Lecture 7: Supplier

relationship continuum
AHAD NAZIR
 The supplier relationship continuum

Spot Purchasing

Regular trading

Call-off contracts
Agenda
Fixed contracts

Partnerships

Joint Ventures

Internal Provision
Review the specifications and go
for standards where possible
?
Identify new sources through
supply market analysis

Reduce Risk
Work with suppliers to develop
their capabilities
 The supplier-buyer relationship
/ contract continuum

Spot Regular Call-off Fixed Partner- Joint Internal

purchase trading contracts contracts ship ventures provision
Select the best overall deal at the time of purchase

Focus on price

No personal relationship

Expect low priority & low motivation from supplier

Using many different suppliers will involve high costs

Good for one-off requirements

Good for standard products with low switching costs and

when annual expenditure is high
Repeated spot purchases

You need to ensure that the supplier remains competitive

Frequent interaction will lead to mutual understanding

Suppliers used frequently tend to give you higher priority - you

may also have one “preferred supplier”

Good when you don’t know requirements in advance and/or

when each requirement is different
Are also called “framework agreements”,
“blanket contracts” or “standing orders”

Supplier agrees to provide items at agreed prices and within

agreed timescales on as needed basis over a period of time

Saves time and effort for you and allows end-users to call-off
requirements directly

Good for frequently required products & services and when it is

difficult to predict amounts in advance

Building in supplier performance measurements can be useful

 4
You commit to purchase a certain volume or value

This type of contract is more attractive to the supplier

and you may therefore get better conditions

Good for frequent requirements when volumes can be

predicted in advance
 GOAL

Partnerships are appropriate for critical and

bottleneck items and where the focus is on long-
term product development

They can allow you to achieve a better result than

you could have achieved alone

Partnerships require time and effort so selecting

the right partner is fundamental
A joint venture is a separate unit formed and owned by
two or more organisations

More direct influence than in a partnership...

..but also more expensive to set up and manage

For products or services which are significant to your

competitive advantage
Internal provision means making rather than buying

Gives you maximum control over

supply and reduces supply risk

But:

Developing or acquiring the capabilities to provide can be

very costly

Your fixed costs will increase

You may not reach an efficient scale of production

 The 4 categories of items

Leverage
Routine

Critical

Bottleneck
 Having a supply strategy
means knowing:
How many supply market segments to buy from

How many suppliers to buy from

What type of relationship to have with your suppliers

(arms length or collaborative)

What type of contract to have

Which operational procurement strategies to pursue

For each type of item we’ll look at:
How many suppliers to use?

What type of a relationship to have?

What type of contract to use?

What operational strategies to have?

What type of supplier you should look for?

What types of buyers need to be involved?

Routine Items
What are they?

Many suppliers & the item is readily available

Standard item

Your annual expenditure on the item is low

The item is low risk to your company

Your expenditure only represents a small part of the

supplier’s turnover
Routine Items
You would therefore like to:

Have simple procurement processes

Minimise administrative costs

Minimise intervention with the supplier

Delegate actual buying to end-users

 Routine Items
Using many different suppliers for routine items means
unnecessary high efforts and costs

Try to use one single “preferred supplier”

Try to have long-term, call-off or “evergreen” contract

which covers as many items as possible

You can link prices to an index or use cost-reduction

clauses
 Having a supply strategy
means knowing:
How many supply market segments to buy from

How many suppliers to buy from

What type of relationship to have with your suppliers

(arms length or collaborative)

What type of contract to have

Which operational procurement strategies to pursue

Leverage Items
What are they?

Many suppliers & the item is readily available

Standard item

Your annual expenditure on the item is high

The item is low risk to your company

Your relatively high expenditure makes your purchases

attractive to suppliers
Leverage Items

Since the value is high & risks are low,

you will focus on price

Price changes can have a significant

impact on your company

Since the value is high, a degree of

switching costs can be tolerated
 Leverage Items
Supply strategy options depend on:

The volatility of the market

Your knowledge of the supply market

The degree of price variation amongst suppliers

The level of “switching costs”

Switching costs
Switching costs are the costs associated with
changing suppliers

?
 Switching costs ?
Can be:
Costs related to negotiating a contact

Re-training of staff

Changes in processes & design

Obsolescence of old stock

Penalties for terminating the previous contract

Inefficiencies in start-up phase, etc.

 Switching costs
Suppliers may try to build in switching costs by:

Offering benefits & discounts for customer loyalty

Developing strong links with your executive

and/or technical staff

Providing free training and other services

Buyer Characteristics

Strong negotiators who are comfortable with

arms-length relationships (spot purchases and
when entering into term contracts)

If switching costs are high, the person

managing the contract need to be good at
establishing and maintaining a co-operative
relationship
 Supply strategy for continuously required leverage items
Case 2:
Case 3:
Case 1: Low price Case 4: Case 5:
Low price
Element of variability /
Very high variability / High price variability High price variability /
strategy negligible
switching non-trivial /low switchi§ng costs non-trivial switching
switching
costs switching costs costs
costs
Number of
One Many One Many Two or three
suppliers
Term contract Term (framework)
Type of
–typically long Spot Term contract Spot contract – typically over
contract
term medium term

Lowest cost Lowest cost

Type of over the Lowest cost Lowest cost over the
over contract Lowest cost today
supplier contract term today contract term
term

Co-operative
(will not
exploit Arms-length
Nature of
dominant Arms-length (buyer- Arms-length Co-operative
relationship
position once dominant)
buyer is
“locked in”)
 Having a supply strategy
means knowing:
How many supply market segments to buy from

How many suppliers to buy from

What type of relationship to have with your suppliers

(arms length or collaborative)

What type of contract to have

Which operational procurement strategies to pursue

Bottleneck Items
What are they?

The item is high risk to your company

There are few suppliers

It is not a standard item

Your annual expenditure on the item is low

Your relatively low expenditure is likely to make your

purchases unattractive to suppliers
 Bottleneck Items
What to do (I):

Focus on reducing risks - price & cost of acquisition is

of secondary importance

If possible, buy the item from one supplier for increased

leverage

If needed, use two suppliers to have a back-up option if

problems arise
Suppliers of Bottleneck Items
- desirable characteristics

The supplier should be reliable and not

behave opportunistically or exploit its
strong bargaining position

It should be able to supply the required item for the long term

If the risks are upstream the supply chain, the supplier needs to
have sufficient clout & sound strategies with its suppliers
Buyer Characteristics
- Bottleneck Items

The buyer should be a team player who can

work with other functions in your company to
reduce risk

It is important to maintain a good impression of

the supplier and to be a good customer

The buyer should be more of a relationship

manager than a hard negotiator
 Supply Strategy for Bottleneck Items
- Summary
Supply strategy for continuous bottleneck items
Number of suppliers: One or two
Nature of relationship: Be a “good customer”
Type of contract: Term contract (probably
for a significant period)

Type of supplier
¨Must be particularly capable in the areas which pose the greatest
risk to your company
¨Will not exploit its strong bargaining position with your company
¨Will continue to supply the required products for the long term

ITC
 Having a supply strategy
means knowing:
How many supply market segments to buy from

How many suppliers to buy from

What type of relationship to have with your suppliers

(arms length or collaborative)

What type of contract to have

Which operational procurement strategies to pursue

 Critical Items
What are they?

They are non-standard

There are few suppliers

Few alternatives exist

The risk to your company is high

Your annual expenditure on the item is high

Your relatively high expenditure makes your purchases

attractive to suppliers
Critical Items

Suppliers will typically have a small number of large

customers

The numbers of suppliers to switch to will be limited

Partnership is the ideal relationship

Developing a partnership:
Partnerships involve time & effort and are based on trust

You need to be willing to work closely with the supplier and to

share information

Select a partner with which you can develop a competitive

advantage

The contract is more of an expression of

long-term commitment and one that GOAL
states the ground rules
Operational Strategies
for Critical Items (II)

Organisational learning & communication strategy - how to

continuously develop and improve the relationship?

Capture the supplier’s expertise & innovation capabilities to

optimise design

Protect future costs & availability (e.g., of replacement items &

spares for capital goods)

Joint approaches to quality assurance QUALITY

Thank
you