Part 3: Challenges

Part 3: Challenges

Salutica Allied Solutions faced various procurement and global sourcing challenges, such as
demand forecasting, ESG, digital transformation, raw materials shortage, and rising freight
costs.

The first challenge is demand forecasting. Many managerial choices that aim to
understand and estimate future consumer demand over a certain period are based on demand
forecasting (Garth Tarr et al., 2019, as cited in Narayanan et al., 2017). Salutica faced
accurate demand forecasting, allowing it to optimize inventory and predict the quantity of
materials needed to meet customer satisfaction (Beroe Inc, 2023). This is because it can
determine when and how much to order from suppliers to ensure quantity materials are
available on time. Not only that, but Inaccurate forecasting might also impede the operational
process and result in less-than-ideal decisions. Furthermore, unanticipated occurrences like
natural catastrophes or worldwide pandemics influence demand projections in the electronics
supply chain. For example, the COVID-19 pandemic has altered customer behaviour and
disrupted supply chains, making it challenging for businesses to predict demand with any
degree of accuracy (Acharya, N et al., 2023). Another situation is seasonal error. Seasonal
demand forecasting errors occur when demand forecasts fluctuate seasonally and do not
accurately reflect or manufacture according to customer demand and orders. Due to the
forecasting model needs to consider the seasonality of some products, so that companies may
face shortages during peak periods or overstock during off-peak periods (Nalini, 2023). When
Salutica demand forecasts are wrong, delays in delivery can result in reduced customer
satisfaction and loyalty while turning to competitors for more reliable services (Netish
Sharma, 2023). Another impact is that companies need more inventory or stock out, which
can result in lost sales opportunities, stock shortages, or production delays. Stockouts can also
lead to customer dissatisfaction, damaged relationships, and loss of market share. In Salutica,
stockouts bring production lines to a halt, causing delays and impacting overall operational
efficiency. This is because the supplier cannot supply the material quickly, thus extending the
production time. By accurately forecasting demand and aligning procurement decisions with
actual demand, manufacturers can optimize inventory management to maintain customer
satisfaction, but not to the condition where they have unsold extra goods. This not only helps
Salutica maximize profits and reduce waste but also enhances overall operational
performance (Acharya, N et al., 2023).
 The second challenge faced by Salutica is ESG. Salutica is making significant
attempts to integrate environmental, social, and governance considerations into its
procurement practices. It aims to promote responsible sourcing, reduce a company's
environmental impact, and ensure ethical business practices throughout the supply chain.
Environmental focuses on minimizing negative environmental consequences, such as
reducing pollution, resource conservation, and greenhouse gas emissions. Social in
procurement includes human rights, ethical labor practices, diversity and inclusion, and safety
and health considerations in the workplace. The governance element in ESG procurement
involves ethical and responsible business administration. This includes accountability and
compliance with relevant rules and regulations (Mike Cullen, 2023). Although adhering to
ESG principles displays a company's dedication to ethical and sustainable business
operations, there are challenges, such as uncertainty in suppliers, cost implications, and
adaptation change. For example, when deciding to implement ESG in procurement, there is
much uncertainty about the ESG of suppliers, such as the possibility of not following or
adapting ESG practices. For example, Salutica considers the environmental sustainability,
social responsibility, and ethical governance of its suppliers to reduce the possibility of non-
compliance. Another situation is cost savings, one of the goals to be achieved in procurement,
but it is necessary to include costs to accommodate ESG practices. For example, if Salutica
had to change from a generic material to a specific material, the cost of purchasing the
material would go up. It also increases costs from finding the right supplier to shipping. So,
Salutica needed to understand the importance of ESG in managing procurement costs
effectively (Marc Kloepfel, 2024). Therefore, Salutica influenced procurement in the face of
various ESG situations, such as improving resource efficiency, reducing waste, enhancing
business reputation, and streamlining risk mitigation. Salutica can overcome social risks,
including human rights and workplace welfare, development, and security issues. Not only
that, Salutica can also overcome environmental impacts, including damage to ecosystems and
energy wastage.

The third challenge is digital transformation. Since the COVID-19 pandemic, digital
transformation has risen much higher on the corporate agenda. These led Salutica to need to
start looking at technology as a tool for proactive sourcing management, a hard lesson
learned from the impact and aftermath of the COVID-19 pandemic (Bonnet, D et al., 2021, as
cited in Alabdali, M, A et al., 2022). Digital transformation strategies provide organizations
with new competitive advantage in responding to the latest digital technologies and making
the most of them in procurement and global sourcing. When Salutica needs to implement a
digital transformation, the firm must change its structure, and this solution requires much
time and effort to overcome resistance, such as invoices becoming e-invoices and no use of
paperwork to go through work. Another is changing existing employee management, such as
giving them training and learning if not enough knowledge in the digital sector, to help the
management convince employees to accept changes and improve their working conditions
(Loonam J et al., 2018 as cited in Abadallah, Y et al., 2021). This is also because technology
will create more opportunities for employees to innovate and effectively use these
technologies to improve productivity, creativity, and work more efficiently.

Salutica still needs to learn the concept of agile teamwork because it requires much
training on different skills and different organizational structures (Bai, C et al., 2021, as cited
in Abadallah, Y et al., 2021). Digital transformation also concerns Salutica's data security and
privacy a concern. Procurement involves sensitive information, including financial details
and supplier contracts. So, the company must take action to implement robust cybersecurity
measures to protect private information. The impact of digital transformation on company
procurement will affect relationships with other stakeholders in the supply chain. The internal
effect on the digital improvement of organizational issues will influence the gradual reduction
of the workforce. From a procurement point of view, digital technology will help to find more
available potential suppliers, allowing the number to increase significantly. Digital
transformation facilitates collaboration and communication within the procurement
ecosystem, such as digitization enabling real-time access to information and documents and
fostering cooperation across geographic locations. These reduce communication barriers
while strengthening relationships with suppliers and internal stakeholders.

The fourth challenge faced by Salutica is the need for more raw materials. Although
obtaining raw materials may seem like a routine task, it significantly impacts how businesses
operate as it sets the tone for an organization's overall performance and financial health. This
process requires thorough research as it requires the selection of suppliers to include accurate
product specifications and suppliers that can meet tight deadlines. Salutica faces challenges
of raw material shortage: demand and supply volatility, poor estimation of materials quantity,
and poor quality. Wrong estimates can lead to undersupply or oversupply of materials. The
supply shortage disrupts the production schedule at the site, and reordering can lead to long
delays and additional costs. Reordering can cause other problems, such as inconsistent color
and dimensional tolerances. That is why product price goes up; no new products are on the
market. In the case of poor production quality, the quality of finished materials could be
improved due to the constructor or supplier's neglect of installation materials, which could be
better. When something goes wrong, such as cracking or failure, supplier surveys will delay
the time to order a new product (M, M, Rahman et al., 2017). This is because if the quality of
the material does not meet the standard or there are defects, the use of the material will be
delayed at the time of production. Material defects may also be caused by improper handling
in the process of packaging, transportation, or delivery of goods because some materials may
have minor defects that can be repaired. However, some materials may have significant
defects that cannot be repaired, so the fundamental material cannot be used, and this
gradually leads to a shortage of materials (Asnaashari E et al., 2009 as cited in M, M Rahman
et al., 2017). Weather, geopolitics, legislation, market circumstances, and client preferences
can all impact the raw material order process. Production schedules and budgets may be
affected by the possibility of shortages, price increases, or declining quality because of these
developments. So, these problems, such as production delays and operational processes, will
impact procurement and global sourcing for a company, increasing costs and leading to lost
sales. Fluctuations in the procurement of raw materials can lead to price increases that affect
Salutica's manufacturing processes and increase operating expenses. Shortages of raw
materials can lead to increased costs, production delays, and lower yields (Olivia
Montgomery, 2023).

The last challenge is rising freight costs. International shipping costs have soared over
the past year, and fierce competition for cargo containers has become the new standard. Now,
freight rates are expected to rise again and may be higher than pre-pandemic levels. From
2020 to 2021, the average freight rate for a 40-foot container from Asia to Europe will
increase from $2,000 to nearly $14,000. At the same time, the shortage of vessels is not only
causing shipment delays but also exacerbating the severity of distribution challenges (Modifi,
2021). Salutica poses several challenges, such as increased transportation costs and decreased
profit margins, difficulty managing inventory and warehousing, and a container shortage and
shipping delay crisis. The lack of imports has led to a one-way trade crisis. The balance must
be restored before container shortages and shipping price increases remain problematic. Port
back-up issues during the pandemic persist, affecting port accommodation capacity. Now,
severe congestion prevents some ships from docking for days or weeks at a time. These
unloading delays have created a shortage of containers, affecting future shipments as waiting
times at ports are much longer than before the pandemic (Modifi, 2021). By 2023, overall
interest rates will be nearly 10 percent higher than last year. External factors affect freight
rates, such as high oil prices and reduced carrier capacity, which increase costs. High demand
and limited supply will also raise interest rates and affect profit margins (Adam, H. S, 2023).

After that, Salutica maintains sufficient inventory levels to ensure timely customer
delivery. However, as a price increase, it results in longer delivery times when companies
choose future periods to reduce the impact of rising spot prices (Adams, H. S, 2023). These
can lead to confusion in inventory management and missed order schedules. The effects of
increasing freight costs on procurement with supplier relationships, sourcing decisions, and
inventory management. Rising freight costs can lead to strained relationships with suppliers,
especially if they are unable or unwilling to shoulder the increased shipping costs. So,
procurement professionals may need to renegotiate contracts or find alternative suppliers
offering more competitive prices. After that, higher freight costs can affect purchasing
decisions, causing the procurement team to rethink sourcing strategies and supplier locations.
For example, it may be more attractive to source goods from geographically close suppliers
or have lower shipping costs to mitigate the impact of rising freight rates.
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