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Prof. J.K.Nayak

Designing the supplier structure: single vs. multiple sourcing

Van Weele on Single Sourcing: When? Customised, small-series, high-tech products, confidential production techniques time pressure

+ Increased involvement, better information + Streamlined procedures + Reduced lead times + Better personal relations - Dependence, high switching costs - Loss of competitive edge / market feeling

Single vs. multiple sourcing

Low indirect costs: price can be reduced by multiple sourcing / competitive bidding High indirect costs: indirect costs can be reduced by deep involvement with a single supplier

Price vs. indirect costs

Multiple suppliers

Price Total costs Single supplier

Indirect costs


Indirect costs Total costs

Organising the supplier structure

Companies currently seek to reduce the number of direct suppliers One means: Single sourcing Other means: Tiering
rearranging the supplier network so that manufacturer deals with limited number of main suppliers, which have responsibility for complete system

Managing individual supplier relationships

Kraljic's Portfolio Based on differences in the purchased product, suppliers represent different interests for the company These different interests lead to a differentiated purchasing strategy towards suppliers and supply markets Criteria: impact on financial results, supply risk

Portfolio strategies
High leverage items Substitutes available Market research Competive bidding Financial Importance Labour-intensive Reduce product variety Systems contracting Low routine items Low strategic items Difficult to change Create mutual commitment Partnership

Monopolistic market Find alternatives Secure supply/volume assurance bottleneck items High


Partnership development
Not surprisingly that real partnerships are still very scarce...
Hendrick and Ellram (1993) demonstrated that thebalance of power is only true in 1% of the buyersupplier relationships. A, DTI study(Dept. Of trade and industry) in the UK showed that there is still very little mutual trust between suppliers and automotive manufacturers.

The question is how to develop a partnership relation with your most important suppliers.

2 Partnership development
Intensity of the relation

Involve Partner Rationalise


Acknowledge High Number of suppliers Low

Partnership development
Acknowledge suppliers as a real source of competitive advantage and as an extension of the firm.
This often requires changes in: - mind shift (not-invented here syndrome) - working culture: teamwork, jobrotation, processfocus, ... - purchasing management style - communication towards suppliers

Rationalise the supplier base. A professional

selection process is used to select partner suppliers that are portentially best-in-class in development, project management and operational management (zero defects) Strong involvement of R&D, Development and Purchasing All potential supplier are considered Cost based discussions Selection is based on facts and figures: ABC analysis Article/supplier matrix, Portfolio analysis, etc.

Increased partnering; filter out the truly best-inclass suppliers and streamline processes and improve the relationship with these suppliers.
Definition of technology choices, design review, method of cost analysis, workingrules, projectplan, etc. Co-operation and continuous improvement Concrete and measureable targets Systematically measure, evaluate and discuss supplier and customer performance (vendor rating & supplier satisfaction) Increase process alignment and integration

Actively involve suppliers (early or timely) in new product development processes in order to fully leverage their technological knowledge and experience
Clear communication Close link between R&D, Purchasing and Development Relational and communicative skills purchasers Value chain mapping Extended enterprise Residential engineering / co-location

Integration: tuning future product and investment plans, management information systems, accounting systems, etc.. Co-operation becomes doing business together.
Both parties invest seriously in future plans Continuous control and monitoring Risks and rewards are shared (not always 50/50) Maximum interdependency Enterpreneurial management style Technology sharing Ethical issues

Tools and techniques

There are many tools and techniques companies use to develop partnerships:
Portfolio analysis Value chain mapping Supplier satisfaction survey Supplier development teams Early supplier involvement Residential engineering, co-location Supplier management plans Training courses Relationship assessment tool (RAP) Vendor rating and ranking

Understanding supplier relations : key dimensions

Complexity Investments Adaptations Trust vs. formalisation

Conflict vs. co-operation

Power vs. dependence

Relations between organisations are in fact bundles of micro-relations
on different organisational levels (corporation, division, unit, plant) on different hierarchical levels in different functional areas

Relations also have different aspects

commercial technical legal social ethical

An investment is made on one occasion and is expected to provide return over several periods, while a cost is associated with an activity the return on which is expected to come during the same period
examples: additional capacity, special machines, special routines, specific knowledge,..

Costs of supplier relations: contact, information, adaptation

mainly at the beginning

Benefits: rationalisation, development, structure

usually over time

Result: initial losses and switching costs promote longterm relationships

Different types:
technical knowledge-based administrative economic legal

Adaptations also represent investments and thus create switching costs

Trust vs. formalisation (contracts)

Means to handle uncertainty Van Weele: contracting as one of the crucial phases in the overall purchasing process, an important step in improving the results in doing business with suppliers Hakansson and Snehota, 1995: Formal contracts are often ineffective in taking care of the uncertainties, conflicts and crises that a business relationship is bound to go through over time .. informal mechanisms are more effective Research: the older the relation, the less important contracts are

Conflict and co-operation

Buyer and seller should neither smooth over existing conflicts nor let them escalate

Conflicts/mistakes/misunderstandings represent learning opportunities Co-operation is needed to exploit those opportunities

Usefulness of relations
Cooperation High 'Nice' 'Developmental'

'Marginal' Low Low

'War' Conflict High

(Supplier) relations are not always good and nice: relations can be difficult to manage relations can be problematic relations can be a burden relations are not isolated (chains, networks ..) relations are a fact of life

Recommended literature
Anderson, J. C., H. Hkansson and J. Johanson (1994), 'Dyadic Business Relationships Within a Business Network Context', Journal of Marketing, Vol. 58, October, pp. 1-15. Dyer, J.H. and W.G. Ouchi (1993), Japanese-Style partnerships: Giving Companies a Competitive Edge, Sloan Management Review, Fall, pp. 51-63. Ellram, L.M. (1991), 'A Managerial Guideline for the development and implementation of purchasing partnerships', International Journal of Purchasing and Materials Management, Vol. 27, No. 2, pp. 2-8. Helper, S.R. (1991), How much has really changed between US automakers and their suppliers?, Sloan Management Review, Summer, pp. 15-28. Hines, P. (1994), Creating World-Class Suppliers: Unlocking Mutual Competitive Advantage, London: Financial Times / Pitman Publishing. Lamming, R. (1993), Beyond partnership, strategies for innovation and lean supply, London: Prentice Hall. Leenders, M.R. and D.L. Blenkhorn (1988), Reverse Marketing: The New Buyer-Supplier Relationship, New York: Free Press. Lewis, J. D. (1995), The Connected Corporation: How Leading Companies Win Through Customer-Supplier Alliances, New York: Free Press.