© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Planning 9.Sourcing strategy: getting better results from suppliers

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Program Why suppliers do not always think in the interest of their customers Main elements of supplier management Getting better results from suppliers The myth of partnership

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Why suppliers do not always think in the interest of their customers Reasons for slack in materials cost and prices: Price increases automatically passed on to the next in line Over -specification Technical requirements (defined by R&D departments) which are not necessary for the functioning of the product are imposed on suppliers. Mechanistic competitive bidding amongst a fixed group of suppliers Purchasers regularly sound out competition amongst a limited number of suppliers by playing them off against each other

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Why suppliers do not always think in the interest of their customers Reasons for slack in materials cost and prices: Supplier cartels in (international) supply markets Traditional purchasing (Buyers are involved late, if at all, in the purchasing decision-making process; the company deals with a fixed group of familiar suppliers) Suppliers’ customers relationship programs (Relationship programs include offering fringe benefits to customers (e.g. invitations for sports events, exhibitions and trade fairs) in order to create a preferred position at members of Decision Making Unit)

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Main elements of supplier management Supplier strategy should answer these core questions… For which commodities should the number of suppliers be reduced? For which commodities should the current number of suppliers be maintained? For which commodities should the number of suppliers be increased?

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Main elements of supplier management Supplier relationship Sourcing strategy issues  Global versus local sourcing: International supplier orientation necessary or is local, national orientation sufficient?  Single versus multiple sourcing: Purchase the product at one or more suppliers?  Partnership or competitive bidding? Buy from supplier with whom a partnership relation is preferred or keep the supplier at distance?

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Main elements of supplier management Supplier relationship Contract strategy issues  Buying on contract or buying on spot basis. Is the total volume of purchased products to be covered by a contract or is part of the volume bought on a spot basis?  Price agreement versus performance agreement. Just a price agreement or is a detailed service level agreement (SLA) necessary with arrangements on time, tests, maintenance etc?  Fixed fee contract versus cost plus contract. (See Chapter 3)

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Getting better results from suppliers Towards performance based relationships. A stepwise approach  Contract review. A thorough analysis of current contract arrangements with existing suppliers. Objective: agree on a performance based contract.  Competitive bidding amongst existing and new suppliers. Analysis of (international) supply market, sounding out international competition. Objective: Select Best-In-Class supplier.  Optimizing supplier relationship and value chain mapping. Focus is on continuous improvement with the supplier based upon Total Cost of Ownership.

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) The myth of partnership Philips, one of the first European companies focussing on partnership, introduced the term ‘co-makership.’ Broersma (1991) defined it as: ‘the building of long-term relationships with a limited number of suppliers based on mutual trust’ Objective of this type co-operation is to achieve improvements in:  Cost  Logistics  Quality  Product development

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) The myth of partnership Ellram and Hendrick (1993): A ‘partner’ is defined as a firm with whom your company has an ongoing buyer-seller relationship, involving a commitment over an extended time-period, a mutual sharing of information and a sharing of risks and rewards resulting from the relationship This research has demonstrated that:  Less than 1% of supplier relations can be characterized as a partnership relationship. However, these suppliers were responsible for 12 % of total purchasing volume!

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) The myth of partnership A DTI (1994) study concludes that ‘in developing new working agreements with their suppliers most vehicle manufacturers still appear to deal more in rhetoric than in reality’ This comes a no surprise. Cooperation with suppliers requires internal teamwork between all disciplines and companies still operate in a functional manner. Developing a partnership with suppliers takes time. The road is long and difficult. There are no easy ways or short cuts to success here.

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) Relationship characteristics operational tactical strategic Time – horizon from order to order 1 year 1-3 years 1-5 years Quality as requested by producer quality control by producer as requested by producer quality control by producer and supplier ‘sign-off’ by supplier quality assessment by supplier sign-off by supplier early supplier involvement in design quality assessment by supplier Logistics orders annual agreements + call- off orders periodical scheduling of materials requirement by producer electronic document interchange Contract from order to order annual agreement (1 year) annual agreement (>1 year) quality agreement design contract life of type responsibility Price/cost price price+ rebate price + cost-reduction targets price based on open calculation continuous improvement AspectsSupplier Preferred supplierSupply partnerDesign Partner The myth of partnership

© Cengage Learning – Purchasing & Supply Chain Management 4 ed ( ) The myth of partnership “Partnership is the result of the contractors’ continuous effort to improve results in the relationship with suppliers, rather than a technique which can be adapted and applied in a short time”