case about strategic positioning in procurement

Case: Strategic Positioning of the Procurement Function

This case regarding strategic positioning of the procurement function is created as support to lectures about procurement organization and procurement compliance.

Reading in Advance of the Cases

Part 1 Organization

Background

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Acme Manufacturing was founded in 1998 in Västerås, Sweden, by siblings Anders and Karin Nilsson with a single punch press and a mission to deliver high-quality, custom sheet-metal enclosures to local machine shops. In its first five years, the company grew organically through local referrals and small contracts with municipal utilities.

By 2003, revenue had climbed from SEK 2.5 million to SEK 25 million, and the workforce grew from two family members to a team of 20 skilled fabricators, welders, and assemblers. The firm’s reputation for rapid turnarounds on prototype runs cemented its place in the regional industrial ecosystem.

Early Decentralization and Growth (1998–2008)

From the outset, Acme’s founders adopted a decentralized purchasing model: each production supervisor controlled ordering of components—ranging from fasteners and sheet metal to electro-mechanical parts—based on immediate job needs. Supervisors maintained personal spreadsheets listing preferred local vendors, negotiated informal discounts for bulk buys, and handled urgent orders by directly calling suppliers. While this approach allowed low working capital requirements and swift responses for ad hoc customer demands, it also meant that global supplier leverage was nonexistent. Individual orders remained small, typically under 500 units, and spread across more than 50 active vendors by 2008.

During this period, Acme’s leadership rarely convened to analyze consolidated spend data. Annual procurement costs hovered at 40–45% of COGS (Cost of Goods Sold) with little variability, since each site and production line adopted its own ordering cadence. Holding costs remained low—inventory turns of 8–10 per year—but purchasing inefficiencies showed up in two key areas:

  1. Pricing Variance: Without aggregated negotiations, payment terms and pricing varied widely. Standard fasteners cost up to 20% more compared to industry benchmarks. High-demand items like DIN rails and linear motion guides sometimes carried premium lead-time surcharges of 15–25% when expedited.
  2. Quality Incidents: In rush orders, supervisors frequently sourced from unvetted, lower-cost suppliers. Quality inspections documented rework rates between 3–7% for rush-bought parts, translating to additional labor costs and scrappage that impacted profit margins by up to 2% per production batch.

Despite these inefficiencies, Acme’s organic growth continued. In 2005, the company opened a second 3,000 m² facility in Malmö to serve southern Sweden’s automotive and marine OEMs, replicating its decentralized procurement practices. Two years later, a third site was established in Esbjerg, Denmark, to tap into offshore energy markets. By 2008, combined revenue exceeded SEK 120 million, and headcount reached 120.

Initial Attempts at Centralization (2009–2015)

Recognizing margin erosion and rising competition, Acme’s executive team conducted a strategic review in 2009. They identified three pressing challenges:

  • Excessive Unit Costs: Compared to peer group benchmarks, Acme paid 10–15% above market rates for core mechanical components.
  • Variable Supplier Reliability: On-time delivery performance averaged 70–75%, leading to unplanned downtime and expedited freight costs.
  • Lack of Accountability: The absence of a dedicated procurement function meant conflicting directives—production pushed for speed, finance sought cost reductions, and sales prioritized customer timelines.

As a remedy, the board launched small-scale initiatives:

  • Standard Supplier Onboarding: Introduction of a vendor qualification process requiring basic quality and delivery data.
  • ERP Module Rollout: Deployment of a basic purchasing module in the existing ERP system to capture transaction-level data.
  • Procurement Training: Two-day workshops for production supervisors on basic negotiation techniques and forecasting methods.

These efforts delivered mixed results: emergency orders decreased by 10%, and spend transparency improved marginally. However, no team had end-to-end ownership of supplier relationships, and data remained siloed across sites. By 2015, improvement gains had stagnated, and key cost-saving targets remained unmet.

Competitive Pressures and Strategic Review (2016–2022)

Between 2016 and 2022, Acme faced escalating pressure from larger Scandinavian and German fabricators offering integrated design-to-manufacturing capabilities at lower per-unit costs. Annual profitability margins dipped from 14% in 2016 to 10% in 2022. Market intelligence reports indicated that peer firms with centralized procurement were negotiating price reductions of 12–15% on core categories and achieving on-time delivery rates above 90%. Quality warranties improved, with reported defect rates under 1% due to vetted supplier partnerships.

In response, Acme’s leadership convened a cross-functional task force in Q4 2022 comprising production managers, finance directors, IT leads, and quality assurance. Their mandate was to recommend a procurement transformation roadmap. The task force’s findings included:

  • Capability Gaps: Lack of skilled procurement professionals; no centralized spend analytics; ERP data inconsistencies.
  • Process Flaws: Absence of standardized ordering protocols; emergency buy escalation paths unclear; no category management framework.
  • Opportunity Areas: Potential savings of SEK 15–18 million annually through volume-based contracts; improved supplier performance could reduce rework costs by SEK 2 million.

The task force proposed a phased pilot approach: focus first on high-volume mechanical components—specifically bearings and seals—and measure impact over six months. Achievable quick wins would build support for a full procurement function.

Pilot Launch: Bearings & Seals (Jan–Jun 2023)

In January 2023, CEO Maria Lindström appointed Johan Eriksson—formerly Senior Buyer at a major OEM—to lead the pilot. Johan spent the first month conducting a detailed diagnostic:

  • Data Collection: Extracted 12 months of transactional data from three ERPs, cleaned and classified spend into standardized part numbers.
  • Stakeholder Interviews: Met with 15 production supervisors, 5 finance analysts, and 3 quality engineers to map pain points and success criteria.
  • Site Visits: Spent a week at each plant—Västerås, Malmö, Esbjerg—to observe ordering workflows, warehouse layouts, and lead-time bottlenecks.

Key diagnostic findings:

  • Combined monthly order volume averaged 60,000 bearings and seals. Orders were placed ad hoc—peak months saw surges up to 85,000 units, stressing suppliers.
  • 14 distinct suppliers across three sites, average part-cost variance of SEK 3–5 per unit depending on supplier.
  • Emergency order rate averaged 15% of total spend, often at +25% cost premium and lead-time of 2–3 days versus standard 7–10-day replenishment.
  • Quality defect rates varied: 0.8% for reputable European suppliers, up to 5% for lower-cost vendors used in urgencies.

Armed with data, Johan negotiated master agreements:

  • Supplier A (Sweden): 15% cost reduction, guaranteed 48-hour standard lead-time, with a minimum monthly volume commitment of 25,000 units.
  • Supplier B (Germany): 18% cost reduction on orders above 30,000 units, 7-day lead-time, two-week rolling forecast requirement.

Implementing these agreements required cross-functional coordination:

  • IT Integration: ERP purchasing module updated with contract pricing, automated order batching scripts, and real-time spend dashboards.
  • Warehouse Reconfiguration: Dedicated racking for bearings and seals to streamline pick-and-pack and free capacity for other categories.
  • Communication Protocol: Standard operating procedures for order reviews every Wednesday, with emergency order windows defined for critical maintenance needs.

Pilot Results and Challenges

After six months, Johan reported:

  • Cost Savings: Realized a 14% average cost reduction, saving SEK 2.4 million annually on bearings and seals.
  • Delivery Performance: Improved standard-order on-time delivery to 94%. Emergency orders dropped from 15% to 6% of total.
  • Inventory Turns: Increased from 8 to 11 turns per year, reducing working capital.
  • Quality Improvement: Defect rates reduced to 1.2% overall, but spikes occurred when emergency suppliers were engaged.

However, two challenges emerged:

  1. Emergency Order Protocol: Although emergency orders declined, when invoked they still carried high premiums and lacked a dedicated owner, causing average resolution time of 36 hours. Maintenance teams cited this delay for two unplanned production stoppages affecting 5% of monthly output.
  2. Ambiguous Reporting Lines: Johan’s pilot charter designated CFO review of cost savings, but operational escalations went to the COO. This misalignment led to delayed decisions on approving additional headcount for procurement analytics and stalled rollback of underperforming suppliers.

Executive Decision: Formalizing Procurement Function

In July 2023, based on the pilot’s quantitative and qualitative insights, the board approved a formal Procurement department structure:

  • Chief Procurement Officer (CPO) reporting to COO. Accountable for procurement strategy, supplier segmentation, risk management and digital procurement transformation.
  • Category Manager—Direct Materials (×1): Oversees high-volume categories including bearings, seals, linear guides, raw materials; leads supplier negotiations, establishes KPIs.
  • Category Manager—Indirect Spend (×1): Manages non-production categories such as MRO, office supplies, travel; consolidates vendors, optimizes TCO.
  • Buyer—Nordic Region (×2): Executes operative buying, manages order placement, monitors supplier performance for Swedish and Danish operations.
  • Buyer—International Region (×1): Coordinates imports from Asia and Europe, handles customs, manages freight partners, and maintains lead-time variance analytics.

The board defined ambitious 12‑month targets:

  • Cost Savings: 8–10% reduction across all direct materials, translating to SEK 48–60 million on SEK 600 million spend.
  • On‑Time Delivery: 95% consistency across all replenishment categories.
  • Defect Rate: Halve supplier-related defects from 2.4% to 1.2% of total deliveries.
  • Contract Compliance: Increase spend under master agreements from 62% to 85%.

Through the pilot and this detailed narrative, students should discern:

  • The strategic value of volume leverage versus local responsiveness in high-mix manufacturing.
  • How clear escalation paths and reporting lines are critical to resolve cross-functional tensions.
  • Role definitions that separate strategic oversight (CPO, Category Managers) from operational execution (Buyers).
  • Data-driven target setting and KPI formulation (e.g., Cost Savings % = Last years volume (last years price – new price).
  • Organizational change management challenges when introducing centralization across multiple sites and cultures.

Group Discussion Questions (30 min)

  1. Which advantages and disadvantages of centralized vs. decentralized procurement are most critical for Acme’s next phase? Explain your reasoning.
  2. Of the proposed roles (CPO, two Category Managers, three Buyers), which hire or restructuring would you prioritize first—and why?
  3. Should the Procurement department report to the COO as planned, or directly to the CEO? What are the strategic pros and cons of each reporting line?
  4. Identify two “quick wins” based on Johan’s pilot that you would highlight to gain executive buy‑in for full rollout.
  5. How would you handle urgent orders (e.g., emergency spare parts) without sacrificing the volume discounts achieved by centralized ordering?

Strategic positioning Class Debrief & Reflection (30–40 min)

  • Each group presents their recommended organizational structure and reporting line (≈ 5 min per group).
  • Compare and contrast proposed role prioritizations; debate potential impact on speed vs. savings.
  • Discuss which KPIs (e.g., Cost Savings %, On‑Time Delivery Rate, Defect Rate) best measure short‑term and long‑term success.
  • Summarize how today’s solutions tie back to Acme’s 12‑month targets and strategic objectives.

Part 2: Developing a Supplier Code of Conduct & Ensuring Compliance

Background & Reading Material (15 min)

As Acme Manufacturing expands its supplier base across Europe and Asia, end-customer requirements and international regulations have made supplier compliance a critical priority. Historically, the company’s sourcing focused on cost, quality, and delivery. However, new tenders from major OEMs now mandate documented adherence to ethical practices: zero tolerance for child labor, safe working conditions, fair wages, and environmental stewardship.

In 2024, Acme’s Quality Director, Helena Berg, audited three key suppliers:

  1. Jiangsu Precision Parts, China: High-quality machining but found minor safety violations—unguarded machinery and irregular rest breaks. Social media flagged environmental discharge into local waterways.
  2. Baltic Fasteners, Latvia: Competitive pricing and reliable delivery, yet wage records showed temporary staff paid below minimum wage and no formal grievance process existed.
  3. Västkust Plast, Sweden: Exemplary environmental and labor standards but charged 5–7% premium, making them costlier than international counterparts.

The audit findings spurred a cross-functional task force led by CPO Emma Johansson in November 2024. Task force members included representatives from Procurement, Quality, Legal, and Sustainability. Their objectives:

  • Draft a Supplier Code of Conduct (SCoC) aligned with UN Global Compact and ISO 20400 guidance.
  • Define key compliance criteria, audit protocols, and remediation steps.
  • Integrate SCoC requirements into new contracts and supplier onboarding processes.

Key task force discussions uncovered these trade-offs:

  • Cost vs. Compliance: Strict SCoC enforcement may increase unit costs by 3–5% initially, but reduce reputational and legal risks.
  • Audit Frequency: Annual on-site audits provide depth but are resource-intensive; remote self-assessments are cheaper but risk incomplete transparency.
  • Supplier Segmentation: Tier-1 suppliers (≥ SEK 5 million annual spend) require full audits; Tier-2 (< SEK 5 million) accept self-declarations with random spot checks.

By January 2025, the task force produced a draft SCoC covering:

  • Labor Standards: No child or forced labor; freedom of association; fair wages and working hours.
  • Health & Safety: Compliance with local safety regulations; personal protective equipment; incident reporting.
  • Environment: Waste management; emissions monitoring; resource efficiency targets.
  • Ethics & Integrity: Prohibition of corruption; transparent accounting; protection of whistleblowers.

They also outlined a three-step compliance process:

  1. Onboarding Declaration: Suppliers complete a detailed questionnaire and sign the SCoC.
  2. Risk Assessment & Segmentation: Categorize suppliers by spend, geography, and product risk.
  3. Verification & Audit: Conduct remote reviews for low-risk suppliers; schedule on-site audits for high-risk or Tier-1 suppliers every two years.

Finally, the draft contract clause mandates that non-conformance triggers a corrective action plan within 60 days or potential contract termination.

Your reading should reveal:

  • The rationale for SCoC development in response to regulatory and customer demands.
  • Trade-offs between cost increases and risk mitigation.
  • Key sections of the Code and their practical implications.
  • The three-step compliance process and audit segmentation logic.
  • Potential challenges in enforcing SCoC across diverse geographies and spend tiers.

Group Discussion Questions (30 min)

  1. What are the most critical SCoC clauses for Acme’s business and reputation? Why?
  2. How would you balance audit rigor (on-site vs. remote) with resource constraints? Propose an audit schedule.
  3. Which suppliers (by region, spend tier, or product type) would you prioritize for full audits first—and why?
  4. How can Acme incentivize suppliers to adopt higher compliance standards without resorting to contract termination?
  5. Propose metrics to monitor SCoC effectiveness (e.g., audit pass rate, corrective action closure time, non-conformance incidents).

Class Debrief & Reflection (30–40 min)

  • Groups present their prioritized clauses and audit strategies (≈ 5 min per group).
  • Compare proposed segmentation approaches; debate cost vs. compliance trade-offs.
  • Discuss supplier engagement tactics: training, incentives, and clear escalation paths.
  • Summarize how SCoC integration supports Acme’s strategic objectives and major OEM tender requirements.

Note: Illustration to case about strategic positioning in procurement and supplier code of conduct was created by SORA on May 17, 2025.

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