Principles of Purchases: Sourcing Strategy for Pacific Systems Corp

This case study analyzes the sourcing strategy for Pacific Systems Corporation (PSC), a medium-sized high-tech company. The analysis focuses on the selection of a DVD drive supplier, comparing four potential suppliers based on quantitative and qualitative evidence, including price, delivery lead time, quality, and other factors. The recommended sourcing strategy is discussed, along with risk reduction plans. The case also addresses the importance of supplier capacity, the differences between single and multiple sourcing, and the level of effort required for different sourcing decisions. The document includes financial analysis worksheets, supplier evaluation, and a sourcing risk management plan, providing a comprehensive overview of the principles of purchases in a real-world business context.

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Running head: PRINCIPLES OF PURCHASES
Principles of Purchases
Author’s Name
Institutional Affiliation

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Principles of Purchases
(Q. 1) What is your recommended sourcing strategy in this case? Please support your
decision with quantitative and qualitative evidence gathered during the case analysis.
Also, present your plan to reduce any risks associated with your sourcing decision.
In this case, the department of defense first introduced strategic sourcing is a term of
supply chain management for accruing best practice of goods and services. Pacific Systems
Corporation, Inc. (PSC) can generate a remarkable relationship with its suppliers by sourcing
DVD drives single-handedly i.e. without involving any third-party (PCS, 2018). Since
DVD’s were new in the markets at that specific period of time, it was found that not only the
computer industry intended to use this product, but also all the electronic devices industry as
well. Having a single supplier will provide an opportunity to PSC in leveraging its business
with generating maximum returns (FY07 Update, 2008).
Sourcing strategy is considered to be the logical technique for gathering data and
finding out which companies possess the best possible values in the markets wherein they
operate. In order to support this decision, quantitative evidences have been gathered during
the case analysis, which can be better understood from the below table:
Particulars Elecom Sure Tech E-Drive Park
Quoted price
(per unit)
$127 $ 144 $140 $ 132
Delivery lead
time
8 weeks 3 weeks 2 weeks 10 weeks
Supplier Quality 9500 PPM
defects
10500 7500 PPM
defects
4000 PPM
defects
On time
Delivery Record
95% 97% 99.5% 99%
Tooling cost $2.73 $ 3.18 $2.95 $1.20

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Frequency of
Shipment
Monthly Weekly Every Other day Monthly
Ramp Up time 4 months 5 months 4 months 4 months
Denomination of
contract
Yen Dollars Dollars Dollars
Based on the above portrayed table, it is clear that E-Drive will be the best supplier
choice in terms of its performance for PSC as compared to others. Justifiably, E-Drive has the
ability to comply with the highest quality metric of 99.5% with exceptional delivery capacity
within the period of 2 weeks. Although the quoted price of its products is comparatively
higher than the other suppliers, the guarantee factor that maintains by E-Drive is adequate
enough to attract huge figure of customers as most of them have guarantee issues with
cheaper price.
However, one of the ways of reducing the risks related to sourcing decision is keeping
faith on the suppliers. It is vital to consider for the purpose of enhancing a supplier’s
confidence level to perform tasks in a more efficient way. The company i.e. PSC can also
determine the capability of the suppliers by forecasting demands and supplies of products
with the help of cross-functional sections. It will also assist to control the financial
obligations at the time of higher demand and thereby avoid the adverse consequences of
customer dissatisfaction.

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(Q.2) A sourcing decision of the magnitude highlighted in this case requires a serious
commitment of resources and time. Do all sourcing decisions require similar
commitments of time and effort? If not, describe the types of sourcing decisions that
justify this effort. Describe the types of sourcing decisions that do not justify or require
the level of effort and analysis required in this case.
In this present technology-driven era, there are broad assortment of different suppliers
throughout the globe, therefore, all the sourcing decisions do not require same amount of time
and effort to address any specific problem. The products including DVD drives and monitors
undergo through several manufacturing procedures, which is quite time consuming. In case of
selecting the suppliers, PSC must ensure its operational efficiency in terms of providing zero
defect products to the end users. The suppliers whose strategic target meets the company’s
intention can help to build a mutual long-term relationship amid the two parties. Fasteners for
computer not justify or require the level of effort and analysis required in this case (Grondys,
Kott, Sukiennik & Seroka-Stolka, 2015).
(Q.3) How important is the issue of supplier capacity in this case? How did you evaluate
supplier capacity? What level of attention or importance should supplier capacity
receive during the sourcing decision? Why?
Technological changes are rapidly increasing day by day because of the growing
product and/or service demands and rejuvenated economy. In order to raise customers’
satisfaction level with innovation and creativity, PCS need to pursue the ability to work with
new projects and prototypes and also ensure to maintain suppliers’ capacity. If the suppliers
do not have enough capacity, it will certainly affect the structure of growing plan of the
company and thereby generate negative outcomes such as loss of existing potential
customers. Therefore, under this circumstance, the company should select an appropriate

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supplier cautiously and recheck as well as make any sourcing decision accordingly (EDrive
Actuators, 2019).
(Q.4) The issue of single versus multiple sourcing is an important consideration during
supplier selection. Identify the potential advantages and disadvantages of single and
multiple sourcing.
The major advantages of single sourcing include stabilizing a company’s supply chain
and maintaining clear authenticity. Moreover, the other advantages embrace diminishing
manufacturing costs and amplifying product value for the customers (Invensis, 2019). In
terms of disadvantages of single sourcing, it must be mentioned that the entire production of a
company depends on one supplier, therefore, in case of the failure; the whole production
process might become misbalanced. This often fails to meet the sudden product demands.
On the other hand, developing monetary growth and coping with intense market
competition successfully by lowering product costs are certain advantages related to multiple
sourcing. While discussing about the disadvantages of multiple sourcing, it must be
mentioned that several suppliers need to be managed and monitored critically in order to
make them perform better. Contextually, low costs cannot be leveraged, as in this case, the
economics of scale is misbalanced in terms of production for the suppliers (Costantino &
Pellegrino, 2010).

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References
Costantino, N., & Pellegrino, R. (2010). Choosing between single and multiple sourcing
based on supplier default risk: A real options approach. Journal of Purchasing &
Supply Management, 16, 27-40.
EDrive Actuators. (2019). Superior quality, optimum solutions. Retrieved from
https://edriveactuators.com/
FY07 Update. (2008). Implementation of strategic sourcing initiatives. Department of
Defense Strategic Sourcing, 48-75.
Grondys, K., Kott, I., Sukiennik, K., & Seroka-Stolka, O. (2015). The importance of supplier
selection process in business relationships. Czestochowa University of Technology, 1-6.
Invensis. (2019). 7 benefits of single-source BPO partner. Retrieved from
https://www.invensis.net/blog/bpo/why-your-business-should-have-a-single-source-
outsourcing-partner/
PCS. (2018). Shop by category. Retrieved from http://www.pcs-company.com/

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Appendices
Appendix 1- Supplier Financial Analysis Worksheet
Selected Financial Ratios Elecom
Asset utlization in billlion ($)
Asset Turnover (Sales/Assets) 1.316322398
Inventory Turnover 5.199962182
Receivable Days 49.23692308
Payable Days 29.12676923
Capitalization
Leverage 1
Return on equity 0.025313892
Long term debt to equity 0.2518226
Long term debt to asset 0.2518226
Current Ratio 1.215938448
QuickRatio 2.214478266
EBIT Coverage 0.75
Reinvestment ratio 1.96350572
Profitability Ratios
Contribution Margin 0.996076923
Operating Margin -0.965231373
Profit Margin 0.019230769
Selected Financial Ratios Sure-Tech
Asset utlization in billlion ($)
Asset Turnover (Sales/Assets) 1.571428571
Inventory Turnover 5.433333333
Receivable Days 29.45454545
Payable Days 49.09090909
Capitalization
Leverage 1
Return on equity 0.107142857
Long term debt to equity 0.157142857
Long term debt to asset 0.157142857
Current Ratio 1.33877551
QuickRatio 2.073469388
EBIT Coverage 5.458333333
Reinvestment ratio 0.56
Profitability Ratios
Contribution Margin 0.975454545
Operating Margin -0.87913554
Profit Margin 0.068181818

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Selected Financial Ratios E-Drive
Asset utlization in billlion ($)
Asset Turnover (Sales/Assets) 1.642857143
Inventory Turnover 9.060606061
Receivable Days 59.47826087
Payable Days 35.2173913
Capitalization
Leverage 1
Return on equity 0.073928571
Long term debt to equity 0.172142857
Long term debt to asset 0.172142857
Current Ratio 1.348623853
QuickRatio 2.743119266
EBIT Coverage 2.615384615
Reinvestment ratio 0.848484848
Profitability Ratios
Contribution Margin 0.991086957
Operating Margin -0.925656049
Profit Margin 0.045
Selected Financial Ratios Park
Asset utlization in billlion ($)
Asset Turnover (Sales/Assets) 1.382935293
Inventory Turnover 7.005169867
Receivable Days 46.36162362
Payable Days 33.2103321
Capitalization
Leverage 1
Return on equity 0.047458665
Long term debt to equity 0.168401715
Long term debt to asset 0.168401715
Current Ratio 1.129394813
QuickRatio 2.135158501
EBIT Coverage 1.845454545
Reinvestment ratio 1.52
Profitability Ratios
Contribution Margin 0.98302583
Operating Margin -0.924366771
Profit Margin 0.034317343

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Appendix 2: Total Cost Analysis Worksheet – Year One
Cost Category (per unit) Elecom SureTech E-Drive Park
Quoted Unit Price 127 144 140 132
Transportation 18 6 14 18
Tooling 3 3.5 3.25 2.75
Quality non-conformance costs (based on eq.4.2) 2.85 3.15 2.25 1.2
Duties/customs, insurance, and tariffs 11.5 1.5 3 13
Inventory safety stock carrying charges 1.8 0.996 0.97 1.87
Ordering, inbound receiving and inspection costs 4.5 4 3.25 2.25
Estimated Per Unit Total Cost ($) 168.65 163.146 166.72 171.07
Appendix 3: Supplier Evaluation and Selecting Analysis
Organization
Name
Deliver
Performance
Process and
technological
capability
Transportation
Cost
competitiveness
Elecom Average deliver
performance (4
weeks)
A variety of
electronic
components
(30% of market
share)
18 per
unit(relatively
higher)
Sure Tech Relatively faster
(3 weeks )
Exclusive design
and production
$6.00 per unit
( cheapest)
E-Drive Fastest than
others (only 2
weeks)
Committed to
set up JIT
production (20%
of market share)
$14 per unit
Park
Technology
Relatively lower
than the others
(10 weeks)
New entry with
12% of market
share
$18 per unit

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Appendix 4 - Sourcing Risk Management Plan for E-Drive
Potential Concern Area Risk or Concern Risk Reduction plan
Management Capability The nature of communication
between quality departments
and production & quality
issues with product shipment
Control and monitor the
activities of every department
for development
Determine the importance of
team work
Understand the impact of
organization’s bottom line
Delivery performance E-Drive meets highest point
if on-time delivery takes
place within lesser duration
of 2 weeks
Continuous management of
operations and monitor the
communication between the
two parties
Quality performance Defects of 7500 PPM Should introduce a quality
rechecking equipment
Process Capability Gaps in monitoring control
limits
Initiate six-sigma to all
processes and use statically
improved process
Capacity E-Drive has the capability to
meet the future targets with
the capacity of 96%
Develop a healthy
relationship with the new
entries such as Sure Tech and
help them to adopt the US
technology
Cost Transaction costs are
relatively higher and show
inefficiency in logistics
Although PSC manages its
own transportation, setting a
delivery cost and managing
the inventory level id are
required
Technical Ability E-Drive has the ability to
make changes within its
future products
Roles of R & D departments
of both the companies with
specific aims and
technological capacities
Logistics Nil Nil
Financial Issues Cost of inventory: Total Continuous monitoring of

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Current liabilities- Long term
debt
balance sheet and maintain
good relationship with other
suppliers
Other Commercial Issues Nil Nil