5-1

McGraw-Hill/Irwin
The
2003McGraw-Hill
by The McGraw-Hill
Companies,
All reserved.
rights reserved.
World Class Supply ManagementSM, ISBN 0-07-229070-6, CopyrightCopyright
2003 by
Companies,
Inc. AllInc.
rights

Chapter 5
BUYER-SUPPLIER
RELATIONSHIPS

5-2

Key Concepts
A Transformation in Relationships
Three Types of Buyer-Supplier
Relationships

Transactional Relationships
Collaborative and Alliance Relationships
Collaborative Relationships
Supply Alliances
Which Relationship is Appropriate?

The Supplier's Perspective

Developing and Managing Collaborative
and Alliance Relationships
5-3

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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
Institutional Trust

5-4

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Evolving to WCSM Through Alliances

Systematically selected supply alliances
built on institutional trust...
help organizations complete their
evolution to World Class Supply
ManagementSM.

5-5

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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?

5-6

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

The Suppliers Perspective

Suppliers want good customers
Several issues affect their assessment,
among them are:

5-7

Cash Flow
Openness and Approachability
Availability
Professionalism

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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?
5-8

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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?
5-9

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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
5-10

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

New Skills and Attitudes Required

Developing and managing collaborative
and alliance relationships require supply
professionals that possess the following
skills and attitudes:

5-11

Recognize the benefits of collaboration

Ability to identify, obtain and use data
Able to work in chaos and uncertainty
Agile, flexible, and highly adaptive

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

A Transformation in Relationships
The transformation from reactive and
mechanical purchasing to proactive
procurement and on to WCSM 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
ones gain would be the others loss
5-12

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Problems with the Term Partner

During the late 1980s and early 1990s,
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.

5-13

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Three Types of Buyer Supplier Relationships

Transactional
Collaborative
Alliance

5-14

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Continuum of Buyer-Seller Relationships

Figure 5-1

Activity/Attribute

Transactional

Communication
Competitive Adv.
Connectedness
Continuous Impr.
Contributions to NPD
Difficulty of Exit
Duration
Expediting
Focus
Level of Integration

5-15

Collaborative

High pot. for problems

Low
Independence
Little
Few
Low
Short
Reactive
Price
Little or none

Alliance

Systematic approach
High
Interdependence
A focus
Many ESI
Difficult high impact
Long
Proactive
Total cost
High or total

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Continuum of Buyer-Seller Relationships

Figure 5-1 Continued

Activity/Attribute

Transactional

Number of Suppliers
Open Books
Quality
Relations
Resources
Service
Shared Forecasts
Supply Disruptions
Technology Inflows
Type of Interaction
5-16

Many
No
Incoming inspection
Inward looking
Few low skill level
Minimal
No
Possible
No
Tactical

Collaborative

Alliance

One or few
Yes
Design quality in system
Concern w/well being
Professional
Greatly improved
Yes
Unlikely
Yes
Strategic synergy

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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

5-17

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Advantages of Transactional Relationships

Relatively less purchasing time and effort
are required to establish price
Lower skill levels of procurement
personnel are required

5-18

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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 buyers products
5-19

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Collaborative and Alliance Relationships

"Collaboration is the new imperative,"
declares Michael Dell
Collaborative and alliance relationships
tend to result in lower total costs and
improve performance of the supply chain

5-20

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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

5-21

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Collaborative Relationships
Typically used for the procurement of noncommodity items and services
A collaborative relationship frequently is
an appropriate first step on the road to a
strategic alliance

5-22

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Collaborative Relationships
Collaborative relationships tend to
foster.

5-23

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

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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

5-24

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

The Alliance Options

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

5-25

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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

5-26

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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

5-27

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Benefits of Supply Alliances

5-28

Lower total costs.

Reduced time to market
Improved quality
Improved technology flow from suppliers
Improved continuity of supply

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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?

5-29

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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
5-30

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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

5-31

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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

5-32

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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

5-33

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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

5-34

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 5
Appendix
INSTITUTIONAL
TRUST

5-35

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
5-36

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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
5-37

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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
5-38

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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
5-39

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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
5-40

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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
5-41

World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.