CHAPTER 7

Supplier Relationships
OPS911
Strategic Procurement Management

Lecturer – Alana Tweddle

Learning Outcomes
This chapter aims to provide an
understanding of:
• Relationship purchasing and purchasing
relationships
• Models of supplier relationships
• The termination of supplier relationships
The Relationship Spectrum
Factors influencing the closeness of the buyer-seller
relationship
• The type and length of the supply contract
• The number of suppliers in the supply market
• The product or service provided
• The amount and quality of information exchange
• The pricing scheme and delivery schedule
• The extent of senior management involvement
• The extent of supplier development and support
offered by the buyer
The ‘right’ relationship

• Spot buying
• Regular trading
• Fixed contract
• Single sourcing
• Strategic alliance
• Partnership
Supplier Relationships

Main differences between transactional and relationship purchasing

Transactional Relationship
• A one-off or short-term transaction focus • Agreed shared objectives and joint planning
• Arms length • Openness and transparency between the
organisations
• Emphasis on price, quality and delivery in the
offered product • Each party understand the expectations of one
another
• The use of power and negotiation to seek the
best possible deal • Complex and integrated relationships, including
internal relationships
• No innovation
• Emphasis on improving price, quality, delivery
• Moderate supplier contact and other factors such as innovative design as a
collaborative exercise between purchaser and
• Little sharing of information supplier
• High level of contact, including at senior level
in both organisations. Each contact being used
to gain information and strengthen the
relationship
• Recognition that the relationship might not last
for ever, and have a prepared and agreed exit
strategy
Supplier Relationship Management: Benefits

• The company incurs fewer costs of identifying, appraising

and training new vendors, and fewer transaction and
contracting costs of multiple sourcing and competitive
bidding
• Quality and other problems can be ironed out progressively
• Goodwill developed with positive relationships may earn
preferential treatment or flexibility from suppliers
• Suppliers may be more motivated to give their best
performance
• Motivated suppliers may be willing to co-invest
• There is less risk of supplier failure or poor performance
Relationship Risks

There are particular risks arising from the

following scenarios:
• Sole sourcing arrangements and single
sourcing arrangements
• Outsourcing arrangements
• Long-term partnership relations
• Supplier tiering
What type of relationship is best?
The most appropriate relationship type for a given purchasing situation
may depend on factors such as the following:

The nature and importance of the items being purchased

The competence, capability, cooperation and performance

of the supplier

Geographical distance

The compatibility of the supply partners

The organisation’s and purchasing function’s objectives and

priorities

Supply market conditions

Legal and regulatory requirements

 Supplier Relationships – Power
Procurement considerations Weighting Buyer Strong Balanced Supplier Strong

1. Number of acceptable suppliers HIGH LOW

Production or service capacity currently

2. HIGH LOW
available in the market from suitable suppliers
Existing share of shortlisted suppliers' current
3. HIGH LOW
capacity
Increase in demand for the product or service
4. HIGH LOW/NONE
possible in the future

5. Substitution possibilities MANY NONE

6. Knowledge of product cost breakdown EXTENSIVE POOR

7. Knowledge of supplier's pricing policy YES NO

Supply logistics (eg., geographical or

8. ADVANTAGEOUS DISADVANTAGEOUS
transportation considerations)

9. Attractiveness to relevant suppliers STRONG WEAK

Barriers hindering a change of supplier (eg.,

10. INSIGNIFICANT SIGNIFICANT
cost of change; rigid user requirements)

ADVANTAGEOUS BALANCED DISADVANTAGEOUS

Place a tick in the appropriate box.

To apply a weighting - if one item is more important than the others, then place 2 ticks in the appropriate box.
Supplier Preferencing Matrix

What is it?
• Helps procurement teams to understand how a supplier might value its
account with them.
• It proposes from the supplier’s perspective there is an association between
the attractiveness of the buyer’s account and the revenue generation. This
will in turn affect how the supplier manages the account with the buyer.

What does it measure?

• Relative value of the account –represents a measure of potential revenue
• Attractiveness of Account –represents prestige, future business, etc.
Are you a Customer of Choice?

Put yourself in the Supplier’s shoes…

Attractiveness Size of Account

• Ease to do business with • More than 5% revenue of

• Payment terms manufacturing is a large
• Paperwork / automation customer
• Consistency of orders • >10% for minerals
• Future forecasts • >3% for retail
• Potential growth • Major profit impact
• Additional opportunities
• Relationships
• Brand / Image marketable
for other customers
• Profitability of account
 Supplier Preferencing Model
HIGH

• Small customer but potential to • Major customer, with profitable

expand business account
• Profitable or lucrative account • COSSET CLIENT – DEFEND
• NUTURE CLIENT – SEEK NEW VIGOROUSLY, PROVIDE HIGH
LOW ATTRACTIVENESS

OPPORTUNITIES LEVEL OF SERVICE AND

RESPONSE
DEVELOPMENT CORE
• Minor customer • Large customer - sizeable
• High cost to serve • Unattractive due to reducing spend,
• IGNORE CLIENT - GIVE LOW low profits or contractual terms
ATTENTION, LOSE WITHOUT • RISK LOSING CLIENT – DRIVE
PAIN PREMIUM PRICE, SEEK SHORT
TERM ADVANTAGE
NUISANCE EXPLOITABLE
LOW SIZE OF ACCOUNT HIGH

Supplier Preferencing Portfolio Matrix

 With more detail… Supplier Preferencing
Explanation
The Supplier Preferencing Matrix can help procurement teams to understand how a supplier
might value its account with them. It originated in the mid 1990s and was developed by Paul
Steele and Brian Court and proposes from the supplier’s perspective there is an association
between the attractiveness of the buyer’s account and the revenue generation. This will in turn
affect how the supplier manages the account with the buyer. The two axes of the model are as
follows:
• Relative value of the account – represents a measure of potential revenue
• Attractiveness of Account – represents prestige, future business, etc.
The matrix is divided into four key areas:

• Develop/nuture – Accounts in this area of the matrix bring little in terms of value to a
supplier but are very attractive in terms of their potential. Often a great deal of focus is
placed on developing this aspect of customer relationships as they can be seen as the
supplier’s future
• Nuisance – Organisations in this area of the matrix bring little in terms of value and
potential and so the supplier might be expected to show little interest or support and to be
actively making efforts to withdraw
• Core/protect – Accounts in this area of the matrix are both high value and attractive. They
are seen as core business and the supplier will place emphasis on levels of service in order to
defend their position, whilst attempting to increase business
• Exploit – Organisations in this area of the matrix may have a high volume of sales from an
account that is not considered to be attractive. In this case, the supplier may concentrate on
gaining short-term benefits due to the fact that retaining a longer term relationship if not
considered important
Supplier Preferencing Portfolio Matrix - Explanation

The matrix is divided into four key areas:

• Develop/nuture – Accounts in this area of the matrix bring little
in terms of value to a supplier but are very attractive in terms of
their potential. Often a great deal of focus is placed on developing
this aspect of customer relationships as they can be seen as the
supplier’s future
• Nuisance – Organisations in this area of the matrix bring little in
terms of value and potential and so the supplier might be
expected to show little interest or support and to be actively
making efforts to withdraw
• Core/protect – Accounts in this area of the matrix are both high
value and attractive. They are seen as core business and the
supplier will place emphasis on levels of service in order to
defend their position, whilst attempting to increase business
• Exploit – Organisations in this area of the matrix may have a
high volume of sales from an account that is not considered to be
attractive. In this case, the supplier may concentrate on gaining
short-term benefits due to the fact that retaining a longer term
relationship if not considered important.
Termination – Legal Considerations

Financial consequences

Confidentiality agreements

Intellectual property rights

Capital assets

Security issues

Employee rights (transition of business)

Signed record of settlement
Factors influencing the closeness of the buyer-seller relationship

 Timing
 Relationship Aspects
 Legal Considerations
 Financial consequences
 Intellectual Property rights
 Capital assets
 Security issues
 Employee rights (transition of business)
 Confidentiality agreements
 Signed record of settlement
 Succession Issues
What about your supplier’s suppliers?

Those that integrate for direct

First-tier suppliers supply to the assembler or
who have a significant
technical influence on the
Lamming assembly while supplying
indirectly

Those that supply

Second-tier suppliers
components to first-tier
suppliers for integration into
systems or provide some
support service
Costs and risks of supplier switching
RISKS OF SUPPLIER SWITCHING
The new supplier may fail to perform
Process incompatibility
Cultural or inter-personal incompatibility
Loss of knowledge
Learning curve
Exposure to new or unfamiliar supply
risks
Exposure of intellectual property,
confidential data
Problems of adversarial hand-over from
the old supplier
COSTS OF SUPPLIER SWITCHING
Identifying and qualifying new suppliers
Initiating and administering tendering
exercises or other sourcing and
contracting processes
Settlement of not-yet-delivered items
from old supplier; settlement of
outstanding claims; payment of ‘exit’
fees
Change of internal systems and
processes
Familiarising and training the new
supplier
Contract development and contract
management
Risk mitigation measures and corrective
measures
Increasing relationship strength
between two organisations