As Rob Pincombe, what action(s) would you recommend and why?
The current value chain of Unified looks like above. Rob is in a unique scenario of where he has to decide on 2 aspects of sourcing. Firstly, he must decide which honey is he going to source and second is he going to involve a 3rd party to purchase honey or is he going to source directly because of the government regulations on quality standards.
These are the options Rob has with respect to honey purchase
- The current chinese canadian honey
- Canadian Argentine blend honey
- Pure Canadian honey
- Pure US honey
Every scenario has advantages and disadvantages
Chinese Canadian honey
- Cost is $1.08 per pound which is cost effective when compared to all the options available.
- It is an established taste and hence it would be easy to continue with current customers
- China is the largest producer of honey and hence can ensure availability.
Canadian Argentine blend
- Cost is $1.42 per pound which is moderately high priced when compared to the other options
- The biggest advantage is that a Canadian supplier base already exists. Canada is the 10th largest Honey producer in the world.
- The taste differs from the regular honey which creates a threat of this honey not being accepted by customers.
- There is a threat of product recall due to use of veterinary drugs. As the case mentions the CFIA is monitoring food, animal and plant health that includes honey from countries that includes Argentina
Pure Canadian Honey
- It is similar to the US honey market and the local suppliers ensure the quality of honey produced
- Canada has a large supply base and is also the 10th largest producer
Pure US honey
- The taste would satisfy the need of customers
- It is safe and would be approved by CFIA and hence there is a low probability of product recall. This also ensures a constant supply of honey.
- This option costs $1.79 per pound which is the highest priced among all the options
- US might have a capacity constraint. One of the reasons of imports is to ensure product availability but making within US there is a probability that there might arise a capacity constraint
Understanding the above advantages and disadvantages of various options available, honey selection must be in way that meets the interest of the major customers of Unifine. However, the final use of honey by customer is in dips and other side products hence the focus will also be to control costs, although taste and product availability are clearly concerns.
After deciding on what metric Rob is going to base his purchase, the next step to decide whether Rob should go for a direct sourcing strategy or a 3rd party source strategy.
There are several advantages of 3rd party strategy
- Better relationship and communication,
- Higher bargaining power because the 3rd party supplier has a volume discount
- low complexity in managing multiple suppliers
However, depending on one supplier might cause danger of supply disruptions in case that supplier has troubles in the business. This raise a question of whether Unified should continue with its decision of using an arrangement with Harrington Honey must be revisited.
These are the following sourcing options available and following are the advantages and disadvantages
Indirect sourcing with 3rd party involvement
- 3rd party has international experts for purchase, delivery, and financial transactions
- The 3rd party buys larger volume hence they can pass on the volume discount to Unified
- Unified will need to maintain low inventories and will have a shorter lead time
- All these would help Unified to just focus on their core competency i.e. food market
- The issue of having a 3rd party there is a communication delay. Changes in the supply base might not be conveyed to Unified
- The 3rd party always adds a premium to the purchase and hence there is a higher cost
Sourcing directly from suppliers and involving in 2nd tier suppliers
- No 3rd party hence no premium and hence lower costs
- More visibility. Can have direct control over the quality of the product for instance the chloramphenicol ppm level in honey
- Can develop long term relationship with suppliers and can negotiate with for costs through larger volume of business
- Shift in core competency focus. Sourcing directly would involve larger costs and larger efforts in identifying suppliers.
- The shipping costs might have to be borne by Unified
- Currently pasteurization is done by Harrington. In case they directly source from 2nd tier suppliers they have to pasteurize which would increase the costs.
Considering the pros and cons of the various options available Unified should continue to pursue with 3rd party suppliers. However, Unified can have an audit regularly with suppliers to Harrington (2nd Tier suppliers) to ensure that they comply with the regulations.