Supply Chain Development within Volvo

Penta Chain
Development through Supplier Relationship
Improvement

Ala Pazirandeh
Sandra Mattsson

This thesis comprises 15 ECTS credits and is a compulsory part in the Master of Science with a Major in
Industrial Engineering Logistics, 270 ECTS credits
No. 2/2009
II
Supply Chain Development within Volvo Penta Chain; Development through Supplier
Relationship Improvement

Ala Pazirandeh
Sandra Mattsson

Master thesis

Subject Category: Technology

University College of Borås

School of Engineering
SE-501 90 BORÅS
Telephone +46 033 435 4640

Examiner: Prof. Dag Ericsson

Supervisor: Prof. Dag Ericsson

Högskolan i Borås

501 90 Borås

Client: Volvo Penta, VARA/ SWEDEN

Date: February 2009

Keywords: SCM, Supplier Relationship Management (SRM), B2B, Strategic

Planning, Supplier Development, Buyer-seller relationships

I
Acknowledgement
This report is the Masters’ Thesis of Industrial Engineering-Logistics studies at University of Borås.
It gave us the opportunity to use what we have learnt during the programme. Due to the vast area of
investigation the research presented, writing and working on this report has meant a lot of work.
However, at the same time this was the challenge we were looking for and a really interesting
journey where we got the opportunity to learn a lot. Hereby, we would like to express our deepest
gratitude to the following people for their help in enriching the quality of this report and guiding us
along the way.

First of all we would like to thank Bodil Hägg for giving us the opportunity and helping us find this
interesting subject to work on. We also thank her for getting us in touch with other Volvo companies’
personnel during this research. We would also like to thank our supervisor at Volvo Penta, Vara,
Tonny Tuvheim for his support, kindness and patience; the same gratitude to all the other personnel
at Vara that we have interviewed.

Furthermore, we would also like to thank Mr. Stefan Karlsson at Volvo Trucks for his time and kind
assistance in benchmarking parts of the study.

Last but not least we would like to express our highest gratitude to Prof. Dag Ericsson that has been
our tutor and examiner during this report. Dag has guided us along the way, advised us and made
suggestions to improve this work. His time has meant a lot and his feedback has helped us create an
up to date and interesting thesis.

Finally, we would like to thank our parents for their endless support throughout this report and
throughout our lives. Thank you for standing behind us and helping us move forward, for your
unconditioned love and support.

II
Abstract
In today global business market, concepts are moving towards inter-national and inter-firm in
contrary to older days. This has made companies explore ways to leverage their supply chains, and to
evaluate the role of suppliers in their activities. One result has been the increased outsourcing of
activities and performance. This has heightened the role of suppliers ever more.

Consequently, in order to maintain competitive in the market and to be able to satisfy the
knowledgeable end customer, suppliers must be completely aligned with the core company and its
objectives and performances. This goal is only gained through strategic benchmarking towards
Supplier Development.

With a large number of suppliers to deal with, it won’t be feasible to have partnership relationship
with each. The strategic approach is to classify them in a manner suitable for the company and only
then start from top of the list setting goals for the most prioritized.

Before making any attempt in Supplier Relationship Development, the company must start from
within setting the right mindset from top down, inside its own ground. Only then Supplier
development will be aligned with the objectives of the company and the program will be integrated
and successful.

This research sought after ways to develop a strategic and systematic method of dealing with
suppliers. This guideline was classified as a step by step map of a Supplier Development program.
The study was conducted for Volvo Penta Vara Company, and as part of its Supply Chain
Development Program. The findings from the company and literature were compared and analyzed
and finally guidelines were developed.

This report is the last part of the master’s studies in Industrial Engineering-Logistics at University of
Borås. It gave us the opportunity to use what we had learnt during the programme. Considering the
broadness of the subject we were after, this report meant a lot of work. However, this was the
challenge we wanted and an intriguing journey where we learned a lot along the way.

III
Contents
Acknowledgement ..................................................................................................................................I
Abstract ................................................................................................................................................III
1 Introduction....................................................................................................................................1
1.1 Background.............................................................................................................................1
1.1.1 Supplier Relationships and Strategies.............................................................................1
1.1.2 Supplier Relationship Management (SRM) in literature ................................................1
1.1.3 Company profile .............................................................................................................2
1.2 Purpose and Objectives...........................................................................................................2
1.3 Problem Definition .................................................................................................................3
1.4 Delimitations ..........................................................................................................................4
1.5 Outline ....................................................................................................................................4
2 Methodology ..................................................................................................................................6
2.1 Research Approach.................................................................................................................6
2.1.1 Data collection method ...................................................................................................7
2.1.2 Sampling Methods ..........................................................................................................7
2.2 Analysis method .....................................................................................................................8
3 Theoretical Foundation ................................................................................................................10
3.1 Trends in Supplier arena.......................................................................................................10
3.1.1 Outsourcing activities to suppliers ................................................................................10
3.1.2 Reducing the number of suppliers ................................................................................10
3.1.3 Developing partnerships with Suppliers .......................................................................10
3.2 What is a Supplier Relationship?..........................................................................................11
3.2.1 Supplier Relationship costs and benefits ......................................................................11
3.3 Manage and Strategy ............................................................................................................12
3.4 Benchmarking Supplier Relationships .................................................................................13
3.5 Supplier relationship management .......................................................................................15
3.5.1 Areas of presence of SRM ............................................................................................15
3.5.2 Areas of benefit from SRM...........................................................................................17
3.6 Social factors in SRM...........................................................................................................18

IV
 3.7 Supplier Selection.................................................................................................................19
3.7.1 Role of procurement in SRM ........................................................................................19
3.8 Supplier Classification..........................................................................................................22
3.8.1 The Japanese paradigm .................................................................................................22
3.8.2 A Strategic Supplier Segmentation ...............................................................................23
3.8.3 Supplier Classification at SAAB...................................................................................25
3.9 Supplier Development ..........................................................................................................26
3.9.1 Why develop suppliers? ................................................................................................26
3.9.2 Which Suppliers to Develop .........................................................................................28
3.9.3 Supplier Development Programs ..................................................................................28
3.9.4 Mapping the Supplier Development .............................................................................29
3.9.5 Problems in implementation of Supplier Development ................................................31
3.9.6 Supplier Development Program at Scania ....................................................................33
3.10 Information Technology and SRM.......................................................................................35
4 Empirical Foundation...................................................................................................................37
4.1 Volvo Penta Supplier Relationship Management.................................................................37
4.1.1 History...........................................................................................................................37
4.1.2 Penta within AB Volvo .................................................................................................38
4.1.3 Production .....................................................................................................................39
4.1.4 Volvo Penta Supplier Market........................................................................................39
4.1.5 The Supply Chain Development Program ....................................................................41
4.1.6 SRM within SCD program............................................................................................41
4.1.7 Communication.............................................................................................................42
4.1.8 Connections with Suppliers ..........................................................................................44
4.1.9 Supplier Segmentation within Penta Vara ....................................................................45
4.1.10 Sources of problem .......................................................................................................46
4.2 SRM within Volvo Trucks....................................................................................................48
4.2.1 Supplier Market.............................................................................................................48
4.2.2 Procurement within Trucks...........................................................................................48
4.2.3 Communication.............................................................................................................48
4.2.4 The Supplier Internet Portal ..........................................................................................49
4.2.5 The Supplier Relationship Development Program .......................................................50

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 4.2.6 SRM Logistics group program......................................................................................51
4.2.7 Sharing Responsibilities (Risk).....................................................................................52
4.2.8 The escalate strategy for Critical Suppliers ..................................................................52
4.3 Penta vs. Trucks....................................................................................................................54
4.3.1 Points from Trucks SRM ..............................................................................................54
4.3.2 Comparing the communication strategies.....................................................................54
4.3.3 Main SRM differences ..................................................................................................55
5 Discussion: Problem Analysis .....................................................................................................57
5.1 SRM trends in literature suitable within Volvo Penta ..........................................................57
5.1.1 Social Factors................................................................................................................57
5.1.2 Making procurement more effective.............................................................................57
5.1.3 Mapping Supplier Development Step by Step ..............................................................58
5.1.4 In case of problems .......................................................................................................59
5.1.5 Utilizing IT in Communications ...................................................................................60
5.2 SRM approaches that work in Volvo Penta..........................................................................62
5.2.1 Vara Supplier Market issues .........................................................................................62
5.2.2 Vara Supplier Segmentation .........................................................................................62
5.2.3 Source of problems in buyer-supplier connections.......................................................63
5.3 SRM approaches in Trucks suitable for Volvo Penta...........................................................65
5.3.1 Volvo Trucks Key Points..............................................................................................65
5.3.2 Utilizing a SRM Logistics group in Communications..................................................65
5.3.3 Key Comparison Points ................................................................................................66
5.4 Suggestions for SRM improvement......................................................................................67
5.4.1 Illustrating Improvement...............................................................................................67
5.4.2 Improvement Suggestions.............................................................................................68
6 Conclusions and Recommendations ............................................................................................69
6.1 Conclusion ............................................................................................................................69
6.2 Recommendation for future work.........................................................................................70
7 Bibliography ................................................................................................................................71

VI
Table of Figures and Tables
Figure 1 research approach ....................................................................................................................1
Figure 2 result from sampling method...................................................................................................8
Figure 3 bow tie and diamond relationship models ...............................................................................1
Figure 4 different modes of relationships ..............................................................................................1
Figure 5 supplier relationship lifecycle..................................................................................................1
Figure 6 different stages of SRM.........................................................................................................17
Figure 7 the Japanese Supplier Segmentation......................................................................................23
Figure 8 different strategies toward supplier shortcoming ....................................................................1
Figure 9 steps in mapping Supplier Development ...............................................................................29
Figure 10 different levels of Logistics Information in SRM .................................................................1
Figure 11 inter-firm connections............................................................................................................1
Figure 12 Distribution of Volvo Penta worldwide.................................................................................1
Figure 13 AB Volvo companies and business units, where Penta stands in the AB group .................38
Figure 14 the communication outline between Vara, its customers, and its suppliers ..........................1
Figure 15 Mapping the Supplier connections ........................................................................................1
Figure 16 Vara Supplier Segmentation pyramid according to the attention planned for.....................46
Figure 17 Volvo Trucks Communication outline and SRM advisor implication ..................................1
Figure 18 a copy of the Supplier Performance Breakdown sheet from the Supplier Portal ................49
Figure 19 Volvo Dispatch precision statistics sheets...........................................................................50
Figure 20 the escalated strategy for critical suppliers............................................................................1
Figure 21 the communication network of Vara and Trucks with their suppliers...................................1
Figure 22 communication network between procurement and the Core Company...............................1
Figure 23 communication areas to focus on ..........................................................................................1
Figure 24 Vara Supplier Structure, first step segmentation ...................................................................1
Figure 25 Comparing the communication network of Vara and Trucks ...............................................1
Figure 26 Main Problem areas and Possible Solutions..........................................................................1

Table 1 Cooperation in comparison with Coordination.......................................................................14

Table 2 Strategic Supplier Classification.............................................................................................24
Table 3 commodity portfolio Matrix ...................................................................................................30
Table 4 potential problems in Supplier Development .........................................................................32
Table 5 evaluation of Vara top ten suppliers according to volume delivery .......................................45
Table 6 evaluating the Problem Supplier group...................................................................................46
Table 7 a Strategic Supplier Segmentation ..........................................................................................58
Table 8 the problems caused in implementation of SRM program and how to resolve them .............60
Table 9 Problems in Supplier Connection and suggestions .................................................................63
Table 10 the Major Differences between Vara and Trucks SRM........................................................66

VII
VIII
1 Introduction

1.1 Background
Firms are increasingly exploring ways to leverage their supply chains, and in particular, to
systematically evaluating the role of suppliers in their activities. One result has been the increased
outsourcing of activities not considered to represent core competencies. (Kannan, et al., 2006)

Outsourcing allows firms to exploit the capabilities, expertise, technologies, and efficiencies of their
suppliers. Increased outsourcing, however, implies greater reliance on suppliers and a corresponding
need to manage the supplier base.( Kannan, et al., 2006) This has for some companies meant
reducing and streamlining the supplier base, and/or developing closer relationships with suppliers
(Scannell, et al., 2000).

1.1.1 Supplier Relationships and Strategies

A Supplier Relationship is a relationship that differs with different suppliers. They affect the buyer
company in different ways, and present different potentials. These effects and benefits depend on the
internal operations as well as interdependent operations with other supplier and customers. Supplier
Relationships affect the cost and revenue of both companies involved. When trying to change these
costs and benefits, the company must consider the effects. ( Ford, et al., 2003)

It is important to align the company policy and routines with the strategies taken towards suppliers.
To be able to handle the whole network of suppliers, a company needs to start handling every
individual supplier relation. However, the effects every decision will have on other actors as well as
the effect on the whole network, needs to be taken into consideration. (Ellegaard, et al., 2003)

Suppliers can be critical and extremely important players in a company’s performance. Having
supplier relationships that don’t work as planned can be extremely costly for the buyer company. As
mentioned before every supplier relationship is unique and needs to be adjusted according to
different factors affecting this particular relationship.

1.1.2 Supplier Relationship Management (SRM) in literature

Identification of when these relationships are appropriate, the dimensions of effective relationships
and how relationships can be a source of competitive advantage have received considerable attention
in the literature (Ellram, 1995; Carr & Pearson, 1999; O’Toole & Donaldson, 2000; Corsten & Felde,
2004).

Supplier Development is a series of formal activities undertaken by customers to improve the

performance and capabilities of their existing suppliers. By initiating supplier development programs,
customers become a catalyst for change. Through supplier development, the customer can help
suppliers attain tough cost reduction goals and create better performance. Improved supplier

1
relationship in a company can gain numerous competitive advantages such as improved shared
information between the two partners, improved product development due to better knowledge,
lower cost and prices of purchased goods and maintenance, lower defects, and etc. Most of these
advantages are gained due to a better mutual knowledge of databases achieved through built trust
caused by better relationship, in other words better cooperation.

Traits such as coordination, collaboration, commitment, communication, trust, flexibility, and

dependence, are widely considered to be central to meaningful relationships. (Kannan, et al., 2006)
Willingness, to work together and to share risks allows benefits to be achieved not only in cost,
quality, delivery, and productivity, but in product development, technology deployment, and problem
solving. (Fram, 1995; Hahn, et al., 1990)

1.1.3 Company profile

Volvo Penta’s history goes back to 1868 when Sköfde Gjuteri och Mekaniska Verkstad was founded.
It was in the early decades of the 20th century that the engine production started. Volvo Penta is one
of the smaller Volvo Group companies with a unique specialist production of marine engines. The
company has a wholly owned plant in Vara Sweden, where they have production of the famous D4
and D6 diesel engines. These engines have contributed to Volvo Penta’s world leading position
within the marine industry.

Their motto in production is: "Volvo Penta Purchasing shall have such competence regarding the
global supplier market that Volvo Penta will be provided with optimum Product- and Process
development, Products and Services that fulfill and exceed the customer's expectations on quality,
cost and times." (Volvo Suppliers website)

1.2 Purpose and Objectives

Supplier Relationship Management (SRM), and thus this study, is after finding ways to make the
company be a better purchaser. In line with this, the primary question of this thesis is as following:

“How we can improve production by improving supplier relationships.”

Motives behind this Supplier Development are to reach competitive advantages, optimal processes,
flow stability, long-term relationships, and continuous improvements. This goal is sought through
relationships this purchasing brings about, and also in other processes. This can be achieved by
improving the company understanding of its suppliers.

Moreover, the main question was further divided into more details in order to find the answer to it.
Thus, the objective was to find the answer to the following questions:

1. How communications within the company, with its suppliers and also with the procurement
department can improve;
2. How Volvo Penta can move from a reactive way of dealing with its suppliers into a proactive
way;

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 3. What SRM trends can be utilized in the Volvo Penta Supplier relationship improvements
study; and
4. The major differences between supplier relationships that are working at Penta today and the
ones that are not working.

Thus, the purpose of this study can be summarized into the following:

1. Achieving cost reduction, quality improvement, and delivery performance improvements, by

improving relationships between Vara and its suppliers.
2. Presenting the company with a systematic process they can use in order to continue making
improvements.

However, improving the supplier relationship without integrating the processes with the other areas
of the supply chain might lead to a one way road and even a dead end. Thus, in order to get the best
feedback wanted and to be a pioneer in the business, companies should work from inside out, gaining
a full understanding of what they want and how they’re heading there. Learning their own supply
chain and objectives of their chain, then moving towards plotting a suitable CRM, SRM, and so on
and having them all integrated in concept and process will make the company the leader in the
market.

1.3 Problem Definition

Volvo Penta Vara has recently started to produce towards customer orders. This has led to a higher
demand when it comes to flexibility and planning within the supply chain. No systematic work exists
within the company when it comes to supply chain development, i.e. continuous work with the
development of suppliers. On the other hand, there has been a big investment in the factory to
increase the technical capacity within production. Therefore it is very important for them to have full
control of their suppliers and to “grow” together. It is vital for them to live up to the new logistics
demand. Due to the new policy of Make to Order they need to find a way to cope with supplier
development instead the old way of relying on forecast.

In order to overcome this task, Penta Vara has undertaken a project under the name Supply Chain
Development. The objective of this program is to cut production costs by three percent, focusing on
developments in Supply Chain Management (SCM) areas as well as purchasing. The following
report is part of this bigger project, with attention given to the Supplier Relationship Management.

Volvo Penta is dealing with a rather large number of suppliers, approximately 240, having a long
history of relationship with most. On the other hand, due to the nature of the company’s production,
suppliers for each part are unique. Hence, the company doesn’t have the space to change suppliers as
easy and as often as wanted. Consequently, this has shifted some power to the suppliers, making it
difficult for Vara to deal with the shortcomings that occur every now and then.

Furthermore, the contracts with suppliers are conducted by a separate department of purchasing.
Neither Sufficient nor efficient communication exists with the main manufacturing department. This
has raised some conflict in interactions between Volvo and the suppliers.

3
The main task of this study is to look into the way the company is dealing with this problem today,
compare it to the academic literature and studies done by other departments, and make suggestions or
improvements in places of need.

1.4 Delimitations
Supplier Relationship Management is a vast area of research, taking into account many various
aspects of the matter, such as information technology, Supplier Selection, contractual issues, Demand
Management, Segmentation, and many more.

Unfortunately, due to constraints in time and resources, it was impossible to go through all of these
factors in detail. Thus, this report is limited only to a few of the aspects that were more closely
related to improving the supplier relationships within the case study.

The main areas of focus were: how to make better supplier segmentation and so have better
management of them; which group of suppliers to focus the development on; presenting a method of
mapping the supplier development; and the role of procurement in this development.

1.5 Outline
The outlines of the following chapters are as followed:

Chapter 1 – Introduction; this chapter was an introduction and background to this thesis. A
background and a definition on Supplier Relationship Management were given. The problem was
identified and formulated and a background of the subject and the case study company was
presented. The objective of the study along with the main question of the report was noted, and
limitations in the way were recognized.

Chapter 2 – Methodology; in this chapter different methods of research methodologies, Data

collection methods, and research sampling methods used in the Study were presented. Furthermore,
the analysis methods utilized were also noted.

Chapter 3 – Theoretical Foundation; the scientific and executive theories used in the study were
noted in this chapter. Moreover, references to books, articles and Internet websites were made. The
chosen theories were, as much as possible, rationalized. Additionally, in areas of necessity
modifications were made, and new founded theories were extracted.

Chapter 4 – Empirical results; this chapter presented the results achieved from actual and real-time
companies. In the first part results from the case study of focus, Volvo Penta Vara, were given.
Afterwards, results from other AB Volvo group departments’ Supplier Development programs, and
their achievements in the same area of study were given.

Chapter 6 - Discussion: Problem Analysis; in this chapter mainly a summary of the results with
interpretation were given; a brief combination of the theories and the results. By comparing the
founding from the theoretical chapter, the empirical results of the case study, and the founding from

4
studies done by other real-time companies, an analysis was made. The conclusion to this analysis is
the answer to the main question of the thesis which was the objective of the report. Additionally, the
difficulties raised in this research were also delineated.

Chapter 7 - Conclusions and Recommendations; The findings and results of this study were
discussed in a very brief manner. In addition, some ideas and thoughts on future work in this area
were presented here.

5
2 Methodology
In this chapter the methods chosen in order to get results and answers to the main question of the
thesis were represented. After presenting the research approach details of methods used in collecting
data as well as methods used for sampling were noted. Finally, in the last part of this chapter,
methods of analysis were presented.

2.1 Research Approach

The results gained in this report were the outcome of both an inductive and a deductive reasoning
procedure. An inductive reasoning was utilized in areas of observation showing us which methods of
behavior in real-time is actually working. These observations were generalized into the conclusions
needed. However, as known, inductive reasoning is a complement of deductive reasoning. Thus,
deductive reasoning was the main instrument in finding the objectives and questions of the thesis.

In addition, this report is also the result of both empirical and theoretical work. The study started by
understanding the current situation, learning the more competent ways of the situation, and learning
to change the current situation towards them.

The current situation was understood, through researching the case study company and ways they
were dealing with their suppliers. The shortages and power areas were noticed and listed. Competent
ways of dealing with suppliers were learned through vast literature reviews and trends presented in
researches. In addition, other Volvo companies with a similar research that seemed more successful
in the area were also studied, and results compatible for the case study were gathered. Finally,
changing towards the better was resulted from comparison and analysis of the results gained in the
three areas.

There were various methods to gather and analyze information from existing systems. Literature
study helped create the frame of reference used to analyze the information, and a case study with a
survey helped gather the information required. (Johnsson, 1998)

The method used for this work will mainly consist of literature review (different books, articles, etc.)
to get an overview and a better knowledge within the subject of supply chain development, supplier
relationships, and how to manage them. This formed a background and a ground work on which the
improvements in Volvo Vara was assessed and analysed upon.

Nonetheless, this ground work was compared to the way Volvo Vara is dealing with its suppliers
today, and also with the findings of other real-time companies on the subject. Some of these
companies within the Volvo Group had better knowledge and experiences when it came to this issue.
In some cases they used the same suppliers. In addition, AB Volvo has demanded all corporations to
work in the same way when it comes to areas like supplier communication. This rationalized the

6
comparison. The analysis was made to check whether the company is on the right track, moving
towards improvement, or not.

2.1.1 Data collection method

The needed data in order to respond to the objectives of this thesis were divided into three general
categories of: Data from Volvo Penta Vara, Data from other companies having done similar studies,
and last but not least, literature review.

The data needed to be gathered from Penta Vara were listed as: the current connections with
suppliers, information on problem suppliers in order to visualise examples of shortcomings, current
communications with the procurement department, and the studies done by the company on SRM so
far. The communication, problems, classifications, solutions and time fencings were recorded. This
information was compared with the literature review made, to see whether the company is on the
right track or not.

From other companies with similar researches, information on actions made towards improving their
supplier relationships, their communication with the procurement department and the effect it had on
their supplier relationships were gathered.

In order to gather all this information defined, several interviews with different departments
including other Volvo group members, purchasing department, and some suppliers were conducted.
A number of questioners were prepared and scattered among different authorities such as Vara
management, supplier management, and other company top management.

Lastly, the data collected from literature were classified as the latest trends in SRM that seemed
compatible within our Case Study Company, information on how to make improvements in existing
supplier relationships, information on the role of procurement in SRM, and information on how to
classify and develop suppliers. These data were gained by reviewing the books, reports, papers and
also by browsing the internet in related subjects.

2.1.2 Sampling Methods

This research like any other has benefited from both quantitative and qualitative data. According to
Ekwall (2007) definition, Primary data are those collected directly by the researcher through
interviews, questionnaire, observation, and etc. Secondary data are those achieved by reviewing
other works such as books, papers, reports, and etc. (Ekwall, 2007). Both definitions were practiced
in this study. The primary data were those collected from the case study company as well as those
from other companies for the purpose of comparison. The secondary data on the other hand, were
those gathered through study of articles, journals, books, websites, and reports.

Primary Data Inductive

reasoning

+ Results

7 Deductive
reasoning
Secondary Data
 Figure 1 research approach

Within Volvo Penta, two different methods of sampling were chosen in order to make the necessary
analysis. First a group from the problem suppliers were selected and mapped to detect the source of
problems and see examples of shortcomings. Afterwards, the top suppliers delivering to Vara, by
their volume delivery, were mapped and their connections were drawn to see the existing
relationships with them.

Another area of choice was among other companies with SRM studies. Firstly, companies from the
same group (Volvo AB) were chosen. These companies had more or less the same background, dealt
with the same procurement department, and shared some of the same suppliers. Secondly other
companies with a similarity in the nature of their products with a geographical availability for ease in
access were of choice. The findings of the latter were extracted from the reports published on the
matter and presented in the Theoretical Foundation Chapter.

SRM trends that will

work in Vara
(Proactive & Reactive)

Figure 2 result from sampling method

2.2 Analysis method

Two ways were recognized in how to bring about changes in the supplier relationships within this
study. A Reactive way, to recognize the existing shortcomings and to fix problems when they occur,
the second, and more importantly, a Proactive way focusing on methods and notions to prevent any
problems from head start. In this study we try to see through both methods of thinking and focus
more on Proactive ways in order to avoid being in the pitfall in the first place. By realizing these
methods of working, and making them part of the mindset throughout the company, the development
will become a strategic one and not just a quick fix.

Furthermore, this study also noticed two types of change to lean towards. The Structural changes,
which is change in distribution of work, specialization, co-ordination, and etc; and the Cultural

8
changes that are changes in attitudes and opinions. In order to make any long time and effective
change, change in mindsets, from top down, is a necessity. With the right change in mindset,
attitudes and performance, in the same direction of the core objective, effective and efficient change
in performance and structure will be made as well.

The paper ahead tried to focus mainly on the relationships involved between buyers and suppliers
and on ways to improve supplier relationships in order to achieve cost reduction, improved quality,
and improved delivery performance.

Data from the case study company was gathered using some statistical methods and classified into
tables and charts. These charts and figures were used to make comparison with the data gathered
from the academic literature in order to see if the path chosen by the company is moving towards
improvement in production or not. In addition, other studies done by other companies were also
analysed and information thought useful for the case study were extracted and further compared to
the data in hand. Furthermore, in places possible, some solutions were also made for improving the
supplier relationships.

The report will be presented as a masters’ degree report as well as a report for Volvo Penta to ground
improvement in methods to develop their Supplier Relationships.

9
3 Theoretical Foundation

3.1 Trends in Supplier arena

When talking about suppliers and methods of purchasing supplies, the past 15 years has meant great
deal of change. Three major trends can be noticed in this area.

• Outsourcing activities to suppliers

• Reducing the number of suppliers
• Developing partnerships with the suppliers

3.1.1 Outsourcing activities to suppliers

The aim in outsourcing is to concentrate on core competence, meaning that the company will
specialize in fewer activities in order to meet customer demands. There is one expression that clearly
explains the advantages of outsourcing production and services:

“If you make it yourself it will be as good as you know how, but if you buy it then it can be as good
as the best in the world know how”. ( Ford, et al., 2003)

Outsourcing can lead to better efficiency and effectiveness but will also lead to increased dependency
to the supplier.

3.1.2 Reducing the number of suppliers

Nowadays it is common for companies to move towards fewer suppliers upstream. The main reason
for this trend is partly due to the outsourcing trend. The trend was mainly seen in the automotive
industry where companies like Ford and Chrysler reduced their supplier basis tremendously during
the 1990s.

3.1.3 Developing partnerships with Suppliers

Cooperation is a common word to use when talking about supplier relationships. The trend has
moved from an earlier approach of “arms length” relationships towards long term relationships.
Terms like joint product development and integrated logistical systems are now widely used and
companies have started to realize the importance of close relationships with their suppliers to achieve
effectiveness and efficiency.

Cooperative relationships, also referred to as partnerships, are based on different factors where
sharing information can be seen as the key to success. When talking about sharing information with a
“partner” both demand and supply information should be included. Using the word “partnership” can
have different meanings depending on what type of partnership is being considered. There are three

10
different types of partnership that can be used namely cooperation, coordination and collaboration
(Harrison & van Hoek, 2005). There should be a distinction between these different styles which will
be elaborated more later on in this report.

3.2 What is a Supplier Relationship?

There are many different ways to define a Supplier Relationship. The two most common ways are to
look at such a relationship either from an economic or a behavioral perspective. (Donaldson &
O’Toole, 2000) Economic models concentrate on measureable economic variables and behavioral
models take matters like history, social structures and dependency into consideration.

• Economic – cost, power, risk aversion

• Behavioral – commitment, confidence, cooperation, mutuality

The economic model is after reaching cost-effective relationships, were the companies involved can
stay independent while free to use or create a state of dependence at the expense of their partners.
However, in order to fully utilize the economic potential of this model, it should be complemented by
the behavioral aspects. The economic perspective lacks the ability to take the whole network or
supply chain into consideration. For example the strategy for a company can be to work on a long-
term basis and to support its suppliers, although the policy and the routines of a company can be to
use offers with the lowest price at every purchase. This will lead to a sub optimization. Therefore it is
important to combine the two approaches with each other. The behavioral model goes beyond the
dyadic relationship and thus takes the whole network into consideration. The main idea is to use the
most suitable suppliers, working models and connections to be able to produce exactly what the
customer is asking for. (Ellergard, et al, 2003)

To manage the suppliers the best way possible, there needs to be a good understanding of what the
different relationships mean and whether they are helping the business succeed or not. A Supplier
Relationship is a relationship that differs with different suppliers. They affect the buyer company in
different ways, and present different potentials. The effects and potentials depend on how the
relationship relates to the internal operations of the company. They also depend on its
interdependencies with other supplier and customer relationships. (Ford, et al., 2003) The qualitative
nature of some effects makes them more difficult to measure than others. These effects will probably
show up in the longer duration.

Supplier Relationships affect the cost and revenue of both companies involved. (Ford, et al., 2003)
When trying to change these costs and benefits, the company must consider the effects, but this can
be hard to quantify. Hence, it can be wise to go through different Supplier Relationship costs and
benefits in order to get a better understanding of the effects.

3.2.1 Supplier Relationship costs and benefits

Improving Supplier Relationships can be an important way for a company to create savings and gain
cost efficiency. The cost consequences of Supplier Relationships can be listed as follows:

11
 • Direct costs of procurement: such as the price paid, logistic costs, and etc.
• Indirect costs of handling the relationship: which can be categorized into:
1. Specific relationship: supplier training, development, inward inspection, etc.
2. General: communication, administrative systems, research, supplier monitoring, etc.

Understanding and thus having the right relationship can reduce cost in many of these areas.

On the other hand, when talking about the benefits of a Supplier Relationship, the most obvious are
the physical ones such as products, components, and equipment. A more thorough look at the
relationship can reveal less obvious benefits, for example suppliers’ technical skills that can be very
useful. Resources of this kind can be used to help develop a company if properly used. “Supplier
Relationships can dramatically enhance the resources and capabilities that a company can make and
hence improve its overall standing and market effectiveness.” (Ford, 1998) The benefits can be
categorized in two sets.

• Cost Benefits: for example reduced administration costs through more integrated
information systems.
• Revenue Benefits: enhancement of the revenue generating capacity of the buying company,
for example quality improvement leading to increased sales.

3.3 Manage and Strategy

Since every supplier relationship is unique and involves complexity it is hard to find an easy way to
handle it. This will most likely cause problems due to such a complex area to handle. There is no
doubt that a company’s purchasing strategy plays a vital role when it comes to supplier relationship
management. It can be said that there are two problem scenarios that should be avoided and
considered when dealing with this type of questions.

1. Reducing purchasing costs – which might lead to sub optimization where other costs like
quality costs will increase
2. Establishing purchasing partnerships – the risk is that with too much focus on supply-
partnerships the company might not see where it is really needed. Some relationships need
close partnerships while others are better left with distance.

It is important to align the company policy and routines with the strategies taken towards suppliers.
To be able to handle the whole network of suppliers, a company needs to start handling every
individual supplier relation. However, the effects every decision will have on other actors as well as
the effect on the whole network, needs to be taken into consideration. (Ellegaard, et al., 2003)

Traditionally, the supplier relationship has been limited to the primary contact between the
customer’s purchaser person and the supplier’s salesperson (Harrison & van Hoek, 2005). This
created a situation where other functions of a company like marketing, information systems, and else
were kept at a distance. This method of supplier relationships creates a model resembling a “bow
tie”. In this model communication is limited to one single channel. Instead, using a model where
multilevel contact is created between different functions of both companies, will lead to active
12
relationship management and supplier development processes. In contrast to the “bow tie” this latter
model will create a diamond where multiple-contact is encouraged (Harrison & van Hoek, 2005).
This situation is depicted in the following figure.

R&D Marketing
R&D Marketing Logistics Operations
Logistics Operations Information Information
systems systems
Information Information
systems systems
Supplier Customer
Sales Purchasing

Supplier Customer Relationship Supplier

management development
Figure 3 bow tie and diamond relationship models

Since many parts of a company impact the Supplier Relationships, using the diamond model
becomes important. Individuals from many different functions such as finance, production, and etc,
have different requests and wishes that affect the relationships. These interactions from different
parts of the company impact both companies involved. Thus, changes can never be planned or
implemented by one company alone. The closer the relationship between two companies, the denser
the interactions as well as the interdependence between these two will be. Thus, co-aligning supplier
behavior becomes a critical issue in the supply strategy. In order to make critical change, companies
should understand that change process is always likely to be slow and complex. Therefore, they
should work together with their suppliers rather than using a single “master plan”.

Suppliers are both a critical and an extremely important player when talking about a company’s
performance. Having supplier relationships that don’t work in the expected way can be extremely
costly for the buyer company. As mentioned before every supplier relationship is unique and needs to
be adjusted according to different factors affecting this particular relationship.

3.4 Benchmarking Supplier Relationships

Managing supplier relationships is about trying to use them effectively for purposes the company is
pursuing and within the context of a wider relationship portfolio. (Ford, et al., 2003)

In today business world where competition takes place between supply chains instead of individual
companies (van Weele, 2005), and where customer is the “king”, it becomes important to move away
from traditional approaches and find new ways of creating customer satisfaction. The focus should be
on value innovation and finding new, undiscovered markets. Here the customers can be used as
spring boards, where one can develop a way to manage supply chains and supplier relationships.

13
This new way of thinking is referred to as Demand Chain Management where a company goes
beyond the normal way of thinking and elaborates new approaches where strategic re-positioning,
differentiation and uniqueness are key factors (Ericsson, et al., 2009). While Supply chain
management focuses on increasing operational excellence, demand chain management needs
thinking outside the box which will require companies to handle their business in a different way.

Here cooperation and collaboration become critical factors and leaning on coordination will not be
sufficient. It is common for companies to use these words to explain the same situation, but as
mentioned before in this report there is a difference between different types of partnerships. While
coordination can be achieved through external orders, cooperation needs a new way of thinking
inside a company where a willingness to cooperate exists.

Arm’s length Very loose Coordination Cooperation Collaboration

Figure 4 different modes of relationships

Cooperation between two organizations with equal dependencies on one another can create mutual
benefits (Rogers, 2005), which in this case will be referred to as Collaboration. Depending on what
kind of system used to handle the company, closed or open, different management styles needs to be
in hand. The old model shows a hierarchical management style where “power over” is the used
approach. The new model, on the other hand, shows an approach where cooperation is vital and
where system members are powered to do things. (Ericsson, et al., 2009)

Catalyst Suitable Management

Closed
systems
Hierarchical
External orders Functional,
Coordination “Power over”
standard
products
Internal Governance
willingness to Open systems “Power to do
Cooperation
join forces things”
Table 1 Cooperation in comparison with Coordination

In the end, it’s worth mentioning, that when talking about Arm’s Length relationship, throughout this
chapter, we are not only referring to the traditional only by contracts mean. One of the perks in
Arm’s length relationship is minimizing dependence on suppliers and maximizing the bargaining
power. This type of relationship is suitable for suppliers with which due to the non strategic nature of
the items, less dependency is shared. (Dyer, et al., 1998)

The traditional Arm’s length relationship suggesting short term contracts and moving from supplier
to supplier is not economically viable in today’s market. Thus, when administrating this type of
relationship, the number of suppliers is usually kept smaller, while trying to maintain
competitiveness among them. In addition, suppliers are expected to keep a certain level of dedication
to inter firm coordination, such as incorporating compatible EDI systems.

14
3.5 Supplier relationship management
Supplier relationship management (SRM) is a comprehensive approach to manage an enterprise's
interactions with the organizations that supply the goods and services it uses. The goal of supplier
relationship management is to streamline and make the processes between an enterprise and its
suppliers more effective. (bitpipe- White Papers, 2008)

Supplier Relationship Management (SRM) is a set of principles, processes, templates, and tools that
help companies maximize relationship value and minimize risk and management overhead over the
entire supplier relationship lifecycle. (eSourcingWiki, 2007)

It can be said that Supplier relationship management is after finding ways to make the company
become a better purchaser. This goal can be achieved by improving the understanding the company
has of its suppliers.

However, improving the supplier relationship without integrating the processes with other areas of
the supply chain might lead to a one way road and even a dead end. Thus, in order to get the best
feedback wanted and to be a pioneer in the business, companies should work from inside out, gaining
a full understanding of what they want and how they are heading there. The company can become a
leader in the market by learning its own supply chain and its objectives. Only then, moving towards
plotting a suitable CRM, SRM, and so on and having them all integrated in concept and process will
be a strategic move.

3.5.1 Areas of presence of SRM

SRM should be present at all stages of the supplier relationship cycle. Different stages of SRM
should interact at all times in order to make long term consistent improvements. This means
attracting new suppliers from the range of available, acquiring them according to the company needs,
maintaining and developing those that are competent, and ending relationship with those that are not.
(Lang, et al., 2002) This concept is illustrated in figure 5 where suppliers are attracted from their
global market, selected as company suppliers while evaluated and maintained within the company
community, and finally those incompetent, rejected back to the global market.

15
 Maintain and develop
good suppliers

Company
suppliers

Attract Reject bad

new suppliers
suppliers

selection
Supplier

Figure 5 supplier relationship lifecycle (Lang, et al., 2002)

In a global economy with a deep knowledge and understanding, all products, resources, and material
can be purchased and produced anywhere in the world. This means finding the best in such a vast
range of suppliers can be complicated and tough. Since this is the place where company suppliers are
selected this area of SRM needs detailed attention. Choosing the most competent suppliers from the
beginning means less work in fixing problems later on. This is the Supplier Selection 1 stage of SRM.

After selecting the right suppliers according to the manufacturing needs of the company, they should
be attracted by the procurement department by means of marketing and negotiating through
contracts. This will form the grounds for future negotiations and relationships with the suppliers.
These suppliers will now be the Company Suppliers.

The next stage will be to maintain and develop the selected suppliers. In order to this in a competitive
manner, suppliers should be evaluated and classified. Supplier Evaluation 2 is another part of SRM,
where each company according to its needs, product requirements, and the scope of manufacturing
and its market, chooses a list of criteria with which suppliers will be evaluated upon. In addition,
Supplier Classification 3 is also an important stage in maintaining and further developing suppliers.

Using all the information in classification of suppliers and evaluation criteria, in the next stage of
SRM suppliers will be informed of Supplier Development step they need to take in order to guaranty
a competitive edge for the company.

Finally, suppliers that seem not compatible even after the other stages, and still bringing down the
performance of the company, should be changed and their contracts terminated.

1
Due to limitations in time and space, Supplier Selection concepts and practices were not discussed thoroughly
further in this report.
2
Due to constraints facing this report Supplier Evaluation details were only noted in brief
3
Supplier Classification will further be fully discussed in this chapter

16
The four different parts of SRM recognized and noted in this report are depicted in figure 6. These
SRM parts are more or less introducing the same concept and as the arrows in the figure indicate are
interrelated and should interact at all times.

Figure 6 different stages of SRM

3.5.2 Areas of benefit from SRM

The question that arises here is how SRM can be of advantage to the supply chain and hence the
company. Improved supplier relationship in a company can gain numerous competitive advantages
such as improved shared information between the two partners, improved product development due
to better knowledge, lower cost and prices of purchased goods and maintenance, lower defects, and
etc. most these advantages are gained due to a better mutual knowledge of databases achieved
through built trust caused by better relationship.

According to Lang, et al. (2002), having a first-class relationship with suppliers will help the
company gain competitive advantages in the following areas:

1. Increased satisfaction with supplies purchased. Consequently this will speed up new product
development by having better shared knowledge of suppliers and other technologies.
2. Increased suppliers’ satisfaction in terms will lead them to attract and retain the most
competitive suppliers of their own.
3. In line with this, improved business process across the supply chain will lead to lower prices
of purchase and maintenance for supplies and services. (Lang, et al., 2002)

17
3.6 Social factors in SRM
The buyer-supplier relationship can be complicated at times, however there are different ways for
improving this relationship. One of the areas that have to be considered in this improvement is the
social and cultural issues. Culture, society, politics, and traditions play an important role in any
relationship. After choosing the suppliers throughout the world in order to maintain and develop a
nourishing relationship these aspects should be recognized as well as any other. This partnership can
be improved through various steps such as the ones recognized by Ireton, listed below:

1. Compliance with local and international regulations;

2. Conduct that breeds honesty, respect and open dialogue; and

3. Strategic financing that benefits both parties (Ireton, 2007)

Compliance means, it is important that different partners in the chain be fully aware of all regulations
and status of their other partners. They should know who they’re working with. Like the old saying,
“ignorance is no excuse”. Buyers should be fully aware of who they’re dealing with and vice versa.
On the other hand buyer and suppliers should also have complete knowledge of the legislations of the
environment they’re working in. This information can be gained either through previous studies or by
hiring a 3PL to do the job.

Conduct in about achieving harmony. After being aware of the social responsibilities and the status
of working partners, companies should tend to be more in harmony with these responsibilities and
with their presence in the supply chain. This means, they try to ensure chosen suppliers fulfill their
codes of conduct and stand up to their own level of financial, environmental and social responsibility.
Having this code of conduct will make sure that suppliers work to keep at the highest point of
standards set.

Finally, Strategic Finance, the last aspect in buyer-supplier relationship is about financial issues.
Although having the lowest price in negotiations is a big goal, it shouldn’t be the ultimate. Insisting
on having lower price might lose the trust and loyalty of the supplier and thus not a good thing.
Matters to take into consideration here are what the payment terms should be, what the tradeoffs are
at this point, who should benefit time wise, and what the currency fluctuation risks are.

After companies invest the necessary resources in finding the right suppliers it is important to
maintain and nourish this relationship by factors listed above as well as others being noted later, in
order to make it into a long term. However, it is worth noting that each supplier relationship has its
own value that it is not necessarily the same as the other.

18
3.7 Supplier Selection 4
As mentioned in the first part of this chapter Supplier Selection is part of SRM. In fact, K.L. Choy et
al. recognized it as one of the important functions of SRM. To make the right decisions from the start
will help preventing complications along the way. It is safe to say price, quality, delivery reliability,
and service are the most important criteria used to select and monitor potential suppliers. However,
the type and circumstances of the purchase indicates the specific criteria used and their relative
importance. Thus, to select suppliers can positively and directly influence relationship success.
(Kannan, et al., 2006)

With the competitive advantages required to be a winner in today’s global market, higher
responsiveness as well as reduced cost are a must. Thus, alignment of buyer needs with supplier
capabilities becomes a prominent objective. While criteria such as price and delivery performance
are always important, buyer companies must go even further and explicitly take a supplier’s strategic
orientation and commitment of meeting mutual goals, into consideration.

Supplier relationship management contributes to supplier selection and consequently increases the
competitive advantage of a manufacturer. (Choy, W et al., 2004) One of the ways to make an
educated decision and select appropriate suppliers, is to utilize a common, even a Web-based,
platform. In this way customer needs could be directly aligned with suppliers’ capabilities.

It can be seen that price is not the only factor to be considered in the supplier selection process. A
wide range of other factors such as quality, organization and culture, as well as the alignment of
supplier capabilities in a long-term strategic way should also be considered. (Choy, et al., 2004)

3.7.1 Role of procurement in SRM

Procurement 5 , which is called purchasing in some texts, is embedded and part of Supplier Selection
(SS) in SRM. According to an online encyclopedia, procurement is defined as the acquisition of
goods and/or services at the best possible total cost of ownership, in the right quantity and quality, at
the right time, in the right place and from the right source for the direct benefit or use of
corporations, or individuals, generally via a contract. (NationMaster - Encyclopedia)

The main questions about the role of procurement in SRM are how procurement contributes to the
business relationships, and the different approaches available in the matter?

4
Supplier Selection is an Important and vast area of SRM and going through all its concepts and details is beyond
this report’s limitations. Thus, only a brief introduction to the overall concept is given in this section.
5
In this report the focus was given to the procurement part best adaptable to the case study of the thesis, and details
about SS and purchasing criterions were not discussed.

19
In general, procurement is after making strategic buying decisions in the market. With sufficient and
accurate data available, this decision is strategically made using economic analysis methods such as
cost-benefit 6 analysis or cost-utility analysis.

The role of procurement can be divided into three major parts:

1. The role of rationalization: This indicates what we need to buy from our suppliers and which
suppliers we should use. 7
2. The role of development: This role is about the existing potential to develop resources, and
the scope of this potential (suppliers).
3. The role of structure: Is after finding the ways in which companies impact the structure of the
supplier market.

These roles are the foundation of procurement practices. In the business world today the following
steps are usually carried out by the procurement departments.

3.7.1.1 Gathering of Information

This information is dominant in order to make strategic decisions and to develop log-term relations in
the future. Thus, information both from the buyer company and the suppliers are needed.

The buyer company should duly inform the procurement department of its objectives, product
development, supply chain details, financial status, and needs. In addition the procurement
department should gather sufficient information from the suppliers indicating their status that can
satisfy these requirements.

3.7.1.2 Contacting Suppliers

At this point after identifying the suitable suppliers using the information gathered from both the
buyer company and the supplier market, these potential suppliers will be contacted. Requests for
Quotation (RFQ), Requests for Proposals (RFP), Requests for Information (RFI) or Requests for
Tender (RFT) are among things asked for from the potential supplier. An alternative to this is making
direct contact with the suppliers. (DefenseAcquisittionUniversity, January 2001)

3.7.1.3 Background Review

The next step, after contacting the selected suppliers, is checking the performance background of
each supplier. Here, references for the product or service quality are requested.
(DefenseAcquisittionUniversity, January 2001) Furthermore, all requirements for backup services
including installation, maintenance, and warranty are checked. In this step a trial or probationary
period might be considered.

6
Cost-benefit analysis is an important technique for project assessment. It is the process of weighing the total
expected costs against the total expected benefits of one or more actions in order to choose the best or most
profitable option.
7
This part of procurement is not applicable at Volvo Penta, because they do not have much to say when it comes to
these questions.

20
3.7.1.4 Negotiation
After the suppliers are wisely selected and reviewed for performance, negotiation for developing
contracts is undertaken. Here is the place where price, availability, and customization possibilities are
talked about. However, it should be noted that estimations on most these factors must be in hand due
to previous assessments in data gathering step. Moreover, schedules for delivery are set, and the
contract is completed.

3.7.1.5 Fulfillment
When negotiations are done and contracts are established and signed by partners, base on the terms
indicated in them suppliers are required to make the necessary preparation, shipments, delivery, and
the buyer company to make the payments. Other functions that might be conducted at this step are
installation and training. (DefenseAcquisittionUniversity, January 2001)

3.7.1.6 Consumption, Maintenance and Disposal

At this point the buyer company will evaluate the performance and services provided by the
suppliers. Having close communication between the manufacturing company and the procurement
department are of vital importance to this development. This communication will let the OEM 8 be
aware of the terms of contract and places of deviation, and the procurement department aware of the
shortcomings the suppliers might bring about. Thus, the procurement department will be able to deal
with the situation and request either party for balance of standards.

3.7.1.7 Renewal
Finally, when the duration of the contracts is over and the items are completely consumed, the
company can choose to either renew the contract or to produce item internally. In case of contract
renewal, the company determines whether to consider other suppliers or to continue with the same
supplier and the procurement department makes the preparations.

8
Original Equipment Manufacturing

21
3.8 Supplier Classification
Due to the different economical importance of different suppliers, a company cannot provide the
same attention to all suppliers. Studies indicate that normally only 20 percent of suppliers are
responsible for 80 percent of the cost of material. Therefore, using the same strategy for all suppliers
is not the best choice. Thus, a company should utilize a mix of different models which can be
individualized for any specific supplier or specific type of suppliers. (Freytag & Mikkelsen, 2007)

Supplier Classification is the third part of Supplier Relationship Management. There can be two main
ways of classification named in the industry. One is based on an older western way of thinking such
as Ford, the other on a more modern paradigm, starting from Japan with Toyota being the pioneer.

In the first and traditional way which is widely used among the American industry, purchase of an
item can be spread among alternate suppliers in such a way as to improve the firm’s bargaining
power. (Porter, 1980) The latter on the other hand, takes a different approach, being keen on deeper
supplier relationships.

J.H. Dyer et al. named numerous advantages in the Japanese way of thinking including:

• Sharing more information and thus being better at coordinating interdependent tasks;
• Invest in dedicated or relation-specific assets which lower costs, improve quality, and speed
product development; and
• Rely on trust to govern the relationship, a highly efficient governance mechanism that
minimizes transaction costs. (Dyer, et al., 1998)

However, there are still some disadvantages present in this method of classification. Building up and
keeping such relationships are costly and it is also difficult to change such suppliers in cases of
inefficiencies.

Nonetheless, it should still be in mind that not one size fits all. Like all other areas of Supply Chain
Management, supplier relationship is also not an exception. The nature and amount of the product
supplied from each individual supplier, along with the strategic importance of the product for the
buyer company are among factors that determine the strategy chosen in supplier segmentation.

3.8.1 The Japanese paradigm

In the Japanese way of dealing with suppliers the level of closeness is mostly defined by how
customized the product delivered is. They form a very close relationship, sending part-time to full-
time employees, working together, co-designing products, and sharing all information, with suppliers
delivering high value, highly customized parts. These suppliers are mostly wholly owned or partly
owned suppliers. The next set, are some independent suppliers as well as some partly owned. The last
set, are independent suppliers which provide standardized or commodity like parts. This group is less

22
involved in the activities of the other two groups. Thus, it is less important to develop a close
relationship in design and improvement with this group.

Wholly / Partly owned suppliers

• Very close relationship
• Sharing intimate information
• Co-design and co-planning

Partly owned / independent suppliers

• Close relationship
• Sharing information
• Development planning

Independent suppliers
• Upon contract relationship
• arms length relationship

Figure 7 the Japanese Supplier Segmentation

The differences in addressing these levels are due to differences in characteristics such as relation-
specific investments, level of information sharing, level of assistance provided by the buyer company
(such as sending in house employees or providing education), and level of trust. These differences
will be more elaborated in next sections.

3.8.2 A Strategic Supplier Segmentation

It is important to know both arm’s length 9 and partnership approaches to supplier segmentation have
their own benefits. Arm’s length relationships make supplier grow, learn from their competitors, and
bring upon economies of scale. On the other hand, partnership allows suppliers to experience closer
relationships, bigger relation-specific investments, higher level of info sharing, and higher level of
trust.

Consequently, in order to achieve effective strategic supplier segmentation, OEM10 ’s should take
advantage of both paradigms. Realizing the benefits of this strategic segmentation, it will extend to
higher tier suppliers by the first tier suppliers and so on.

In order to achieve this strategic segmentation, having the Japanese way of separating their suppliers
in mind, the company should first segment its suppliers into two primary groups of: strategic
suppliers, and non-strategic suppliers. First group of suppliers are those supplying strategic goods,
which will make the finished product different from the other competitors, while the latter are those
supplying commodity like parts.

For independent suppliers, supplying standard non-strategic parts such as bolts and the like, arm’s
length relationship seems sufficient, helping them benefit from economies of scale. Deeper
relationships here might lead to competitors gaining information, and it is not worth spending on
relation-specific investments for each OEM.

9
The arm’s length relationship mentioned here might defer from the old concept usually named in textbooks. This is
further explained in this section.
10
Original Equipment Manufacturer

23
 On the contrary, affiliated suppliers can benefit from partnership relationships bringing them closer
to their customers. Assisting these suppliers to reach lower production costs, improve quality, and
minimize inventories, will help the OEMs themselves to succeed.

However, when talking about arm’s length relationship we don’t mean the traditional concept of
having numerous suppliers and switching between them. We simply mean keeping the few with less
fuss. This can even implicate having long term relationships with a few suppliers of one part.
Accordingly, even if having only two suppliers for a specific part, companies should maintain the
vigorous competition between them by managing them skillfully, such as giving volume according to
performance.

Furthermore, this classification can be done in more details, by taking the volume purchased from
each group of suppliers into consideration. This is completely illustrated in Table 2 which is an
extension of the Kraljics model.

Low volume purchase high volume purchase

bottleneck suppliers Critical Strategic Suppliers
High opportunity goods

substitution difficult strategically important

Strategic Suppliers

internal production might be an option substitution or alternate difficult

monopolistic market major importance to purchasing
high entry barriers of importance to Supplier Selection
critical geographic or political situation

Noncritical Suppliers Leverage suppliers

Non-Strategic Suppliers
Low opportunity goods

sufficient availability sufficient availability

substitution possible alternatives available
lower information sharing substitution possible
standard specification of goods benefiting from economy of scale
learn from competition
standard specification of goods

Table 2 Strategic Supplier Classification

The first group will be the Noncritical suppliers, which provide the standard parts in low volumes
delivered. These suppliers can easily be substituted due to the high availability. The next group are
called leverage suppliers, these are those supplying standard part but in high volumes, such as bolts.
The same method can be used for this group with a difference in keeping closer relationship due to
the high volumes purchased. Economies of scale can be utilized here.

Suppliers delivering strategic goods in low volumes are named bottlenecks. Changing them will be
difficult due to their oligopolistic market. Closer relationship must be formed with this group and in
cases of pressure companies might decide to produce the item internally. The last group will be the
Critical Strategic Suppliers, supplying strategic goods in high volumes. These are strategically
important suppliers, changing them will be very difficult and thus are of great importance in Supplier
Selection stage by the procurement department.

24
As in most models of classification problems might occur in real-time situations. The Strategic
supplier classification depicted in the matrix in table 2 is no exception that might be worth
mentioning.

• A supplier can be placed in several quadrants of the matrix

• The classification doesn’t take the whole network into consideration. The fact that supplier
relationships affect one another is not considered in this model. (Pederson & Torvatn, 2003)

3.8.3 Supplier Classification at SAAB

Since problems occur in classification of the suppliers, SAAB has chosen to use a self developed
model that is based on the Kraljics matrix. The model is adjusted according to the special needs of
SAAB. (Falkenberg & Nilsson, 2005)

The different supplier relationships are divided into three groups named Operational Alliance,
Increased Alliance, and Partnership. In this model the suppliers are evaluated according to their
degree of complexity and the importance of procurement.

The suppliers that fall into the operational alliance group are supplying standardized products that
have low impact on the production at SAAB. These suppliers can be replaced when needed and the
items purchased represent a small part of SAAB’s total purchase. Suppliers from increased alliance
group are providing SAAB with products that must be adjusted or that are available in several
variants. The possibility to replace a supplier in this group is decreased. Falling into the partnership
group will demand a higher degree of co-operation and adjustment. These suppliers have a great
impact on SAAB’s production and are hard to replace. (Falkenberg & Nilsson, 2005)

25
3.9 Supplier Development
As mentioned earlier in this chapter supplier development is one of SRM four parts coming after
Supplier Selection, Supplier Evaluation, and Supplier Classification. After suppliers are selected by
the company according to the objectives of the company and evaluated in a consistent manner and
classified into strategic categories, there are three ways in which they can be dealt with in case of
problems.

If the core company is not satisfied with the performance of its suppliers they can either produce the
item internally, change the supplier, or improve the existing supplier 11 . The nature of the product, its
value, and the volume delivered by the particular supplier indicate which path to choose. For
example, if the item supplied has low value and is delivered in low volume, changing the supplier
might be the right strategy. On the other hand, if an item with a high strategic nature is delivered in
low volumes the company might decide to produce it internally. In cases of more moderation,
supplier development seems the best choice.
Volume delivered

Internal
Supplier Supplier production
Change Developmen

Nature & value

Figure 8 different strategies toward supplier shortcoming

Formal activities undertaken by customers to improve the performance and capabilities of existing
suppliers are referred to as supplier development. ”Supplier Development are any effort of a buying
firm with a supplier to increase its performance and/or capabilities and meet the buying firms short
and/or long-term supply needs.”(Krause & Ellram, 1997)

3.9.1 Why develop suppliers?

Traditionally, most suppliers focused on meeting customer specifications and so they usually
managed their processes on their own with as little customer input as possible. All this changed in the
1980s, when the trend towards reducing the number of suppliers became a fact. The buying
companies started to cooperate more with the few remaining suppliers. These suppliers were given
long-term contracts. This changed everything and supplier development became an attractive
proposition for both suppliers and buying companies.

11
Supplier Development

26
Outsourcing is another trend that has made supplier development more important. Buying firms now
depend on their suppliers to deliver products with high quality, performance and low cost.

Surviving today’s competitive marketplace can be hard and therefore it will be easier to work
together with the suppliers to achieve the best possible solutions. Future determining objectives like
lower inventory levels, faster order fulfillment cycles, shortened life cycles, removal of non-value-
adding costs and tasks are all drivers for finding ways to develop the suppliers.

According to Christopher (1992), using a more extensive cooperation between a buying company
and its suppliers will certainly increase the possibilities to achieve better productivity and efficiency,
which will lead to competitive advantages against other companies. A company that provides optimal
processes will have an advantage towards its competitors. This will help the company minimize
internal waste. According to Rich & Hines (1997), minimizing internal waste is what supplier
development is all about.

In order to create stable relationships it is a good idea to develop the existing relationships instead of
changing the suppliers often. This will reduce the insecurity and make the collaboration easier.
Relationships with duration are also a prerequisite to achieve flow stability that will be a competitive
advantage for the company. Ultimately, working together with the suppliers and helping them to
develop is a good way to make sure the supply chain improves as a whole while continuously find
new solutions to different problems.

Thus the motives for supplier development can be listed as follows:

• Competitive advantages
• Optimal processes
• Flow stability
• Long-term relationships
• Continuous improvements

Supplier development can be made in two different ways:

1. Reactive – The buying company react to disturbances throughout the flow, and supplier
development is initiated only to reduce these disturbances.
2. Proactive – cooperation between the buying company and the supplier to prevent
disturbances from occurring in the first place.

Through supplier development, it is possible for the buying company to act in a more proactive way
and thus improve the relationship with its supplier. According to Handfield et al. the different ways
in order to improve suppliers are to assess their operations, providing them with incentives in order
to improve their performance, instigating competition among suppliers, and working directly with
suppliers through training or other activities. (Handfield, et al., Winter 2000)

Using a proactive way will reduce the need to execute costly activities to handle those disturbances.
(Rich & Hines, 1997) One of the prerequisites of supplier development is a mutual agreement and

27
risk taking between both the supplier and the buyer company. Consequently, both parties must share
a high level of trust in sharing internal information with one another. Even in such a situation,
success is still not a sure thing.

Working with supplier development, always has the risk of the buying company leaning towards
short-term advantages at the expense of a long term partnership. Forcing a supplier to meet the exact
needs of the buying firm might hurt the competitiveness of the overall supply chain. The needs of the
end customer must always be the main focus, and care must be taken to not lose sight of this along
the way. (Harrison & van Hoek, 2005)

Although making improvements is feasible by just hitting the easy-to-fix problem suppliers, this
might act only as a short term fix. This will need more reactive methods in the future. The best way
to address Supplier Development is to view it as a long term strategy and make it part of an
integrated supply chain development program.

3.9.2 Which Suppliers to Develop

Supplier development requires a substantial commitment of human resources by both firms. So the
question of “which suppliers to develop?” needs to be a strategic decision rather than simply a
reactive one. (Hartley & Choi, 1996)

When trying to identify the best candidates to develop the first thing that comes in mind is of course
the economical amount of purchases a company makes from a supplier. However there are some
other situations that need to be taken into consideration. There are materials that are purchased in
high volume or in low volume. However, the volume purchased isn’t always the winning criteria.
There are suppliers where the purchased material is in low volumes but strategically important for
the company.

Another issue that can be worth considering is the length of the supplier relationship. The suppliers
considered to be retained and awarded future business should be prioritized. The type of
administrative or manufacturing processes used by the supplier should also be considered. The
industrial engineering techniques used during supplier development are more effective for labor-
intensive assembly processes than for capital-intensive ones. (Hartley & Choi, 1996)

3.9.3 Supplier Development Programs

Implementation of supplier development requires vast organizational changes with a fast paste that
suppliers must endure. Development programs can create better collaboration, where the buyer
company uses the program to help suppliers reach better performance. In most cases this is done
through better information flow and sharing of knowledge. (Beaumont, et al., 1996) Supplier
Development programs create benefits for both parts, although these profits are usually less obvious
to the suppliers. Therefore, the buyer company is responsible for informing its suppliers of the
advantages of such a program and to get them on board. In case of insufficiency in this process, lack
of proper commitment from the supplier should be expected. (Krause & Ellram, 1997)

28
Many companies use what they call a supplier development programs to award the supplier for a
certain level of quality or etc. A supplier development program must be more than that. It should be a
systematic teaching process, enabling suppliers make continuing improvements. (Hartley & Choi,
1996) Such a program should aim at the following improvements:

• Lowering the total costs of the supply chain

• Increase the profitability for the supply chain participants
• Increase the quality of the product
• Help achieve on-time-delivery at each point in the supply chain

In other words the program is after helping suppliers achieve better performance. Having them
charge less, or simply auditing their supplies, is not what the program is about. Two of the most
important functions of a supplier development program are:

• Provide information – regarding products, expected sales growth etc. lack of information will
lead to higher inventory to balance the uncertainty which in terms leads to additional costs.
• Provide training – for example, teach the suppliers how to cut costs, provide them with
know-how and tools to achieve improvements.

Of course, developing such a program will incorporate costs, time, and resources to commit.
Although, many big scale companies use such an approach. Purchasing Magazine conducted a poll
that claimed 53 percent of companies engage in supplier development programs. (Half Work with
Suppliers, Half Don't, 2000)

3.9.4 Mapping the Supplier Development

Steps in Supplier development recognized in most literature are more or less the same. After going
through many articles on the subject the following steps were introduced in most, and can be
applicable in most situations with minor modifications.

Figure 9 steps in mapping Supplier Development

29
3.9.4.1 Identify the most important commodities
This step needs the participation of all strategically affected departments such as finance, IT,
production, design, etc. this classification can be done by methods introduced in Supplier
Classification section of this chapter.

Low volume purchase high volume purchase

bottleneck suppliers Critical Strategic Suppliers
opportunity

substitution difficult strategically important

goods

monopolistic market substitution or alternate difficult

High

Noncritical Suppliers Leverage suppliers

opportunity

sufficient availability alternatives available

substitution possible standard specification of goods
goods
Low

Table 3 commodity portfolio Matrix (Handfield, et al., Winter 2000)

3.9.4.2 Identify the important suppliers 12

After identifying the critical commodities, suppliers providing these goods should be identified and
categorized into “problem suppliers”. These are the suppliers that should be developed and focused
attention on.

In identifying these suppliers a Pareto Analysis 13 might seem worthwhile. (Handfield, et al., 2000)

3.9.4.3 Start from within

Before addressing the critical suppliers to make the required improvements, buyer companies must
work from within and make the proper adjustments inside their company. By having a harmonious
strategy inside the manufacturing throughout to the supplier, improvements will be in line and
integrated with supply chain development.

3.9.4.4 Inform the supplier

The next step here is to meet the supplier top management and to inform them of measures and
strategic alignments of the company in order to have the suppliers integrated with the whole supply
chain. Furthermore Handfield, et al. (2000) expresses the need to be professional in meeting the
supplier to build trust and reliability.

It is common to use the suppliers’ competence and knowledge about the business, and then provide
them with new angles of approach and potential solutions. The buying company contributes by
12
Step one and two are more completely analyzed in the Supplier Classification section of this chapter.
13
Pareto Analysis is a statistical decision making technique to select a limited number of tasks that produce
significant overall effect. The idea is that the majority of problems (80%) are due to a few key causes (20%).

30
introducing new angles of approach and potential solutions and the supplier having knowledge of
their organization, contributes with solutions that demand knowledge of the business.

Different ways have been recognized in order to get the supplier “change”. These methods were
categorized in three major trends:

1. Point out: In this method the supplier gets informed of the fact that present performance is
not accepted.
2. Suggestions: Here customer tells the supplier how to improve “do as I say”. The problem
here is that risk undermines the existence of the supplier and stability gets worse.
3. Same way of working: This is done with the customer providing arguments on why the
supplier should use the same way of working as the customer. In other words education is
provided by the customer, “do as I do”.

3.9.4.5 Choose the key projects

The next step is to analyze the different opportunities detected in terms of feasibility, finance,
duration, and return on investment to choose the most important goals.

3.9.4.6 Set details of implementation

At this step a mutual agreement should be set on the whereabouts of the project; How much resource
is needed, when to distribute it and by whom, time frames of achievement, specific outcomes desired,
etc.

In order to make strategic decisions here, five functions should be considered and executed:

• Education; process improvements, quality systems, productions philosophies, etc.

• Certification; standardization of products.
• Joint product development; shared responsibility and co-operation.
• Sponsorship programs; permanent personnel at the supplier, works as a organ of contact.
• Jointly solving problems; joint financing, joint competence.

3.9.4.7 Monitor Implementation

The final step is to monitor the implementations in order to make sure everything is going as planned
and make changes in places of need.

3.9.5 Problems in implementation of Supplier Development

It is worth mentioning that in carrying out the steps in Supplier Development, like any other project
implementation, problems might occur. In this particular implementation problems might be due to
shortcomings from either the supplier company, the buyer company, or from the interface of the two
companies.

31
3.9.5.1 Supplier side
Shortcomings of the supplier might be because of shortage in its resources or simply from lack of
trust. Lack of trust is caused by putting insufficient effort in step four of the supplier development
map, Inform Suppliers. Shortcoming in resources on the other hand might be because of lack in
human resources, inadequate technology, monetary matters or machinery.

If suppliers are not assured of the outcome of the project for themselves, they might not put the
required attempt in implementing it. In order to solve this problem they should be assured of the
outcome and of how they will benefit, from the starting point. Ways to do this include: setting the
business relationships based on the improvement; showing where they stand among other suppliers;
pointing out the benefits from the beginning; and making sure of the execution through follow ups.

In implementing the improvement program supplier might come shorthanded due to lack of
resources. To cover up this deficiency, buyer companies can lend a helping hand by different means
such as providing financial support, providing personnel support, focusing on easy to solve
improvements, or provide necessary training.

3.9.5.2 Buyer side

The deficiencies here are mostly due to the fact that managers can’t see the real benefit. This might
be in line with raising the bar too high to achieve, dealing with too large a number of supplier to
make it feasible financially, or not having the proper support from higher authorities.

Minimizing the number of suppliers, setting smaller goals, focusing on the long term objectives, and
determining the costs and benefits will result in the desired commitment.

3.9.5.3 Buyer-supplier interface

The interfaces between the two partners make it smooth or harsh to conduct improvements. Problems
occur when trust is not present in sharing of information, benefits are not fully understood, and/or
alignment is not made properly.

Trust can be made through time with better communication, decreasing the presence of legal
involvement, having confidential information exclusive and etc. On the other hand, benefits to be
gained must be correctly communicated and incentives and motivations made for partners to commit
in the way they should. Finally to make alignment right road map of future objectives and
expectations should be duly shared and development programs should be adjusted to conditions.

Potential problems
Supplier Lack of commitment
Lack of resources
Buyer Lack of buyer and management commitment
Hard to see immediate benefits
Lack of enthusiasm due to unrealistic expectations
Buyer-Supplier Lack of trust
Table 4 potential problems in Supplier Development

32
3.9.6 Supplier Development Program at Scania
In order to understand a real time execution of a supplier development program, this study seemed fit
to briefly introduce findings of Scania supplier development report. (Andersson & Wahlquist, 2002)

During the 1990s Scania felt the pressure of a tough competition within the automotive industry.
Thus, in order to maintain competitive in the market, along other companies they started bench
markings. After the research done at Cummins in 1998, due to the positive results of the study they
established their own SCD-department. They have started a development program to help their
suppliers evolve their business with Scania support since.

The program is in most cases initiated when a problem occurs (reactive) and is intended for suppliers
with great importance. Suppliers with strategic importance are not included in the program. These
suppliers already know what is expected from them and live up to the demands. The purchasing
department is immediately notified in case of insufficiencies, and two different options are presented.
One is to call in an SDX-group that is responsible for the development of the supplier. The other is to
use a long-term approach where the supplier is educated at Scania’s production system (SPS). The
two different approaches to solve problems are:

1. Work Shop – Short term, reduce disturbances that needs to be solved immediately
2. Education in SPS ( Scania Production System) – Long term, supplier gets certified

3.9.6.1 Work Shop

A work shop is initiated when a supplier performance is not sufficient and the purchasing department
recognized a short term fix. The SDX-group will create an adapted program focusing on the failed
variable from the supplier. These variables include Quality, Delivery precision, and Economy. In
other words the people that work with Work-shops solve problems that need to be taken care of
immediately.

The following steps are untaken in a workshop:

1. Before the work-shop is started someone from the SDX-group visits the supplier to tell them
about the dissatisfaction of Scania.
2. The Work-shop is started with a discussion and an analysis with the supplier about its
performance.
3. Then the supplier gets to perform an exercise where the importance of delivery precision and
product quality is illustrated.
4. Then the supplier gets a chance to discuss the situation and ways to solve the problem.
5. The supplier now gets to present a possible solution for the problem.
6. Once this is done Scania and the supplier agree on an action plan that contains suggestions on
how the supplier will improve its performance.

33
3.9.6.2 Scania Production System
Scania production system (SPS) is similar to Toyota’s famous production system TPS. The SPS is
built on the fact that customer is in focus, staff are respected, company constantly attempts to reduce
internal waste, and that the operators have a central role. There are four overall principals that the
SPS is built upon:

• Standardized way of working

• Right from me
• Produce only when there is an order
• Continuous improvements

The education consist of Scanias attempt to perform training with the supplier, during a couple of
weeks. During this training they use tools like films, lessons, and visits at Scania production site.
This is done to inform the supplier how SPS works and what the principals are. After going through
the education the supplier is expected to become certified according to step one in SPS within a time
frame of 6 to 12 months.

34
3.10 Information Technology and SRM
It can be said that gradual increments of information sharing produce a positive increase in the local
and global performance of the supply chain (Willcocks & Sauer, 2000). Information Technology has
been both a driver and an enabler of the SCM world. In today’s ever growing IT world, newer
systems are more than just an efficiency enabler, they also enable new opportunities. (Skjott-Larsen,
et al., 2007) On the other hand according to almost every textbook written, information flow is a big
portion of SCM and Logistics. Thus, this research has seen fit to give an insight to how IT can
contribute to SRM.

One of the main issues in SRM, like many other parts of SCM, is the uncertainty existed in
placement of orders for suppliers. This uncertainty, itself is an effect of a bullwhip effect coming
from the end customer. Instead of the older method of buffering this uncertainty with material
inventory, IT has provided modern methods of buffering using clearer knowledge.

Logistics Information can be categorized into four groups of transactional information, management
control information, decision analysis information, and strategic planning information. (Skjott-
Larsen, et al., 2007) The application of each in SRM is shown in the pyramid understood from T.
Skjott-Larsen et al. book. The foundation of the pyramid being the transaction information bases the
ground for further decision and management purposes. Furthermore, computer software models in
assisting each of these named stages have been proposed in recent years.

Strategic planning info.

Decision analysis info.

Computer
programs
Management control info.
assisting the
applications
Transactional info.

Figure 10 different levels of Logistics Information in SRM

In SRM, the information flows in between different firms. This is known as the inter-firm
information flow. The most common information system in dealing with the inter-firm information
flow is the Electronic Data Interchange (EDI) which is widely used by most companies. This
commonality in utilization is vital due to standardization required for integration. However, as
mentioned before IT is an enabler of new opportunities. Hence, Internet and XML has opened
numerous doors for faster, easier, more accurate, more accessible, and finally with higher

35
transparency information communication. Transparency and visibility are the pre-requisites in
preventing errors from amplifying as information flows upstream to the suppliers.

To go even further, and have a higher level of optimization, the inter-firm information system should
be integrated all through the supply chain. (Skjott-Larsen, et al., 2007) This can easily be achieved
using the modern technologies such as RF and RFID tags which can transmit data from the point of
order all the way to the top suppliers by a click on the readers. Using the Internet as order placement
and inter-firm information portal is another way of achieving this integration.

P.B. Schary et al. illustrate the connections between the company and its suppliers in figure 11.
While top management negotiate the requirements for starting business, other levels of performance
need to be coordinated through transaction of information. Operations in one company should be
informed to the planning level of the other and vice versa. The duration of relationships between the
two companies depends on the duration of these connections which in terms depend on level of trust
and relationship between them. IT systems such as email, extranet 14 portals, EDI, and many more
can be enablers of this coordination to the highest point.

Negotiation

Boss Coordination Boss

Planning Planning

Execution Execution

Supplier Buyer Company

Figure 11 inter-firm connections (Skjott-Larsen, et al., 2007)

Finally, Information Technology is developing by the day and bringing upon new opportunities for
faster, easier, and more efficient connections and thus making the supply chains ever more virtual.
Virtual networks are chains where the partners within a supply chain are linked together by a
common information system (Harrison & van Hoek, 2005). Virtual chains in term help in flexibility
and efficiency in connections and performance due to the transparency of information from upstream
to downstream.

Virtual integration is a prerequisite in order to compete in today’s global market where the consumer
is in focus and consumer insight becomes extremely important. Information technology means
opportunities to find the key to competitiveness. Therefore, corporations should have in mind that
moving with technology, although risky, would be the winning card.

14
Extranet is the extended version of internet, used between the company and its suppliers or customers.

36
4 Empirical Foundation

4.1 Volvo Penta Supplier Relationship Management

4.1.1 History
Volvo Penta’s history goes back to 1868 when Sköfde Gjuteri och Mekaniska Verkstad was founded.
Manufacture included cast-iron goods and hardware such as boilers, pots and pans, ploughs and
threshing machines. It was in the early decades of the 20th century that the engine production started.
The engine produced was called Penta, gotten from the Greek word meaning five, referring to the
five men who sketched the first drawings of the product. In the second decade of that century the
production was extended to two, three and four cylinder engines. Later in 1946 the 6cylinder diesel
was introduced.

Export began and continued during the 60s and 70s and rose as high as 84 percent in 1973. Large
volumes of industrial engines were sold to makers of irrigation units. Volvo Penta acquired outboard
production from Monark-Crescent, adding new products to the program. In 1991, Volvo Penta
launched the KAD-concept, a new generation of engines with lower weight and reduced emissions
and fuel consumption. The next year, in Lexington, Tennessee, Volvo Penta began manufacturing
gasoline engines and Aquamatic stern drives for the increasingly important American market. (Volvo
Penta global website) Later that decade Penta, taking advantage of the growing economy in China
and Far East established an assembly factory for industrial engines in Wuxi, outside Shanghai.

Figure 12 Distribution of Volvo Penta worldwide

37
4.1.2 Penta within AB Volvo
AB Volvo is one of the biggest industrial companies in Sweden today. It has production in around 25
different countries. The company has approximately 80.000 employees within five different business
areas. Mack, Renault and Volvo Trucks represent over two third of the company’s turnover. Volvo
Penta is one of the smaller manufacturers within the group.

Figure 13 AB Volvo companies and business units, where Penta stands in the AB group

4.1.2.1 Volvo Penta Distribution Center (VPDC)

VPDC is situated in Vara, Sweden. Orders are shipped to customers worldwide with an
approximately 95 percent export rate. A complete order is a combination of engine, drive and other
accessories. All these material are supplied from the Vara factory, which makes the logistics flow
rather unique.

It is worth noting that since the engines Vara is producing are worth around 70,000 SEK each, a one
day stop in the production caused by any shortcoming from any of the suppliers would be extremely
costly for the plant.

38
4.1.3 Production
It is well said that Penta is constantly developing new ideas for its products. The launch of the D4
and D6 by the company has been the big news in the marine business. These top notch engines are
manufactured in the factory in Vara. Volvo Penta also manufactures the new electronics platform,
EVC (Electronic Vessel Control). (Volvo Penta global website)

By taking advantage of electronics, Volvo Penta was first to develop the next sensation in the marine
world: the joystick – a skipper's dream. The innovative joystick makes it easier to dock a boat than
park a car. (Volvo Penta global website) Moreover, in the autumn of 2006, the first four-engine
installation of IPS on a single 75-foot boat was performed.

4.1.3.1 Production motive

As noted, Volvo Penta is one of the smaller Volvo Group companies with a unique specialist
production. This could be taken as one of Penta’s advantages. On one hand being part of a strong
organization provides technical and financial support to innovative and pioneering features, and on
the other being a small company means having flexibility.

At Volvo Penta the goal is to provide the right product, with the right quality, at the right time and
place, with the right price, to the end customer. This has made Penta’s products labeled with a clear
innovative and competitive image. In achieving this goal Penta maintains committed to the Volvo
Group standards of quality, safety and environment.

Their motto in production is: "Volvo Penta Purchasing shall have such competence regarding the
global supplier market that Volvo Penta will be provided with optimum Product- and Process
development, Products, and Services that fulfill and exceed the customer's expectations on quality,
cost and times." (Volvo Suppliers website)

Since Vara changed policy to manufacturing towards the customer, the production rate has
decreased. Consequently, the delivery of raw material needs to be decreased as well. Even though, it
seems easier to change the production rate, having the long term objectives in mind, changing the
delivery rates from suppliers seems the better choice.

4.1.4 Volvo Penta Supplier Market

Penta Vara is dealing with 244 suppliers worldwide. Hence, it can be said that Volvo Penta is dealing
with a semi large number of suppliers.

Basically, Vara is oriented towards European suppliers, but also have suppliers in Japan, Brazil and
in the US. They are planning European hubs for far away suppliers in order to maintain the three day
delivery lead-time. Vara has around 20 US suppliers from before, but is trying to replace them with
new European ones.

39
Due to the nature of the product Vara is producing, suppliers for each part are unique. So, the
company does not have the space to change suppliers as easy and as often as wanted. This further
means, they cannot implement new Supplier Selection methods in most cases. Consequently, this has
shifted some power to the suppliers, making it difficult for Vara to deal with the shortcomings that
occur every now and then. Thus, they have to deal with the existing suppliers and try to improve the
relationships with suppliers, making them have a long history of relationship with most. In addition,
changing suppliers here would be extremely costly and not feasible.

Furthermore, the Supplier Selection process and the contracts with them are conducted by a separate
department of procurement. This is a separate office located in Gutenberg which acts for all AB
Volvo companies. They have a mutual Supplier Evaluation Model (SEM) in order to select and
evaluate suppliers for all companies. According to the document prepared by Volvo Logistics on
SRM, these general SEM measurements within Volvo groups are as follows:

1. The right product; 2. The right quantity; 3. The right time; 4. The right place.

Furthermore, measures should be in accordance with the delivery instructions indicated in each
individual contract. Unfortunately, neither Sufficient nor efficient communication exists between the
procurement department and the main manufacturing department in Vara. Consequently, this has
caused some conflict in interactions and requisitions between Volvo Penta and the suppliers.

In addition, AB Volvo has conducted an internet based supplier portal for some limited activities
with their suppliers such as posting SEM information, attracting new suppliers, and available forms
for new potential suppliers. Vara demands that suppliers receive EDI call offs from the company and
invoice them over the net. Today around 220 of their suppliers are on the EDI connection, the
remaining ones will not convert to EDI basically because they are small suppliers or US based ones.

Vara does not accept deviations from spec in material, and is asking the supplier to replace or rectify
the fault on their own expense, but other costs will be covered by Penta. According to Penta
management if they are dealing with a critical deviation from the standards agreed upon extreme
measures (i.e. zero tolerance 15 ) are taken. However, informal communication and meetings on the
subject are preferred.

Since Penta Vara does not have the freedom in changing their suppliers, and considering the number
of existing problems with a number of the suppliers, it can be interpreted that they are using a
reactive way of working. This reactive way should be changed into a proactive way trying to prevent
problems from occurring in the first place.

15
This is not the same concept of “Zero Tolerance Approach” taken by Volvo Trucks.

40
4.1.5 The Supply Chain Development Program
The following points are the different objectives recognized by Penta for the Supply Chain
Development (SCD) program:

• Introduction of members and information on Vara-plant.

• Volvo Penta view of current situation, potential issues, and future actions. The issues here are
as follows: Communication, Delivery performance 16 , Actual capacity vs. delivery schedules,
Lead-times and flexibility, Quality issues measured using QPM 17 and PPM 18 19 , Status of
ongoing initiatives in cases of availability, Other issues such as EDI, packaging, labeling, and
etc.
• The suppliers’ view on current situation, potential issues and proposed actions.
• Agreement on short-term and long-term action plans, to secure and develop material supply
to the Vara-plant.
• Wrap-up and conduct decision on next steps, i.e. follow-up on meeting.

4.1.6 SRM within SCD program

Volvo Penta vision for the SCD program for 2008 is developed to the thought of having suppliers
who can support the volumes, variations and demands that the market is asking for by a hundred
percent.

In order to achieve this vision, Penta overtook an SRM program as one of the major parts of the
SCD. The steps taken in this program were as follows:

• All suppliers have received some attention, at least a letter containing information of where
Volvo Penta is going.
• Suppliers are classified by means of quality and delivery precision into four groups of
Problem suppliers, Important or sensitive suppliers, Suppliers with development potentials,
and lastly others.
• Top group of suppliers have been to Vara during 2008 on a logistics day, along with the
procurement and quality departments.
• Top group of suppliers are to participate in cost cutting projects.
• Middle group have been visited by logistics or quality departments.
• There is an agreed way of measuring performance, and it is on a regular basis communicated
to the suppliers.

16
planned level is a hundred percent
17
Quality Performance Measures
18
Production Performance Measures
19
planned level is more than 200PPM and 50QPM

41
Furthermore, a “Working procedures and methods” outline has been sought after by the group in
order to handle the suppliers. In this outline procedures and methods for how to work with suppliers
were to be documented. According to the SCD program in Vara suppliers are classified into three
groups of important or sensitive suppliers, suppliers with development potential, and finally others. A
fourth group of Problem Suppliers is also identified. Lastly, the outline is to point out the different
working procedures on how to handle the fourth group of Problem Suppliers. These new ways of
working are noted to note: communication about Penta’s demands on quality, frequently organized
meetings, common cost reduction activities, follow-ups, or measures from supplier.

Another issue recognized in this program is organizing and bringing upon closer cooperation and
responsibilities between SQA 20 and the Vara plant. Responsibilities were to be duly defined. In
addition, new methods of working together through meetings, follow-ups and so on, between Vara,
SQA and the suppliers were to be explained.

Moreover, in order to assure the Proactive flow in the defined methods, the new working procedures
were to be tested. Firstly, the new ways of working with suppliers in group one, were to be tested on
nine of the suppliers in this group. The results were further to be evaluated and modification made in
places of need.

4.1.6.1 KPI-goal: PPM

The ultimate goal in this program was that by the end of 2008 the PPM-level for the nine chosen
suppliers be at a constant level of 200 PPM. As of today this goal is not yet achieved.

4.1.7 Communication

Order PMI EDI

Customer MU1 S1
VPDC
Order PMI EDI
Customer MU2 S2
Manufacturer
EDI
Customer Order PMI
MU3 S3

End Customer Market Unit Vara Manufacturing Supplier

Figure 14 the communication outline between Vara, its customers, and its suppliers

4.1.7.1 Placement of orders by end customers

Volvo Penta engines are sold through Market Units (MU) located along the coastal areas worldwide.
The MUs forward the order via a computer system (PMI), directly to the factory as soon as placed.
Then the engine is booked, and either removed from VPDC or Manufactured to order in Vara
Production. 21

20
Supplier Quality Association
21
The lead time for production is eight days.

42
4.1.7.2 Communication with suppliers
Using a forecast method incorporated by Penta group, after estimating the needed supplies, Vara
communicates them using an EDI system on weekly basis. The systems suppliers use, are required to
be completely compatible with the one at Vara, and upon this date they all are.

The major problem in the EDI system is at times when a supplier wants to switch to EDI and they
have to deal with startup problem, but this is normal and not a big issue.

At Penta the suppliers are expected to be contacting the company in case of problems. In case of any
deviation from what Penta has ordered whether from material ordered or the required delivery time,
Penta should be informed. However, the company checks the lists daily and follow up on “missing”
items are conducted. But as stated the normal thing is that suppliers contact the company.

Using this EDI system and the evaluation method incorporated by the company, suppliers are
informed of their performance and of which performance group they are in (problem suppliers or
not). In line with this, suppliers are also visited twice a year by the company representatives for
further update and evaluations.

Furthermore, after a Supply Chain Development program, a research program incorporated by Penta,
they distributed a letter indicating the company objectives and their expectations from the suppliers.
These letters were communicated to all suppliers in order to inform them of the expectations, and for
them be prepared for further communications. Suppliers are also scheduled for follow up meetings
for closer communications.

It is worth mentioning that suppliers should be informed of how they are being measured by the
company they are working with and where they stand in this evaluation method. This will help the
suppliers make improvement in order to be on the top of the evaluation list. Consequently, this will
make deeper closer relationships and loyalty between the two companies.

Vara has also planned to meet the suppliers in group one at least once a year, but unfortunately real-
time situation has made this impossible in some cases. However, Vara has made sure to have oral
communication with 80 percent of them every year. The meetings are to mainly discuss deviations
from Vara expectations, or to consult new material or services required for the plant. According to
one of the managers, having face to face meetings is always the most effective method available.

43
4.1.8 Connections with Suppliers
In order to find the existing connections between Vara plant and the suppliers, this research
approached a number of the top suppliers. Vara lists their suppliers according to the volume delivery
to the plant, the highest delivery supplier being at the top of the list. In this study, the top ten
suppliers in this list were chosen and a questionnaire was prepared in order to map the connections.

How much does Vara

have a say towards this
Delivery lead-time
supplier? (Measuring the
from the supplier level of dependency)

Depth of
communication,
frequency, accuracy
History of quality and and trust
delivery of the supplier Supplie

Flexibility of the
supplier towards Vara
Specific issues with
the supplier

History of problems with

the supplier and the
history of vara dealing
with it

Figure 15 Mapping the Supplier connections

The outline of this questionnaire is depicted in figure 15. As illustrated in the chart the list of
questions was after finding the following criterions:

• Level of dependency between the plant and the supplier

• Level of flexibility of the supplier towards the plant
• Dept of communications, (the frequency, accuracy, and trust)
• History of problems and issues
• History of quality and delivery
• Delivery lead time

The findings from this evaluation are summarized in table 5. As it is listed in the table, it can be
clearly seen that wherever the level of dependency, flexibility, and communications are low and
limited, the given supplier falls in the Problem Supplier category. Further, as seen in table 3, the
delivery precisions are relatively low for these suppliers.

44
On the other hand, according to Vara plant they have been having problems with the oversea
deliveries due to long time taken to fix defects. Moreover, as detected here there was a connection
between the lead-times and level of performance in factors noted.

Supplier Quality Delivery Lead Dependency Communication Flexibility Problems &

(Problem / (PPM) (del.pre) time issues
non-problem) (days)
NP 0 97.4% 1 High High High -
NP 0 100% 3-4 High High High Long lead-
time in case
of new parts
NP 0 95.8% 3-4 High High High -
NP 0 75% 3-4 High High High -
P 0 62.4% 6-7 Low Limited Low Limited
because of
the contract
by the
procurement
NP 4405 100% 5-7 High High High -
NP 0 - 20-25 High High High -
P 0 78.2% 2-25 High High Limited Change of
supplier
NP 244 100% 3-4 High High High Change of
supplier
NP 0 100% 3-4 High High High -
Table 5 evaluation of Vara top ten suppliers according to volume delivery

4.1.9 Supplier Segmentation within Penta Vara

As mentioned and as part of the SCD program within Penta, suppliers were evaluated according to
quality and delivery precisions. Vara has a formal classification method in measuring the suppliers
which is consistent and coherent between different suppliers and divisions of the company. It is
important to be consistent between different divisions and to use the same measures among suppliers.
This will bring integrity to the performance and give a coherent view to the company in case of
evaluation and thus weighting of the suppliers.

Based on the same quality, and deliver precision measures suppliers are evaluated regularly to see if
they cope with the company needs and changes through time. In each case this evaluation might
change their group from either color to the other.

So, suppliers were classified into four groups: Problem suppliers, Important or Sensitive suppliers,
Suppliers with development potentials, and lastly others.

The problem suppliers are the ones which will be focused on first. Each supplier within this group
will be asked to pay a visit to Vara plant and measures, standards and expectations will be duly
explained to them. Mutual objectives will be defined and follow-ups will be made. Thereafter, the
suppliers within the Important or sensitive group will be processed and invitations will be sent to
them for cost reduction purposes.

45
Figure 16 Vara Supplier Segmentation pyramid according to the attention planned for

Vara had a research conducted on each of the suppliers in the segmented groups and studied the areas
of problem for each supplier. These problems were measured by means of delivery precision and
quality. Finally, suggestions were made for improvement in case of each supplier and filed in
separate documents.

This report attempted in reviewing these documents in order to find a common trend or a connection
in the source of problems. The review was done on 21 of the top problem suppliers according to the
list already prepared by Penta and summarized in an excel table. A brief format of the table is shown
in Table 6 evaluating the Problem Supplier grouptable 6.

Main Port of Del. Suggestions Dept.

Supplier Quality Logistics
Problem Delivery Precision by Penta Involved

flexibility Change
Sweden Flexibility
Lead times
with Vara supplier
lead time Local DC
Supplier Europe 40 - 97
Small
Defects purchasing
del perc. deviations Closer
East Asia from Suppl.
Quality Relationship

Table 6 evaluating the Problem Supplier group

4.1.10 Sources of problem

The main problems detected in evaluation of Problem Suppliers were the supplier flexibilities, long
lead times from oversea suppliers, bad delivery precisions, some software system problems, and
some quality issues. The suggestions made here were to change the supplier in extreme cases, to

46
change the lead time frozen times, work on flexibility issues, working on contracts, planning Local
Distribution Centers, and developing closer relationship by having frequently meetings.

From this evaluations as well as the one conducted on the top suppliers according to volume delivery
two main problems were extracted.

1. The limitations brought upon by poor communication between the procurement department
and Vara Plant. Consequently, this has lead to contracts that are not completely compatible
with the requirements of Vara. Hence, it can be said that deeper communication between the
two offices will solve many problems with the suppliers.
2. The lead-times required to fix defects and problems every now and then. This lead time
might be due to the location of port of delivery and limited communication between the two.
Having more frequent quality checks before shipment, having in house employees from Vara,
or higher level of risk sharing might be the answer to this problem.

47
 4.2 SRM within Volvo Trucks

4.2.1 Supplier Market

Volvo Trucks is dealing with around 1200 suppliers. This number is almost thrice the number of
suppliers Vara is working with.

They have a developed SEM (supplier evaluation model) on which they measure the supplier
performances. These are standard measures consistent and common among all divisions of AB
group.

Volvo Trucks has locally situated plants for oversea and faraway suppliers and subsequently has a
three day delivery lead-time from all its plants.

4.2.2 Procurement within Trucks

Like Vara, the third party department of purchasing is in charge of the Supplier Selection and
contracts made with the suppliers. But, unlike Vara, Trucks has a close interaction and
communication with the purchasing department and thus they work together in choosing and closing
deals.

However, still the main problem Trucks is facing in dealing with suppliers recognized by the
management, is the fact that purchasing is in charge of controlling the suppliers on cost and price
matters. Considering the fact that Trucks has a close relationship with purchasing, not having full
control is still an issue.

4.2.3 Communication
Following a SRM research done by the company all suppliers were connected to the company
through a separate SRM advisor in the SRM Logistics group. This has made the interactions and
performances become much more integrated in dealing with each individual supplier. It has also
reduced the administrative costs involved. In line with this, all suppliers communicate their problems
and concerns directly with this group, and the group in charge of resolving the issues. Furthermore,
all problems regarding delivery and quality are required to be communicated with the SRM Logistics
group in advance, so they can be sought through and planned for.

S1 advisor1

advisor Manufacturing
S2

S3 advisor

Suppliers SRM Logistics Group Trucks Core Company

48 implication
Figure 17 Volvo Trucks Communication outline and SRM advisor
In order to have the efficient communication needed, Volvo requires all suppliers to have an English
speaking contact for interacting with the company. They are also asked to have a 100 percent EDI
installed system compatible with the one of Volvo and their second tier supplier.

Volvo Trucks communicates the delivery precision acquired by each supplier through Dispatch
Precision Statistics form, at the beginning of each month with its suppliers. This helps the suppliers
be alert and informed of their performance measures constantly and thus, make the necessary
improvements where and when needed.

Finally, they have frequent meeting held within the company and with the suppliers on areas of
development as well as measures and evaluations taken.

4.2.4 The Supplier Internet Portal

The Volvo Supplier Internet Portal 22 is an online website created by the group for interaction with
current as well as potential suppliers. Unfortunately, not all Volvo group companies and suppliers
use this website actively, and due to mainly security reasons, EDI system is more commonly used for
communications. However, according to one of Trucks managers, they have a high level of
utilization of the suppliers Internet Portal.

The website has numerous features for suppliers. Among them are the SEM measurements required
by AB Volvo and questionnaire forms for new potential suppliers seeking partnership. This portal
has separate parts for each individual AB group companies with their own information.

In Volvo Trucks they have unique tables in order to evaluate and inform suppliers of their
performance updates. The Supplier Performance Breakdown sheets use different SEM qualifications
such as PPM, QPM, Delivery Precision, and costs incorporated to evaluate supplier performance.
Suppliers can be informed of their performance and the company on the other hand will have an
active database for evaluation perposes.

Figure 18 a copy of the Supplier Performance Breakdown sheet from the Supplier Portal

22
www.volvo.com/suppliers

49
Another feature on the Supplier Portal is the Dispatch precision statistics form. This form is
communicated by the SRM Logistics group at some AB Volvo companies including Trucks to the
supplier at the beginning of each working month 23 . These sheets inform the supplier of their
performance according to the delivery precisions in agreed upon intervals, a copy of this sheet is
shown in figure 19.
Volvo DISPATCH precision statistics

Supplier : .... ....................

Host Buyer : 0000 RV3P 0550

SQA Host : VTC 2009 .............

Logistic coach: VTC 9468 .............
-------------------------------------------
I Period 07 03 I Period 07 02
I Weeks 0710 - 0713 I Weeks 0706 - 0709
I I
Goods Main I Qty of Correct I Qty of Correct
receiver suffix I deliv. Qty % I deliv. Qty %
--------- ------ I ------ --- --- I ------ --- ---
1001/VTC /TUVE 20 I 10 9 90 I 16 14 88
1002/PARTS/GENT 95 I 6 6 100 I 11 10 91
1024/VBC /BORÅS 28 I 2 0 0 I 1 0 0
4388/N.ASSY/NRV 556 I 2 1 50 I 1 0 0
4645/VET /GENT 70 I 8 8 100 I 7 7 100
---------------------- ------------------ --------------------
Totals: 28 24 86 36 31 87

Note: Please give feed-back to the material controller at the

specific goods receiver within five working days if you do not
agree with the figures of the latest period

Figure 19 Volvo Dispatch precision statistics sheets

4.2.5 The Supplier Relationship Development Program

Furthermore they have had a research study done on Supplier Relationship Management and are
implementing the results on their relationships.

One of the implications is the imputing of one SRM advisor for each supplier. This has helped them
reduce the number of employees and thus cost in this area.

Volvo Trucks has changed their measuring factor from delivery precision to batch precision. In
addition, they have also added the frequency of communications between the supplier and Volvo
Trucks, as another factor in evaluating their suppliers.

In order to keep in track with the research done and to improve the supplier relationship status,
Trucks holds meetings every forth night. They also discuss the new possible developments in these
meetings.

They have developed two different concepts in order to ensure suppliers comply with standards a 100
percent. The two concepts are called Global charge back policy and Zero tolerance approach. These

23
These forms are updated in GPS

50
approaches are to enables Volvo group companies pursue recovery of costs due to external supplier’s
non-conformance.

4.2.5.1 Global Charge back Policy

This policy is taken upon a supplier’s inability to meet company’s requested dispatch or delivery
date, or the requested quantity within an agreed upon lead-time.

The charge back policy determines the number of hours per non-conformance area, to be charged
back to the company immediately (e.g. in case of a missing on line), or after a given grace period
(e.g. in case of an incorrect label). This policy can be employed partly on an ad-hoc basis as well.

4.2.5.2 Zero Tolerance Approach

As part of the Charge Back Policy, the Volvo Group plants can apply the Zero tolerance approach.
This approach is taken in case of major suppliers that are disturbing the production, or have a high
impact on the number of incorrect deliveries to each plant.

The approach states that if suppliers have not reached the 100 percent target of dispatch precision
within the agreed time period, and despite thoroughly discussed and agreed time and action plans, the
full extent of Charge Back Policy will be applied. Then the company conducts invoicing on e.g. 1
hour per fault delivery. The objective is to improve the supplier’s service level considerably, in order
to reduce the total cost in the supply chain from supplier to the point of use.

The approach can be calculated according to the following equation.

Charge = No. of wrong deliveries 24 × 1hr per working cost per plant 25

4.2.6 SRM Logistics group program

Some of the major AB Volvo group companies 26 have developed a SRM Logistics group transferring
the responsibility of SRM and SRM development issues to them. This has had a number of
advantages including reduction in personnel cost, reduction in administrative costs, creating unity
and integrity, reliability, and finally higher level of education incorporated.

The main responsibilities of this group are recognized to be: Assist, Evaluate, Supervise, and
Provide. Assist, is to help suppliers reach the objectives and standards set by Volvo. Evaluate, is
taking SEM factors of dispatch precision and logistics audits to measure their performance
throughout time. Supervise, is to supervise their commitment against updated action plans given by
Volvo. Finally, Provide feedback of their performance to the suppliers through meetings.

In Volvo Trucks All suppliers must be assigned to an SRM in the purchasing system 27 . Thus, the
SRM will be the primary contact and information channel for all SRM Logistics activities.

24
too early, too late, or the wrong quantity
25
differs from year to year and from plant to plant
26
Including Volvo, Renault, Mack, Trucks, Bus and Parts
27
Today named as Coach in GPS

51
Consequently, major risks of supply shortage or disturbance, will be coordinated by the SRM. In the
same manner, all questions regarding matters such as daily supply issues are to be communicated and
solved between the different contacts at the supplier and goods receivers here.

4.2.7 Sharing Responsibilities (Risk)

In the research conducted by this group, one of the fundamentals has been the responsibility sharing
between both the suppliers and Volvo Company.

Volvo Trucks has implemented this article by dividing responsibilities in the following manner. The
company takes responsibility for the transport batch. They share the risk involved by having
suppliers take charge of delivering batches with a 100 percent precision on the point of delivery.
Trucks, on the other hand, takes full responsibility for giving the best possible forecast required 28 .
Moreover, suppliers are the ones taking full responsibility for quality issues.

4.2.8 The escalate strategy for Critical Suppliers

This strategy is a five step strategy taken by Volvo Group in order to deal with suppliers bringing
upon problems for the company manufacturing. Each step explains what the depth of problem is and
how the company should deal with it and what measures should be taken.

The first step is in case of delivery disturbances from the set agreements. In this case the Material
controller in the SRM Logistics investigates the reason for the disruption, and discusses the problem
with the contact person at the supplier. Furthermore, daily control of disrupted material flow should
be taken to avoid consequences in production, assembly and after market.

In the second step if the delivery disturbances continued existing despite an agreed upon activity
plan, or if the activity plan was not presented to the Material controller within the requested time
period, further measures should be taken. At this point, the material controller informs the material
control-manager about the delivery problem. Moreover, the SRM person and purchaser are informed,
and the Supplier team manager will comment on the agreed activity plan or present the previously
requested activity plan. If required the supplier and the Material controller meet to discuss ways to
fix the problem.

However, if delivery problems still continued, the Material controller still has the responsibility for
day to day operations and all information about deviations, and to tell the Material Control Manager
of the problem and all its relevant information. At this point, the Material-control manager might
decide to involve the SRM person, purchaser, delivery account manager and Material controller for
discussion of corrective actions. Responsible managers at the supplier are called to a meeting. All the
members mentioned along with the supplier agree upon a revised action plan.

If the decisions made were not kept by the supplier and the supplier still remains critical, the
purchasing comes into action. Purchasing works together with the SRM person to try fix the problem.
28
They are making frequent forecasts twice a week inside the company and communicating it with the suppliers just
as often. Although, they have a freezing time fence of three days incorporated with the suppliers.

52
If necessary, they will have departments of Supplier Quality, Volvo Supplier improvement team etc
to support. Corrective action plan as well as time fencing will be presented to Purchasing, Material-
control and Manufacturing Management.

Finally, in case the supplier still remains critical despite all previous actions plans the purchasing
management comes to action. The buyer-supplier relationship responsible person along with the
purchasing set up a crisis organisation. A possible change of supplier is discussed at this stage.
Material controller is still responsible for details and information on demands and deliveries.
Level of activity

Step 5

Step 4

Step 3

Step 2

Step 1

Responsibility

Figure 20 the escalated strategy for critical suppliers (V7 ConfEscalStratCritSuppl 20070321)

53
4.3 Penta vs. Trucks
In order to find out ways to improve the SRM within the case study company, this section tried to
make a comparison between how Truck is proceeding and how Penta is working. Different methods
that seem to be effective in Trucks were extracted and compared with those that were not working in
Penta.

4.3.1 Points from Trucks SRM

The important and dominant points found in the SRM methods researched and practiced in Volvo
Truck were the following:

1. Situating one SRM advisor per each supplier

2. Choosing “frequency of communication” as one of SEM factors
3. Setting frequent follow up meetings
4. Sharing the risks involved (Supplier taking care of quality or delivery vs. Trucks providing
right forecasts)
5. Having Local Distribution Centers for far away suppliers (in order to maintain the three day
delivery lead-time)

Furthermore, the key factors and facets in Volvo Trucks communication with its suppliers were
summarized in these numbers:

1. Communicating all issues through the SRM advisor regarded for each individual supplier
2. Dispersing “Dispatch Precision Statistics” sheets to each supplier on monthly basis
3. Having frequent follow up meetings
4. Active use of the Internet Supplier Portal for some extend of communications

The final issue worth noting in Trucks SRM is the step by step dealing method with critical suppliers.
This step by step method is recognized as soon as a supplier starts disrupting the production and the
smoothness in delivery of goods is distracted. At this point first the Material controller gets involved,
seeking out a solving solution. Step by step if the problem is not resolved involvement moves up
towards the top management. The last step involves consideration of change of supplier.

4.3.2 Comparing the communication strategies

Comparing the two network of communication between Volvo Trucks and Volvo Penta in figure 21,
it is clear that the difference is the existence of the SRM Logistics group and attribution of one SRM
advisor for each individual supplier. This has had numerous advantages including integration of the
performances and interactions, administrative cost reduction, personnel reduction, and finally closer
relationship due to more personal communications. The important thing to take into consideration is
the SRM advisor’s personality and marketing skills.

54
 Volvo Trucks

Supplier SRM advisor Core Company

VPDC Volvo Penta Vara

Manufacturer

Figure 21 the communication network of Vara and Trucks with their suppliers

4.3.3 Main SRM differences

In the final section of this chapter, the main differences between the SRM strategies within Volvo
Trucks and Volvo Penta have been listed.

1. The first important difference is in the relationship between the manufacturer and the
procurement department. One of the major problems Vara is dealing with is due the limited
communication they have with the procurement. Procurement is in charge of contractual
matters as well as evaluations and SEM. Thus, not having close communication with them
has made strategies unaligned and thus limitations in flexibility between the manufacturer
and its suppliers. On the other hand, it is clearly visible that with having close relationship
with the purchasing department, Trucks does not face such issues. In fact, this department
works like a hub organizing and integrating relationships.

2. The second issue is the SRM implication of one SRM advisor per supplier in Volvo Trucks.
As stated before, this has had several advantages for Volvo Trucks. On the contrary, Vara
communicates with Suppliers through EDI in a general method. In a meeting with one of
Trucks management, it was stated that the new method has lead to less administrative costs,
including personnel, dedicated to different aspects of SRM. Further, this has made the
performances and the interactions far more integrated between Trucks and its suppliers. This
might be effective in Vara as well.

3. The next point is Trucks taking frequency of communication into consideration as one of
SEM factors. This sends a signal to the suppliers, informing them to communicate more
frequently and closer to be among the top suppliers. This improves competition among
suppliers to improve their communication skills and consequently strengthens the
relationships.

4. Another measure in Trucks being effective in SRM is having Local Distribution Centers for
suppliers located farther in distance. This helps them maintain steady delivery lead-times. In
addition, it also helps noticing shortage in deliveries and quality issues in advance and
conducting action plans preventing disruption in material flow.

55
5. The final measure to note is the use of the supplier internet portal. More frequent use of this
portal will help the company gain closer and smoother communication skills. Communicating
through the internet will help supplier relationships be more accessible, faster, with more
visibility. This visibility in terms will improve communication itself as well as preventing the
amplification of errors by detecting them ahead of time. Moreover, due to the transparency
brought to the chain it will also increase flexibility between the two companies.

56
5 Discussion: Problem Analysis

5.1 SRM trends in literature suitable within Volvo Penta

After conducting the literature review, this thesis tried to find specific SRM trends suitable for Volvo
Penta Manufacturing. The report started with social factors to consider in relationships with
suppliers, how procurement can become more effective in SRM, the supplier development steps to be
taken while having an effective classification of suppliers, and finally the problems that might occur.
In the end the information flows that need to be heightened were recognized and a brief note on how
IT can contribute was made.

5.1.1 Social Factors

As mentioned, culture, society, politics, and traditions play an important role in any relationship.
After choosing suppliers in a global scale the company must realize these social factors and make
adjustments needed in order to maintain and develop a nourishing relationship.

The main aspects realized in this report, and applicable to Vara Supply Chain, are listed below. These
aspects should be communicated and understood between both the company and its suppliers.

1. Compliance: Knowing who you are working with.

2. Conduct: Knowing and standing up to the recognized responsibilities.
3. Strategic Finance: Issues to consider here are:
• payment terms,
• existing trade offs (e.g. lower price vs. trust),
• time fencings,
• currency fluctuation risks

5.1.2 Making procurement more effective

There were two things to take into consideration in this section. One was the Supplier Market of
Vara, and the other was the fact that they do not have the ability to change suppliers as easily and as
often as wanted. Thus, all the steps on the role of procurement named in the theoretical foundations
chapter could not be utilized in Vara. The ones applicable in order to improve the effectiveness of
procurement were as follows:

1. Gathering information: information should be Current and Accurate from both the supplier
and the buyer company;
2. Fulfillment: to make sure suppliers make the necessary shipment, deliver, installation, and
training on one hand, and Buyers make the necessary payment on the other;
3. Consumption, Maintenance, and Disposal: here they should evaluate supplier
performances and services. The important issue here is to:

57
 Maintain close communication with the manufacturing.
4. Renewal: decide whether to renew the contract, change supplier, or produce item internally.

• Company requirements
• Supplier shortcomings

Procuremen Close relationship Core Company

• Terms of Contract
• Permitted deviations from accepted standards
Figure 22 communication network between procurement and the Core Company

5.1.3 Mapping Supplier Development Step by Step

Finally, and after considering the social factors as well as the possible contributions of Procurement,
a Supplier Development Map was sought after. After numerous literature reviews the following Steps
and outlines were found to be most effective in Vara.

1. Indentifying the most important Suppliers: This is one of Supplier Classification techniques.
Taking table 7 into account, one of the most effective methods of classification is by
comparing and contrasting the volume of purchase from the supplier, against the nature and
value of the product purchased. The value and nature are measured upon the degree they
make the final product unique in the market.
Low volume purchase high volume purchase
bottleneck suppliers Critical Strategic Suppliers
Strategic item

substitution difficult strategically important

internal production might be an option substitution or alternate difficult
Suppliers

monopolistic market major importance to purchasing

high entry barriers of importance to Supplier Selection
critical geographic or political situation
Noncritical Suppliers Leverage suppliers
sufficient availability sufficient availability
item Suppliers
Non-Strategic

substitution possible alternatives available

lower information sharing substitution possible
standard specification of goods benefiting from economy of scale
learn from competition
standard specification of goods

Table 7 a Strategic Supplier Segmentation

From the strategic segmentation given in the figure above, after segmenting suppliers
accordingly, the following strategy of relationship can be chosen for each:
• Non-Critical Suppliers → Arm’s Length relationship 29
• Leverage Suppliers → Mid-term relationship; taking advantage of economies of scale
• Bottleneck Suppliers → Long-term relationship or switching to internal production
• Critical Strategic Suppliers → Long-term Partnership

29
The types of relationships here are more completely explained in chapter three of this report.

58
 2. Identify Important Suppliers: After the strategic segmentation and realizing which suppliers
the company wants to build longer term relations with, the most important suppliers must be
identified. These will be the “Problem Supplier” category to pay the prior attention to.
3. Start from within: The Company should start and make adjustments inside the company first
in order to achieve harmony inside out. This is the Step were the company attempts to
Change the Mindset of the inside players.

4. Inform the Suppliers: This is a delicate stage in which the company attempts to Change the
Mindset of Suppliers. The following points should be considered in this stage:
• Have the objectives and performances integrated with the Company
• Communicate the SEM measures of the company
• Communicate Company expectations from the Development program
• Providing new angles to the existing knowledge of the Suppliers
• Provide necessary education and resources for execution of expectations

5. Choose key projects: After all the above mentioned stages, the Company should study the
projects and decide which are the most important and have priority in execution. The aspects
to take into consideration are:
• Feasibility
• Finance
• Duration
• Return on Investments

6. Set details of Implementation: After deciding which projects to execute first, the details of
implementation should be listed. These details are such as:
• Required Resources
• Time Frames
• Desired Outcomes
• Setting the Contributing Parties
• Joint programs (Risk / Development)
• Sponsorships
• Education
• Standardization

7. Monitor Implementation: After execution is conducted according to the set details, the
implementation should be monitored along the way. Standards maintained, and changes and
modifications made in places of need.

5.1.4 In case of problems

Like any other program in any other business area, the implementation of the selected programs
might be faced with obstacles and problems. These problems are due to the Suppliers side

59
shortcomings, the Buyer Company side, or the interface of the two. The outline of the possible
problems and how to deal and prevent them are depicted in table 8.

Problem
Source of Problem How to Resolve
Caused by
• Providing a lending hand
• Financial support
Resource Shortage
• Personnel support
• Educational support
• Efficient and effective effort in
“informing Suppliers” step
Supplier • Pointing out the benefits from the
beginning
• Setting the business relationships
Trust
based on the improvement
• Showing where they stand among
other suppliers
• Making sure of the execution
through follow ups
Managers can’t see the real
• Duly determining the costs and
benefit
benefits
Not
having • Focusing on the long term
Buyer Raising the bar too high to
the right objectives
achieve
Mindset • Setting smaller goals
Too large a number of supplier • Minimizing the number of
to make it financially feasible suppliers in Step five (5)
• Better communication
• Decreasing the presence of legal
No trust in Info. Sharing involvement (making it informal)
• Having confidential information
exclusive
Sup-Buyer • Incentives and motivations made
Interface Benefits not understood for partners to commit
• Duly pointing out the benefits
• Duly shared road map of future
objectives and expectations
Proper alignment not made
• Development programs should be
adjusted according to conditions
Table 8 the problems caused in implementation of SRM program and how to resolve them

5.1.5 Utilizing IT in Communications

As mentioned in the final section of chapter three, Information technology can contribute in
numerous ways to heighten and empower communications. The visual effects, telecommunications,

60
internet, extranet, EDI, email, and an endless list of features make communications resemble face to
face, which is the most effective means of communication.

Figure below shows the communication areas that need more focus and attention. These
communications are shown by Red arrows. Vara can utilize IT measures such as Volvo Supplier
Internet portal, new feature of EDI, and email, to evaluate these communications. Furthermore, more
frequent meetings and telephone conversations can evaluate Negotiation and Coordination status.

Negotiation

Boss Coordination Boss

Planning Planning

Execution Execution

Supplier Buyer Company

Figure 23 communication areas to focus on

61
5.2 SRM approaches that work in Volvo Penta

5.2.1 Vara Supplier Market issues

The figure below depicts the unique Supplier Market structure of Volvo Penta. The important issue
for Vara is to separate the commodity like suppliers from the Strategic item suppliers which provide
the items which make the final product unique. The points here are:

• The number of Suppliers: Limited for Strategic item suppliers due to the nature
• Placement of Power: These Suppliers have power over Penta due to their rather Oligopoly
Market
• Change is unlikely: due to the two points above changing suppliers is not easily possible

• Commodity like suppliers

• A “perfect Competition” Market
• Alternate suppliers available

Vara
• Strategic item suppliers
• A “Oligopoly” Market
• Alternate suppliers rarely available

Figure 24 Vara Supplier Structure, first step segmentation

5.2.2 Vara Supplier Segmentation

After a study done on Supply Chain Development, Vara has made a segmentation of its suppliers
dividing them into four groups. This segmentation is done according to delivery precision and
quality. The four groups are:

1. Problem suppliers,
2. Important or Sensitive suppliers,
3. Suppliers with development potentials,
4. And others.

According to the literature and real-time studies done for this thesis, this segmentation is rather
proactive and in line with the second step recognized in the first part of this chapter.

“Identify Important Suppliers: After realizing which suppliers the company wants to build longer
term relations with, the most important suppliers must be identified. These will be the “Problem
Supplier” category to pay prior attention to.”

62
However, in order to make implementation of programs feasible in real-time situations, two
suggestions were made:

1. To undertake step one of “Mapping Supplier Development” first. This means Identifying the
most important suppliers, and those whom a long term relationship is required with. Then,
select the “Problem Suppliers” from this list. This way the circle of programs for execution
will be smaller and thus more feasible.
2. Secondly, adding “Frequency of Communication” 30 as another measuring factor. This will
act as an incentive motivating the suppliers in communicating more often with the company.

5.2.3 Source of problems in buyer-supplier connections

Two analyses were done on supplier connections in Vara Penta. The first analysis was done on
connections between Vara and their top ten suppliers delivering the highest volume. The second was
conducted on 21 of the top Problem suppliers. The findings were categorized in two tables, searching
the source of problems in connections.

The main problems detected were listed in table 9.

Problem Suggestions by Vara Suggestion by Report

• Since contract seem to be the
source of this problem
improving relationship with
• Working on contracts
Supplier Flexibilities procurement.
• Work on flexibility issues
• Developing the right mindset by
plotting the benefits for
procurement.
• Change the lead time frozen
• LDC and European hubs seem a
long Lead-times from times
suitable plan for maintaining
Oversea Suppliers • Planning Local Distribution
steady lead-time.
Centers
• Sharing risk
• Having frequently meetings
Bad Delivery Precisions • Communicating to motivate
for closer relationship
suppliers for better performance
some Software System
• Solving through Meetings • Providing education and training
Problems
• Providing education and training
some Quality Issues • Solving through Meetings
• Providing missionary personnel
Table 9 Problems in Supplier Connection and suggestions

In extreme cases, changing the supplier was suggested by the group. However, this has not been
conducted until today.

Finally, two main problems were extracted and listed below.

30
This action has been conducted in Volvo Trucks and according to the management, it has been effective.

63
1. The limitations brought upon by poor communication between the procurement department
and Vara Plant. Consequently, this has lead to contracts that are not completely compatible
with the requirements of Vara. Hence, it can be said that deeper communication between the
two offices will solve many problems with the suppliers.
Further, having an action plan and informing procurement managers of the benefits and
incentives for the whole company will motivate them for better communication to gain
mutual benefits.
2. The lead-times required to fix defects and problems every now and then. This lead time
might be due to the location of port of delivery and limited communication between the two.
Having more frequent quality checks before shipment, having in house employees from Vara,
or higher level of risk sharing might be the answer to this problem.

64
5.3 SRM approaches in Trucks suitable for Volvo Penta

5.3.1 Volvo Trucks Key Points

The most important points effective in Volvo Trucks that seemed applicable in Vara were listed
below:

1. Situating one SRM advisor per each supplier and communicating all issues through them.
2. Choosing “frequency of communication” as one of SEM factors in evaluating suppliers.
3. Setting frequent follow up meetings gaining closer relationship through face to face talks.
4. Sharing the risks involved making supplier one of the key players.
5. Having Local Distribution Centers for far away suppliers helping them maintain a steady
delivery lead-time.
6. Active use of the Internet Supplier Portal achieving faster, easier, and more accessible means
of communication.

5.3.2 Utilizing a SRM Logistics group in Communications

Volvo Trucks

Supplier SRM advisor Core Company

VPDC Volvo Penta Vara

Manufacturer

Figure 25 Comparing the communication network of Vara and Trucks

As shown in the figure above and noted in the previous chapter, Trucks has gained numerous
advantages by organizing a SRM Logistics group. All suppliers communicate through one SRM
advisor set in this group. All problems and issues are directly noted to the SRM advisor and they
classify, evaluate, and resolve. The advantages of this are as follows:

• Integration of the performances and interactions

• Administrative cost reduction
• Personnel reduction
• Closer Relationship due to a more personal communications

The important thing to take into consideration here is the SRM advisor’s personality and marketing
skills.

65
5.3.3 Key Comparison Points
By comparing the major points in SRM strategies within Volvo Trucks and Volvo Penta, the most
important differences being effective in Trucks were found. Among them the ones that seemed fit for
Penta were chosen and listed below:

Difference Problem in Vara Pros in Utilization

Limited Procurement can act as
communication with a hub organizing and
Strong Relationship the procurement. integrating relationships
between the Unaligned strategies
Role of Aligned Strategies and
Manufacturer and the with supplier.
procurement Performances
Procurement Limited flexibility
department between the
manufacturer and Better Flexibility
suppliers.
Less administrative
costs
A SRM advisor Communication Direct communication
Less personnel
per supplier through the advisor. with Suppliers.
Integrated performances
and the interactions
Motivating Suppliers to
Evaluating suppliers on communicate better to
Frequency of Evaluating only on be in the top
frequency of
communication as Quality and Delivery
communication among
a SEM factor precision. Strengthens
other.
relationships

Maintain steady
delivery lead-times
Detecting defects in
Local Distribution For suppliers located Considering this as a
deliveries and quality
Centers farther in distance. new strategy.
ahead
Maintaining smooth
flow of goods
Smoother,
more accessible,
Supplier Internet faster,
Active Utilization. Limited Utilization
Portal more visible,
and better transparency
of communication
Table 10 the Major Differences between Vara and Trucks SRM

66
5.4 Suggestions for SRM improvement

5.4.1 Illustrating Improvement

The figure below was illustrated in order to show the main problem areas within Vara today. These
are the relationship between the Core Company and its procurement department, as well as with its
suppliers. Suggestions in order to improve were made, noting this will result in the company and its
procurement becoming a united front, building a stronger relationship with suppliers developing
them to motivated partners, growing together.

Supplier

Buyer rocuremen

Problems

• Long lead time for oversea suppliers • Limited communication with the
resulting on big costs in case of defects procurement
• Software & Quality issues • Contracts not completely compatible
with Vara needs
• Unaligned strategies with supplier
• Flexibility limitations

Possible Solutions

• Providing education and training • Improving relationship with

• Providing missionary personnel procurement
• Sharing risk • Developing the right mindset by plotting
• Communicating to motivate suppliers the benefits for procurement
for better performance
• LDC and European hubs seem a suitable
plan for maintaining steady lead-time
• more frequent quality checks before
shipment

Final Result

Supplier Buyer
Stronger Relationship rocuremen

Motivated Partners United Front

Figure 26 Main Problem areas and Possible Solutions

67
5.4.2 Improvement Suggestions
Finally, and in the last section of this chapter, it has been attempted to gather all the suggestions
made for Improvement throughout the thesis. 31

1. Realizing the Social Factors: Who are the Suppliers? What are the cultural issues regarding
them? What codes of conduct are there present? What are the financial issues here?

2. Changing Mindset from within: Know the achievement wanted, see the big picture, and
accept out of the norm for improvement.

3. Improving Relationship with Procurement: conducting an action plan, illustrating the

possible benefits of better communication and getting procurement management on board.
Communicating current and accurate data on what’s missing, what’s expected, and what’s
required.

4. Mapping the Development Program: Segmenting Suppliers Strategically, prioritizing

objectives and projects, setting smaller but achievable goals, finally monitoring the
implementation.

5. Providing a helping hand: providing resources, education and training, and lending
employees might have a bigger Return on Investment in the long run.

6. Utilizing IT: Moving with Technology is risky but necessary.

31
The suggestions here are only a brief note. They have all been elaborated thoroughly in this chapter.

68
6 Conclusions and Recommendations
This chapter is an overall conclusion to the whole thesis with an answer to the main question.
Consequently, all the findings and results in the previous chapters were summarized and the outcome
presented. Furthermore, recommendation for future work was also given.

6.1 Conclusion
The globalization trend in today business world along with phenomenon such as outsourcing has
made suppliers a key factor for success and maintaining a competitive advantage in the market. This
increased importance of suppliers in optimization of performances within any company brings focus
to managing and constantly developing relationships with them.

In a company, that is changing strategies towards end costumer with a limited and rather fixed circle
of suppliers such as Volvo Penta, developing relations has an even greater importance. In order to
make this change and have it integrated with other company objectives and performances the
company must start from within. Having the right mindset from top management down to every
personnel inside the company is a fundamental step.

As procurement is a separate department and in charge of contractual matters with suppliers in the
case study of this research, having a close and accurate communication of what’s missing, what’s
expected, and what’s required is also vital in relationships with suppliers. Illustrating the possible
benefits of better communication for the whole network can get their management on board.

Thereafter, the company must attempt in changing the suppliers mindset. In order to achieve such a
goal the buyer company must first realize the Social Factors, knowing the potential and current
partners, knowing their rules and regulations, and finally realizing the financial issues in establishing
a business with them.

Then, and after aligning the inside objectives and processes, business relations with suppliers are
sought after. In order to make the execution feasible, the company must decide which suppliers to
develop and to what extent. This requires a strategic segmentation of the suppliers. The most
strategic suppliers are prioritized and informed. This is a critical step, because if suppliers are not
duly explained of the details and benefits of the program they might not get on board.

Finally, details of the implementation according to each individual supplier potentials and previous
plans are set. However, constant monitoring and communication is required for both parties to
maintain in track. The buyer company should provide a helping hand such as education in places of
need. Having better suppliers will mean having a better competitive advantage.

69
6.2 Recommendation for future work
Suppliers are the upstream players of the Supply Chain. They have both inner company issues as well
as intercompany relations with the buyer company. This presents a vast area of research in the
section.

In this research focus was given to Supplier Development finding a general groundwork for mapping
the improvement. Each of the steps introduced in this thesis can be opened up and evaluated in
detailed implementation possibilities.

Another major area of research not sought after in this study due to limitations, is the improvement of
communications. The constant growing of Information Technology brings numerous possibilities on
ways to improve communication inter and intra firms.

Finally, areas of Risk Management in order to develop the relationship between the dyads, VMI
issues concerning the development, the incorporation of lean thinking, MPC issues in integrating
communication with suppliers, and how forecasting can bring dyads closer, are all other areas to look
further into.

70
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Appendix a
Analyzing top Problem Supplier (give us difficulties today that must be fixed)

Sup No. Main Prob. port of Del Quality Logi. Suggestion Involved Start of
plier del. prec. contract
(year)
117 (Flexibility) Doesn't fit Italy 68.90 small some work on the Purchase
with today's demand % defects flexibility
long time to stop agreement contract
orders in case of has been
reduction settled
restrictions in w/o Vara’s
increases in orders Knowledge
(small faults) Wrong
labelled pallets, small
parts missing
(Inflexible) a lot of 95.20 small no Chng sys. frm ITT,
system errors % defects deviations 4 to 2 frozen purchase
wks
(Bad Del.prec) move prod.
To suppl 967
(Slow replies on Q-
issues)
(Del.prec) 58.80 not much under
improvements are % improvement
being made, from 46
to 58
had problems with the
EDI system

(12w leadtime + 6w Japan not much move purchase

ocean freight) extra deliveries
job, have to order from japan to
airfreight + high sec. A lot of somewhere in
stock in Vara "extra europe
ques."
sized
coupling
(rework)
(bad del.prec.) 100 Turbo small Meeting with quality >
change/move orders % break deviation Vara in Supplier,
every week down and sprig!! del. Perc. >
the cause purchase
not found

74
Appendix b
Questionnaire for Top ten suppliers according to volume delivery (2008)

The following questionnaire is designed as part of the Master thesis on Supplier

Development within Volvo Penta and in order to evaluate the top suppliers delivering to the
manufacturer. Please kindly answer the questions for the listed suppliers.

2008, Sweden

Supplier No:

Questions:

1. What is the history of quality and delivery performance from this supplier?

2. What is the delivery time from the supplier to Volvo?

3. What is the dependency between the supplier and Volvo, how much does Volvo have to say?

4. What is the depth of communication with the supplier, how often and how good is the
communication etc.?

5. How flexible would you say the supplier is, what has been the flexibility considering the changes
in Volvo?

6. Has this supplier appeared on the “problem list”?

7. If yes, how has these problems been solved?

8. Are there any specific problems in the supplier’s history?

75
76