Prof. J.K.Nayak

Designing the supplier structure: single vs. multiple sourcing
Van Weele on Single Sourcing: • When? Customised, small-series, high-tech products, confidential production techniques time pressure

• • • • • •

+ Increased involvement, better information + Streamlined procedures + Reduced lead times + Better personal relations - Dependence, high switching costs - Loss of competitive edge / market feeling

multiple sourcing • Low indirect costs: price can be reduced by multiple sourcing / competitive bidding • High indirect costs: indirect costs can be reduced by deep involvement with a single supplier .Single vs.

Price vs. indirect costs Multiple suppliers Price Total costs Single supplier Indirect costs Price Indirect costs Total costs .

Organising the supplier structure • Companies currently seek to reduce the number of direct suppliers • One means: Single sourcing • Other means: Tiering – rearranging the supplier network so that manufacturer deals with limited number of „main suppliers‟. which have responsibility for complete system .

Managing individual supplier relationships Kraljic's Portfolio • Based on differences in the purchased product. suppliers represent different interests for the company • These different interests lead to a differentiated purchasing strategy towards suppliers and supply markets • Criteria: impact on financial results. supply risk .

Portfolio strategies High leverage items  Substitutes available  Market research  Competive bidding Financial Importance  Labour-intensive  Reduce product variety  Systems contracting Low routine items Low strategic items  Difficult to change  Create mutual commitment  Partnership  Monopolistic market  Find alternatives  Secure supply/volume assurance bottleneck items High SupplyRisk .

The question is how to develop a partnership relation with your most important suppliers... Of trade and industry) in the UK showed that there is still very little mutual trust between suppliers and automotive manufacturers. – A. – Hendrick and Ellram (1993) demonstrated that the„balance of power‟ is only true in 1% of the buyersupplier relationships. DTI study(Dept. .Partnership development Not surprisingly that real partnerships are still very scarce.

2 Partnership development High Integrate Intensity of the relation Involve Partner Rationalise Low Acknowledge High Number of suppliers Low .

This often requires changes in: . . processfocus...Partnership development Acknowledge suppliers as a real source of competitive advantage and as an extension of the firm. jobrotation.working culture: teamwork. .mind shift („not-invented here syndrome‟) .purchasing management style .communication towards suppliers .

Development and Purchasing – All potential supplier are considered – Cost based discussions – Selection is based on facts and figures: ABC analysis Article/supplier matrix. etc. Portfolio analysis. project management and operational management (zero defects) – Strong involvement of R&D. A professional selection process is used to select partner suppliers that are portentially best-in-class in development.Rationalise the supplier base. .

method of cost analysis.Increased partnering. evaluate and discuss supplier and customer performance (vendor rating & supplier satisfaction) – Increase process alignment and integration . filter out the truly best-inclass suppliers and streamline processes and improve the relationship with these suppliers. etc. projectplan. – Definition of technology choices. design review. – Co-operation and continuous improvement – Concrete and measureable targets – Systematically measure. workingrules.

Purchasing and Development Relational and communicative skills purchasers Value chain mapping „Extended enterprise‟ Residential engineering / co-location .Actively involve suppliers (early or timely) in new product development processes in order to fully leverage their technological knowledge and experience • • • • • • Clear communication Close link between R&D.

accounting systems. • • • • • • • Both parties invest seriously in future plans Continuous control and monitoring Risks and rewards are shared (not always 50/50) Maximum interdependency Enterpreneurial management style Technology sharing Ethical issues . management information systems. Co-operation becomes „doing business together’. etc.Integration: tuning future product and investment plans..

Tools and techniques There are many tools and techniques companies use to develop partnerships: • • • • • • • • • • Portfolio analysis Value chain mapping Supplier satisfaction survey Supplier development teams Early supplier involvement Residential engineering. co-location Supplier management plans Training courses Relationship assessment tool (RAP) Vendor rating and ranking .

co-operation • Power vs.Understanding supplier relations : key dimensions • Complexity • Investments • Adaptations • Trust vs. dependence . formalisation • Conflict vs.

unit.Complexity • Relations between organisations are in fact bundles of „micro-relations‟ – on different organisational levels (corporation. division. plant) – on different hierarchical levels – in different functional areas • Relations also have different aspects – – – – – commercial technical legal social ethical .

information. • Costs of supplier relations: contact.. adaptation – mainly at the beginning • Benefits: rationalisation. structure – usually over time • Result: initial losses and switching costs promote longterm relationships . while a cost is associated with an activity the return on which is expected to come during the same period‟ – examples: additional capacity. special machines. development. special routines.. specific knowledge.Investments • „An investment is made on one occasion and is expected to provide return over several periods.

Adaptations • Different types: – technical – knowledge-based – administrative – economic – legal • Adaptations also represent investments and thus create switching costs .

. “an important step in improving the results in doing business with suppliers‟ • Hakansson and Snehota. the less important contracts are . conflicts and crises that a business relationship is bound to go through over time . informal mechanisms are more effective” • Research: the older the relation. 1995: “Formal contracts are often ineffective in taking care of the uncertainties.Trust vs. formalisation (contracts) • Means to handle uncertainty • Van Weele: contracting as one of the crucial phases in the overall purchasing process.

Conflict and co-operation • „Buyer and seller should neither smooth over existing conflicts nor let them escalate‟ • Conflicts/mistakes/misunderstandings represent learning opportunities • Co-operation is needed to exploit those opportunities .

Usefulness of relations Cooperation High 'Nice' 'Developmental' 'Marginal' Low Low 'War' Conflict High .

networks .‟) relations are a fact of life ..Conclusions (Supplier) relations are not always good and nice: • • • • • relations can be difficult to manage relations can be problematic relations can be a burden relations are not isolated („chains.

'Dyadic Business Relationships Within a Business Network Context'.L.H. • Ellram. 2-8. (1994).R. International Journal of Purchasing and Materials Management. S. (1995). October. (1993). • Hines. • Leenders. Fall. The Connected Corporation: How Leading Companies Win Through Customer-Supplier Alliances. . Ouchi (1993). 58. Creating World-Class Suppliers: Unlocking Mutual Competitive Advantage. New York: Free Press. Johanson (1994). 27. strategies for innovation and lean supply. and D. • Lewis. P. D. J. J. M.Recommended literature • Anderson. and W. (1991). H. Beyond partnership. Blenkhorn (1988). London: Prentice Hall. pp. R. L.M. pp. 2. • Dyer. • Lamming.G. C. 15-28. Reverse Marketing: The New Buyer-Supplier Relationship. pp. 51-63. Sloan Management Review. Håkansson and J. 1-15.R.. Vol. 'A Managerial Guideline for the development and implementation of purchasing partnerships'. New York: Free Press. „Japanese-Style partnerships: Giving Companies a Competitive Edge‟. Sloan Management Review. London: Financial Times / Pitman Publishing. • Helper. (1991). Vol. „How much has really changed between US automakers and their suppliers?‟. Journal of Marketing. J. No. Summer. pp.

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