L4M6 Chapter 1

 

Basic features of relationships:

• Long-term

• Future focus

• Links and ties between the parties

• Commitment

Relationship drivers are key values that build relationships e.g. trust, transparency, reciprocity etc.

Relationships can be viewed on a continuum from close commitment to more distant. A close relationship is not necessarily always best; it is important to prioritise certain relationships.

Internal and external relationships

The inter-business external supply chain refers to other organisations in the supply chain including raw materials, manufacturers etc.

• Parts of the inter-business supply chain could be vertically integrated within the same company

• The internal supply chain refers to the flow of information, resources etc within an organisation. The make vs buy decision is a decision between internal and external.

• Procurement function might become an internal consultancy when procurement activities are done by part-time purchasers, or there are complicated multi-functional purchases.

Internal relationships would have the following characteristics:

• Basis of agreement: no legal contract but some sort of agreement, that could give rise to misunderstanding

• Costs: maybe not a direct fee but costs accounted in some way

• Personal relationships and internal politics may exist

There are 3 types of stakeholders in an organisation:

• Internal: within an organisation

• External: no direct dealing with the organisation but have an interest in its activities

• Connected: direct legal or commercial dealing with the organisation

An organisation might be organised in a functional organisation structure, e.g. procurement, finance, marketing etc. This allows for cost-effective scaling, but can cause barriers between functions.

·        Cross-functional teams may exist to bring individuals across different functions.

·        There might be cross-organisational teams that extent to representatives from suppliers / customers

Relationship spectrum

The spectrum is a model describing different levels of closeness, ranging from adversarial to ‘co-destiny’.

From a procurement perspective, relationships can range from spot buying to partnerships, according to regularity and structure of trading.

A competitive relationship is likely to result in a win-lose, and is characterised by distrust, little recognition of mutual interests.

• These relationships are transactional, and the buyer might use multiple suppliers to induce competition

A relational approach creates shared benefits, and potentially a win-win situation. Long-term relationships could be developed with a small range of suppliers.

A relationship lifecycle ranges from birth -> growth -> maturity -> decline -> termination

·        Birth starts with selecting suitable suppliers. Decline is when relationships have achieved their aims and lead to termination

 

Relationship portfolio analysis

Relationship purchasing is an approach that establishes strong relationships with suppliers, deriving added value for both.

Value measures the worth of something and can be measured in two ways: cost of production and price that consumers are willing to pay.

·        Added value is the margin on the cost that the customer is willing to pay due to the service provided by the company.

Supplier Relationship Management (SRM): involves activities such as gathering supplier information, prioritising, developing approaches, monitoring relationships.

Portfolio analysis and segmentation: categorising firm’s suppliers according to importance, volume, risks etc.

·        There are different types of risks: supply risk, supplier risk, environmental, demand etc.

·        Risk = profitability x impact

o   Probability as  %, and impact as a number from 1 to 10

A risk assessment grid might be used, measuring likelihood of occurrence against impact on the organisation.

 

A supply positioning model is a tool to establish what kind of supply relationships should be developed.

·        Pareto principle: 80% of spend is with 20% of the suppliers.

o   This means that procurement function should focus on the critical few suppliers, and maintain the rest

·        The Kraljic matrix, mapping financial risk against complexity, is also a useful model

A supplier preferencing model is a tool for the supplier to establish its preference to deal with a buyer.

Attractiveness of the buying organisation	Development	Core
	Nuisance	Exploitable
	Value of buyer’s business

This is useful to consider for SRM, because it shows that a buyer needs to maintain its attractiveness to the supplier in order to get the best deals / attention.

If a supplier positioning model and supplier preferencing model match (i.e. both buyer and supplier view each other as strategic, or routine), then things are straightforward. If there’s a mismatch, an SRM action plan might be required so that the buyer reduces its exposure to risk of breakdown.

·        SRM action plan needs to consider the current state relationship, organisation strategy and state of supply market.

 

The competitive environment

The supply environment can be seen as a group of enlarging circles. On the inside is the procurement function, then the organisation, then the micro environment and lastly the macro environment.

• Procurement influences the internal environment by ensuring the flow of items into the organisation

• Procurement influences the micro environment by managing supplier behaviour and enhancing the organisation’s competitive advantage

• The macro environment is outside of procurement’s control.

The external environment has three influences on an organisation:

• Threats (from legislation, competition etc) and opportunities (technology, consumer demand etc)

• Source of resources needed by the organisation

• Contains stakeholders who may influence organisational activities

 

The five basic market structures are:

• Perfect competition

• Monopoly

• Imperfect competition: lots of suppliers with differentiated products

• Oligopoly: type of imperfect competition where there are a low number of large suppliers

• Duopoly

Reminder: STEEPLED stands for:

• Social

• Technological

• Economic

• Environmental

• Political

• Legal

• Ethical

• Demographics

Porter’s 5 Forces:

• Competitive rivalry within the industry / market (this is the main one)

• Suppliers’ bargaining power

• Buyers’ bargaining power

• Threat from potential new entrants

• Threat from substitute products

The potential weaknesses of the 5 Forces model are that it focuses on profitability, only considers 5 factors and is designed at the strategic business unit level rather than whole organisation.

Competitive sourcing procedures, such as competitive tendering, e-auctions etc are the best guarantee of quality and price because they promote equal competition.

• There might be a political need to increase competition in a supply market, especially for the public sector, by encouraging new entrants, collaborative sourcing and global sourcing

• But competitive sourcing may not work if it deters new innovative suppliers who can’t compete on scale, or prevents long-term partnerships from forming

Competitive advantage

Competitive advantage: business supplies value to its customers more effectively / efficiently than its competitors.

·        This could be through low cost or differentiation of products

	Lower cost comparative advantage	Differentiation competitive advantage
Broad (industry wide) competitive scope	Cost leadership	Differentiation
Narrow (market segment) competitive scope	Cost focus	Differentiation focus

Porter’s strategies for competitive advantage

Cost leadership: important form of advantage in price-sensitive markets.

Differentiation: key form of advantage when a company is faced by a strong low-cost competitor.

 

Competencies: activities by which an organisation deploys resources effectively. Two types of competency:

• Threshold: basic capabilities that need to support the organisation

• Core: distinctive, value-creating skills

 

Value-adding supply chain relationships

According to Porter’s value chain, each organisation has primary value and secondary value activities:

• Primary value activities: bringing resources into the organisation, transforming them, and moving finished products to consumers

• Secondary value activities: supporting the primary activities

Primary value activities have 5 areas:

• Inbound logistics

• Operations

• Outbound logistics

• Marketing and sales

• Service

Secondary value activities include HR, Technology and Procurement. Procurement supports primary value activities by fulfilling the 5 Rights, providing information to marketing and sales, managing outsourcing of logistics etc.

Activities within the value system are interdependent, forming linkages.

Activities that add cost without adding value are waste activities.

Added value: Organisations can add value by enticing customers to pay more (with additional features), or reducing costs. Procurement can add value by cutting costs or increasing operational efficiency.

• One way for procurement to add value is by reducing inventory size while ensuring that there is enough stock to meet service provision levels. Just in time (JIT) could be used.

Pricing management: managing input costs by ensuring that the organisation gets optimum prices for routine and leverage item procurements. This will involve price analysis, cost analysis and price leverage.

Quality

Quality control: systems for detection and correction of defects e.g. inspections.

Quality assurance: systems for prevention of defects (more proactive).

Quality management system (QMS): coordinated activities to continually improve quality. Total Quality Management (TQM) is an approach to quality that is applied across a company’s entire supply chain.

 

Supply chain management (SCM)

SRM and SCM are different:

• Supplier Relationship Management (SRM): mainly focused on relationship between buyer and immediate suppliers.

• Supply Chain Management (SCM): looks at all interactions / linkages between all organisations in the supply chain.

Lean thinking: a three-pronged approach focused on quality, waste elimination and employee involvement.

• It’s predicated on using less of everything

• Key principles include specifying what creates value, identifying all steps in the value stream, focus only on these steps and continually remove layers of waste

Agile supply: focused on using a responsive supply network to exploit profitable opportunities. While Lean focuses on removing surplus flesh and bulk, Agile is quick in movement.

·        One view is that Lean is most relevant when cost and quality is paramount, whereas Agile is important when service levels and innovation are key.

·        Agile is ready to accept stock as long as it makes sense to hold stock. For example, there might be late customisation of stock to suit customer orders.