Supplier Relationship Management

Supplier Relationship Management An important feature of a world class organisation is the way the organisation has been able to develop and link its suppliers with its external processes, Peter Hines, World Class Suppliers, (Pitman, 1994). Supplier relationship management can be defined as the relationship that exists between the supplier and its buyer based on long term commitments and trust with the ultimate aim to maximise the potential value of the relationship. This will include the management of different forms of supply relationships such as partnership, joint venture and vertical integration. 1.2 Importance of Supply Relationship Management The critical importance of supplier relationship types to achieve supply chain competitiveness can be viewed under the following headings: The effective use of strategic partnership Typical traditional short term relationship is characterise by irregular or one-off transactions that give rise to supply uncertainties, difficulties in choosing suppliers, and is price oriented making this type of relationship unreliable and unsupported. Organisations can move from this type of relationship towards a long term relationship known as partnership based on trust, shared goals and risks to achieve mutual benefits. Nigel Slack, Stuart Chambers and Robert Johnston, Operations Management, (Pearson, 2010), define partnership as an agreement between two firms that seek to accomplish a common objective. The Japanese, James P Womack et al, the Machine That Changed the World, (Macmillan, 1990) , used the concept of partnership and lean to gain competitive advantage because they realised their partners had the expertise, the technical knowledge and were reliable. Effective partnership with suppliers made them to compete favourably in the market because of good product quality, lo w cost and reliable delivery. Therefore, firms can use this same method to rationalise their supply base and use the lean concept to produce efficiently which will lead to reduce product lead times, reduce inventory and inventory cost. The implementation of new management tools and systems A key element of supply relationship management that gives firms competitive advantage is the implementation of the lean concept of monitoring supplier performance and continuous improvement. Monitoring performance is a post-contractual procedure in which the buyer continuously keeps an eye on the supplier by either managing the suppliers activities to make sure all commitments are met or using a measurement matrix such as key performance index (KPI) to compare supplier progress and divergence from targeted objective. The overall competitive advantage is an operation that is continuously improved in terms of quality, delivery and service. In 1989, Chrysler benching against the Japanese companies, initiated the Supplier Cost Reduction Effort (SCORE) program aimed to reduce cost, quality and monitor supplier performance; Dawei Lu et al, Supply Chain Management module notes (WMG, University of Warwick, 2011). The integration of knowledge and technology to create an all new technology Integration with supplier is all about coordination. Here, the buyer and supplier come together to align their processes thus improving communication and supply chain visibility for both parties. When firms integrate their knowledge and technology they are able to meet the needs of end customers by getting the right product at the right price and quality, giving them a competitive edge. This strategy was used by Bose Corporation 1990 that led to the extension and creation of the JIT2 concept, a logical extension of JIT that eliminates waste in the system, improves communication and reduces demand variability. Efficient consumer response (ECR) to demand variability caused by the forester effect. Firms are always seeking solutions for continuous demand variation and consumer requirements. Through effective supplier and buyer collaboration, firms will be able to achieve competitive advantage by efficiently managing their supplier relationship to meet the needs of the end consumer creating a fluid inventory flow from suppliers to the consumers reducing lead times, demand variability and uncertainty. This has led to initiatives such as Radio Frequency Identification Device (RFID), a tracking technology that provides real time information and location of goods. Tesco, UKs largest grocery retailer has exploited this technology strategy and is piloting pallet-level RFID to manage its logistics; Christos Tsinopoulos and Carlos Mena, Competing Supply Chain Strategy: Tesco, Aldi and Lidl, (ECCH, 2010). Increase competition amongst firms to secure and increase domestic and international market share. Domestic and international market pressures are just other facets that have pushed firms to collaborate and develop strategic partnership with suppliers to gain competitive edge. Using this approach, firms use both local and international suppliers to broaden their sourcing base, reduce product lead time, and stream line cost through cheaper, global and local sourcing alternatives. The benefits are quick response to demand variation and high availability of variety of products at reasonable price and quality. This in turn attracts a greater amount of customers and increase market share. This is a strategy which IKEA, a Swedish international furniture company has successfully used to provide quality products at reasonable price and secure a large market share both domestically and internationally. 1.3 Relationship Management Framework 1.3.1 Introduction A relationship defines an interaction between individuals, organisations and groups; Kenneth Lysons and Michael Gillingham, Purchasing and Supply Chain Management (Prentice Hall, 2003). There are many possible supply chain relationship types because very few companies can operate on their own. These relationships can be categorized as business-to-business (B2B), business-to-consumers (B2C), consumers-to-business (C2B) and customers-to-customers (C2C). B2B relationships are most common and have been used in many approaches and models such as IMP, SCOR, HP, GSCF, Service supply chain and IUE-SSE to help explain supplier-customer interaction. 1.3.2 Industrial Marketing and Purchasing (IMP) interaction Approach The IMP interaction approach is a dynamic model of supplier-customer relationship developed in the mid 1970s by a group of five European countries and universities; IMP Group.[online].(http://www.impgroup.org/about).(Accessed 06 Feb 2011). Based on investigations of about 900 business relationships, the IMP group developed a model of an interaction process at both the firm and individual levels creating a dynamic, complex and long standing relationship rather than one based on a short term stable relationship; Bensaou M (1999), Portfolios of Buyer-Supplier Relationships, Sloan Management Review, Vol. 40, 35-45. This relationship is influenced by soft factors such as power, cooperation, closeness and expectations as well as external environmental factors such as market structures, dynamism, internationalisation and position in the market. The IMP Group approach and model provide a good overview of buyer-supplier relationships and have formed the basis of other frameworks like David T. Wilson, (1995) Integrated model of Buyer-Supplier relationships, Journal of the Academy of Marketing Science , Vol. 23, 335-345. 1.3.3 Supply Chain Frameworks Customer-supplier relationship management models and frameworks can also be viewed within the context of the different types of supply chain models that exhibit customer-supplier relationship management. This will include a variety of supply chain models which address customer-supplier relationships such as HP, SCOR, GSCF, and IUE-SSC model. These models identify customer-supplier relationships by adopting two differing views; product and service supply chain view. Product oriented models adopt a manufacturing approach that involves the physical movement of goods under uncertainties managed to satisfy customer demands and include the HP, SCOR and GSCF models. The Hewlett Packard (HP) model was developed by the Hewlett Packard Company as a result of spiral inventory and customer dissatisfaction the company was facing with its order fulfillment process. Lee, H. and C. Billington, (1995), The Evolution of Supply-Chain Management Models and Practice at Hewlett-Packard, Business Source Premiere, Vol. 25, 42-63, used this model to demonstrate how suppliers, manufacturers and customers are linked in the flow of goods with multiple warehouses providing inventory at each stage to buffer demand. The Supply Chain Operations Reference (SCOR) model is a highly structured and broad model developed by the Supply Chain Council to measure total supply chain performance; Supply Chain Council. [Online].(http://supply-chain.org/f/SCOR%2090%20Overview%20Booklet.pdf ) (Accessed 06 Feb 2011). The SCOR model adopts a process manufacturing viewpoint and identifies supplier- customer relationships by breaking down the supply chain into links, each link made up of processes representing supplier-customer relationships. These relationships are then benchmarked using Key Performance Indicators (KPI) to assess the success within the supply chain. This model, although it improves customer satisfaction through improved supplier-customer relationships, it does not attempt to describe some elements of post delivery customer support, a critical feature of supplier-customer relationship management. The Global Supply Chain Forum (GSCF) is yet another supply chain framework that adopts the process manufacturing approach and identifies supplier relationship management as one of its eight key business processes of product flow. Croxton L. Keely et al, (2001), the Supply Chain Management Processes, International Journal of Logistics Management, Vol. 12, 13-24, depicts this model as an end-to-end process where each process is linked and managed to interface with key customers and suppliers. This creates eight business processes among which is customer-supplier relationship management to allow the smooth flow of product within the supply chain. 1.3.4 Service Supply Models The above three models define supply chains purely from a traditional perspective of product flow. However, with the growing importance of services and service industry, Ellram et al, (2004), Understanding and Managing Service Supply Chain, The Journal of Supply Chain Management, Vol. 40, 17-32, adapted this manufacturing approach into a new line of service thinking that uses service capacity and delivery, instead of products to classify supply chains as the key processes. This service supply model captures customer-supplier relationship via an end-to-end supplier and customer process that include capacity and demand management, cash flows and service delivery management, and just like manufacturing supply chain, customer relationship management. This is a very good approach that identifies relationship management but limited in that services are intangible and this makes them difficult to visualise and measure. A follow up to the service supply chain viewpoint is the work of Baltacioglu et al (2007), A New Framework for Service Supply Chains, Service Industries Journal, Vol. 27, 105-124, who proposed the IUE-SSC model. IUE-SSC model represents the initials of the affiliated organisation of the authors and Service Supply Chain Model. This model identifies customer-supplier relationships by breaking down supply chain into three basic parts: the supplier, the service provider and the customer. Here, the service supplied by the supplier constitutes a core and supporting service and just like the service supply chain model by Ellram et al, this model identifies a number of activities that includes some customer-supplier relationship management essential to the service supply chain. Relationship types are diverse and could either be of business type such as B2B or consumer type such as C2C. In my thinking the popularity of B2B and the historical context of consumer-supplier behaviour pushed the above mentioned authors to focus exclusively on B2B relationships in explaining customer-supplier behaviours in the models they proposed. But the general shift in consumer behaviour and the impact of globalisation and information technology should trigger a move to contemporary models of consumer-supplier relationships in business-to-consumer, consumer-to-business or consumer-to-consumer. I therefore think that the modern business world would appreciate models build around E-commerce type relationships and a move from product or service approach models that explains consumer-supplier relationship management. 1.4 Relationship Portfolio and Management Approach Conventional thinking suggests that relationships tend to vary with companies and there is no fit for all purpose relationship. A logical step after organisations are able to identify the various types of relationships is to focus on the relationship portfolio they want to build with their suppliers and to effectively manage this relationship for competitiveness. A number of methods and approaches have been adopted ranging from the various types of relationships to more analytic models such as Kraljics Purchasing/supply portfolio-analysis and the power regime. Firms have adopted different approaches to tailor the different types of relationships to fit their particular products, service or markets. These relationships tend to follow a pattern from a short term traditional arms length relationship to a new form of close and long term relationship known as partnership or vertical integration; Alan Harrison and Remko van Hoek, Logistics Management and Strategy, (Pearson, 2008). Others have viewed this trend as a continuum and included additional types such as strategic alliance and joint ventures. Depending on its strategy, a firm might adopt a range of style such as develop strategic partners by rationalising its supply base and dealing only with a few suppliers, a popular approach most firms are now adopting. It might also adopt a variety of relationships style depending on the markets and the products. The Kraljics model analyses the purchasing portfolio of a firms product into high and low supply risk and supply impact on the financial results. The end result is the segregation of products as: strategic, leverage, routine and bottlenecks as shown below; High Low Fig 1: Kraljics model Leverage products Alternate source of supply available Substitution possible Competitive bidding Strategic products Critical for products cost price Dependence on supplier Performance based partnership Routine products Large product variety High logistics complexity Labour intensive System contracting E-commerce solutions Bottleneck products Monopolistic market Large entry barriers Secure supply and search for alternatives Low Supply Risk High Source: Dawei Lu et al, Supply Chain Management module notes (WMG, University of Warwick, 2011). Using this method, management can therefore spend time and develop performance based relationships such as partnership on those suppliers whose products matter most, for example, strategic products and outsource non critical or leverage products. Bensaou M (1999), Portfolios of Buyer-Supplier Relationships, Sloan Management Review, Vol. 40, pp. 35-45 adopted a similar approach based on product and market conditions to create a supplier portfolio of our different relationship profiles; captive buyer, strategic partnership, market exchange and captive supplier. To effectively manage the relationships such as the Captive buyer and Market exchange, Bensaou suggested the use of management practices such as treating each other with respect and fair profit sharing and for strategic partners to regularly exchange information or pay frequent visit creating a social climate that is trusting and collaborative. The ABC analysis method is another commonly used technique by businesses to segment supplier relationship portfolio. Wagner S. and Johnson J. L., Configuring and Managing Strategic Supplier Portfolios, Industrial Marketing Management, Vol. 33, 717-730 adopted this approach using a wide range of factors such as volume, suppliers performance, supplier strategic importance, price and quality to segregate suppliers into category (Cat) A, B and C. Cat A suppliers where suppliers that supplied a total 80% volume, while Cat B supplied 15% and finally Cat C, 5%. Very little time is spent on managing and developing Cat C supplier because of their limited volume. In most cases they are used by the company as a way to reduce cost by either direct sourcing or via e-procurement. On the other hand, Cat A suppliers should be considered imperative by top management and a close relationship or partnership should be developed. This relationship can be monitored through regular and annual meetings with suppliers as well as creating an award for suppliers to maintain motivation. In addition, the buyer can invest on supplier development by either assisting or sponsoring supplier to improve performance. Another approach is that by Andrew Cox et al (2004), Managing Appropriately in Power Regimes: Relationship and Performance Management in 12 Supply Chain Cases, Supply Chain Management, an International Journal, vol. 9, 357 371, that correlates the findings of relationships and performance management strategies in power regimes. In a power regime, a business can decide on the appropriate relationship and relationship management style(s) depending on their power condition, as shown on the fig 3. Therefore, in a business deal where the buyer is dominant or has an interdependence power position, it will be better to choose a relationship approach based on supplier development. Conversely, in a supplier power regime relative to supplier dominance and/or interdependence then the option is for a supply chain management approach to be adopted. A change in the power structure in this technique will lead to a change in the relationship portfolio and this will lead to improve performance outco mes especially when either parties change their behaviour. 2.0 STRATEGIC OUTSOURCING A significant decision facing most businesses today and which have a long term impact on the firm is whether to produce internally (insourcing) or use an outside supplier (outsourcing); Robert Monczka, Robert Trent, and Robert Handfield, Purchasing and Supply Chain Management, (Thomson, 2005). 2.1 Outsourcing and Supply Network Design Outsourcing, sometimes referred to as make-or-buy, is a strategy by which an organisations management decides to hand over its non-core activities to a specialised third party that can efficiently provide the service; Kenneth Lysons and Michael Gillingham, Purchasing and Supply Chain Management, (Prentice Hall, 2003). Therefore, central to outsourcing is the make or buy decisions and the relationship that is formed between the purchaser and the supplier. The make or buy decision arises because organisations have come to the realisation that they cannot produce or make everything on their own and can effectively spend more time on core competence while non core competence could be outsourced. This decision to outsource or make or buy is a strategic one that will create a new supply network of suppliers and sometimes suppliers suppliers. In this new supply network, the organisation will need to adjust its operation in line with its new suppliers and, where possible, its suppliers suppliers creating a total supply network; Nigel Slack, Stuart Chambers and Robert Johnston, Operations Management, (Pearson, 2010). This strategic decision to outsource brings a whole new chapter within the organisation and will prompt a key design decision; how to configure the new network and how much of the network should be retained by the organisation. This will help management to decide on how it intends to influence and manage the overall new structure . 2.2 Outsourcing Decision Process and Influencing Factors Traditionally, the main outsourcing decision process focused on cost reduction. However, the importance of outsourcing decision to an organisation competitive position has pushed many organisations to consider a number of other factors. The decision process adopted here is one adapted from Robert Monczka, Robert Trent, and Robert Handfield, Purchasing and Supply Chain Management, (Thomson, 2005). 2.2.1 Planning phase The initial process in undertaking any outsourcing motive is to initiate a project of a cross functional team and define its scope and objectives. The team should identify activities to be outsourced and present to management for acceptance. Explore the Strategic Implications phase Strategic implications will mean aligning the outsourcing decision with three main factors: The companys long term plans and its impact on other activities and functions. This means if the activity that is being outsourced should disrupt the companys future plan or affects other functions, it is better off being insource. Furthermore, the decision should be in line with an understanding of the organisations core competence. If outsourced activity is not perceived as being core capabilities, the firm might decide to outsource. Analysis of the impact of process technological and how it compares to its competitors for competitive advantage. If analysis shows minimal competitive advantage then the organisation can decide to outsource but in cases where in house process technology provides competitive advantage, the organisation could reconsider to insource. 2.2.3 Tactical implications phase Tactical decision process will consider the following factors, and the ability to test prospective outsourcing initiative. Alternatives to outsourcing: Being tactical is crucial in outsourcing because the final decision to outsource can be very expensive for the organisation. Therefore, before making that final decision, the organisation could reconsider alternatives to outsourcing such as producing in-house, subcontracting or vertical integration. The length of contract: Outsourcing decision could mean being tied down in a long term contract which could impact on other strategic objectives. Impact of size: Also the size of the outsourcing activity can impact on the decision process as management can decide on other options if the activity to outsource is too large and can have adverse effect on core activities. Corporate culture: The impact on corporate culture is another key tactical factor that should be considered on outsourced activity to organisation. This means considering employees feelings regarding the activity to be outsourced. 2.2.4 Cost analysis phase Critical to any outsourcing decision process is its ability to be cost-effective at a quality level competitive in the marketplace. An accurate cost-effective calculation looks beyond the initial and obvious costs and is based on a marginal costing principle; a cumulative costing concept including total variable cost, total fixed cost and operating costs. Other costs will include the opportunity cost which is the potential benefits forgone if the activity being outsourced is done in house. Implementation phase The implementation process will be driven by effective service provider selection and managing post-contractual relationship. Because outsourcing usually involves a long term contract and high investment, selecting the correct service provider is imperative. The selection process will include; Market research: This involves carrying out a thorough market research to determine market price and terms of conditions, and identifying potential service providers with the right expertise, capacity and similarity in corporate culture. Develop a tender request. The tender request should provide in detail the outsourcing requirements as well as general information about the organisation including the scope and the objectives of outsourcing. This document will form a good guide to potential service providers. Conduct site visit. After tenders have been submitted, a site visit to potential service provider will aim to compare reality to what is on paper. It will be an opportunity to look at the corporate culture, its processes, the people, and how they can fit in to the outsourcing organisation. Negotiate. Negotiation will aim to find a common ground for a win-win situation. Central to this will be: quality of service and the performance level, scope for improvement and change, pricing and management style including assimilation of employees. The implementation process is not complete without any form of decision to manage post-contractual relationship which is very important to the sustainability of the whole outsourcing process. The key factor is to develop a key performance indicator (KPI) to continuously measure and monitor performance of service provider so that service quality is maintained and relationship continuously improved. In conclusion, the decision to outsource by a firm is a crucial and strategic one because it affects a greater part of the firm and it can be used as a competitive tool. Traditionally, this decision was based simply on cost and benefits but as discussed above, the decision process is now influenced by many factors and departments. Therefore, for an outsourcing decision process to be effective and efficient, a cross functional team should be selected to be part of the whole process. Implementation Problems Shawn McCray (2008). [Online].(http://www.tpi.net/pdf/papers/Top_10_Problems-with_Outsourcing.pdf).(Accessed 23 February 2011), identifies poor change management and governance as key issues in implementing outsourcing. Some of the problems related to implementation are: Post-contract processes poorly written: This occurs because both parties after signing the contract do not want to work together. The root problem being mutual misunderstanding of contract and the scope of outsourced activities resulting to services not performed and increase frustration amongst staff. Cultural clash: Cultural clash, corporate or international, can tend to produce tension, distrust and misunderstanding. This is problematic especially in a situation of offshoring where communication is limited to email or phones. This will be further compounded in difference in work ethics which if not streamlined will create added tension. Quality of service: A main reason management decides to outsource is to improve the quality of service. Where service provider is unable to achieve this, the whole outsourcing process becomes questionable and creates problems surrounding contractual performance and implementation. Lack of Coordination: Coordination and the lack of a coordinating team present an implementation problem. This is because as soon as the contract is signed, the client quickly shifts all responsibilities to the service provider who is still trying to get started and there is no team in place to coordinate activities. This will lead to a slow start, confusion within the system and poor quality service provided. Loss of talents: Outsourcing decision creates lots of uncertainties which will push some talented employees to look for jobs elsewhere. Moreover, some of these employees may feel de-motivated working for a new service provider. The loss of talent and unsatisfactory employees can cause a drop in the quality of service provided. Service provider lacks required skills: Some service providers may lack the necessary skill and may be depending on hiring new staffs and/or train existing ones. If this process takes too long as in a client retained organisation, service provider may be unable to produce contractual results thus affecting operational implementation. Cost of service: The cost of providing the outsourcing service might actually tend to be high because cost estimations were not properly carried out and certain activities not taken into consideration. Other costs and barriers to operational implementation will be that service provider is unable to deal with the volume of activities, as well as find it difficult to handle and maintain client equipment and facilities. 2.4 Key Benefits and Potential Outsourcing Risks Kenneth Lysons and Michael Gillingham, Purchasing and Supply Chain Management (Prentice Hall, 2003), explain that the main benefit associated with outsourcing is that it gives management the necessary time to concentrate on the core business operations. The Outsourcing.Institute.[online].(http://www.outsourcing.com/content.asp?page=01b/articles/intelligence/oi_top_ten_survey.htmlHYPERLINK http://www.outsourcing.com/content.asp?page=01b/articles/intelligence/oi_top_ten_survey.htmlnonav=trueHYPERLINK http://www.outsourcing.com/content.asp?page=01b/articles/intelligence/oi_top_ten_survey.htmlnonav=truenonav=true).(Accessed 23 February 2011) in a survey highlighted some other important outsourcing benefits; Outsourcing of non-core activities to a world class provider encourages reengineering and its associated benefits on improvements in performance in terms of cost, quality, service and speed. Outsourcing can be used by management to reduce huge capital investment on non-core business functions thereby making funds available to areas of the business involved in direct production. Operating cost incurred in outsourced activity is also reduce as expenses such as marketing and research and development are passed to the service providers. Outsourcing could help an organisation build a new capability from start due to lack of internal resources and expertise required to get this activity start up. Also, risks related with government compliance, late deliveries or technology innovation and failures are either reduced or shared as activity is passed on to the expert service provider. Another major outsourcing risk is making the wrong outsourcing decision on what to outsource and what not to outsource and the need to effectively manage relationships. Any wrong decision will be too costly for the organisation. Outsourcing is a crucial decision for any company and it is recommended that the final decision process accommodate a cross functional team that should critically evaluate both the cost and benefits including the strategic and tactical perspectives of outsourcing. REFERENCING BOOKS Alan Harrison and Remko van Hoek, Logistics Management and Strategy, (Pearson, 2008). James P Womack et al, the Machine That Changed the World, (Macmillan, 1990). Peter Hines, World Class Suppliers, (Pitman, 1994). Kenneth Lysons and Micheal Gillingham, Purchasing and Supply Chain Management (Prentice Hall, 2003). Nigel Slack, Stuart Chambers and Robert Johnston, Operations Management, (Pearson, 2010). Robert Monczka, Robert Trent, and Robert Handfield, Purchasing and Supply Chain Management, (Thomson, 2005). JOURNALS Andrew Cox et al (2004), Managing Appropriately in Power Regimes: Relationship and Performance Management in 12 Supply Chain Cases, Supply Chain Management, an International Journal, vol. 9, 357 371. Bensaou M (1999), Portfolios of Buyer-Supplier Relationships, Sloan Management Review, Vol 40, 35-45. Baltacioglu et