COURSE: BUSINESS AND MANAGEMENT
MODULE: PROCUREMENT AND SUPPLY
COURSEWORK: LION AIR CASE STUDY
The case study information states that a supplier’s current ratio and acid test
ratio have both fallen below 1.0:1. Explain the significance of this to Lion Air and
consider potential limitations of this.
Current ratio and acid test both are liquidity ratios that determine whether business will
be able to function in the near future, meaning, does the company have sufficient cash
to pay its short-term liabilities (Proctor, 2006).
The difference is that acid test ratio does not consider inventory due to the fact that, for
some businesses, it may not be the most liquid asset. Therefore, which ratio is the most
appropriate to use when evaluating the supplier’s liquidity depends on its ability to
convert stock in cash quickly. If either of the ratios is below 1.0:1, it indicates that
business has more current liabilities that current assets and that it does not have
enough cash to cover these liabilities which in time will lead to bankruptcy.
In Lion Air case, ratios are very low and it means that the supplier is not able to pay to
its own suppliers and other current liabilities. The cause for this situation might be that
the managers did not appraise suppliers and did not monitor their performance. They
depended solely on their long relationship. Furthermore, the contract between Lion Air
and the supplier is going to last 2 more years. If the food and beverage supplier cannot
pay its own suppliers the consequences may be the following:
• There will be a delay in production of their goods.
• Inability to be committed to the contract.
Both of these points suggest that the delay in their production of goods will cause
shortage of food and beverages for Lion Air and that, potentially, will decrease customer
satisfaction. Furthermore, the inability to fulfil the contract may result in additional costs
for both Lion Air and its supplier, for instance, fee when breaking the contract and,
possibly, solicitor and other fees if the case goes to the court.
For Lion Air this is a very significant problem, because it has to keep fulfilling contract
for 2 more years when it could switch to a different supplier that would meet all
company’s requirements instead. In addition, the supplier may cut costs due to its
financial instability and that will affect the
quality of the Lion Air products.
The limitations of both ratios:
• It does not consider the long-term liquidity of the business, which may not even
be possible, because a business cannot always predict what decisions it will
make.
• Sometimes trade payables, which is a current asset, can turn into a bad debt if
the business is not getting paid. Therefore, there may be less current assets than
expected.
These limitations mean that, when assessing the supplier’s liquidity, Lion Air is not going
to have the most accurate data and both parties can only make short term decisions.
, The case study information states that Philippa intends to formalise the appraisal
and selection of potential suppliers. Explain appropriate selection criteria that
she might use in the process of selecting suppliers.
Over time, Lion Air was a business that had no procurement specialists and, thus, could
not procure well. Now the company has a procurement manager, who will lead Lion Air
in the right direction in this area of operations. In addition, the procurement now is
centralised with the procurement manager based in the head office and it is beneficial,
because there is a greater control over procurement activities, there is an expertise and
conflicts between different departments can be avoided.
The appraisal and selection process of suppliers is essential in order to avoid different
supply chain risks. A good example of a consequence of not having an appraisal and
selection process is the supplier’s financial difficulties that potentially would have a
negative impact on Lion Air.
The requirements of the buyer will depend on the product bought (Taherdoost, 2019, p.
1027).
When selecting a supplier, Philippa can utilise the Carter’s 10 c’s model as a guide of
what supplier selection criteria to use. The key criteria would be:
• Capacity, because it is about whether a supplier is able to satisfy Lion Air’s
demand for products. If not satisfied, it will lead to customer dissatisfaction, for
instance, food and beverages or delay supply chain from functioning well, for
instance, shortage in planes.
• Cash resources (financial stability), because if a supplier is struggling financially,
it may result in inability to supply goods on time, lower quality due to attempts to
cut costs and it may even cease to trade altogether. A great example of an airline
that struggled with covering costs and gaining funds which led to the business
going into administration is Flybe (Topham, 2020).
• Commitment, because if a supplier is interested in providing the best quality and
service possible, it will prevent supply chain and reputation risks. According to a
Forbes article, trust between suppliers is essential and supplier should be treated
as a partner in order to achieve commitment from supplier’s side (O’ Marah,
2016).
• Cost, because it will affect different aspects, for example, whether the buyer can
afford to buy the quantities necessary and if it can, what level of quality can be
expected from a supplier based on the particular cost.
Lion Air has to use these criteria and other provided by Carter in order to select the
most suitable supplier and have an efficiently running supply chain, otherwise, the
consequences are going to be like with the food and beverage supplier which lacked
financial stability. The suppliers are going to be selected based on their suitability
instead of how long has Lion Air worked with them.
Outline e-sourcing tools that LA might use to help the sourcing of requirements
from external suppliers. Consider potential benefits that LA might achieve by
introducing e-sourcing tools.
MODULE: PROCUREMENT AND SUPPLY
COURSEWORK: LION AIR CASE STUDY
The case study information states that a supplier’s current ratio and acid test
ratio have both fallen below 1.0:1. Explain the significance of this to Lion Air and
consider potential limitations of this.
Current ratio and acid test both are liquidity ratios that determine whether business will
be able to function in the near future, meaning, does the company have sufficient cash
to pay its short-term liabilities (Proctor, 2006).
The difference is that acid test ratio does not consider inventory due to the fact that, for
some businesses, it may not be the most liquid asset. Therefore, which ratio is the most
appropriate to use when evaluating the supplier’s liquidity depends on its ability to
convert stock in cash quickly. If either of the ratios is below 1.0:1, it indicates that
business has more current liabilities that current assets and that it does not have
enough cash to cover these liabilities which in time will lead to bankruptcy.
In Lion Air case, ratios are very low and it means that the supplier is not able to pay to
its own suppliers and other current liabilities. The cause for this situation might be that
the managers did not appraise suppliers and did not monitor their performance. They
depended solely on their long relationship. Furthermore, the contract between Lion Air
and the supplier is going to last 2 more years. If the food and beverage supplier cannot
pay its own suppliers the consequences may be the following:
• There will be a delay in production of their goods.
• Inability to be committed to the contract.
Both of these points suggest that the delay in their production of goods will cause
shortage of food and beverages for Lion Air and that, potentially, will decrease customer
satisfaction. Furthermore, the inability to fulfil the contract may result in additional costs
for both Lion Air and its supplier, for instance, fee when breaking the contract and,
possibly, solicitor and other fees if the case goes to the court.
For Lion Air this is a very significant problem, because it has to keep fulfilling contract
for 2 more years when it could switch to a different supplier that would meet all
company’s requirements instead. In addition, the supplier may cut costs due to its
financial instability and that will affect the
quality of the Lion Air products.
The limitations of both ratios:
• It does not consider the long-term liquidity of the business, which may not even
be possible, because a business cannot always predict what decisions it will
make.
• Sometimes trade payables, which is a current asset, can turn into a bad debt if
the business is not getting paid. Therefore, there may be less current assets than
expected.
These limitations mean that, when assessing the supplier’s liquidity, Lion Air is not going
to have the most accurate data and both parties can only make short term decisions.
, The case study information states that Philippa intends to formalise the appraisal
and selection of potential suppliers. Explain appropriate selection criteria that
she might use in the process of selecting suppliers.
Over time, Lion Air was a business that had no procurement specialists and, thus, could
not procure well. Now the company has a procurement manager, who will lead Lion Air
in the right direction in this area of operations. In addition, the procurement now is
centralised with the procurement manager based in the head office and it is beneficial,
because there is a greater control over procurement activities, there is an expertise and
conflicts between different departments can be avoided.
The appraisal and selection process of suppliers is essential in order to avoid different
supply chain risks. A good example of a consequence of not having an appraisal and
selection process is the supplier’s financial difficulties that potentially would have a
negative impact on Lion Air.
The requirements of the buyer will depend on the product bought (Taherdoost, 2019, p.
1027).
When selecting a supplier, Philippa can utilise the Carter’s 10 c’s model as a guide of
what supplier selection criteria to use. The key criteria would be:
• Capacity, because it is about whether a supplier is able to satisfy Lion Air’s
demand for products. If not satisfied, it will lead to customer dissatisfaction, for
instance, food and beverages or delay supply chain from functioning well, for
instance, shortage in planes.
• Cash resources (financial stability), because if a supplier is struggling financially,
it may result in inability to supply goods on time, lower quality due to attempts to
cut costs and it may even cease to trade altogether. A great example of an airline
that struggled with covering costs and gaining funds which led to the business
going into administration is Flybe (Topham, 2020).
• Commitment, because if a supplier is interested in providing the best quality and
service possible, it will prevent supply chain and reputation risks. According to a
Forbes article, trust between suppliers is essential and supplier should be treated
as a partner in order to achieve commitment from supplier’s side (O’ Marah,
2016).
• Cost, because it will affect different aspects, for example, whether the buyer can
afford to buy the quantities necessary and if it can, what level of quality can be
expected from a supplier based on the particular cost.
Lion Air has to use these criteria and other provided by Carter in order to select the
most suitable supplier and have an efficiently running supply chain, otherwise, the
consequences are going to be like with the food and beverage supplier which lacked
financial stability. The suppliers are going to be selected based on their suitability
instead of how long has Lion Air worked with them.
Outline e-sourcing tools that LA might use to help the sourcing of requirements
from external suppliers. Consider potential benefits that LA might achieve by
introducing e-sourcing tools.
