LESSON THREE

MANAGING SUPPLIER RELATIONSHIPS

3.0 Introduction
Purchasing- supplier involvement relationship refers to the act of integrating purchasing
professionals and firms keys suppliers in the firms decision making process with respect to
sourcing decisions (Amelia Carr and John Person 2002).
It can also be referred to as the process of managing interaction between two entities one which
is supplying things to the other. It is a two way process thus it should be able to improve the
performance of both the buying organization as well as the supply organization. It involves
proactively developing relationships with particular suppliers. They traditional approach to
buyer-sellers relationship which dates back to the 1920s for most industries relies on using
multiple suppliers for most purchased items. E.g. a purchase might take three bids then play one
supplier against another to get the lowest price. This approach also features the use of short term
contacts where purchasers are unwilling to commit to a supplier over an extended period of time.
It provides little incentive for supplier to invest in longer term productivity or quality
improvement. Short term contracts encourage profit maximizing as quickly as possible minimal
commitments and trust does not exists between purchaser and seller which further limits joints
innovation and performance improvement. Buyer seller relationships can also be referred to as
customer seller relationships (CSR).
3.1 Advantages of Closer Buyer-Seller Relationship
Development of mutual trust: This is the foundation of all strong relationships. While
seemingly intangible, trust refers to the belief to the character, ability, and strength or truth of
another party.
Cost reduction: It makes it possible for the example for the seller to share cost data with the
buyer which can result in a joint effort to reduce supplier cost through mutual sharing of ideas. It
cans also result in supplier working closely with purchaser early in the design of a new part.
Long terms contracts: Opportunity to evaluate which supplier should receive long term
contracts. A long time contract provides and incentives for a supplier to invest in new plants and
equipment’s which makes the supplier more efficient and results in lower costs for the purchaser.
 Long terms contracts can also lead to the joint development of technology, risk sharing and
supplier capabilities.
Solving product quality problems: working together with the supplier enables teams from
both sides to assess the source of the problems through sharing of ideas and by changing
processes or improving them, the products can be of better quality leading to low costs for the
buyer.

3.2 Collaborative buyer-seller relationships

Most purchasers and sellers now recognize a need for joint cooperation to achieve cost, quality,
delivery and time improvements. During the 1980s progressive purchasers developed
collaborative relationship or alliances with suppliers after eliminating poor or marginal
suppliers from the supplier base
Collaboration is defined as the process by which two or more parties adopt a high level of
purposeful corporation to maintain a trading relationship over time. The relationship is bilateral;
both parties have power to shape its nature and future direction over time. Mutual commitments
to the future and a balanced power relationship are essential to the process
3.3 Characteristics of successful collaborative buyer-supplier relationships
 One or limited number of suppliers for each purchased item or family of items: - The
suppliers often provide materials under long term contracts with agreed upon performance
improvement targets.
 A win- win approach to reward sharing.
 Joints efforts to improve supplier performance across all critical performance areas
 Joints efforts to resolve disputes
 Open exchange of performance: - This includes information about new products suppliers,
cost data and production schedules and forecasts for purchased items
 A credible commitment to work together during difficult times:-the purchaser doesn’t
results to old practices at the first sign of trouble.
 A commitment to quality, defect free product having design specifications that are
manufacturable and that the supplier’s process is capable of producing
3.4 Characteristics of buyer- seller relationships
The table below compares the characteristics of traditional and collaborative buyer-supplier
relationship. While not all relationships between purchasers and suppliers should be
collaborative, the trend is towards greater use of collaborative approach.
Traditional approach Collaborative approach
Suppliers Multiple sources played off One of a few preferred
against each other suppliers for each major item
Cost sharing Buyer takes all cost sharing Win-win shared rewards
Supplier hides cost sharing
Joint improvement Little or none Joint improvement driver by mutual
effort interdependence
Dispute resolution Buyer unilaterally resolves Existence of conflicts resolution
disputes mechanisms
Communication Minimal or no two way Open and complete exchange
exchange of information of information
Market place Buyer determines response to Buyers and sellers work
adjustment s changing conditions together to adopt to a
changing market place
Quality Buyer inspects at receipt Designed into the product

3.5 Evolving from adversarial to collaborative relationships

How do buyers and sellers move from an adversarial, arm’s – length relationship to one of
mutual trust and commitment?
Phase 1: Traditional schools of supply management: - each party views the other with minimal
trust or respect. Relations are frequently confrontational- ever hostile. Multiple sourcing
competitive bidding and short term contracts characterize purchasing strategy. Purchasers
quickly replace suppliers who cannot provide price reductions. Relationships are described as
antagonistic.
Phase 2: Mere suspicion rather than total distrust multiple sourcing still provides a level of
safety and control. Fragment sourcing changes still occur as purchasers search for the source
 capable as providing the greatest cost reduction. Although an arm’s length relationship still
exists attitudes start to give way to the beginning of a working relationship. Relationships are
described as competitive or adversarial.
Phase 3: Closer buyers and sellers relations as a result of mutual goals. Purchasers begin to
recognize the advantages of maintaining a smaller supply base along with sophisticated
measurement, design and quality system, a purchaser encourages suppliers to provide cost
reduction ideas. Strategies focusing on lead time reduction become popular. Relationships are
described as cooperative.
Phase 4: total trust between purchasers and sellers both parties commit to working together and
emphasize strategies supporting world class performance levels. Purchasing is responsible for
managing a supply base that best support a firm’s performance objective. Trust and informative
sharing become common while both parties focus on component on total cost to achieve joint
cost reductions. The seller becomes an extension of purchaser’s organization and vice versa.
Relationships are described as collaborative.
3.6 Supplier Development

The Chartered Institute of Purchasing and Supply- CIPS (2013) define supplier development as
the process of working with certain suppliers on a one-to-one basis to improve their
performance for the benefit of the buying organization. It is closely associated with supplier
relationship management and partnering - two separate subjects on which CIPS has similar
literature. Lysons and Farrington (2006) define supplier development as any activity that a
buyer undertakes to improve the supplier’s performance and/or capabilities to meet the buyers’
short- or long-term supply needs. Supplier development is actually developing suppliers in
much the same way employees are developed

3.7 Divers of Supplier Development

Key trends shaping the need for organizations to focus attention on supplier development
include; risk reduction, cost reduction, competition, corporate social responsibility and going
green.

 Risk minimization: risk anticipation, monitoring and mitigation play an ever increasingly
important role in these times of economic uncertainty. Unabated increase in raw material
 cost, energy prices and further pressure due to increased labor costs and currency
appreciation, quality and delivery under-performance have put number of vendors at a
greater financial and operational risk. Leading organizations are working in close
collaboration with their key suppliers helping them identifying new ways of working which
improves their bottom line performance and ensuring the risks organizations are exposed to
is minimized to a greater extent.
 Cost Reduction: Procurement leaders are realizing the opportunities for further cost
reduction from a Total Cost of Ownership (TCO) standpoint by working in close
collaboration with key suppliers across the lifecycle of the product. For example, during the
product development stage it is critical for suppliers to develop products and samples from
the “large scale production feasibility” aspect rather than trying to make customized and/or
over-engineered samples. Close interactions by key suppliers with buyers to proactively
advise them of alternative ways of making the products may reduce the operation cost and
create a win-win situation for both parties. Similarly, close collaboration at the mass
production stage unlocks substantial opportunities for cost reduction, which can only be
realized if the both the buyer and supplier collaborate closely to remove cost at all stages of
the product lifecycle.
 Corporate Social Responsibility/Compliance: Recently there has been an increase in
compliance violations issues in Asia, specifically in China. Particularly, many large
organizations are under fire for “underpay” and “overtime” situations. The situation has
been further exacerbated due to the global crisis as a number of key suppliers have stopped
hiring new workers and forced the existing workforce to work longer hours. Achieving the
right level of compliance and to ensure that brand image does not suffer as a result of non-
compliance is a core tenet of ensuring a sustainable relationship with key suppliers.
Working in close collaboration with suppliers, to ensure that workers receive at least the
minimum legal wage and are appropriately compensated for overtime hours is a basic
necessity. A direct impact in compliance improvement can also be achieved without
increasing product cost through assisting suppliers to improve their productivity and quality.
 Innovation through Collaboration: An increased focus of working closely with key
suppliers from the initial stages of product development leads to differentiated and
innovative products at competitive prices in the market place. Rather than providing
 technical specifications – which in many cases limits the innovation as most of the design
details are fixed - leading players provide functional goals to the suppliers and let them
come out with innovative ideas.
 Going green: As natural resources become scarcer and measures to reduce pollution and
global warming increase, the continued trend to go “green” has been accelerating-Innovative
companies are finding another compelling reason to adopt leaner and greener practices—the
economic and environmental benefits. Working closely with suppliers - to improve the
effectiveness of their operations and reduce waste through alternative material usage,
improved material utilization, transportation optimization to reduce carbon emissions etc. -
facilitates the journey to becoming greener.

3.8 Ways of Developing Suppliers

 Providing financial support to suppliers operations

 Providing skills or expertise through training suppliers staff
 Establishing supplier performance standards
 Providing accurate and timely information to suppliers
 Advising suppliers on innovations or changes in technology and production techniques
 Early supplier involvement in product design and development
 Sharing of facilities and equipment
 Undertaking joint initiatives
 Reciprocal trading

3.9 Measures to Enhance Supplier Development

 Seconding purchasing staff to the supplier organization

 Seconding supplier staff to the purchasing organization
 Negotiating improved terms of contracts
 Introducing improved costing approaches
 Undertaking on site audit of supplier activities
 Establishment of joint problem solving committees / holding consultative meetings
3.10 Benefits of Supplier Development

 Better Alignment of Business Objectives-The closer alignment of Buyer and Supplier

values facilitates the development of trust-based relationships which inspire greater
collaboration and opportunities for increased innovation. Supplier development initiatives
help suppliers to understand buyer’s values, Brand DNA and thereby getting the “right”
product out in first time meeting/exceeding the expectations of customers.
 Achieving Sustainable Cost Reduction-Though an investment is needed to implement
Supplier Development, it is proven to bring direct financial benefits once in place. Building
leading practices and indicators into the supply base helps to unlock substantial value and
cost reduction. Achieving “right” and “consistent” quality- Supplier Development
facilitates the development of a quality culture in the supplier organization, making sure
quality is “built into the process”, and helping clients to move towards vendor
independence.
 Reducing risk in the supply chain- Supplier Development initiatives can help to reduce
supplier operational and financial risks, particularly related to buyers increasing dependence
on its key suppliers, supplier quality issues, supply shortage issues and unanticipated price
volatility etc. at each step of the risk management process - anticipation, monitoring and
mitigation. Gaining competitive advantage- Leading companies take a downturn as an
opportunity and look for institutionalizing leading practices in their organization so that they
are all set for reaping the gains and best prepared for the upturn. Companies can get ahead
of the competition through new product development and innovation. Working in close
collaboration with suppliers, helps bring “innovative” and “irresistible” products & services
to the market place faster to differentiate the buying entity from its competitors.
 Improving Sustainability- Supplier development initiatives lead to enhanced collaboration
between clients and their suppliers as well as to efficient and effective usage of resources by
adopting “lean” practices. Removing the “waste” across the whole supply chain helps to
make it “lean” and “green
 Minimizing Compliance risks- Compliance can be significantly improved by improving
productivity and quality which helps to alleviate excessive overtime and underpayment
 greatly reducing the risk to the company’s reputation, erosion of shareholder value and
market share that can occur as a result of supplier non-compliance.
 Instigating Continuous Improvement (CI) - Leading buyers work with key selected
suppliers to improve the supplier’s performance and define a roadmap with actions leading
to improved processes and outcomes for both parties. Periodic targets are set jointly between
the Buyer and its suppliers and mutually agreed upon. A formal agreement should be
developed with clearly defined clauses in contracts around KPI improvements, price
reduction requirements & business growth plans. Moreover, financial benefits accrued from
CI initiatives must be reasonably shared between Buyer & Supplier, creating a “virtuous
circle” of continuous improvement and strengthened collaboration.
 Developing new vendors- To overcome too much reliance on specific suppliers, to avoid
mono(duo)-polistic situations, or to increase available capacity/shorten lead times, supplier
development initiatives can help to introduce alternative suppliers that are equally or more
capable of providing products and services to the buyer.

3.11 Challenges Encountered in Supplier Development

Companies without a strategic SRM program in place can only recognize the benefits of a
supplier development program with much difficulty. It is important for the organization to
recognize that not all the suppliers can be treated at the same level and a differentiated SRM
approach needs to be applied for different levels of suppliers. Collaboration with key strategic
suppliers is a must as these suppliers are a major source of competitive advantage. Getting the
buy-in and clear understanding from top management on the need to embark upon supplier
development initiatives and associated financial, resources and time commitment is absolutely
critical. For example, based on Accenture’s experience working with Retail organizations in
Greater China, most of the local fashion retailers do not necessarily have well-defined SRM
programs in place. The path towards supplier development initiatives may take another year or
so to instill the basic fundamentals of SRM before embarking on advanced development
initiatives. However, multinationals sourcing from Greater China typically have a more mature
SRM framework in place and the need for establishing strong partnerships with strategic
suppliers is well recognized.
Another complexity we have seen of implementing SRM programs is lack of accountability and
clear ownership of vendor relationships. For example, within Retail companies, the Merchant is
responsible for the vendor relationship, negotiating cost and vendor funds, but does not have
visibility to the vendor’s shipping performance and its effects on the total cost to stock the
product. If the Merchant is measured (incented) on a P&L that does not include Supply Chain
costs, there is an inherent disconnect. Many organizations struggle with this shared ownership
of vendor relationships between merchandising and supply chain.