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CHAPTER 1
INTRODUCTION
1.1 SUPPLY CHAIN MANAGEMENT
Supply Chain Management (SCM) has received an increased amount of interest both
from academicians and practitioners. The success stories of Apple, Dell, McDonalds,
Wal-Mart and Zara have relied much upon the responsive supply chains. The best in
class organizations have become benchmark because of the stratagems they are
adopting especially to manage the supply chain.
According to Christopher (1998), a supply chain consists of multiple firms, both
upstream (i.e., supply) and downstream (i.e., distribution) thus having a network of
organizations that are involved, through upstream and downstream linkages, in the
different processes and activities that produce value in the form of products and
services delivered to the ultimate consumer. The first step in understanding a supply
chain network is to place one of the network organizations into its proper zone
(Walker, 2005). Lambert et al. (1998) defined supply chain as an integration of key
business processes from end user through original suppliers that provides products,
service, and information that add value for customers and other stakeholders.
Keith Oliver coined the term „supply chain management‟ in 1982. SCM is a central
and important area for academic research due to its impact on firms competing in
today‟s global economy and it has become a significant strategic tool for firms
endeavoring to improve quality, customer service and competitive success for
sustainability. To be successful and viable in global scenario supply chain
management is the requisite in managing the operations of all partners involved.
Companies that acknowledge supply chain as a strategic asset achieve 70 percent
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higher performance (Global Supply Chain Survey, 2013). According to Quinn (1997)
SCM deals with management of all of those activities associated with moving goods
from the raw-materials stage through to the end user which includes sourcing and
procurement, production scheduling, order processing, inventory management,
transportation, warehousing, and customer service and also embodies the information
systems required to monitor all of those activities. Simchi-Levy (2000) defines SCM
as a set of approaches utilized to efficiently integrate suppliers, manufactures,
warehouses, and stores, so that merchandise is produced and distributed at the right
quantities, to the right locations, and at the right time, in order to minimize system
wide costs while satisfying service level requirements. The holistic concept of supply
chain takes into consideration all the processes and functions from beginning to end.
This concept contradicts the single unit focus for profitability by integrating all the
units to be a „supply chain‟.
Mentzer et al. (2001) have cited the existence of different supply chain flows like
products, services, information, financial resources, demands and forecasts from
supplier‟s supplier to customer‟s customer (Figure 1.1). There is a close connection
between the design and management of supply chain flows. A supply chain is a
sequence of processes and flows (Figure 1.2) that take place within and between
different stages and combine to fill a customer need.
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Figure 1.1: Supply Chain Flows
Source: Mentzer et al. (2001)
To be cost efficient is the top priority for business leaders across all industry sectors
(KPMG, 2011). As organizations with mature procurement functions enjoy lower cost
growth, greater business flexibility, increased market certainty and as a result
significant competitive advantage over their peers, so many executives are looking to
procurement to engage the business in strategic conversations about how the supply
chain can be optimized to deliver the greatest returns (KPMG, 2012). To manage the
resources optimally from the supplier to customer, many approaches are used. New
opportunities are created, new ways of cutting cost are identified and new ideas for
product development are hitched with the involvement of players in supply chain. To
simplify the roles to be played by the supply chain members the cycle view discloses
the responsibilities of these players.
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Figure 1.2: Cycle View of Supply Chain
Source: Chopra (2010)
The roles and responsibilities specified in cycle view facilitate the work of all
members according to the strategy espoused in supply chain. According to Fisher
(1997), supply chain strategy should align with demand and supply characteristics of
the product distributed through that supply chain. He proposed the efficient
orientation in case of functional products and responsive orientation in case of
innovative products. The efficient supply chains utilize the lowest possible cost and
responsive supply chains take the lowest possible time with variety offerings. For
both efficiency and responsiveness, the coordination among the members of supply
chain like supplier, manufacturer and retailer is required so as to meet the overall
objective of supply chain. Responsive and effective supply chains as introduced by
Fisher (1997) are demonstrated in Table 1.1.
A distinction between physically efficient and market-responsive supply chains can
also be made with reference to lean and agile supply chains. Naylor et al. (1999) have
defined:
• Leanness (Figure 1.3) means developing a value stream to eliminate all waste,
including time, and to ensure a level schedule.
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• Agility (Figure 1.4) means using market knowledge and a virtual corporation
to exploit profitable opportunities in a volatile marketplace.
• Leagile (Figure 1.5) is the combination of the lean and agile paradigms within
a total supply chain strategy by positioning the decoupling point so as to best suit the
need for responding to a volatile demand downstream yet providing level scheduling
upstream from the marketplace.
Table 1.1: Efficient and Responsive Supply Chain
Efficient Supply Chain Responsive Supply Chain
Primary purpose Supply predictable demand
efficiently for the lowest possible
cost
Responding quickly to unpredictable
demand in order to minimize stock-
outs, forced markdowns and obsolete
inventory
Manufacturing focus Maintain high average utilization
rate
Deploy excess buffer capacity
Inventory strategy Generate high turnovers and
minimize inventory throughout the
chain
Deploy significant buffer stocks of
parts or finished goods
Lead-time focus Shortened lead-time as long as it
doesn‟t increase cost
Invest aggressively in ways to reduce
lead-time
Approach to choosing
suppliers
Select primary for cost and quality Select primarily for speed, flexibility
and quality
Product-design strategy Maximize performance and
minimize cost
Use modular design in order to
postpone product differentiation for
as long as possible
Source: Fisher (1997)
Many programs, processes and tools like Electronic Data Interchange (EDI), Efficient
Consumer Response (ECR), Vendor Managed Inventory (VMI) and Collaborative
Planning, Forecasting and Replenishment (CPFR) are available now-a-days to meet
the specific goal of supply chain. These new transformational approaches are based
on forging integration across the supply chain to achieve the supply chain objective.
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Figure 1.3: Lean Supply
Many programs, processes and tools like Electronic Data Interchange (EDI), Efficient
Consumer Response (ECR), Vendor Managed Inventory (VMI) and Collaborative
Planning, Forecasting and Replenishment (CPFR) are available now-a-days to meet
the specific goal of supply chain. These new transformational approaches are based
on forging integration across the supply chain to achieve the supply chain objective.
EDI enhances the efficiency and reliability in the system as it is used as a
communication tool with suppliers for ordering and order processing, payment and
delivery arrangements. Information sharing via technology catalyzes the cooperation
level. The strategic concepts like ECR and VMI focus on entire supply chain and help
in reducing the total cycle time. Further, to control, simplify and automate the buying
process, many organizations are adopting e-procurement for efficient inventory
control, reduction in purchasing overheads, removal of intermediary costs and to
improve manufacturing cycles. This is possible with the use of e-commerce in e-
Material
Supply Satisfied
Customer
Material
Supply
Satisfied
Customer
Material
Supply
Satisfied
Customer
Lean Processes
Agile Processes
Agile
Processes Lean
Processes
Decoupling
Point
Figure 1.5: Leagile Supply
Source: Mason-Jones et al. (2000)
Figure 1.4: Agile Supply
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procurement for real time information and quick linkage with parties. To enhance the
linkage among all the partners of supply chain Voluntary Inter-industry Commerce
Solutions (VICS) has developed a CPFR model. Over 300 companies (VICS, 2004)
have implemented this model and showed in-stock percentage improvements of 2-8
percent for products in stores and inventory reductions of 10-40 percent across the
supply chain.
Figure 1.6: Supply Chain Network Zones
Source: Walker (2005)
To apply the supply chain strategies and techniques available at the right point
understanding the network zones (Figure 1.6) becomes essential. Transforming raw
material into components by the organizations is done at upstream level. The quality
of raw material provided by the supplier goes in long run in providing the quality
finished product to customers for meeting their demand. Therefore, the raw material
provider or the supplier plays an imperative role in deciding about the functionality of
the final product. The responsibility falls on the supplier to deliver the order on time
with minimal defects. Only transactional way of exchange between buyer and supplier
cannot yield quality results, for improved performance the focus on developing
relationship orientation with supplier so as to yield good future returns becomes
mandatory.
Raw
Materials
Upstream
Value-Added
Transformation
Midstream Value-Added Manufacturer
Downstream Value-Added
Fulfillment
Customers
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1.2 BUYER-SUPPLIER RELATIONSHIP
An effective supply chain is made up of a series of partnerships and partners are
required to build and maintain long term relationships because the trend has been
observed (Balakrishan, 2004) towards the conscious examination and rationalization
of supplier networks and the development of collaborative or partnership relationships
between buyers and suppliers. The efficacious execution of supply chain management
philosophy becomes promising by crafting cooperative relationships with the players
of upstream network zone which expedites responsiveness via operational
performance and better efficiency via cost saving.
Historically, supply chain relationships have been used either on power or on trust. In
power based relationships, the stronger party usually exploits the weaker one. In the
short run, the stronger party is able to benefit at the expense of weaker one but since
this is not sustainable, in the long run either the relationship breaks down or the
overall chain performance starts deteriorating. Supply chain relationships are typically
long term and require considerable strategic coordination for sustainability. The
World Business Council for Sustainable Development (WBCSD, 2008) defines
sustainable development as forms of progress that meet the needs of the present
without compromising the ability of future generations to meet their needs. The
WBCSD calls for an organization development framework that supports a
collaborative approach to sustainable development, uniting individuals, organizations,
ideas and assets to benefit. Therefore, every organization has to foresee collaboration
among all the parties/players of supply chain for viable growth of all involved.
Sourcing from other firms can generate relatively more uncertainties in upstream
network zone. These risks and uncertainties are reduced when there is more of
collaboration between buyer and supplier instead of use of power. It is prudent to go
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for a few trustworthy suppliers instead of weak large number of suppliers. Focusing
on integration between buyer and supplier processes also tends to reduce waste and
delays. Although ideally supply chain management emphasizes total integration of all
the business entities within the supply chain, but a practical approach is to consider
only the strategic suppliers and customers because most supply chains are too
complex to achieve full integration of all the supply chain members.
The use of partnership instead of power is also encouraged by Shah (2009).
According to him, the initiative for a new supply chain is usually started by the focal
firm which provides leadership to the entire value chain. How these initiatives impact
the cost aspect is depicted in Table 1.2.
Table 1.2: Cost Impact of Supply Chain Initiative
Type of
Initiative
Supplier Costs Customer Costs Supply Chain Costs Action/Initiative enabler
I. ↓ ↓ ↓ Supply Chain Partnership
II. ↑ ↓ ↓ Power equations
III. ↑ ↓ ↑ Power equations
IV. ↑ ↑ ↑ Power equations and
gaming by two parties
Source: Shah (2009)
Relationships designed strategically, managed with collaboration and further
redesigned with the environmental changes tend to sustain longer.
Companies such as Honda, John Deere, and Praxair (Chenoweth et al., 2012) are
increasingly making full supplier cost disclosure a condition for consideration as a
potential supplier to plan supplier management initiatives. Suppliers‟ perspective is
also taken while preparing the balanced scorecard of the organization. A balanced
scorecard for supply chains consists of a financial perspective, a process perspective
and cooperation quality and cooperation intensity perspectives (Stadler and Kilger,
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2004). Bhagwat and Sharma (2007) have taken into consideration the partnership
evaluation parameters in a supply chain given by Gunasekaran et al. (2004) while
devising a balanced scorecard approach for measuring the performance of supply
chain. While taking supplier‟s perspective, the inbound logistics cost as a percentage
of sales, average payment period to the creditors, and the suppliers‟ performance in
terms of reduction in variance in time and quality are the most important Key
Performance Indicators (KPIs) in the manufacturing sector (Anand et al., 2005).
Therefore, the concentration on managing the relationship with supplier has gained
prominence as now-a-days the suppliers are also engaging in value enhancing
collective efforts to enhance the responsiveness and efficiency of the supply chain.
1.3 BUYER-SUPLLIER RELATIONSHIP MANAGEMENT
Relationship with suppliers is a critical component of managing the Supply Chain.
Global Supply Chain Forum identified supplier relationship management as one of the
eight core supply chain processes. The leading organizations along with basics are
using differentiating processes like supply planning with key suppliers and effective
supplier management to reduce complexity and volatility risks. For sustainable supply
chain, collaboration with suppliers and managing key suppliers professionally, are
required. For effective management of these relationships, Spekman et al. (1999) have
defined ten principles which are as follows:
• Integrate suppliers into the Supply Chain
• Share information
• Develop trust
• Organize effectively to achieve alignment
• Use commodity teams
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• Look globally for advantage – global sourcing
• Focus on total costs
• Rationalize the supply base
• Let the suppliers manage it
• Leverage technology
The focus of procurement has shifted from encouraging competition among many
suppliers in order to drive down process to long term relationships with fewer
suppliers and deeper investments in relationships. Buyer-Supplier Relationship (BSR)
management is one of the most important parts of supply chain management.
Effective relationship management and improving qualitative and quantitative levels
of suppliers could be a competitive advantage of every company (Cusumano and
Takeishi, 1991). The Association for Operations Management (APICS) has defined
this relationship management as follows:
Supplier Relationship Management (SRM) is a comprehensive approach to managing
how an enterprise interacts with the organizations that supply its goods and services.
The goal of SRM is to streamline the processes between an enterprise and its
suppliers. SRM often is associated with automating procure-to-pay business
processes, evaluating supplier performance, exchanging information with suppliers,
and supplier certification.‟
Stadler and Kilger (2004) say that Supplier Relationship Management encompasses
strategic sourcing, collaborative design and manufacturing, and collaborative e-
procurement both for direct and indirect goods. It enables to create and sustain
sourcing strategies across areas of design and strategic sourcing responsibilities.
It takes time to build strategic relationships; to manage them involves the contribution
of many elements and the organizations have realized the importance of focusing on
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this issue because of the competitiveness it may generate for the efficiency and
responsiveness of the whole supply chain. The concept of managing relationship with
the supplier became notable gradually.
1.4 EVOLUTION OF BUYER-SUPPLIER RELATIONSHIP MANAGEMENT
Globalization, environmental dynamism, technological changes and increasing
customer needs have pressurized the firms to remain competitive. These factors have
also changed the scenario of sourcing patterns of the firms. Earlier, purchasing was
not a specialized function and could be performed by anyone in the company. The
realization of its importance, as it is responsible for 50-90 percent of cost of goods
sold, has made purchasing function widely recognized. Purchasing function
contributes to the strategic success by confronting with the above mentioned factors.
The modern purchasing function is different from traditional in terms of planning and
implementation involving strategic members of supply chain. The risks and
uncertainties diminish by the negation of opportunistic behavior. The supplier chosen
with caution is likely to be trustworthy to the buyer. The strategic shift of purchasing
function, from transaction oriented traditional approach to strategic oriented modern
approach, has established the need of relationship management.
Rogers (2006) in his study has depicted (Figure 1.7) the change in the form of
evolution of BSR from spot purchasing arm‟s length which had short term focus and
transaction orientation to strategic partnership alliance which has long term focus and
relationship orientation. In practice, many business relationships are long term.
Harmonious and mutually successful long-term supplier relationships have been
observed in many industries and documented by researchers in strategy and
management. In these supplier relationships, both the buyer and supplier are
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concerned about how their current strategic behavior affects their future interactions,
and value long-term cooperation over one-shot business transactions. In fact, some
buyers strongly prefer to deal with suppliers on a long-term basis as observed in case
of Honda Company (Handfield and Nichols, 2002) which emphasizes the
development of trust with its suppliers. Initially, Honda was not allowed to produce
cars and also few existing automotive suppliers were willing to provide parts to the
company. Those few suppliers who convinced to supply are now having close ties
with the company and today Honda is the largest exporter of cars in the U.S. and also
eighty percent of items are single sourced with one set of dies by the company.
The first truly long term inter organizational relationships evolved in Japan during the
post-World War II years, when the organizations in Japan recognized a new type of
integration scheme known as the keiretsu which encompasses informal but strict
cooperation among members (Prescutti, 1992). As the organizations cannot rely only
on their competence and potential but the capabilities of suppliers are also need to be
utilized by establishing linkages and relationships with them. Relationship with
suppliers is a critical component of managing the supply chain. Supply chain
relationships are typically long term and require considerable strategic coordination.
Cooperation between supplier and focal organization arises directly from both trust
and commitment.
The relationship cannot be formed with all the suppliers. Like in case of Whirlpool
Corporation (Handfield and Nichols, 2002) when it faced intense competition in early
1980s, it realized the need to achieve competitive advantage from sourcing strategy.
The corporation identified Inland Steel as the key supplier and gradually reduced the
number of suppliers for steel from eleven to four in 1994 and sourced 80 percent of
steel requirements from Inland Steel which further changed the traditional BSR to
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strategic relationship between the two companies. When the buyer and supplier are
willing to collaborate then it strengthens the association and gives it the form of
relationship. Commitment through investment and support in each other‟s venture
establishes closer relationship.
Value Generation
Strategic
Partnership
Alliance
Concentration of Buying Power
Consolidation of Buying Power
High Value
Dynamic Relationship Management
Joint Benchmarking & KPI Management
Balanced Scorecard Reporting
Preferred
Supplier Concentration of Buying Power
Consolidation of Buying Power
Medium Long Term Focus
Contract & Relationship Setup &
Management
Occasional RFQ
Dual Supply
Strategy Short-Medium Term Focus
Consolidation of Buying Power
Low-Medium Value
Standard Terms & Conditions with
Modifications
Regular Tenders
Spot
Purchasing
Arm’s Length
Short Term Focus
Every Transaction is Stand Alone
Low Value
Standard Terms & Conditions
Figure 1.7 Supplier Relationship Evolution
Source: Rogers (2006)
The business environment with lots of changes in competition, government
regulations, environment concern, and technology and customer demands leads the
organizations to focus on strategic relationships with the suppliers. The organizations
try their best to fully utilize their as well as suppliers‟ potential to be successful in
their ventures. With this approach the partners of supply chain concentrate on the
associations in between them in the form of a relationship for future sustenance. For
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the successful collaborations the suppliers have to be chosen strategically and also
invested in for the development of not only the supplier but also the dyadic
relationship between the buyer and the supplier. In the mid-1990s, Deere & Company
(Stegner et al., 2002) used the assessment criteria from the Malcolm Baldrige Quality
Award to evaluate areas of the business with special emphasis on supply
management. They wanted to reduce costs especially the supply base costs so as to
compete globally. The engineers from the supplier development group were sent to
train supplier personnel for optimum resource utilization and production efficiency.
The significant savings were realized by the suppliers as their production capacity
increased, lead times decreased and overall business performance enriched. A
stronger supplier base was created by this initiative of Supplier Development (DEV)
which also reduced the cost and amplified the performance of Deere & Company.
Ultimately the competitiveness of whole supply chain improved because of one step
put forwarded by the focal company.
Strategically managing the suppliers for sustenance and profitability requires
teamwork. The organizations can restructure and redevelop with their suppliers. As
observed in case of Harley Davidson (Kamath, 2008) which became almost bankrupt
in early 1980s, then it focused on restructuring the supply chain with main focus on
supplier involvement. Since 1990, it has reduced its supplier base to half and also
relationship with three thousand MRO suppliers has been concentrated to three
suppliers for eighty to ninety percent of the procurement. Now it keeps supplier
delegates on rotational basis in its supplier involvement program. This strategy has
helped the company in: regaining its market share, reducing inventory period from
fifteen days to six and half days, increasing output of bikes by seventeen and half
percent every year.
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Effective relationship with suppliers provides organizations the next-generational
competitive advantage as happened in case of Honda, Harley Davidson, Whirlpool
Corporation and Deere & Company moving the relationship orientation from
transaction basis to close strategic basis. Relationship with suppliers is also important
as it reduces the redundancy and competitive pressure with the aid of synergy of two
players of supply chain: Buyer and Supplier. The strategic differentiation emerges and
a core competency improves when the suppliers are trusted as partners. Krause et al.
(2007) also believed in generating supernormal profit by investing in relation specific
assets for which inter organizational relationship need to be grown between the buyer
and supplier as a source of competitive advantage and value recognition.
1.5 SIGNIFICANCE OF BUYER-SUPPLIER RELATIONSHIP
The relationship which firms establish with their suppliers may take the form of
different models, from a competitive model to a partnership model. Today, a
cooperative relationship is becoming widespread as it leads to greater supplier
involvement in the development of new products. Many auto companies like Ford,
Harley Davidson and Mahindra & Mahindra have been able to design the automobiles
according to the market need with collaboration of their suppliers. The buyer and the
supplier innovate together. This collaboration becomes more fervent when the buyer
starts investing for supplier development. There is ample anecdotal evidence in
corporate practice and academic research that supplier development efforts to improve
supplier performance and/or supplier capabilities can help to meet supply needs and
generate favorable results for the buying firm (Krause et al., 2000). The instance of
Deere & Company is the outcome of such efforts only.
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A cooperative relationship leads the buyer and supplier to consider each other as
strategic partners and work towards a common goal. This results in participating
parties‟ readiness to invest resources, to achieve goals conjointly, to share information
and to solve problems together in order to achieve improved performance and
competitive advantage. Harley Davidson‟s one third market share confirms this
characteristic of BSR.
The relational view of supply chain says that investments are made by buyers in the
development of suppliers in order to accrue tangible benefits such as reduced cost,
greater quality and flexibility and more reliable delivery. Buyers, especially in
manufacturing industries have the priorities of cost, quality, delivery time, reliability
and flexibility as the benefits from relational aspect. To accrue these tangible benefits
such as reduced cost, greater quality and flexibility and more reliable delivery buyers
invest in suppliers (Dyer and Singh, 1998).
Manufacturers pursue lower costs of their supplied inputs so as to lower their total
costs of final assembly and to provide a competitive price on their final products to
customers. Reductions in rework, scrap and downtimes also benefit both the parties in
relationship. Many companies like Dell have success in reducing supply chain costs
by getting delivery speed and reliable delivery from its suppliers and also reduction in
amount of buffer inventory to be held by the buyer. The auto sector of Mahindra &
Mahindra (M&M) has increased outsourcing (Kulkarni, 2004) to seventy eight
percent of vehicle parts and focuses more on critical components like engines and
marketing. It has been possible because of their mantra „let us work together towards
mutual prosperity‟. The supplier technical assistance has helped M&M in co-
designing the vehicles also. Thus, the manufacturing flexibility and response to
unpredictable environment improves when suppliers are able to meet changes in
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quantity requirements, delivery of products at short notices and running smaller
productions at frequent intervals.
Nelson et al. (2001) depicted (Figure 1.8) the long term savings to the organizations in
context of Producer Price Index (PPI) from 1992-98 in case of select U.S. auto
companies. The best in class companies (the Japanese transplants in U.S.A.) had
approximately $600 million more savings as compared to good U.S. companies
because of their close relationship with suppliers.
Figure 1.8: SRM can lead to Large Long-Term Savings
Source: Nelson et al. (2001)
If the relationship developed between buyer and supplier is beneficial and results in
distinguished operational performance compared to competitors, then the outcome is
the competitive advantage and larger market share as appeared in case of Lantiq, the
second largest fabless semiconductor company in Europe. United Microelectronics
Corporation (UMC), a leading global semiconductor foundry, received the best
supplier award from Lantiq. UMC has been considered as valuable partner for
Lantiq‟s fabless strategy and is producing a large portion of their wafer demand with
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high-tech expertise and mature processes to secure the basis for flawless products
(www.umc.com).
For cost efficiency, better performance, fast response to market demands and
changing environmental subtleties, a profound focus on the essentials of BSR and
their influence on various dimensions need to be dealt with.
1.6 CHAPTERS STRUCTURE
With this background, the present study has been undertaken to study the relationship
between the buyer and the key input supplier. With the purpose to conduct a feasible
study to explore and analyze the different dimensions of BSR, this research has been
undertaken. The primary survey has been conducted for the purchasing officials of
different manufacturing and service organizations. The study is organized in the
following way. The first chapter makes an introduction to the topic followed by
second chapter which reconnoiters the previous studies in the field. The third chapter
sets out the objectives of the study and discusses the research methodology. The
fourth chapter discusses the type of relationship of the buyer with the supplier. The
factors explored in the study have been discussed in the fifth chapter. The sixth
chapter discusses the criteria used in supplier selection and evaluation. The seventh
chapter proposes a comprehensive model of BSR. Lastly, the eighth chapter
summarizes the findings of the study and discusses its theoretical and policy
implications for maintaining relationship with supplier. This chapter also discusses
the future directions of research emanating from the study.