CREATING & MANAGING

SUPPLIER RELATIONSHIPS

Chapter 3
Umar Farooq
Management Sciences
GIK Institute, Topi, Pakistan
 Introduction
• Core Competitive factors: In today’s
competitive environment, it is very
important that suppliers deliver innovative
and quality products not only in just-in-
time (JIT) fashion, but also at a
competitive price.

Reasons given for failure of alliances:

• Overly optimistic
• Poor communications
• Lack of shared benefits
• Slow payback results
• Lack of financial commitment
• Misunderstood operating principles
 Keys to Successful Partnerships
Building Trust
• With trust, partners are more willing to
work together, find compromise
solutions to problems, work toward
achieving long-term benefits for both
parties, and, in short, go to the extra
mile.

Shared Vision and Objectives

• Both partners must share the same
vision and have objectives that are not
only clear but mutually agreeable.
• The focus must move beyond tactical
issues and toward a more strategic path
to corporate success.
 Keys to Successful Partnerships
• “You don’t want a partnership that is based on
necessity. If you don’t think that the partnership is
a good mix, but you do it because you have to—
possibly because that supplier is the only provider
of that material in the market, because you’ve
signed an exclusive contract in the past, or for
some other reason—it’s not a true partnership and
is likely to fail”
 Keys to Successful Partnerships Cont…
Personal Relationships
• It is people who communicate and make
things happen.
• An alliance isn’t really a relationship
between companies, it’s a relationship
between specific individuals.

Mutual Benefits and Needs

• Partnership should result in a win-win
situation, which can only be achieved if
both companies have compatible needs.
• An alliance is much like a marriage, and if
only one party is happy, then the marriage
is not likely to last for long.
 Keys to Successful Partnerships Cont…
Commitment and Top Management Support
• Commitment must start at the highest
management level.
• Partnerships tend to be successful when top
executives are actively supporting the
partnership.
• Without involvement, there is no commitment.
Mark it down, asterisk it, circle it, underline it.
No involvement, no commitment.”
• Since partnerships are likely to encounter
bumps along the way, it is critical that
management adopt a collaborative approach to
conflict resolution instead of assigning blame.
Change Management
• Companies must be prepared to manage change
that comes with the formation of new
partnerships.
 Keys to Successful Partnerships
Cont…
Information Sharing & Lines of Communication
• Both formal and informal lines of communication
should be set up to facilitate free flow of information.
• Confidentiality of sensitive financial, product, and
process information must be maintained.
• Sign a nondisclosure agreement.

Capabilities
• Key suppliers must have the right technology and
capabilities to meet cost, quality, and delivery
requirements.
• In addition, suppliers must respond quickly to
changing customer requirements.
 Keys to Successful Partnerships
Cont…
Performance Metrics
You can’t improve what you can’t
measure.
• Measures related to quality, cost,
delivery, & flexibility are used to
evaluate suppliers.
 Keys to Successful Partnerships-
Cont.
Continuous Improvement
• The process of evaluating suppliers
based on a set of mutually agreed-
upon performance measures
making a series of small
improvements over time results in
the elimination of waste in a
system.
• Buyers and suppliers must be
willing to continuously improve
their capabilities in meeting
customer requirements of cost,
quality, delivery, and technology.
 Performance Metrics
• FedEx not only has performance scorecards for their suppliers
but has also developed a Web-based “reverse scorecard” that
allows suppliers to provide constructive performance feedback to
enhance the customer–supplier relationship
Supplier Evaluation and Certification-
Cont.
The Weighted-Criteria Evaluation System
1. Select the key dimensions of performance mutually
acceptable to both customer and supplier.
2. Monitor and collect performance data.
3. Assign weights to each of the dimensions.
4. Evaluate performance measures between 0 and 100.
5. Multiply dimension rating by weight and sum overall
score.
6. Classify vendors based on their overall score:
Unacceptable, Conditional, Certified, & Preferred
7. Audit and perform ongoing certification review.
Supplier Evaluation and
Certification- Cont.
 Performance Metrics
• Total cost of ownership (TCO), made up of all costs
associated w/acquisition, use, & maintenance of a good or
service.
• Three major cost categories are;
o Pre-transaction costs: These costs are incurred prior to
order and receipt of the purchased goods.
o Examples: the cost of certifying and training suppliers,
investigating alternative sources of supply.
o Transaction costs: These costs include the cost of the
goods/services and cost associated with placing and
receiving the order.
o Examples are purchase price, preparation of orders
and delivery costs.
o Post-transaction costs: These costs are incurred after the
goods are in the possession of the company, agents or
customers.
o Examples: maintenance costs and warranty costs.
 Performance Metrics
Examples of Performance Metrics
• Total Cost of Ownership
• Cost/Price- Competitive price & availability
of cost breakdowns
• Quality- Zero defects, Fit for use, ISO 9000
• Delivery- Fast, Reliable/on time
• Responsiveness & Flexibility-
Responsiveness to customers & to changing
situations
• Environment- Environmentally responsible,
ISO 14000
• Technology- Superior product/service design
• Business Metrics- Reputation, information
sharing
 Supplier Evaluation and Certification
• A process to identify best and most
reliable suppliers.
• Sourcing decisions are made based on
facts and not merely on perception.
• Providing frequent feedback on supplier
performance can help avoid surprises
and maintain good relationships.

• Supplier Certification refers to “an

organization’s process for evaluating the
quality systems of key suppliers in an
effort to eliminate incoming
inspections.” -Institute for Supply
Management.
 Supplier Evaluation and Certification
Criteria Used in Certification Programs
• No incoming product lot rejections (e.g., less than 0.5
percent defective) for a specified time period.
• No incoming non-product rejections for a specified
time period.
– (e.g., late delivery)
• No significant supplier production-related negative
incidents for a specified time period
• ISO 9000/Q9000 certified or successfully passing a
recent, on-site quality system evaluation
• Fully documented process and quality system with
cost controls and continuous improvement
capabilities
 Supplier Development
Supplier development refers to buyer’s activities undertakes
to improve a supplier’s performance and/or capabilities based
on the following approach:
1. Identify critical products and services
2. Form a cross-functional team
3. Meet with top management of supplier
4. Identify key projects to improve those areas
5. Define details of Agreement
6. Monitor status and modify strategies
 Supplier Awards
Companies should recognize and celebrate
the achievements of their best suppliers.

Award winners exemplify true partnerships

continuous improvement, organizational
commitment, and excellence.

Award-winning suppliers serve as role

models for other suppliers.
 Supplier Relationship Management
Software
Supplier relationship management (SRM) software
improves profits and reduces costs.

• SRM refers to “extended procurement processes such as

sourcing analytics (e.g., spend analysis), sourcing
execution, procurement execution payment and
settlement, and-closing the feedback loop-supplier score-
carding and performance monitoring.”
Supplier Relationship Management
Software
 Supplier Relationship Management
Software
Five key points of an SRM system:
• Automation
• Integration spans multiple departments, processes, and
software applications.
• Visibility of information and process flows
• Collaboration through information sharing
• Optimization of processes and decision making