Reference no: EM132853721

A: Exerting downward pressure on prices The case study scenario

As members of the Consultancy team you are presented with the case study of a situation whereby a retailer plans to cut costs by reducing prices paid to suppliers. Part of the 2010 merchandising strategy in a major high-street clothing retailer is to cut costs in the supply chain by reducing prices paid to suppliers by 5% on previous year's factory gate prices. All merchandisers in the business are informed of this target, and are instructed to negotiate with suppliers to reduce factory gate prices for comparable products to 5% lower than in 2009.

Individual merchandisers are told that they will be rewarded for meeting cost-cutting targets with a performance-related bonus at the end of the year. Merchandisers based in India negotiate with long-standing suppliers to achieve the lower price, and assure suppliers that they will get repeat orders over the next year if they can meet this lower price. The suppliers agreed, although they realized that the sales over the past 3 year had a gradual fallen by 6%.

The supplier and worker scenario:

One factory manager calculates that, if they produce the goods in their own factory, the lower price means that they will only just break even. This is because the unpredictable flow of orders with short lead times will require them to do overtime shifts, and the costs of paying overtime premiums will be too expensive. However, because of the fall in orders and ultimately profit, the suppliers decided to go with the suggestion.

Therefore, to keep costs down, the factory manager decides to sub-contract (outsourcing) part of the order to another factory in the city which has lower operating costs, without telling the retailer. The subcontractor has never been audited and does not know about the Procurement Code standards. Workers at the sub-contractor's factory are paid below the legal minimum, working hours often exceed 60 hours a week, and none of the workers have contracts.

There are no fire exits in the factory and equipment were close together and the walkways were impassable when production was high. Many times, the workers did not complain about the situation at the factory because the labour market was contracting and employment rate was low.

Case Questions

1. Explore the ways in which the retailer's actions might affect working conditions along the supply chain.

2. In relation to the possible Purchasing Standards that could be implemented, identify which one would lead to breaches by the retailer.

3. From the information given, what could have caused the issues mentioned in the case.

4. As a member of the Consultancy team, identify measures that retailers, in conjunction with suppliers, could have adopted to prevent these kinds of issues occurring in the future.

5. Discuss five (5) points relating to the procurement practices which the team can take away from this case. Include both positive and negative points to the solutions proposed.