Inventory Management: KLM Construction Company

Executive Summary

The current procurement functions at KLM Construction Company are inefficient and costly. Identification of these weaknesses offers the management an opportunity to productivity levels of this department. It is proposed that the firm should technology-based system to help it monitor its transit goods more efficiently. The new system will also lower the cost and improve the firm’s relationship with its suppliers and the transport companies it relies on to deliver the materials to the Dubai Port. From the analysis, it is recommended that this firm should embrace modern inventory management technologies to improve its efficiency in logistics management. It is also determined that forming a strategic alliance with the suppliers may help the firm when it comes to accessing scarce raw materials. The study also recommends the formation of close coordination between the marketing, production, and procurement departments as a way of ensuring that customers always get what they want.

Opportunities for Procurement and Supply Function

According to Fung and Tse, “Procurement is the act of acquiring, buying goods, services or works from an external source,” (34). This is one of the most important management roles. Getting the needed materials for production is a very important task. KLM Construction Company has learned how to design effective procurement strategies that can enable it to have the resources that they need at the best prices possible. These are some of the strategies that have enabled this firm to achieve success in the market. Fung and Tse define purchasing as acquiring products to accomplish specific goals of a given institution (71). Logistics on the other hand refers to planning and management of procurement, transportation, maintenance, and supply of materials at the needed time and in the needed manner. Cooper defines a supply chain as a dynamic and complex network of demand and supply (45). The competition in the real estate market in the United Arab Emirates is becoming increasingly competitive. Dubai has specifically attracted so many local and international players over the past decade due to the strategic location of the city as a business hub. KLM Construction Company, therefore, must find new opportunities for procurement and supply functions that will help create savings, improve efficiency, and add value to the raw materials we are using. KLM Construction Company has gained popularity in the United Arab Emirates as one of the most reliable firms in the construction market. However, this firm has experienced challenges in procuring some of the raw materials in the recent past. The firm relies on imports from China and Japan for some of the products used in constructing houses. It has become more expensive and time-consuming to get these materials from the source to the company’s warehouses in Dubai. This problem must be solved for the company to remain competitive.

According to Baily, the best way of lowering the cost of operations is to improve efficiency in procurement to achieve the best value out of it (113). Using the Porters Value Chain Management Model may be critical at this stage in helping to lower the cost. The figure below shows the model.

Porters Value Chain Model
Figure 1: Porters Value Chain Model

The above model suggests that to get the best value, primary value activities (inbound logistics, operations, outbound logistics, marketing, sales, and service, should be properly supported by secondary value activities such as infrastructure, human resources, and technology. After a careful review of the current procurement and supply functions, it was noted that this firm is spending a lot in monitoring goods once they are purchased from the suppliers to the time they are delivered to the market. Some of these goods are delicate and very expensive hence it is necessary to monitor how they are handled. Currently, the firm is forced to hire Chinese to monitor the movement of goods as they are prepared for shipment till the ship leaves the dock. Once the goods are on high seas, then it becomes almost impossible to determine what is going on and how long it may take before they reach the local port. It is very costly and sometimes inefficient to use human resources to monitor these goods. This is an area that the management can address to find a way of cutting costs and improving efficiency in operation. This efficiency will help in cutting the costs of operations hence the profits will be improved.

How the Profile for Function Can Be Improved

The function of monitoring goods in transit can be improved by automating the process. According to Fung and Tse, many firms in the West are currently automating their procurement and supply systems as a way of lowering their costs of operation and improving the efficiency of these processes (37). This is the solution that this firm needs to solve the current problem. The procurement manager will need software that will help in handling the tasks which are currently handled by individuals whose interests may not be in line with the vision of the firm. SAP Materials Management (SAP MM) offers a perfect opportunity for this firm to improve procurement and supply functions at this firm. This unique software will make it possible to track raw materials from the moment they are received from the supplier to the moment they arrive at the firm’s stores. In the past, it has been difficult to track goods on high seas. The firm has been forced to guess the exact location of the supplies and when they are expected to arrive. This software will solve this problem. The procurement manager will be in a better position to explain the exact location of the raw materials. This will reduce the cost of hiring people to monitor goods on transit because it will be done online. The monitoring process will also be done more efficiently than it is done currently.

This software is simple to use once it has been installed by the relevant vendor, most of who are currently found in Dubai. The procurement officer at our firm in Dubai will coordinate directly with the sales department of the supplier in China. Once the goods are packed, the sales department of the supplier will enter all the details of the goods into the software and send it to our firm’s head of procurement and the transport company. The goods will then be monitored using this special software by three parties, the supplier, the transporter, and the recipient who is our company. Once they arrive at the port, our firm will then be expected to receive them. A message will be sent automatically to the recipient informing them about the arrival of the goods. Once these products are received in good shape, the procurement officer will confirm the receipt. The new system will also increase accountability in this department. One of the models that can help in determining whether this firm is conducting its sourcing activities appropriately is the Kraljic Matrix shown in the figure below.

Kraljic Matrix
Figure 2: Kraljic Matrix

According to Turner, the primary objective of this model is to maximize an organization’s potential buying power and to significantly reduce or even eliminate the supply vulnerability (48). It enables a firm to develop an effective purchasing strategy for the organization’s products and services. As shown in the figure above, this matrix has four quadrants, each having specific characteristics. Understanding how to manipulate unique environmental forces using this model may help this firm to become more efficient. The profile functions can also be improved by using Pareto Principle by giving priority to tasks that have a significant impact on the organization’s success. This way, operating expense (OPEX) and capital expenditure (CAPEX) can be lowered without jeopardizing the desired output.

How Collaboration Can Be Created with Stakeholders

It is important to understand the three groups of stakeholders. They include internal, external, and connected stakeholders. Internal stakeholders are people directly working within an organization such as employees, managers, and owners. External stakeholders are outsiders who are affected by the operations of the business such as clients, creditors, suppliers, the community, and the government. Connected stakeholders are partners who help in marketing an organization to external stakeholders. Each of these stakeholders plays an important role in the survival of KLM Construction Company in this competitive business environment. To understand how collaboration can be created with the stakeholders, Mendelow Matrix may be useful in mapping them based on their interests and influence on the firm. The figure below shows the model.

Mendelow Matrix
Figure 3: Mendelow Matrix

Based on this model, the suppliers are the most important stakeholders that this firm should form a very close working relationship with to achieve the desired success. This matrix will help classify the stakeholders of this firm based on their relevance at any given point. Based on this model, suppliers are considered to play a critical role in ensuring that the needed materials are ready when needed to deliver superior value to the customers. It will be necessary to have a close working relationship with the suppliers to increase engagement in the procurement process. Musa says that firms have come to appreciate the need to form a close alliance with their suppliers, especially those that offer special raw materials which are rare in the market (44). Developing a close working relationship with suppliers makes them feel that they are part of the firm that they supply their products. They will want the success of such firms because of the expected mutual benefits. For KLM Construction Company to introduce this software, it must convince the supplier to use it. This explains why close collaboration with them is very necessary. When the supplier uses the same software as our company, then the tool will be very efficient.

Based on the Mendelow Matrix, another very important group of stakeholders that this firm will need to give special attention to is the shipping companies. KLM will also need to collaborate with the shipping companies responsible for transporting the raw materials from China to Dubai. As mentioned in the section above, the firm is planning to avoid relying on individuals to monitor goods and instead use technology-based equipment. This firm will need the corporation of the shipping company to install the transport equipment with satellite-enabled communication systems that will allow the clients to monitor their goods in real-time. The cooperation of the shipping company will be very important. It will help this firm eliminate some of the challenges it has been experiencing by shipping its raw materials from foreign markets.

The software vendor should also be considered a partner that should play an important role in the success of the new systems that are to be implemented. The vendor will need to review the software to ensure that it functions efficiently as per its expectations. Any upgrades should be done regularly. The Management of KLM Construction Company should have a written contract with these vendors showing that they are fully responsible for issues of maintenance for a given period if certain conditions are met. All the internal stakeholders- which include business owners, top managers, mid-managers, and junior employees- will also be expected to play different roles to ensure that the new system is successful. For instance, the top managers will need to approve the purchase of the equipment that will be used in this project. Business owners must have faith in the new technology as a way of increasing their firm’s profitability. Junior employees will need to undertake new roles as may be assigned by the procurement manager. These internal stakeholders should clearly understand appreciate what is expected of them when introducing change.

Need for Organisational Policies and Procedures

According to Chaze, when introducing new systems within an organization, it is always necessary to re-evaluate the existing policies and procedures to ensure that there is compatibility (43). The proposed changes in the procurement department of this firm may require a complete shift in the approach various activities are conducted within this firm. It may, therefore, be necessary to re-evaluate the current organizational policies and procedures. The first policy that will have to be reviewed will be how raw materials are sourced. Currently, the firm does not have a specific supplier for its raw materials. It always purchases materials from any supplier in the market. This practice must stop. The procurement officer should identify one or two reliable suppliers that will provide all the materials needed from the Chinese market. Narrowing it down to one or two suppliers will create loyalty and trust between this firm and the suppliers. Both parties shall benefit from the loyalty and close relationship.

The procedure of monitoring goods will also change. Under the new system, it will be the responsibility of the transporter and the supplier to ensure that goods are safely packed in the ship from the warehouses of the supplier. This means that individuals who were hired to do that job will no longer be needed, and the cost incurred at this stage will be eliminated. A new procedure will be introduced for monitoring the position of the goods on transit in real-time. The head of procurement will need to train a section of the employees in this department to do this new task. This new system will also demand a revaluation of the people responsible for the procurement of the raw materials. Under the old system, the firm had to send people to the market to look for specific products that were needed for the projects of this firm.

This practice was expensive and very unreliable. It took these employees a long time to get specific products needed. The issue with the local language was also a problem. However, the new procedure eliminates this inefficient, expensive, and tedious procedure. The firm will only need to send an e-mail to the supplier explaining what is needed. The supplier will reply with a catalog having all the examples of the products that meet the requested specifications. The catalog will be sent electronically. The firm can then identify and order the needed items without having to send its employees to China. If the supplier lacks specific products, then a special arrangement can be made by the supplier to get the product from alternative sources. This is possible if there is a close relationship between this firm and the supplier.

To enhance sustainability in its operations, this firm will need to embrace the Triple Bottom Line Model that looks at three issues people, planet, and profit. The Triple Bottom Line model is shown in the figure below.

Triple Bottom Line Model
Figure 4: Triple Bottom Line Model

In its policies, this firm must ensure that the interests of all its stakeholders are taken care of to help protect the interest of the firm. If the stakeholders are satisfied, then they will make an effort to protect the interest of the firm. The planet (environment) should be protected to ensure that it can sustain the operations of the firm. Issues such as pollution and other environmental degradation activities should be avoided at all costs. If possible the firm may engage in environmental conservation activities such as planting trees. The last aspect is the profitability (environment) of the business. The activities should be geared towards lowering expenses while maximizing revenues to make the firm more profitable.

Conclusion and Recommendations

The analysis above shows that KLM Construction Company is doing everything to ensure that it can derive as much value as possible from its procurement strategies. Some of the raw materials used by this firm are imported from other countries such as Japan and China. The management of this company has designed a procurement strategy that helps it in ensuring that it has all the materials that it needs at the right time. It is important to have such an efficient strategy in its supply chain to eliminate cases where projects are delayed due to a lack of materials. According to Weiss, the profitability of KLM Construction Company is partly attributed to its dynamic distribution strategies (1). It is important to note that this firm can derive more value if it makes some adjustments to some of the strategies that it is currently using. The following are some of the recommendations that this firm should consider.

  • KLM Construction Company should use modern inventory management technologies to monitor its stock and determine when it is appropriate to order more raw materials.
  • The company should form a strategic alliance with its important suppliers to ensure that it is always given priority over its competitors in cases of scarcity.
  • There should be close coordination between the marketing, production, and procurement departments to make sure that the quality of the raw materials purchased is as per the expectations of the clients.

Works Cited

Baily, Paul. Purchasing principles and management. Harlow: Financial Times/Prentice Hall, 2009. Print.

Chaze, Aaron. The Asia Investor: Charting a Course Through Asia’s Emerging Markets. Singapore: Wiley, 2010. Print.

Cooper, Peter. Opportunity Dubai: Making a Fortune in the Middle East. Petersfield: Harriman House, 2015. Print.

Fung, Hung, and Yiuman Tse. International Financial Markets. New York: Cengage Learning, 2015. Print.

Musa, Muhammad. Report: Dubai 2014. Oxford: Oxford Business Group, 2014. Print.

Turner, Robert. Supply Management and Procurement: From the Basics to Best-in-Class. Fort Lauderdale: J. Ross Publishers, 2011. Print.

Weiss, Lois. “KLM buys Broadway building with Old Navy sale profits.” New York Post 2014: 1. Print.