Supplier management

Accounting Ahead | Original study resource | accountingahead.com.au

Supplier management

MODULE 6 | PART E.1 | STUDENT COMPANION

Bought-in goods and services are a large share of most manufacturers' costs and most of a retailer's. Reliable

suppliers also make just-in-time inventory possible. But a supplier's cost is more than its invoice.

The hidden costs of a supplier

Supplier costs

Beyond the invoice - usually hidden in

overheads

Purchasing

Placing orders, receiving deliveries,

inspecting them

Holding inventory

Storage, insurance, obsolescence, cash

tied up

Poor quality

Returns, rework, scrap, lost production and

sales

Delivery failure

Chasing orders, back-orders, idle time, lost

sales

Comparing total procurement cost

Supplier A Supplier B

Invoice cost $200,000 $190,000 (5% cheaper)

Supplier-related costs $30,000 $47,500

Supplier cost performance ratio 15% 25%

Total procurement cost $230,000 $237,500

The cheaper price is $7,500 dearer in total - Copperleaf restaurant group (imagined)

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Accounting Ahead | Original study resource | accountingahead.com.au

Supply chain risks

Macro risks

Natural disasters

War and geopolitical events

Economic downturns

Social unrest; legal and regulatory change

Micro (operational) risks

Demand: poor forecasts, changing tastes

Manufacturing: disputes, capacity limits

Supply: late, wrong or failed suppliers

Infrastructure and financial risks

Any of them can also damage reputation - often for longer than the disruption

Global sourcing: savings and costs

Why source globally

Cheaper labour

Lower taxes

Access to commodities

Specialist skills

What it adds

Freight, insurance, longer lead times

Exchange rates, customs, political risk

Culture, language and legal differences

Distance and time zones

Codes of conduct need monitoring: audits, corrective action plans, termination for serious breaches

Standards, codes and inventory

Topic Remember

Certifiable standards ISO 9001 quality; ISO 14001 environment; ISO 22000 food safety

Guidance standards ISO 31000 risk management; ISO 26000 social responsibility

Supplier codes of conduct Hiring (no under-age workers, no discrimination), hours, minimum pay, WHS,

environment - plus monitoring

Modern Slavery Act 2018

(Cth)

Entities with consolidated revenue of $100 million or more report annually on

modern slavery risks in operations and supply chains, and actions taken

Just-in-time Less space, staff, obsolescence and working capital; needs small, on-time,

complete, to-spec deliveries

Vendor-managed inventory Supplier keeps stock where and when production needs it

Disruptions Geopolitical events, natural disasters, supplier failure, logistics failure - more risk

and longer lead times mean more safety stock

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Accounting Ahead | Original study resource | accountingahead.com.au

Case note: about 90% of US infant formula came from four companies. In February 2022 Abbott recalled

powdered formula and shut its Sturgis, Michigan plant after a federal investigation into infant infections;

shortages spread nationwide. The plant restarted on 4 June 2022, then was halted again by storm flooding in

mid-June - a lesson in concentration risk.

From contract to partnership

Behavioural compliance

The contract dictates how problems are solved

Formal and arm's length

Typical early in a relationship

Attitudinal compliance

Both parties willingly solve problems together

Trust and informal exchange

Long-term, mutually sustainable supply

Track on-time, in-full and to-spec rates - leading indicators of costs to come

Choosing suppliers: price usually leads, but weigh quality, reliability and environmental and social credentials.

Multiple suppliers create competition and back-up; a single supplier can bring trust, service and innovation.

Sources: Abbott and US FDA statements reported by CBS News and NBC News (June-July 2022); Modern Slavery Act 2018 (Cth).

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Accounting Ahead | Original study resource | accountingahead.com.au

Practice questions

MODULE 6 | PART E.1 | TRY THESE BEFORE THE WORKED ANSWERS

Question 1 - Hartwell Hardware (imagined): which paint supplier?

Annual figures Supplier P Supplier Q

Invoice cost $480,000 $500,000

Ordering $6,000 $5,000

Receiving and inspection $14,400 $10,000

Returns and rework $9,600 $4,000

Chasing late orders $12,000 $1,000

Question 1 - Tasks

(a) Calculate each supplier's supplier-related costs, supplier cost performance ratio and total procurement cost.

(b) Recommend a supplier. (c) Name two non-financial measures to track.

Question 2 - One supplier or several?

A hospital buys a critical sterile surgical kit from a single supplier. Outline the case for and against adding a

second supplier.

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Accounting Ahead | Original study resource | accountingahead.com.au

Worked answers

MODULE 6 | PART E.1 | WORKED ANSWERS - ATTEMPT THE QUESTIONS FIRST

Question 1 - Worked answer

Item Supplier P Supplier Q

Supplier-related costs $42,000 $20,000

Supplier cost performance ratio $42,000 / $480,000 = 8.75% $20,000 / $500,000 = 4.0%

Total procurement cost $522,000 $520,000

(b) Supplier Q: although its invoices are about 4% higher, its total procurement cost is $2,000 lower, and its far

lower returns and late-order costs signal better quality and reliability. (c) On-time delivery rate; in-full rate;

percentage delivered to specification; defect or return rate; lead time.

Question 2 - One supplier or several?

For a second supplier: back-up if the first fails or is disrupted (patient safety depends on it), more competitive

pricing, and less dependence. Against: a deeper single relationship can bring trust, better service and joint

innovation; two suppliers add qualification, ordering and inspection costs, and lower volumes may raise prices. A

common compromise is a main supplier plus a qualified back-up, with safety stock sized to the disruption risk

and lead time.

STRATEGIC MANAGEMENT ACCOUNTING | M6 PART E.1 | WORKED ANSWERS

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