

Transportation

Contracting additional local transport providers and seeking delivery schedules’ extensions with customers are potential solutions to the transportation problem. The additional transport providers can fill the gap left by those affected by the bush fires. Contract negotiation is part of the procurement process. Negotiating for adjustments of delivery schedules with customers can thus allow the company to seek help from the government to allow grapes’ movement from other states and thus gain capacity to serve foreign customers.

Contract Crushing and Winemaking

Deciding the right volume of grapes and wines to deal with for industry stakeholders at the right price without affecting own production and requiring customers for grapes’ crushing and winemaking to provide their own transportation are the potential solutions. According to, understanding capacity limits can help avoid costly undertakings that may lead to losses. Establishing the optimal crushing and winemaking capacity for others can reduce potential stretching of the company’s capacity. Letting those seeking winemaking and grapes’ crushing services to provide their transportation can ease the pressure on Katsand Wines.

Evaluation of Proposed Solutions

Taking the grapes affected by smoke is the best solution to the grapes’ problem because it will help improve relationships with suppliers. Walker et al. argue that managing supplier relations is vital for sustained competitive advantage. Therefore, prioritising supplier relations is better than gaining new ones.

The optimal solution for the yeast problem is to seek additional volume from the current supplier. Belvedere and Grando argue that retaining suppliers for extended periods can provide cost-saving advantages to an organisation. As such, it is prudent to maintain the current supplier.  

Diversifying suppliers for sulphur and Bentonite procurement is ideal to create a buffer for Katsand Wines in case of shortage. According to Xu, Liu and Zhang, having multiple suppliers mitigates the risk of delayed production in case a supplier is unable to provide the required raw materials. The diversification can thus reduce future disruptions of raw material supply.

Establishing long-term contracts with suppliers for oak barrels is the ideal solution because it can minimise future shortages.  The current shortage has emerged because Katsand Wines does not have existing supplier relations. Mutually beneficial relationships with suppliers can lead to preferential considerations in times of shortages. Engaging suppliers in the United States and Germany in the long-term will provide the company with the best possible outcomes in barrel procurement.

Renegotiating for additional volumes in glass bottles is the best solution because the supplier has not shut down yet. Katsand would thus stockpile the bottles in anticipation for potential supplier shutdown. Horváthová argues that proactive decision-making is supply chain management can help corporations anticipate problems and prepare adequate solutions. Having high levels of inventory can allow the company to seek alternatives in case the current supplier is no longer operational.

Seeking new suppliers in China for labels is beneficial to Katsand Wines because it can prevent disruption of wine export to the country. The company is unlikely to succeed in making labels for the Chinese market in-house because it may not have adequate understanding of specific needs of the customers. Local responsiveness is an essential consideration when making supply chain decisions. As such, new Chinese label makers can ensure continued export to the country, which forms a significant volume of the company’s exports.

 Making the sales department the custodians of data entry into the inventory management system can minimise discrepancies. Basing all procurement decisions on sales forecast can reduce chances of holding too low or too high levels of inventory, which can be costly. Having a single primary data entry point in the sales department can reduce discrepancies and ensure the procurement department purchases raw materials according to the demand levels from customers.

Negotiating for the renewal of the Beijing Wines’ contract has potential to provide Katsand Wines with the best possible outcome.  Nakano argues that retaining customers is preferable to seeking new ones because of time and cost requirements.  Renewing the contract will eliminate the need to replace Beijing Wines and allow Katsand Wines to increase the customer’s lifetime value.

Contracting additional local transport providers is ideal for Katsand Wines because the current shortage is affecting operations. Focusing on the short-term will allow the company’s long-term contractors to seek ways of returning to work for the long haul.  Mangan and Lalwani assert that it is beneficial to maintain supplier relations because they provide more overall long-term value than short-term relationships. Providing an opportunity to the transport subcontractors affected by bush fires to resume service is thus the best desirable outcome.

Choosing the right volume of grapes to crush and wines to make for those seeking the crushing and winemaking service is the best solution. The decision on volume is essential because the company must avoid undertaking too many contracts that can interfere with its own wine production. Setting the right price can ensure profitability while responding to charity obligations to competitors who have suffered serious setbacks. Fredendall and Hill assert that corporations need to fulfil their corporate social responsibilities within their supply chain because it enhances their image and equity among stakeholders. Therefore, balancing own operations and the needs of those who seek crushing and winemaking services can lead to the best results for the company.

Recommendations and Action Plan

The company can overcome the procurement problems through the management of existing supplier relationships, renegotiation of contracts with current suppliers, tendering to engage new suppliers and managing inventory effectively. The purchase of grapes affected by smoke helps manage and maintain relationships with grape suppliers for long-term mutual benefits. The grape purchases will need price negotiations because grape quality has diminished. Renegotiating for additional volumes for sulphur and yeast with existing suppliers plays the role of managing supplier relations and cushioning the company from abrupt shortage resulting from potential shutdown. The need for renegotiating for sulphur supply, despite its inventory level being high emanates from the length of time it takes to supply and the distance from France to Australia. Tenders for label suppliers will fill the gap left when the current supplier shutdown, leaving the company with low inventory levels. The tenders for sulphur and bentonite aim to diversify material sources as a precautionary measure against possible supply chain disruption in the future because the current corona virus pandemic has left the company vulnerable. The tenders for oak barrels aim to establish and sustain supply relations with suppliers in Germany and the United States for the long-term. Oak barrels have specifications that affect the quality of wine. Since Germany and United States provide the ideal oak barrels for Katsand Wines, having a long-term relationship with them can sustain the supply of the raw material. The tender for transport will replace the lost transport subcontractor in the short-term to ensure operational continuity before the subcontractor recovers from the effects of the bush fire. The inventory management approach from the customer demand perspective will reduce data entry errors. Entry by the sales department will ensure the right information is available for sourcing of raw materials in appropriate quantities. Consequently, the company will maintain the adequate inventory levels to support customer demand.

Action

Objective

Timeline

Responsible

Purchase the smoke affected grapes at low prices

Maintain supply of grapes and help suppliers avoid losses

In the short-term before the next season

Procurement department

Renegotiate with existing yeast and sulphur suppliers for additional volume

Stockpile the raw materials in case of shutdown

Between now and the next six months

Procurement department

Tender for new suppliers labels, sulphur, bentonite, barrels and transport

Diversify sources and ensure sustainability of supplies

Between now and the long-term

Procurement department

Manage Inventory based of customer demand

Reduce raw material and production discrepancies

In the short-term and long-term

Procurement and Sales departments


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