creating & managing supplier relationships: procurement & outsourcing 18/05/2015...

Creating & Managing Supplier Relationships:

Procurement & Outsourcing

18/04/23Buyer-Supplier Relationshisp 1

Dr Margaret Farrell [email protected]

Instructor: Dr. Nabil El-sakka (PUA University)

[email protected]

Purchaser – Supplier Relations (Leenders, Johnson, Flynn and Fearon, 2006)


Supplier GoodwillRelationship marketingCarefully cultivated“no company can be world class if it does not measure on a

regular basis the satisfaction level of its key suppliers and try to improve constantly on its relations with its suppliers”

Satisfaction surveys; ‘ one of the interesting outcomes of supplier satisfaction surveys is the general finding that suppliers believe that the best purchasers are those who know more about the suppliers business than the supplier’s own employees’

Supplier Partnerships Wisner, Tan & Leon, citing the Institute of Supply ManagementA commitment over an extended period of

time to work together to the mutual benefit of both parties, sharing relevant information and the risks & rewards of the relationship. These relationships require a clear understanding of expectations, open communication and information exchange, mutual trust and a common business direction for the future. Such arrangements are a collaborative business activity that does not involve the formation of a legal partnership.


Saunder’s view


The Adversarial Model The Partnership Model

Arms Length/ formal communication approachAdversarial attitudesLack of trustAggressive ‘win-lose’ approach in negotiations –price focusEmphasis on individual transactions and short term contracts.Little direct contact and involvement in design activitiesReluctance to share informationReliance on goods inwards inspection and defect rectification

A high frequency of both formal and informal communicationsCo-operative attitudesA trusting relationshipProblem solving, ‘win-win’ negotiating styles, with an emphasis on managing total costsLong term business agreementsOpen sharing of information by multi-functional teamsVendor certification and defect prevention approaches

Developing Supplier PartnershipsWisner, Tan & Leong (2009)

Building trust

Shared Vision &

Objectives

Personal Relationships

Mutual Benefits &

Needs

Commitment & Top

Management Support

Change

Management

Information Sharing

& Lines of

Communication

Developing

Relationship

Capabilities18/04/23Buyer-Supplier Relationshisp 5


Transactional Collaborative Alliance

Communication High potential for problems Systematic approach to enhance communication

Competitive advantage Low High

Connectedness Independence Interdependence

Continuous improvement Little A focus

Contributions to new product development

Few Many – ESI

Difficulty of exit Low Difficult – high impact

Duration Short Long

Expediting Reactive Proactive

Focus Price Total cost

Level of integration Little or none High or total

Level of trust Low High

Number of suppliers Many One or few

Open books No Yes

Quality Incoming inspection Design quality into system

Relations Inward looking Concern with each others well being

Resources Few-low skill level Professional

Service Minimal Greatly improved

Shared forecasts No Yes

Supply disruptions Possible Unlikely

Technology inflows No Yes

Type of interaction Tactical Strategic synergy

Factors influencing type & intensity of relationships


Product/service - a standard or a special?

capital investment needed?a one-off or a continuous

requirement? Make or buy decision?Cost/ annual spend?Requirements levels?Importance/ risk?Geographic factors?

Attitudes & culture of supplier, world class?

End customer perceptions of supply origins?

Security & reliability of supply?

Relative size of buyer & supplier

government regulations?Relationship of supplier with

our competition

Transactional relationships


Characterised by;Lack of concern, a series of independent deals,

no sharing of information, price is the focus, little purchasing time given, lend themselves to e-auctions

Advantages;Reduced time to determine price, lower levels of

skills requiredDisadvantages

Potential for communication difficulty, tend to have more delivery problems and supply disruptions, cost of the expediting, lack of flexibility, transaction quality, less effective motivation,

Supplier Alliances

Benefits of Attributes of

Lower total costsReduced time to

marketImproved qualityImproved

technology flow from suppliers

Improved continuity of supply

Focus on continuous improvements and squeezing costs out

High level of interdependence and commitment

Atmosphere of cooperationComplex web of formal and informal

interpersonal connections, ICT and infrastructures

The alliance evolves over timeEthics take precedence over

expediency Relationship is adaptable to the

changing business environmentDFM, DFA, design for quality and

supplier certificationWin-win negotiationsExecutive level support


What relationship is appropriate?


Are there many relatively undifferentiated suppliers providing what amounts to interchangeable commodities

Does the potential supplier possess economic power which it is willing to employ over its customers

Is there recognition by both parties of the potential benefits of an alliance, but adequate qualified HR are not available at one or both firms

A collaborative relationships is typically a step on the road to a strategic alliance

Is one supplier far ahead in terms of the value it provides; price, innovation, ability to adapt, capacity for teamwork, joint risk taking?

Are some suppliers strategic to your business?Benefit of more ‘integrally connected’ business? Eg

locating personnel in other firm, co-location…Do your customers require a high degree of flexibility?


A transformation in Relationships

Exploratory StageInvestment of time for

learning & distance reduction, no routines

or commitment

Developing StageIntensive mutual learning building trust through investment & informal adaptation

Stable stageRoutine and institutionalized

Wider experienceChanged requirementsInsufficient resourcesLack of commitment

The development of buyer – seller relationships in business markets

Pre-relationship stage High inertia

Questions: What will we both get?How much investment?

What adaptations?What learning?

Trust?

Relationship strategies: Kraljic Matrix


HIGH Supply Market Complexity

Bottleneck Items Cultivate good

relationships Buyer dependent on

seller

Strategic Items Form strategic alliances Consider partnerships Look for efficiencies in

relationship

includes: Supplier Strength &

Risk

Low

Non critical Items Automate Make purchasing

routine Make user responsible Transactional style

Leverage Items Use commercial power Use competition Resource if necessary Seller depends on buyer

Low High

Company attractiveness/ strength

Relationship strategies: Supply Positioning


Low

Supply Exposure

Strategic securityLong term contractsHigh inventories –buffer stocksFind alternatives/ substitutesFind/ encourage new suppliersContingency planningMake or buy

Strategic CriticalMedium or long term contractsSupplier development/ partnershipsCost transparency/ analysisPrice ManagementTotal cost of ownershipContinuous review

Vulnerability

High

Tactical AcquisitionMedium term contractsSimplify purchasing proceduresEmpower end userAutomate processes – cards etc.One stop shop – single supplierService contracts

Tactical ProfitShort Term ContractsActive supplier/ source researchUse market knowledgeUse purchasing leverageUse price intelligence / forecastingKeep switching costs low

Low HighProfit Value/ Potential

Relationship Variables


Length of contractNature of contractFrequency of

contractLevel of contactPeople & functions

involvedJoint problem solving/

task forces

Types of information exchanges

Nature of communications

Co-operationPublic support/

referencesSupplier development

programmes

The suppliers perspective


Prompt payment?Customer secretive?Customers supply management personnel

responsive?Are the customers known as professionals?

Questions to be asked before proceeding


Danger of opportunistic behaviour by supplier?Electronic systems - allow optimum communication between

companies? Is potential partner well equipped in terms of knowledge, expertise

and resources – stay current?Opportunities for joint objective and goal setting?Are they the only possible partners for this commodity; has e-

procurement made others more accessible?Supply manager trained to manage an alliance?Proud of your supply partner?; opportunities for joint marketing? Comfortable with risk associated of reduced supply base?Supplier & buyer alignment with ultimate customer requirementsWill the buyer share the Supplier’s risk in developing new

technologies, systems, processes…?Buyer-supplier aligned in terms of long term strategies &

commitments?Sufficient operational interaction points?

Situations where alliances may not be appropriate


Stability of the prices, market and buyers demandPrice volatilityDemand volatilityHigh switching likelihood with

high switching costs Capability of potential

suppliersNo partnerships/ alliance

capable supplier for an item Capable in the geo area

Rapid technological changeMismatch of clock speed

Competition in the supply marketNon-competitive marketSupplier dependency creationNeglected areasSuppliers seeking to reduce

competition Benefits to the buying

firm from the relationshipNo leverage from partnershipNo hard savings from

partnership Internal buy-in to

partnership

The Purchaser–Supplier Satisfaction Matrix (Leenders, Johnson, Flynn and Fearon, 2006)


Is the current relationship satisfactory?Assumptions for the matrix

Satisfaction with a current supplier relationship can be assessed, whether it is satisfied or not

An unsatisfactory party ( seller or purchaser or both) will attempt to move to a more satisfactory situation

Attempts to move may affect the stability of the relationshipAttempts to move may fall in the win-lose, as well as the lose-lose,

lose-win and win-win categoriesPurchaser and seller may well have different perceptions of the same

relationshipMany tool and techniques and approaches exist that will assist either

party in moving positions and improving stability

Complete satisfaction

Marginal satisfaction

Complete satisfaction

CPurchaser dissatisfied

Supplier satisfied fairness /stability line

requires mutual trust, sharing & respect

Desirable region

APurchaser satisfiedSupplier satisfied

Min acceptable goal for both sides

DPurchaser dissatisfied

Supplier dissatisfied

BPurchaser satisfiedSupplier dissatisfied

Rem. to consider perceptions of both

Total Marginal Complete.Dissatisfaction Satisfaction Satisfaction

Purchaser's SATISFACTION .

18/04/23 Buyer-Supplier Relationshisp 20

SUPPLIER

SATISFACTION

Leenders, Johnson, Flynn & Fearon; 2006

Tools and Techniques for Moving Positions

Crunch tool for the purchaserComplete severance of

purchases without advance notice

Refusal to pay billsRefusal to accept

shipmentsUse or threat of legal

action

Crunch tools for the supplierRefusal to send shipments as

promisedUnilateral price increases,

without noticeInsistence on unreasonable

length of contract, take or pay commitments, onerous escalation clauses or other unreasonable terms and conditions and use of take it or leave it propositions


Tools &Techniques for Moving Positions ctd‘persuading’ techniques: by purchaser

Granting of substantial volume of business, long run commitments, or 100 percent requirements contracts

Sharing of internal information on forecasts, problems and opportunities to invite a mutual search for alternatives

Evidence of willingness and ability to work toward changed behaviour in the purchasing organisation to improve the sellers position

Rapid positive response to requests from suppliers for discussions and adjustments in price, quality, delivery and service.

‘persuading’ techniques: By the supplier

Willingness and ability to make rapid price, delivery and quantity adjustments in response to purchase requests without a major hassle

Invitation to the purchaser to discuss mutual problems and opportunities

The giving of notice substantially in advance of pending changes in price, lead times and availability to allow the purchaser maximum time to plan ahead


Supplier Ranking


Unacceptable suppliersAcceptable suppliersPreferred suppliersExceptional suppliers

Partnerships vs strategic alliances

Some readings and analysis


Strategic Partnerships

Transaction relationships

Information sharing alliances

Collaborative operations alliances

Collaborative network alliances

Partner-ships Vertical integration

Goals Different Some shared interest in improving process

Some similar goals to improve logistics flows & new products

Some similar goals to improve network operations

Some, most goals are common

All goals are common

Time Frame

Short term, as long as the transaction

Short term, as long as the process

Med-long term, dependent on shared investment in mutual assets & processes

Long term LT, limited by structure of ownership (possible to sell minority share)

Long term

Structure Two separate entities

Two separate entities

Two separate entities

Two separate entities, some shared assets

Multiple entities with equity

One owner

Descript of Relationship

Competitive, arms length

Passively collaborative- sharing information only

Actively collab – mutual efforts to improve common processes

Make joint investment in asset and resources

High level of risk sharing & active collaborative effort

One integrated entity

Activities by co-ord method

Buy & sell product & services

Buy & sell prod/ svces share info, active co-ord,

Buy & sell prod/ svces share info, active co-ord & Plng systems & processes

LT aggmnts, share key info, active coord, mutual invests & balanced risk

Run the business with other Part Owners (partners)

Run the business as owner

Instr. For mediating risk

Price Price Price, LT contracts, contingency contracts, hostages

Shared goals, LT & contingency contracts, ‘hostages’

Partial control via partial ownership

Control as owner

2518/04/23 Buyer-Supplier Relationshisp

Building SC collaboration; a typology Building SC collaboration; a typology of collaborative approachesof collaborative approaches


Whipple and Russell, The International Journal of Logistics Management, vol18, No.2, 2007

‘assumption that closer inter-enterprise relationships and enhanced information exchange will improve the quality of decision making, reduce demand uncertainty, and ultimately improve supply chain performance’

‘Recent research studies have shown that collaboration offers promise for improved supply chain performances in several core areas, including increased sales, improved forecasts, more accurate and timely information, reduced costs, reduced inventory, & improved customer service…’

CPFR – Collaborative Planning, CPFR – Collaborative Planning, Forecasting & Replenishment Forecasting & Replenishment


Core expected benefits‘….to increase the accuracy of demand forecasts and

replenishment forecasts and replenishment plans necessary to lower inventories across the SC and attain high service levels of the right products in the right locations.’

Slower to be implement due to;Costs, technological barriers, lack of easy plug and

play format, lack of documentation regarding the ROI, confusion about what CPFR really is

Collaboration Collaboration


“two of more independent companies working jointly to plan and execute supply chain operations with greater success than when acting in isolation” Joint planningReal time information exchange Exchange of tacit knowledgeTrust

Which relationships will provide the greatest payoffThose that are strategically important to your companySegmentation of relationships, but need to examine the range of

relationship types Strategic collaborative initiatives

ECRVMICRCPFRScorecard

Type 1; collaborative transaction mgt

Type II; collaborative event management

Type III; collaborative process mgt

People characteristics

Ltd. person to person interaction Person to person interaction focussed on joint decision regarding events & items of collaborative focus

Person to person interaction focussed on joint problem, LT business planning & developing cross functional processes. More embedded relationships

Process characteristics

Focus is on data exchange & task alignment. Creation of standardised data fro inter-enterprise exchange purposes. ‘Hand-over’ then ‘hand-back’ processes

Focus is on joint planning & decision making processes assoc with specif. events and/or issues. Mix of tacit & explicit knowledge surrounding the process

Fully integrated processes. Higher level of tacit & explicit knowledge surrounding the process. Simultaneity of exchange

Technology characteristics

Technology configured to manage large volumes of transactional data being exchanged automatically

Techn. config. to combine data associated with events; sometimes outside of each individual trading partners enterprise mgt system

Tech in place to facilitate flow through of inform across trading partners regarding SC mgt activities

Decision making – degree of involvement

Individual dependent, monitored & managed generally by 1 or a very small number of individuals

Dept or organisational – structured interaction thro the identified ‘team’. Bulk of team may reside in supplying firm

Social network or relational – multi-disciplinary team, senior level support within & across each org. active participation by network as whole

Collaboration focus

Co-ordination of info with focus on problem solving generally at the supplier level

Collaboration on SC disruptions; main focus on SC efficiencies between supplier & retailer shelf

Collab on SC efficiencies as well as strategic effectiveness. Committed order buys

18/04/23 Buyer-Supplier Relationshisp 29

Type 1; collaborative transaction mgt

Type II; collaborative event management

Type III; collaborative process mgt

Time horizon Short term – analytical in order to obtain problem resolution. Lwr levels of front end planning/ more task driven

Medium range – more prob solving focus, create incremental impact at store level. More front end plan over specific event / time horizon

Long term – focus on future plan for adv SC performance. Highest level of front end planning that is information / decision driven

Classification of return on relationship

reduced probs &/or errors on tasks (eg time delivery, fill rate to DC, inv turns, adequately servicing promos

Improve forecast & trend data. Perf improv more impact orientated (lost sales, promo success). Include more focus on store level impact by anticipating/ adapt to environmental fluctuations

Perf improv. focus on future events (increase sales, new prod/ solutions/ ideas, reduced working capital, category growth). Ration activities, prioritise where the greatest results will arise

Organisation level

Operational – meeting todays needs

Tactical/ managerial; focus on execution of the plan

Strategic –focus on LT improvement plans

Information domain

Large amounts of data often at DC level. More proactive/ less proactive data

Data typically exception based. Focus more proactive/ problem solving

More future focused & proactive. May include a central data repository where both parties can access information

Knowledge level Explicit knowledge Explicit, some level of tacit knowledge Explicit. High levels of tacit knowledge

examples Scorecard collaboration VMI Initial CPFREvent collaboration

Advanced CPFR30

18/04/23 Buyer-Supplier Relationshisp


A managerial guideline for the development & implementation of Purchasing partnerships by Lisa Ellram; August 1991, National Association of Purchasing Management

The role of purchasing in a partnering relationship by Doughlas Macbeth, European Journal of Purchasing and Supply, 1994, 1.

Relationship & performance of trade intermediaries, an exploratory study by Fung, Chen and Yip, European Journal of Marketing, vol 41, No ½, 2007

creating & managing supplier relationships: procurement & outsourcing 18/05/2015...

Documents

buyersupplier relationshisp

suppliers business

open communication

suppliers satisfaction

mutual trust

information reliance

information exchange

relevant information