1. McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter 4 A Portfolio of Relationships 4-2

3. Key Concepts A Transformation in Relationships Types of Buyer-Supplier Relationships »Transactional Relationships »Collaborative and Alliance Relationships »Collaborative Relationships »Supply Alliances The Supplier's Perspective Developing and Managing Collaborative and Alliance Relationships 4-3

4. Key Concepts Situations Wherein Alliances may not be Appropriate The Role of Power A Portfolio Approach New Skills and Attitudes Required E-Commerce and the “Right” Type of Relationship Relationships of the Future 4-4

5. A Transformation in Relationships The transformation from reactive and mechanical purchasing to proactive procurement and on to strategic Supply Chain Management parallels a similar transformation in relationships between buyers and suppliers Prior to the 1980s most purchasing relationships were reactive Interaction between vendor and purchasing resulted in outcomes where one’s gain would be the other’s loss 4-5

6. Problems with the Term “Partner” During the late 1980’s and early 1990’s, “partnerships” became popular »Implications of the term “partner” were not well understood »Legal problems and concerns inevitably arose While the term “partnership” is still relatively common, we avoid use of the term preferring the terms “collaborative relationship” and “strategic alliance.” 4-6

7. Three Types of Buyer Supplier Relationships Transactional Collaborative Alliance 4-7

8. Continuum of Buyer-Seller Relationships Figure 4-1 Communication Competitive Adv. Connectedness Continuous Impr. Contributions to NPD Difficulty of Exit Duration Expediting Focus Level of Integration High pot. for problemsSystematic approach LowHigh IndependenceInterdependence LittleA focus FewMany – ESI LowDifficult – high impact ShortLong ReactiveProactive PriceTotal cost Little or noneHigh or total Activity/AttributeTransactionalCollaborativeAlliance 4-8

9. Continuum of Buyer-Seller Relationships Number of Suppliers Open Books Quality Relations Resources Service Shared Forecasts Supply Disruptions Technology Inflows Type of Interaction ManyOne or few NoYes Incoming inspectionDesign quality in system Inward lookingConcern w/well being Few – low skill levelProfessional MinimalGreatly improved NoYes PossibleUnlikely NoYes TacticalStrategic synergy Activity/AttributeTransactionalCollaborativeAlliance Figure 5-1 Continued 4-9

10. Transactional Relationships Characteristics An absence of concern One of a series of independent deals Costs, data and forecasts are not shared Price is the focus of the relationship A minimum of purchasing time and energy is required to establish prices Transactional purchases lend themselves to e-procurement 4-10

11. Advantages of Transactional Relationships Relatively less purchasing time and effort are required to establish price Lower skill levels of procurement personnel are required 4-11

12. Disadvantages of Transactional Relationships Potential for communication difficulties Expediting and monitoring of incoming quality Inflexible when flexibility may be required Tend to result in more delivery problems Quality will be only as good as required Suppliers provide the minimum service required Less effective performance by suppliers Customers are subject to more supply disruptions Supplier is not motivated to invest time and energy development of buyer’s products 4-12

13. Collaborative and Alliance Relationships “76% of CEO’s think external collaboration with business partners and customers is key to innovation” Collaborative and alliance relationships tend to result in lower total costs and improve performance of the supply chain 4-13

14. Three Success Factors Researchers Stanley and Pearson found that the three most important factors in a successful buyer-supplier relationship are: »(1) two-way communication, »(2) the supplier's responsiveness to supply management's needs, and »(3) clear product specifications 4-14

15. Collaborative Relationships Typically used for the procurement of non- commodity items and services A collaborative relationship frequently is an appropriate first step on the road to a strategic alliance 4-15

16. Collaborative Relationships Collaborative relationships tend to foster…. »Longer term contracts »Reduction of risk for suppliers »Reducing total costs »Improvement of processes »Improvement of products »Increased investment in R & D »Increased investment in training »Increased investment in equipment »Better focus on customer needs 4-16

17. Supply Alliances The fundamental difference between collaborative relationships and supply alliances is the presence of institutional trust in alliances The failure to develop and manage institutional trust is the principle reason that so many supply alliances fail 4-17

18. Benefits of Supply Alliances Lower total costs. Reduced time to market Improved quality Improved technology flow from suppliers Improved continuity of supply 4-18

19. Alliance Attributes Continuous improvement Interdependence and commitment. Atmosphere of cooperation Informal interpersonal connections Internal infrastructures to enhance learning Openness in all areas of the relationship A living system 4-19

20. Alliance Attributes Continued A shared vision of the future Ethics take precedence over expediency Adaptable in the face of change Design of experiments and supplier certification Win-Win negotiations Executive level commitment Avoid terms that could prove destructive 4-20

21. Which Relationship is Appropriate? What are the “Strategic Elements of a Relationship?” Are there many relatively undifferentiated suppliers providing what amounts to inter-changeable commodities? Does the potential supplier possess economic power which it is willing to employ over its customers? If there is recognition by both parties of the potential benefits of an alliance, but adequate qualified human resources are not available at one or both firms? 4-21

22. Strategic Elements of a Relationship Is one supplier head and shoulders above the rest in terms of the value it provides; including price, innovation, ability to adapt to changing situations, capacity to work with your team, task joint risks, etc? Are some suppliers “strategic” to your business? Would your company benefit greatly if the supplier were more “integrally connected” with your company? Do your customers require high degrees of flexibility and speed of responsiveness? 4-22

23. The Supplier’s Perspective Supplier’s want good customers Several issues affect their assessment, among them are: »Cash Flow »Openness and Approachability »Availability »Professionalism 4-23

24. Questions to be Addressed Before Proceeding Is there a danger that the supplier may act in an opportunistic manner over time? Do electronic systems allow for optimum communication and sharing of information? Is the potential strategic alliance able to stay current in the industry? Are both the organizations willing to keep attention focused on the joint customer? Are there other suppliers worth investigating before committing to a strategic alliance? Has the supply manager been thoroughly trained? 4-24

25. Questions to be Addressed Before Proceeding Is the organization proud to be aligned and associated with the supplier? Is the organization comfortable with the level of risk associated with reducing the supply base? Are both supplier and buyer aligned in what their ultimate customer considers to be valuable? If there is substantial risk for the supplier to develop new technologies, products, processes, or service support? Are both supplier and buyer aligned in their respective visions? Are there sufficient operational points of interaction? 4-25

26. Situations Wherein Alliances may not be Appropriate Stability »Price Volatility »Demand Volatility »High Switching Likelihood with High Switching Costs Capability »No Partnership/Alliance-Capable Supplier for the Item »No Partnership/Alliance-Capable Supplier in the Geographic Area »Rapid Technological Change »Mismatch of Clock Speed 4-26

27. Situations Wherein Alliances may not be Appropriate Competition »Non-Competitive Market »Supplier Dependency Creation »Neglected Areas »Suppliers Seeking to Reduce Competition Benefits »No leverage from Partnership »No Hard Savings from Partnership Internal Buy-In »No Internal Customer Buy-In 4-27

28. The Role of Power Power is a topic that makes people uncomfortable Power is at the heart of all business relationships Power plays a key role in two important subclasses of buyer-supplier relationships: »Captive Buyer: buyer is held hostage by a supplier free to switch to another customer »Captive Supplier: makes investments in order to secure a portion of the buyer's business, with no assurance of sufficient business to recoup the investment 4-28

29. The Portfolio Approach Successful supply chain management requires the effective and efficient management of a portfolio of relationships Three environmental factors to consider: »(1) the product exchanged and its technology, »(2) the competitive conditions in the upstream market, and »(3) the capabilities of the suppliers available 4-29

30. New Skills and Attitudes Required Developing and managing collaborative and alliance relationships require supply professionals that possess the following skills and attitudes: »Recognize the benefits of collaboration »Ability to identify, obtain and use data »Able to work in chaos and uncertainty »Agile, flexible, and highly adaptive 4-30

31. E-Commerce and the “Right” Type of Relationship "How does B2B eCommerce affect our selection of the 'right' type of relationship?“ »Selection must be a function of the requirement, not of the Internet! »B2B eCommerce is an enabler 4-31

32. E-Commerce Traps to Avoid Trap #1: Guilding the pig »Take an archaic, cumbersome procurement process and “webbize” it Trap #2: The Magic pill »Looking for the one solution that can be used to solve every procurement situation Trap #3: Supplier equality »Supplier relationships range from transactional to alliances 4-32

33. Chapter 4 Appendix INSTITUTIONAL TRUST 4-33

34. Trust Trust is one of the key factors that differentiates the three classes of relationships. The simplest definition of trust is “being confident that the other party will do what it says it will do.” Some level of trust must be present in all three types of relationships The level of trust increases with collaborative relationships and becomes an essential characteristic with strategic alliances 4-34

35. Attributes of Institutional Trust Developed over time Internal trust is developed before external trust Based on individual and institutional integrity It is greater than individual trust. Trust and relationship are viewed as investments Partners have access to other's strategic plans Relevant costs and forecasts are shared 4-35

36. Attributes of Institutional Trust When key individuals leave, fingerprints are left behind that hold the relationships together Trust is visible Informal agreements are as good as written Both parties are sensitive to the cultural bridge Relationship is adaptable in the face of change Both firms recognize the interdependency 4-36

37. Attributes of Institutional Trust Sharing information is a means of developing trust Conflict in the relationship is openly addressed Rights, desires, and opinions are considered Firms have mutual goals A bank account of trust is created Recognizes trust has different cultural meanings Both CEO's make a personal investment Senior managers from both firms commit Ethical issues are freely brought up without fear An ombudsman is assigned at both firms 4-37

38. Actions to Develop and Manage Trust An inter-firm team is appointed Discussions conducted in an atmosphere of respect Inter-firm team receives guidance and training in the implementation of practices Listening, understanding, time, energy are invested Senior leaders at both firms act as champions A communication system is developed Actions to develop and measure trust are created Risks and rewards are addressed openly Negotiation is used as a trust-building opportunity 4-38

39. Actions to Develop and Manage Trust Both firms work together on technology plans Technical personnel from both firms visit the other Contractual relations are designed to enhance trust Contract relations focus on continuous improvement Team and relationship skills are developed early Company leaders create a formal relationship A contracting philosophy and a legal infrastructure are designed to the relationship Institutional trust is measured and managed 4-39

40. The Alliance Options Merchant supplies the total product. Self-manufacture with key raw material suppliers. In-house plant operated by a supplier. 4-40

41. Supply Management in Action A SUPPLIER ALLIANCE AT QUAKER OATS 4-41

42. Merchant Supply Rejection Absence of lower cost alternative merchant supply (freight cost hurdle). No known way to gain effective cost understanding/cultural improvement with arms length relationship (lack of both parties’ commitment). 4-42

43. Self-manufacture Rejection Not a core competency. Supplier’s cost of capital was generally lower than Quaker’s –best to use their money. 4-43

44. In-house Plant Choice Best cost –no freight, direct feeding of filling line eliminated palletizing, fresher materials. Best opportunity to institutionalize continuous improvement. Alliance relationship comes from the open book need to drive improvement. Quaker and Graham (the selected supplier) agreed to act as one company on each other’s behalf. 4-44

45. Type of Contract: Evergreen from one fixed period to another. Completely open book. Cancelable for failure to perform. 4-45