1. Chapter 11 Supply Chain Relationship Management

2. Objectives After reading the chapter and reviewing the materials presented the students will be able to: Explain the importance of relationships to SCM Describe the development and management of trust based relationships Identify causes of conflict between supply chain members Explain methods of dispute resolution and negotiation

3. Supply Chain Relationships Relationship management is probably the most important aspect of SCM. Relationship management involves issues that include respect, trust, agreements, negotiation, joint ventures, contracting, and even conflict resolution. All relationships are not of equal importance.

4. Relationship Dimensions A greater scope means a greater dependence on the supplier. A large scope of tasks provided by a supply chain partner can bring large benefits as it allows a company to focus on their core competencies. The risks can also be greater as both operational and strategic responsibility is now in the hands of an outside party, requiring close relationship management. The second dimension is criticality of sourced item or task. Criticality is the extent to which the sourced item or task impacts the ability of the organization to perform its core competencies. The greater the criticality of the sourced item, the greater the consequence of poor performance to the company and the greater the requirement for relationship management.

5. Supply Chain Relationship Matrix 1. Non strategic transaction: When both the scope and criticality are low we have relationships that are transaction oriented. The product provided by the supplier is typically standardized and alternative sources of supply or market access are readily available. 2. Contractual relationship: occurs when the cope is high although the criticality of purchased item is low. This relationship is characterized by moderate levels of communication frequency as there is a greater need for control over supplier activities. 3. Partnerships: This relationship type is characterized by the sourcing of critical components or tasks, although low in scope. An example is the sourcing of just in time replenishments of critical manufacturing component. 4. Alliances: Both criticality and scope are high. They reflect high interaction frequency, significant trust, and commitment between supply chain partners.

6. The Role of Trust Successful supply chains are governed by a constant search for win-win relationships based on mutuality and trust. A cooperative relationship results in the development and sharing of joint objectives. Sharing of information is easier between parties that trust each other. Cooperation and coordination results in the elimination of duplication of efforts between parties. Supply chain productivity is increased. Sharing of sales and production information results in enabling members of the supply chain to coordinate production and distribution decisions.

7. Developing a Trust Based Relationship Trust creates a belief that each company is interested in the other’s welfare and would not take action without considering the impact of those decisions on other companies as well. An important element of the relationship is equity. Managers can help promote trust by creating contracts that encourage negotiation as unplanned events arise. What is needed is a combination of a contract, the mutual benefit of the relationship, along with trust that compensates for gaps in the contract. A good conflict resolution mechanism should give the parties an opportunity to communicate and work through their differences. Regular and frequent meetings between members of both organizations facilitate communication and are an important part of conflict management.

8. Managing trust Based Relationships Often top management prefers to be involved in the design of a new partnership that often provides corporate visibility, but is rarely involved in its management. Commitment: of both parties helps a supply chain relationship succeed. Commitment of top management of both sides is crucial for success. Clear method of communication: Lack of information sharing, and the inability to resolve conflicts are the two major factors that lead to the breakdown of supply chain partnerships. Performance visibility: Mechanisms that make the action of each party and resulting outcomes visible and help avoid conflicts and resolve disputes. Fairness: The issue of fairness is extremely important in the supply chain context because most relationships will involve parties with unequal power.

9. Sources of Conflict 1. Relationship conflicts: are a result of strong emotions, misperceptions or stereotypes, poor communication or miscommunication, and repetitive negative behavior. 2. Data conflicts: are caused by lack of information, misinformation, different views on what is relevant, different interpretation of data, and different data assessment procedures. 3. Interest conflict: can be caused by not equally sharing cost savings that result from process improvements between members. 4. Structural conflicts: are caused by factors such as destructive patterns of behavior or interaction, unequal control, ownership, or distribution of resources, unequal power or authority, geographical, physical, or environmental factors that hinder cooperation, and time constraints. Structural conflicts are among the most common sources of conflict. 5. Value conflicts: are caused by different criteria for evaluating ideas or behavior, goals, and different ways of life, ideology, or religion.

10. Dispute Resolution Procedures 1. Litigation: When a supply chain member breaches a contract or commits fraud. Litigation should be used only as a last resort as it can be costly. Judgment is for plaintiff or defendant – all or nothing. 2. Arbitration: When both parties can agree to procedures and norms for how their dispute should be resolved. Parties can choose a neutral arbitrator who is an expert in their field to determine the outcome. 3. Mediation: The mediator conducts shuttle diplomacy, ferrying information, offers, and counter offers between disputants. Mediation is usually voluntary. 4. Negotiation: is the most informal of dispute resolution procedures and does not involve third party assistance. Settlement agreement enforced as a contract. It can be the most inexpensive and swift method of resolving disputes.

11. Negotiation Concepts, Styles and Tactics Negotiations involve give and take, where positions are exchanged until the two parties can agree to mutually beneficial settlement. Issues such as cost quantity, quality, timing, control, options, shared resources, and penalties for non compliance are usually subject to negotiation.

12. Leverage The party with the greatest leverage is able to extract the most value out of the other party. You can use this leverage to request a higher price. Before entering a negotiation, you should reflect on who has the most leverage.

13. Position versus Interest A position is what you signal to the counterparty about your willingness to accept or willingness to pay. An interest is your underlying reason for your position. If both the seller and the buyer disclose their underlying interests to one another, they could discover possibilities for mutual gain.

14. Negotiator’s Dilemma When a negotiator shares truthful information, they have a higher chance of achieving mutually beneficial outcomes. A negotiation will present opportunities for the parties to offer one another things that increase the size of the pie. A good negotiator makes efforts to increase the total value of the deal to both parties, even as the negotiator claims as much value as they can find for themselves.

15. Negotiation Styles Problem solving negotiators approach negotiations as a non zero sum game, where concessions are made by each party in order to create value, and trusting, creative discussions address underlying interests. You should be prepared for adversarial tactics to be employed against you in a negotiation. However you should also be willing to engage in problem solving tactics in a negotiation.

16. Adversarial Tactics 1. Extreme Openers – Anchoring: An analysis of negotiation studies found that for every $1.00 increase in opening offer, we can expect the final sale price to increase by $0.50. 2. Few and Small Concessions – Reciprocity: Adversarial negotiators will make concessions that grow increasingly closer together to signal the counter party that the are reaching their bottom line below which they will not go. 3. Withholding Information: This tactic prevents parties from bargaining on the basis of good information about the actual underlying interests of one another. Negotiation outcomes may be less than satisfactory as a result. 4. Manipulating Commitments: This type of manipulation can backfire in terms of lost credibility and trust if the counterparty views it as trickery.

17. Problem Solving Tactics 1. Listening: It is critical to attack the problem, rather than the people. Listening can transform a conversation from a heated argument into a collaborative dialog. 2. Asking: Asking open questions about underlying interests allows negotiators to focus on interests rather than positions. Asking “why” can uncover hidden interests that can create opportunities for mutual gain. 3. Inventing: Differences between the negotiators can actually help to mutually beneficial settlements. 4. Referencing: Using objective standards such as industry norms or market value allows negotiators to get past different personal preferences to reach an agreement that is defensible from any perspective.

18. Partnership Agreements The Japanese keiretsu concept means a close knit network of suppliers that continuously learn, improve, and prosper along with their parent companies. Draw up a partnership agreement that defines the agreement financially and also a buy-sell agreement, in case one wants out or in case of disputes.

19. Diluting Power It is not uncommon for companies to seek out a partner for additional capital, business connections or managerial skills, or to share expenditures. Often they are offered in exchange for a portion of ownership, control, or some type of decision making power. Power is a limited resource that must be divided carefully.

20. Summary Relationship management involves issues that include respect, trust, agreements, negotiation, joint ventures, contracting, and even conflict resolution. A greater scope means a greater dependence on the supplier. The second dimension is criticality of sourced item or task. Criticality is the extent to which the sourced item or task impacts the ability of the organization to perform its core competencies. Alliances: Both criticality and scope are high. They reflect high interaction frequency, significant trust, and commitment between supply chain partners. Trust creates a belief that each company is interested in the other’s welfare and would not take action without considering the impact of those decisions on other companies as well. Commitment: of both parties helps a supply chain relationship succeed. Commitment of top management of both sides is crucial for success. Structural conflicts: are caused by factors such as destructive patterns of behavior or interaction, unequal control, ownership, or distribution of resources, unequal power or authority, geographical, physical, or environmental factors that hinder cooperation, and time constraints. Structural conflicts are among the most common sources of conflict. Litigation: When a supply chain member breaches a contract or commits fraud. Litigation should be used only as a last resort as it can be costly. Mediation: The mediator conducts shuttle diplomacy, ferrying information, offers, and counter offers between disputants. Mediation is usually voluntary. Negotiations involve give and take, where positions are exchanged until the two parties can agree to mutually beneficial settlement. Problem solving negotiators approach negotiations as a non zero sum game, where concessions are made by each party in order to create value, and trusting, creative discussions address underlying interests. Asking open questions about underlying interests allows negotiators to focus on interests rather than positions. Asking “why” can uncover hidden interests that can create opportunities for mutual gain. The Japanese keiretsu concept means a close knit network of suppliers that continuously learn, improve, and prosper along with their parent companies.

21. Home Work 1. What is the buyer supplier relationship in alliances? 2. Why should litigation be used only as a last resort? 3. Why should we ask open ended questions? 4. Explain the Japanese keiretsu concept.