Creating and Managing Supplier

Relationships
 Learning Objectives
After completing this chapter, you should be able to:
1- Explain the importance of supplier partnerships
2-Understand the key factors for developing successful
partnerships
3-Develop a supplier evaluation and certification program
4- Explain the importance of a supplier recognition program
5- Understand the capabilities of Supplier Relationship
Management
6- Explain the benefits of using SRM software to manage
suppliers
 Chapter Outline
• Introduction
• Developing Supplier Relationships
• Supplier Evaluation and Certification
• Supplier Development
• Supplier Recognition Programs
• Supplier Relationship Management
 Introduction
 In today’s competitive environment, as companies
focus on their core competencies, the level of
outsourcing will continue to rise.
 Increasingly, companies are requiring their suppliers to
deliver innovative and quality products not only in just-
in-time (JIT) fashion, but also at a competitive price.
 In the last few decades we have learned that good
supplier relations can provide many benefits such as
flexibility in terms of delivery, better quality, better
information, and better material flows between buyers
and suppliers.
 companies are realizing the importance of
developing win-win, long-term relationships
with suppliers.
 It is critical that customers and suppliers
develop stronger relationships and
partnerships based on a strategic rather than
a tactical perspective and then manage these
relationships to create value for all
participants.
 According to the Institute for Supply
Management’s glossary of terms, a supplier
partnership is defined as: “A commitment over
an extended time to work together to the
mutual benefit of both parties, sharing
relevant information and the risks and
rewards of the relationship.
 Developing Supplier Relationships
• Building strong supplier partnerships requires
a lot of hard work and commitment by both
buyers and sellers.
• Developing true partnerships is not easily
achieved, and much has to be done to get the
partnership to work. Several key ingredients
for developing successful partnerships are
discussed below:
• Building Trust :
• Trust is critical for any partnership or alliance to work. It
must be built not just at the senior management level but
at all levels of the organization.
• Trust enables organizations to share valuable information,
devote time and resources to understand each other’s
business, and achieve results beyond what could have been
done individually.
• 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 the
extra mile. In addition, there is goodwill developed over
time between the partners.
• Shared Vision and Objectives:
• All partnerships should state the expectations of the buyer
and supplier, reasons and objectives of the partnership, and
plans for the dissolution of the relationship.
• Both partners must share the same vision and have
objectives that are not only clear but mutually agreeable.
Many alliances and partnerships have failed because
objectives are not well aligned or are overly optimistic.
• The focus must move beyond tactical issues and toward a
more strategic path to corporate success. When partners
have equal decision-making control, the partnership has a
higher chance of success.
• Personal Relationships:
• Interpersonal relationships in buyer-supplier
partnerships are important since it is people who
communicate and make things happen.
• According to Leonard Greenhalgh, author of Managing
Strategic Relationships, “An alliance or partnership isn’t
really a relationship between companies, it’s a
relationship between specific individuals.
• When you are considering strategic alliances of any
kind, the only time the company matters is in the
status associated with it [strategic alliance].
• Mutual Benefits and Needs :
• Partnering should result in a win-win situation,
which can only be achieved if both companies
have compatible needs.
• Mutual needs not only create an environment
conducive for collaboration but opportunities for
increased innovation. When both parties share in
the benefits of the partnership, the relationship
will be productive and long lasting.
• An alliance is much like a marriage: if only one
party is happy, the marriage is not likely to last.
• Commitment and Top Management Support:
• First, it takes a lot of time and hard work to find the
right partner. Having done so, both parties must
dedicate their time, best people, and resources to
make the partnership succeed.
• Commitment must start at the highest management
level. Partnerships tend to be successful when top
executives are actively supporting the partnership.
• The level of cooperation and involvement shown by
the organization’s top leaders is likely to set the tone
for joint problem solving further down the line.
• Change Management :
• With change comes stress, which can lead to a loss of
focus. As such, companies must avoid distractions from
their core businesses as a result of the changes brought
about by the partnership.
• Companies must be prepared to manage change that
comes with the formation of new partnerships.
• According to author Stephen Covey, “The key to
successful change management is remaining focused
on a set of core principles that do not change,
regardless of the circumstances.”
• While collaboration has many positives, there is also the
fear of the loss of trade secrets when sensitive information
is shared between partners.
• According to the U.S. Economic Espionage Act of 1996, 18
U.S.C. § 1839 (3), the definition of trade secrets is: “All
forms and types of financial, business, scientific, technical,
economic, or engineering information, including patterns,
plans, compilations, programmed devices, formulas,
designs, prototypes, methods, techniques, processes,
procedures, programs, or codes, whether tangible or
intangible, and whether or how stored, compiled, or
memorialized physically, electronically, graphically,
photographically, or in writing.”
• Capabilities:
• Organizations must develop the right capabilities
for creating long-term relationships with their
suppliers.
• In a recent study on world-class procurement
organizations, the Hackett Group found that one
of the two best practices for top-performing
companies is using cross-functional teams to
achieve common objectives.
• As such, companies aspiring to be world class
must develop cross-functional team capabilities.
• Performance Metrics:
• Measures related to quality, cost, delivery and
flexibility have traditionally been used to evaluate
how well suppliers are doing. Information
provided by supplier performance will be used to
improve the entire supply chain.
• Thus, the goal of any good performance
evaluation system is to provide metrics that are
understandable, easy to measure and focused on
real value-added results for both the buyer and
supplier.
• By evaluating supplier performance, organizations
hope to identify suppliers with exceptional
performance or developmental needs, improve
supplier communication, reduce risk and manage the
partnership based on an analysis of reported data.
• Although price/cost is an important factor when
selecting suppliers, other criteria such as technical
expertise, lead times, environmental awareness and
market knowledge must also be considered.
• In the electronics industry, which pioneered the Six
Sigma revolution, quality is the prime supplier
selection criteria due to its strategic importance.
• Thus quality and the ability of suppliers to bring
new technologies and innovations to the table,
rather than cost, are often the key selection
drivers.
• A multi-criteria approach is therefore needed to
measure supplier performance.
• Over the past several years, total cost of
ownership (TCO), a broad-based performance
metric, has been widely discussed in the supply
chain literature.
• TCO is defined as “the combination of the
purchase or acquisition price of a good or
service and additional costs incurred before or
after product or service delivery”.
• Costs are often grouped into pre-transaction,
transaction and post-transaction costs.
• These three major cost categories are
described as follows:
• Pre-transaction costs: These costs are
incurred prior to order and receipt of the
purchased goods. Examples are the cost of
certifying and training suppliers, investigating
alternative sources of supply and delivery
options for new suppliers.
• Transaction costs: These costs include the cost of
the goods/services and cost associated with
placing and receiving the order. Examples are
purchase price, preparation of orders and
delivery costs.
• • Post-transaction costs: These costs are incurred
after the goods are in the possession of the
company, agents or customers. Examples are field
failures, company’s goodwill/reputation,
maintenance costs and warranty costs.
 Supplier Evaluation and Certification
• Only the best suppliers are targeted as partners.
Companies want to develop partnerships with
the best suppliers to leverage their expertise and
technologies to create a competitive advantage.
• A supplier evaluation and certification process
must be in place so that organizations can
identify their best and most reliable suppliers. In
addition, sourcing decisions are made based on
facts and not perception of a supplier’s
capabilities.
• One of the goals of evaluating suppliers is to
determine if the supplier is performing
according to the buyer’s requirements.
• An extension of supplier evaluation is supplier
certification, defined by the Institute of
Supply Management as “an organization’s
process for evaluating the quality systems of
key suppliers in an effort to eliminate
incoming inspections.”
• The certification process implies a willingness on the part of
customers and suppliers to share goals, commitments and
risks to improve their relationships.
• Implementing an effective supplier certification program is
critical to reducing the supplier base, building long-term
relationships, reducing time spent on incoming inspections,
improving delivery and responsiveness, recognizing
excellence, developing a commitment to continuous
improvement and improving overall performance.
• Supplier certification allows organizations to identify the
suppliers who are most committed to creating and
maintaining a partnership and who have the best
capabilities.
• 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 (e.g., late delivery) for a
specified time period .
• 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.
• Mutually agreed set of clearly specified quality performance
measures.
• Fully documented process and quality system with cost controls and
continuous improvement capabilities.
• Supplier’s processes are stable and in control.
• The Weighted Criteria Evaluation System:
• One approach toward evaluating and certifying suppliers is to use
the weighted criteria evaluation system described below:
• 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 of performance based
on their relative importance to the company’s objectives. The
weights for all dimensions must sum to 1.
• 4. Evaluate each of the performance measures on a rating between
zero (fails to meet any intended purpose or performance) and 100
(exceptional in meeting intended purpose or performance).
• 5. Multiply the dimension ratings by their respective importance
weights and then sum to get an overall weighted score.
6. Classify vendors based on their overall scores, for example:
• Unacceptable (less than 50)—supplier dropped from further
business.
• Conditional (between 50 and 70)—supplier needs
development work to improve performance but may be
dropped if performance continues to lag.
• Certified (between 70 and 90)—supplier meets intended
purpose or performance.
• Preferred (greater than 90)—supplier will be considered for
involvement in new product development and opportunities
for more business.
7. Audit and ongoing certification review.
 Supplier Development
• Supplier development is defined as “any activity
that a buyer undertakes to improve a supplier’s
performance and/or capabilities to meet the
buyer’s short- and/or long-term supply needs.”
• Supplier development requires financial and
human resource investments by both partners
and includes a wide range of activities such as
training of the supplier’s personnel, investing in
the supplier’s operations and ongoing
performance assessment.
• A seven-step approach to supplier
development is outlined below:
1. Identify critical goods and services. Assess
the relative importance of the goods and
services from a strategic perspective. Goods and
services that are purchased in high volume, do
not have good substitutes or have limited
sources of supply are considered strategic
supplies.
2. Identify critical suppliers not meeting performance requirements.
Suppliers of strategic supplies not currently meeting minimum performance
in quality, on-time delivery, cost, technology or cycle time are targets for
supplier development initiatives.
3. Form a cross-functional supplier development team. Next, the buyer must
develop an internal cross-functional team and arrive at a clear agreement for
the supplier development initiatives.
4. Meet with top management of suppliers. The buyer’s cross-functional
team meets with the suppliers’ top management to discuss details of
strategic alignment, supplier performance expectations and measurement, a
time-frame for improvement and ongoing professionalism.
5. Rank supplier development projects. After the supplier development
opportunities have been identified, they are evaluated in terms of feasibility,
resource and time requirements, supply base alternatives and expected
return on investment. The most promising development projects are
selected.
6. Define the details of the buyer-supplier agreement.
After consensus has been reached on the development
project rankings, the buyer and supplier representatives
jointly decide on the performance metrics to be
monitored such as percent improvement in quality,
delivery and cycle time.
7. Monitor project status and modify strategies. To
ensure continued success, management must actively
monitor progress, promote exchange of information and
revise the development strategies as conditions warrant.
 Supplier Recognition Programs
• Today, it is not sufficient just to reward your best suppliers
with more business; companies need to recognize and
celebrate the achievements of their best suppliers.
• As award-winning suppliers, they serve as role models for a
firm’s other suppliers.
• Boeing understands that supplier performance excellence
is critical to its success.
• The company’s Performance Excellence Award and Supplier
of the Year Award are presented annually to recognize
“suppliers who achieve the high performance standards
necessary to meet customer expectations and remain
competitive in the global economy.
• As part of Intel’s SCQI Program (see discussion
in the preceding section), there are three
recognition awards: Certified Supplier Award
(CSA), Preferred Quality Supplier (PQS) Award
and Supplier Continuous Quality Improvement
(SCQI) Award.
Supplier Relationship Management
• Supplier relationship management (SRM) has
garnered increasing attention among firms
actively practicing supply chain management.
SRM is an umbrella term that includes
“extended procurement processes, such as
sourcing analytics (e.g., spend analysis),
sourcing execution, procurement execution,
payment and settlement and—closing the
feedback loop—supplier scorecarding and
performance monitoring.
• According to global consultant Accenture, SRM
“encompasses a broad suite of capabilities that
facilitate collaboration, sourcing, transaction
execution and performance monitoring between
an organization and its trading partners.
• In a nutshell, SRM involves streamlining the
processes and communication between the buyer
and supplier and using software applications that
enable these processes to be managed more
efficiently and effectively.
In general, SRM software varies by vendors in terms of capabilities offered.
AMR Research has identified five key tenets of an SRM system:
• Automation of transactional processes between an organization and its
suppliers.
• Integration that provides a view of the supply chain that spans multiple
departments, processes and software applications for internal users and
external partners.
• Visibility of information and process flows in and between organizations.
Views are customized by role and aggregated via a single portal.
• Collaboration through information sharing and suppliers’ ability to input
information directly into an organization’s supply chain information system.
• Optimization of processes and decision-making through enhanced
analytical tools such as data warehousing and online analytical processing
(OLAP) tools with the migration toward more dynamic optimization tools in
the future.
• There are two types of SRM: transactional and
analytic.
• Transactional SRM enables an organization to
track supplier interactions such as order planning,
order payment and returns.
• Transactional SRM tends to focus on short-term
reporting and is event driven, focusing on such
questions as: What did we buy yesterday? What
supplier did we buy from? What was the cost of
the purchase?
• Analytic SRM allows the company to analyze
the complete supplier base. The analysis
provides answers to questions such as: Which
suppliers should the company develop long-
term relationships with? Which suppliers
would make the company more profitable?
• Read and answer the questions at the end of
chapter three.