Supply Chain Partnerships

Dr S. Najafi Tavana

Managing the supply chain

‘First-tier’ suppliers

The operation

‘Second-tier’ suppliers

‘First-tier’ customers

‘Second-tier’ customers

Purchasing and supply management

Physical distribution management

Logistics

Materials management

Supply chain management

Introduction• An important determinant of supply chain efficiency is the

performance of the purchasing function since it deals with how upstream supply chain operations are conducted.

• Purchased parts can account for up to 80% of the value of the manufacturing costs in some industries.

• While purchasing is usually the function of a dedicated department, it typically involves interaction with other departments within the organisation.

• The decision on whether to purchase and who to purchase from are two of the key issues purchasing managers must address.

Role of the Purchasing Function

• Supplier selection, development and evaluation

• Develop processes that align with operational strategies (e.g. JIT, Inventory management)

• Enable organisational operations

• Develop intra- and inter-organisational relationships

• Develop purchasing policies and strategies

• Evaluate purchased parts and their specifications

• Identify new parts that optimise finished product characteristics and/or reduce costs

Global Purchasing

• For many organisations, purchasing is an international activity requiring consideration of several factors including:

– Exchange rate fluctuation

– Political risks

– Local culture and law

– Tariffs and quotas

– Independent or representative-based material sourcing

– Material standardisation, specification and quality

– Hedging of purchased products

The purchasing process

Purchasing functionSuppliers The internal

operation

rp

Discuss with operations

Liaise with operations

Suppliers prepare

quotations

Prepare requests for quotations

preferred supplier

Prepare

orderpurchase

Select

services

Requests for products and

Produce goods and services

Supplier rating and selection

• The selection of the right supplier(s) is critical to all downstream aspects of the supply chain process.

• Suppliers are chosen on the basis of a range of criteria including, cost, quality, delivery capabilities, flexibility, technological capabilities, financial stability, organisational culture and ICT capability.

• In special cases there is little or no scope to select suppliers (e.g technological advancement, naturally occurring materials)

• In many industries there is a tendency towards single sourcing, preferred suppliers, reduced suppliers and partnerships. Note that changing suppliers may sometimes have huge operational and cost implications.

• In addition, a sourcing strategy may be considered for each supplier– Long-term strategic relationship– Short-term strategic relationship– Long-term transactional relationship– Short-term transactional relationship

• Many organisations use some form of supplier rating process.

Supplier (Vendor) Rating SheetWeighting 5 4 3 2 1 Importance

rating (1-5)Overall score

PRODUCT

Quality 5 25

Cost 4 12

Delivery 3 12

Total 12 49

SUPPLIER

Technical Capability 5 10

Information Systems 4 16

Financial Condition 4 8

Management Capability 3 3

Capacity 3 15

Location 2 6

Flexibility 1 3

Total 22 61

Overall Total 34 110

Supplier Performance Evaluation• It is common to use the rating sheet for initial evaluation of suppliers (and

periodic strategic review) and thereafter use some other form of performance measurement.

• Such performance measurement approaches vary in subjectivity and frequency

of application. A cost-based system is the least subjective of the approaches Supplier: Brownlow Ltd

Product: BLT Sandwich

Monthly purchase

£7,347.00

Non-Conformance No of Occurrences Average Cost Total Cost

Poor Quality 3 £60 £180

Late Delivery 4 £120 £480

Product Re-packaging 6 £10 £60

Total non-conformance cost £720

Purchase + non-conformance cost

£8067

Supplier Performance Index (SPI)

(Purchase + n/c)

Purchase

1.1

Supplier Performance Comparison

• Supplier performance evaluation can be used as a basis to compare the performance of different suppliers.

• If non-conformance charges are given a standard cost for each occurrence, normalisation will have to be applied to reduce bias of high-cost lots.

• A supplier performance comparison may be carried out as follows:

Product: BLT Sandwich

Supplier Unit Cost SPI Total Cost

Wonder Foods £1.20 1.4 £1.68

Brownlow Ltd £1.32 1.1 £1.45

Sandwich Express £1.19 1.25 £1.49

Comments: Lowest unit cost supplier is not lowest total cost supplier

Make or Buy (Insourcing or Outsourcing)• Organisations are faced with the choice of whether to

source a product’s components internally or externally. The decision taken is typically strategic in nature and depends on a range of factors. Standardized MRO inventory is not normally subjected to a make-or-buy analysis.

• For many organisations, cost is the most influential factor in the make-or-buy decision. A total cost analysis of the insourcing or outsourcing options is often carried out. Other factors to be considered may include strategy, quality, technology, supplier reliability, market dynamics, competitor activity and organisational competencies

Making components in-house (Insourcing)

• Conditions that support insourcing are:– Poor supplier performance– Cheaper internal manufacturing– Need for technological or process confidentiality– Availability of excess internal production capacity– Retainership of core competencies within the organisation– Supplier sourcing will involve high initial investment– Business/legal preference or need to control the process

• Advantages of insourcing are:– Control retained within the organisation– Increased process ownership– Better use of resources

• Disadvantages of insourcing are:– Initial investment may be high– Process switching may be difficult (e.g. in response to changing markets)– Economies of scale may require the marketing of excess production

Purchasing components (Outsourcing)

• Conditions that support outsourcing are:– Cheaper to buy than from external suppliers– Business strategy requires no holding of stock– Lack of in-house capacity– Difficulty in obtaining raw materials– Component is protected by proprietary rights/Supplier has better competencies – Suppliers are reliable– There is a need to maintain process and production flexibility– Component is of low value to the process and readily available– Insourcing investment can otherwise be spent on other strategic options

• Advantages of outsourcing are:– Investment risk minimised and cashflow improved– Greater process and production flexibility– Better organisational focus

• Disadvantages of outsourcing are:– Loss of control– Supplier problems may be difficult to deal with– The organisation may lose a technological/strategic advantage

Make vs. Buy Cost Analysis

OUTSOURCING ANALYSIS INSOURCING ANALYSIS

Operation Cost (£) Operation Cost (£)

Purchase 76,152 Direct labour 15,000

Transportation 6,000 Indirect labour 4,500

Inventory 2,540 Materials 40,275

Admin 4,000 Equipment 13,975

Tax (Import) 7,615 Fixed overhead 5,000

Other 0 Variable overhead 1,000

Engineering/design 2,000

Tax/rates 6,000

Other 0

Total 96,307 Total 87,750

Comments: In this instance it is cheaper to manufacture the component in-house. The final decision on whether to pursue this strategy will involve other factors such as availability of raw materials, current skills set, business strategy, etc.

Supply Chain Partnerships

• There is an increasing tendency towards the development of long-term relationships with suppliers. This can be achieved through a variety of channels of which the most common are:– Single sourcing (buying from one supplier)

– Preferred supplier (limiting suppliers to certain organisations which are then ranked)

– Strategic alliances (value-added partnerships in which risks and rewards are shared between the supplier and the customer)

• In general partnerships are sought with suppliers with outstanding performance, desirable/unique products or technological advantage

Advantages of Partnerships

• Operational improvements through cost reduction and asset optimisation

• Technological development through the sharing and development of new skills and applications

• Improved communication and organisational learning/Access to information

• Supplier support and development through assured contracts

• Financial gains through risk and benefit sharing

• More value is added to products and services

• Improved focus on core competencies

• Improved flexibility in the supply chain

• Commercial developments and brand awareness

Disadvantages of Partnerships

• Loss of control of operational activities

• Possibility of declining performance of suppliers

• Possibility of unrealistic demands from customers

• Loss of commercial flexibility through capacity reduction, confidentiality, etc

• Loss of competencies within organisations

• Initial increased cost of implementation/technology may not be recovered

• Technological advantages are now available outside the organisation

• Difficulties in agreeing cost benefit sharing model

Partnership Models

• There are a number of partnership models that are commonly used– Third party logistics where an external company manages the

inbound and/or outbound materials management and distribution– Retailer-supplier partnerships in which the suppliers are given

more information (e.g. extranets) in return for the increased value through rapid replenishment, quick response and vendor managed inventory approaches

– Distributor integration which involves close co-operation to improve customer service and manage inventory

– Franchises in which a head company distributes raw materials/components that are then converted and distributed by the partner (usually trading under the head company’s brand). There may be a pure model (coca-cola) or a hybrid model (McDonalds).

E-Procurement

• Developments in technology have enabled the buying of raw materials and components on-line (e-procurement).

• The concept of e-marketplaces is viewed as an effective way to reduce procurement costs. A number of B2B e-marketplace models have emerged including:– Buyer-managed exchanges

– Supplier managed exchanges

– Distributors/market makers

– Content aggregators

E-Procurement Benefits and Risks

• Cost reduction (sourcing and transaction)

• Visibility of the global market place

• Improved efficiency in the procurement process

• Reduction/elimination of intermediaries (where used)

• Greater presence/participation of SMEs

Risks • Complexities associated with high spec products

• Buying from a supplier of whom there is little knowledge

• Transactional focus/lack of relationships

• Focus on cost (missing the big picture)

Power in the Supply Chain

• The use and management of power is an important aspect of SCM.

• If a single player takes advantage of the chain and thinks selfishly rather than about the chain as a whole, the supply chain can be destroyed and all benefits lost.

• The nature of power regimes differs from one supply chain to the other and from one industry to the other (e.g. buyer dominance/supplier dependency)

• Understanding power regimes and the roles of different players can be used positively to improve the performance of the supply chain e.g. (supplier development)

Power Analysis (Cox et al)

HIGH BUYER

DOMINANCEINTERDEPENDENCE

LOW INDEPENDENCE SUPPLIER DOMINANCE

LOW HIGH

Buyer Power

Supplier Power

Relational Competence and Congruence Analysis

HIGH CONGRUENCE DEVELOPMENT

COMPATIBILITY

LOW INCOMPATIBILITY COMPETENCE DEVELOPMENT

LOW HIGH

Relational Competence

Relational Congruence

• Understanding this analysis enables buyers and suppliers understand requirements and hence develop improvement plans

Relationship Portfolio Analysis

INEQUALITY ADVERSARIAL ARMS-LENGTH

RELATIONSHIPS

ADVERSARIAL COLLABORATIVE RELATIONSHIPS

EQUALITY NON-ADVERSARIAL ARMS-LENGTH

RELATIONSHIPS

NON-ADVERSARIAL COLLABORATIVE RELATIONSHIPS

ARMS-LENGTH COLLABORATIVE

Relational Competence

Relational Congruence

• It may be appropriate to have different types of power relationships with different types of suppliers