Supplier Relationships

- The Chartered Institute of Procurement and Supply

- Diploma in Procurement and Supply – L4M6

L4M6
Supplier Relationships

Understand the dynamics of relationships

in supply chains

1.1 Differentiate between different types of commercial relationships in supply

chains
1.2 Appraise portfolio analysis techniques to assess relationships in supply
chains
1.3 Identify the competitive forces that impact on relationships in supply chains
1.4 Compare the sources of added value that can be achieved through supply
chain relationships

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 Procurement as an internal supplier
• Internal customers of procurement
• Senior management
• Related functions in the internal supply chain, such as finance, engineering,
manufacturing, warehousing and logistics
• Managers in ‘user’ functions
• Staff in other functions who carry out some purchasing for their own units

Characteristics of internal relationships

• Internal customers will often not have a legal ‘contract for services’
• There may not be a direct fee or charge levied for the internal provider’s
services
• Internal customers do not generally have the option to choose or switch
suppliers
• Internal customers are generally personally known to internal suppliers
• There may be conflicts and differences of interest between functions
• In general, however – and unlike external buyer-supplier relations – the
goals and objectives of internal customers and suppliers are (or should be)
broadly shared or aligned
• Internal customer relations are increasingly developed using cross-
functional teams

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 Internal and external stakeholders
- Internal stakeholders are members of the organisation: directors,
managers and employees
- Connected stakeholders have direct legal, contractual or
commercial dealings with the organisation
- External or secondary stakeholders do not have direct
contractual or commercial dealings

The relationship spectrum

Figure 1.1 Supplier relationship spectrum (Source: www.procurement.govt.nz/procurement/guide-to-

procurement/plan-your-procurement/positioning-yourself-in-the-market/)

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 Which type of relationship is best?
- The most appropriate relationship type for a given purchasing
situation may depend on factors such as the following:

• The nature and importance of the items being purchased

• The competence, capability, co-operation and performance of the
supplier
• Geographical distance
• The compatibility of the supply partners
• The organisation’s and purchasing function’s objectives and
priorities
• Supply market conditions
• Legal and regulatory requirements

The relationship lifecycle

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 Stages of relationship development

Pareto principle

Figure 1.3 ABC analysis (Source: adapted from www.resourcesystemsconsulting.com)

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 Risk assessment grid

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Target outcomes of a supply positioning exercise

OUTCOME EXPLANATION
Better understanding of relative The exercise forces buyers to think very carefully about
importance of items in the important aspects of each item they buy, such as supply risk,
purchasing portfolio and relative cost and value to the organisation.
Decision rules for sourcing and Segmentation on the basis of the nature and importance of
relationship approaches, as a the item provides a framework for determining the most
basis for developing action plans appropriate sourcing approach and supply relationship.
Better understanding of stock Items of low cost are relatively inexpensive to hold in stock,
requirements, supporting efficient and if they are items with high supply risk (ie strategic
and effective inventory security items) this suggests a deliberate policy of
management stockholding (contrary to modern thinking in most cases, but
indicated by the results of the analysis).

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 Kraljic Matrix

Figure 1.4 Based on The Kraljic matrix of different supplier types

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Supplier Preferencing Model

Figure 1.5 Supplier preferencing matrix (Source: adapted from: ‘12 Steps to key account management portfolio
analysis’, Part 2, Fig. 2, by Professor Malcolm McDonald MA(Oxon) MSc PhD DLitt DSc, Emeritus Professor, Cranfield
University School of Management)

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 Market management matrix

Figure 1.6 Market management matrix model (Source: PMMS Consulting Group, model developed in Steele, P,T. and Court, B,H.
Profitable Purchasing Strategies: A Manager’s Guide for Improving Organizational Competitiveness through the Skills of Purchasing,
London: McGraw-Hill Press.)

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The purchasing environment

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 Purchasing research
- Environmental analysis
- Industry analysis
- Competitor analysis
- Critical success factor analysis
- Supply, demand and capacity forecasting
- Vendor analysis
- Supply market analysis

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Environmental variables
VARIABLE EXAMPLE IMPACTS ON…
Societal changes Changing customer preferences Product demand or design
Population trends Distribution; product demand and design
Political and legal New legislation Product costs
changes New enforcement priorities Investments, products, demands
Economic changes Interest rates Expansion, debt costs
Real personal income levels Demand
Exchange rates Domestic and overseas demand and profit
Competitive Adoption of new technologies Cost position, product quality
changes New competitors Prices, market share, margin
Price changes Market share, contribution margin
New products Demand, advertising expenditure
Supplier changes Change in input costs Prices, demand, contribution margin
Supply changes Production processes, investment
Changes in number of suppliers Costs, availability, risk
Market changes New uses of products Demand, capacity utilisation
Product obsolescence Prices, demand, capacity utilisation
New markets Distribution channels, demand, capacity utilisation

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 The STEEPLE framework
• Socio-cultural
• Technological
• Economic
• Environmental (or ‘ecological’)
• Political
• Legal
• Ethical

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SWOT analysis

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 Porter’s Five Forces Model

Figure 1.9 Porter’s Five Forces model (Source: Porter, M.E. (1980). Competitive Strategy:
Techniques for Analysing Industries & Competitors. The Free Press, NY)

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Limitations of Porter’s model

• It focuses on profitability, which may not be the primary or sole
objective for all organisations
• It only offers a static ‘snapshot’ of the competitive environment at a
particular point in time
• It considers only five forces
• It is designed to be applied at the level of strategic business units
(SBUs), and not at the level of the whole organisation or supply chain
• It typifies a ‘positioning’ approach to strategy development

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 Porter’s generic strategies for competitive advantage

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Competitive resources and competencies

• Threshold competencies are the basic capabilities necessary to support a
particular strategy or to enable the organisation to compete in a given
market
• Core competencies are distinctive value-creating skills, capabilities and
resources which (Hamel and Prahalad) add value in the eyes of the
customer; are scarce and difficult for competitors to imitate; and are flexible
for future needs

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 The 5 Rights of Procurement
- Quality
- Quantity
- Price
- Time
- Place

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Porter’s value chain

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 Added value: quantity

Benefits of holding stock Costs of holding stock

• Holding stock can ensure continuity • The cost of storage space, such as
of supply if unforeseen events occur warehouses
• Reduces long lead times and • Cost of capital – businesses will need to
ensures production can continue in have the cash flow to buy a large
the short-term. amount of stock in advance.
• Potential discounts may be available • Obsolescence, depending on the
for buying in bulk. This will need to product – some items such as food have
be evaluated against the costs of expiry dates.
stock holding. • Opportunity costs – the money invested
• Holding stock can protect against in the stock could potentially have been
price fluctuations. better invested in alternative projects.
• Stock holding can support demand
management.

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Taichi Ohno’s seven wastes

- Over-production
- Transportation
- Waiting
- Motion
- Over-processing
- Inventory
- Defects/corrections

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 Improving quality
- Selecting suppliers with third party approved or accredited quality
management systems
- Appraising the quality management systems and ‘track record’ of suppliers
- Preparing preferred or approved supplier lists
- Influencing the quality of product design, by working with design and
production departments; keeping up to date with material developments;
recommending alternative materials where appropriate; and involving
suppliers early
- Translating design requirements into clear, accurate materials and service
specifications
- Developing goods inwards procedures for quality inspection and testing
- Managing relationships with suppliers
- Monitoring and controlling suppliers’ quality performance over time (eg
using vendor rating); providing suppliers with feedback; and developing
closer relationships with reliable quality performers

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L4M6
Supplier Relationships

Understand processes and procedures for

successful working with stakeholders

2.1 Analyse the purpose of organisational procedures and processes in sourcing

goods and/or services
2.2 Compare team management techniques to ensure positive stakeholder
relationships
2.3 Compare the practical considerations of stakeholder management
2.4 Identify the processes for terminating stakeholder relationships

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 The Procurement • Planning should include:
• Contract packages
Cycle Aggregation of procurement requirement to obtain
economies of scale
• Source of funding
Budget verification and commitment of funds
• Estimated cost for each package
• Procurement method
• Processing steps and times
Schedule of delivery and implementation dates

• The 4 Es of value for money:

• Economy
• Efficiency
• Effectiveness
• Equity

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Taichi Ohno’s seven wastes

• Transportation
• Inventory
• Motion
• Waiting
• Over-production
• Over-processing
• Defects/corrections

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 The Procurement • Sourcing Definition
Cycle ‘The process of identifying, selecting and
developing suppliers’. Lysons & Farrington

• Supply Sources
• Registered suppliers
• Existing suppliers
• Trade sources or website
• Pre-qualification or expressions of interest

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The Procurement • Focus on whether or not prospective

Cycle suppliers are suitable, acceptable and
capable of fulfilling requirements

• Criteria include:
• Finance
• Production capacity and facilities
• Human resources
• Quality
• Performance
• Environmental and ethical considerations
• IT development and leverage
• Organisation structure

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 • Methods of procurement
The Procurement • Request for Quotations or Single Source
Cycle Procurement
• Competitive/restricted/2-stage tendering
• International/national
• Request for Proposals for consultancy services

• Criteria for evaluation

• Lowest cost
• Quality and cost based
• Margin of preference
When not to use When not to use
• Other
competitive Bidding competitive bidding
When item/service is of When its not possible
sufficient value to obtain firm prices • Negotiation (where appropriate)
When there is a clear When the specification • Preparation - objectives and targets
specification so competitive is likely to change
bids can be evaluated side by • Negotiation team and style
side
When competition exists When price is not the
• Establish areas of agreement (contract)
between a number of good main driver
quality suppliers
When there is enough time When set-up cost and • Consider relevant tender committees
for the process to be time is prohibitive
completed properly

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The Procurement • Contract Management

• Contract communication
Cycle • Contract administration
• Managing contract performance
• Relationship management
• Contract renewal or termination

• Inspection & Acceptance Issues

• Inventory Control & Management

• Planning and forecasting
• Storage & Security
• Obsolesce
• Materials handling
• Allocation of responsibilities
• Logistics and distribution
• Disposals

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 Stakeholder management

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Overcoming resistance

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 The Kubler-Ross change curve

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Force field analysis

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 Conflict and resistance: The Thomas-Kilmann conflict-
resolution matrix

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Tuckman’s group development stages

• Forming
- members try to find out about each other and about how the group is going to
work
• Storming
- members begin to assert themselves and test out roles, leadership, behavioural
norms and ideas
• Norming
- agreements are reached about work, sharing, individual requirements and output
expectations
• Performing
- the group focuses on executing its task
• Mourning or adjourning
- The team sees itself as having fulfilled its purpose, and the group disbands

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 Price fluctuations
- Working with suppliers to reduce the impact of price fluctuations:
• Monitor elements in the market across the whole network of suppliers
• Forward buying
• Work with suppliers to mitigate increases from their supply chain
• Work with suppliers to remove waste and reduce costs
• Preparing strategies to deal with increases

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Early supplier involvement

None ‘White box’ ‘Grey box’ ‘Black box’

NO supplier Informal supplier Formalised Design is
involvement. integration. supplier primarily
Supplier ‘makes Buyer ‘consults’ integration. Joint supplier driven,
to print’ with supplier on development based on buyer’s
buyer’s design activity between performance
buyer and specifications
supplier

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 KPIs for measuring buyer and supplier relationships
- Trust
- Power
- Transparency and information sharing
- Communication
- Commitment
- Co-operation

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Reasons for contract termination

- Contract comes to an end
- Contract is re-tendered
- Buyer undertakes supply base rationalisation
- Supplier suddenly increases prices for no justifiable reason
- Supplier makes a material breach such as poor performance
- Supplier engages in activities that could damage the buyer’s reputation
by association
- Supplier becomes insolvent
- Supplier merges with another organisation

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 Process of termination

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Legal considerations
- Finances
• Penalties
• Transition costs
- Confidentiality
- IPR
• Patents
• Copyrights
• Trade secrets
• Trademarks
- Security
- Employee rights

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 L4M6
Supplier Relationships

Understand the concept of partnering

3.1 Analyse the concept of partnering and where it is a suitable approach

3.2 Appraise the process of partnership implementation
3.3 Identify the reasons why partnerships fail

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Types of partnership

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 Drivers for partnership working
- Generating synergies that will reduce costs and increase profitability
- The ability to develop products more quickly
- To enable both parties to survive in the face of changing or unstable
markets
- To identify wastes such as duplicated activity, bottlenecks and delays
- To enable access a particular market
- Where buyers need to source highly complex products or services
- To increase the security of supply.

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The partnership model

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 Items for partnership sourcing

- High spend
- High risk
- Technically complicated
supplies
- New services
- Fast-changing technology
- Restricted markets

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Mendelow’s power/interest matrix

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 Selling the philosophy of partnership working

Figure 3.5 Based on Kotter’s eight-step change model (Source: adapted from
www.kotterinc.com/8-steps-process-for-leading-change)

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Factors constraining relationship development

- Lack of support from senior managers
- Conflicts of interest between the two parties
- An adversarial approach on the part of a buyer or supplier
- Imbalance of power between the parties
- Lack of trust
- Changes of personnel
- Communication breakdown
- Dissatisfaction, conflict and lack of trust
- Incompatibility of culture and values, processes and procedures or
systems and technology
- Commercial factors

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 Communication within partnerships
- To exchange information – at the start of a partnership
relationship buyers and suppliers need to exchange information to
decide whether the proposed partners are suitable. During the
partnership the parties will need to exchange information in order to
undertaken their roles as part of the partnership.
- To build relationships – building relationships between buyer and
supplier staff at an operational and strategic level is important. This
includes developing rapport, trust and respect. This should be done
throughout the duration of the partnership relationship.
- To persuade – the partners will need to communicate to persuade
each other of the merits of ideas and to come to agreement on how
benefits and costs will be shared.
- To confirm – ensuring that the buyer and supplier have the same
understanding. This will serve to reduce conflict in the partnership.

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Reasons for partnership failure

Area of the market Example of change

External • The economy enters a recession period

• A new technology enters the marketplace
• There is a natural disaster in the country where the supplier is based
• Import and export tariffs change
Levels of demand for the • a new buyer enters the marketplace and it is a more profitable customer for the
supplier supplier. This could increase the power of the supplier
• A key buyer exits the marketplace. This would make the partnership buyer a more
important customer
Supply base of the buyer • New suppliers enter the marketplace and they are able to offer the buyer greater
business benefits than their current partnership relationship. This could increase
the power of the buyer
• A previous supplier leaves the marketplace. This would make the partnership
supplier a more important supplier
• Levels of supply in the market increase or decrease
The buyer and supplier • Strategic intent, e.g., exploiting competitors’ weaknesses or expanding into global
markets
• Strategic match, e.g., using JIT or TQM
• The buyer or the supplier gains more power in the marketplace
The partnership relationship • Performance problems
itself • Change of key personnel

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 CIPS communication model

At Recipient the

Response Review

Right Time
Result Route

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Handy’s four cultural types

Culture Key Features Leadership
Style
Power • Power centred in a key figure, owner or founder Autocratic
culture • Control through direct personal communication
• Little formalisation, rules or procedures

Role • Classical, rational organisation (bureaucracy) Autocratic or

culture • Formalised, impersonal: authority based on position, function; Paternalistic
conformity to rules and procedures

Task • Management directed at outputs and results Paternalistic

culture • Team-based organisation: horizontally structured, flexible or
• Valuing expertise, communication, collaboration Democratic

Person • Serves the interests of individuals Democratic

culture • Management function administrative and supportive, rather than
directive

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