Southern Supply Inc. The Purchasing Policy Guidelines of the Southern Supply Inc. indicate that the company is committed to procuring its goods, products, and services from a diversified pool of vendors, contractors, and service providers. Despite these guidelines, Southern’s purchasing manager prefers to maintain a small cadre of suppliers that he knows and trusts.
How would you expect this situation to affect the assessment of Southern’s financial condition and performance?
a. Although nonquantitative factors may be relevant to a company’s financial evaluation in general terms, the details of this specific situation are not relevant to the firm’s financial condition or performance.
b. The purchasing manager’s behavior should be expected to decrease Southern’s riskiness. His belief that the use of trusted suppliers will prevent or eliminate any inventory or supply delays or outages is, no doubt, correct.
c. The purchasing manager’s behavior should be expected to increase Southern’s riskiness by increasing its exposure to potential supply shortages or mistimed deliveries.

Question

24-03-2020
Business

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Southern Supply Inc. The Purchasing Policy Guidelines of the Southern Supply Inc. indicate that the company is committed to procuring its goods, products, and services from a diversified pool of vendors, contractors, and service providers. Despite these guidelines, Southern’s purchasing manager prefers to maintain a small cadre of suppliers that he knows and trusts.
How would you expect this situation to affect the assessment of Southern’s financial condition and performance?
a. Although nonquantitative factors may be relevant to a company’s financial evaluation in general terms, the details of this specific situation are not relevant to the firm’s financial condition or performance.
b. The purchasing manager’s behavior should be expected to decrease Southern’s riskiness. His belief that the use of trusted suppliers will prevent or eliminate any inventory or supply delays or outages is, no doubt, correct.
c. The purchasing manager’s behavior should be expected to increase Southern’s riskiness by increasing its exposure to potential supply shortages or mistimed deliveries.

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Answer:

C. The purchasing manager's behavior should be expected to increase Southern's riskiness by increasing its exposure to potential supply shortages of mistimed deliveries.

Explanation:

Companies creates a vendor pool to counter the delays in product delivery and shortages of products. As a single supplier is a risk to handle, because of trust issues and it goes both ways.

The purchasing manager would maybe right in trusting his known suppliers, but there is a risk involved there i-e, when the company would want to procure more, then purchasing manager's small group of suppliers may don't have more material to supply because Southern Supply isn't the only company they are dealing with.