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Supplier Assessment - A Joke That's Gone Too Far?

Author(s):

Peter Stannack
Peter Stannack MSc. Director, Performance Sourcing Ltd Ashington Northumberland UK 0 -44-1670 -815258, stannack@stannack.demon.co.uk
Martyn Osborn MBA
Martyn Osborn MBA Head of Procurement Scottish Hydro Electric Perth UK 0-44-1738 455420

83rd Annual International Conference Proceedings - 1998 

Abstract: This paper considers the way in which contextual factors impact upon purchasing and supply. It reviews a number of supplier assessment models and considers whether purchasing professionals can transplant so-called 'Japanese' purchasing techniques into Western contexts.

The Argument

This paper argues three key points, each of which is mutually supporting. The first point is that assessment- as a form of measurement - is largely ineffective.

The second point is that although shindan - supplier assessment - is a keystone of Japanese - and Pacific Rim - supply management activity, (Takizawa 1966), there is no requirement for effective assessment within Japanese style supply management. This argument will be supported by reference to an ECLIPSE model. This identifies contextual issues in Japanese society and supply management which would seem to indicate that assessment is largely unnecessary in this form of supply management.

The third point is that in the context of Western business practice, effective assessment is a vital source of competitive advantage, and that it is possible to employ functionally equivalent factors to develop effective assessment systems.

The Objectives of Assessment

The literature on supplier assessment is extensive. Many authors have produced assessment 'models' which are offered as definitive decision support methods in a variety of settings ranging from systems and software (Gustin. et al 1997) to automotive construction ( Van Wijn 1996) . Many companies operate assessment systems (Stannack and Osborn 1996) which purchasing professionals use for a variety of purposes including the management of commercial exposure, the management of the supplier and supplier selection.

To evaluate supplier reliability and capacity 76

To select the right supplier    81

To motivate suppliers     12

To maintain defect free supply   62

To maintain authority over suppliers  31

To provide a ritual     1

To create a supplier 'club'    12

To improve transparency of decision making 2

To improve visibility of competition  7

To create a stratified supply base   18

To engineer the market     5

To help suppliers develop    33

To test ability to stand up to

stress and pressure ('agility')   18

To compare supplier with supplier   26

To compare supplier with standards   57

To give suppliers a sense of achievement  12

To eliminate risk      46

To provide information for other departments 43

To give other departments a degree

of confidence      22

To offer purchasing departments prestige

in the eyes of other departments   4

To give supplier feedback on progress  12

To predict future supplier performance  7

To give feedback on effectiveness

of purchasing department    1

In considering these systems, one common factor is the degree to which the designers or users of the system claim to have the 'best' system or at the very least, the one most appropriate to the environment in which they operate. Given these claims, it is useful to consider the objectives of these models and the degree to which these objectives are valid. Table one sets out twenty four objectives for supplier assessment drawn from interviews with 143 purchasing managers

Further interviews with a range of internal stakeholders within the companies and the suppliers showed that these objectives were, by and large, deemed not to have been met (Stannack and Osborn 1996).

What Makes an Effective Assessment ?

The struggle to establish one universal 'best practice' model of assessment is chronicled throughout the literature. In order to establish the superiority of one model over another, we require an evaluative framework. This will allow us to determine both the degree to which purchasing managers met their objectives, and whether those objectives were met using the best possible processes. The framework which we developed (Stannack and Osborn 1996) consisted of eight elements

Table Two - Evaluating Assessment

Element   Purpose

Accuracy   The degree to which chosen indicators reflected required     outputs or objectives

Predictive validity The degree to which chosen indicators reflected future     delivery of required outputs or objectives

Stability   Degree to which chosen indicators were stable over time

Consistency   Degree to which chosen indicators reflected outputs      across different businesses/sites

Operational validity Degree to which chosen indicators could be used to vary     the delivery of outputs

Inquisitorial  Degree to which the system reflected the need to      establish reasons for failure

Perceived Relevance The degree to which the indicators chosen were seen as     relevant by the assessed party and other stakeholders

Verifiability  Degree to which chosen indicators could be verified and     expressed

Cost    Resource costs of collecting information about the      indicators

Does Japanese Supply Management Need Effective Assessment?

There is a relatively strong basis for argument that much modern supply management practice has arisen in the countries of the Pacific Rim. Companies such as Toyota and Samsung are held up as exemplars of 'good' supply management practice. Texts such as 'The American Keiretsu' (Burt 1994) are advanced as offering Japanese style improvements to the purchasing process. Indeed Aoki has stated that:

"A key to understanding Japan's industrial performance can be found in the ability of firms in certain industries to co-ordinate their operating activities flexibly and quickly in response to changing market conditions and to changes in other industrial factors in the industrial environment, as well as to emergent technical and technological exigencies" Aoki (1990) p3

Of course, it is nonsense to talk of Japanese style purchasing practice. Despite the attempts by many authors both Japanese and Non Japanese to develop the concept of a 'Japanese' character or Nihon -Rashisha, we can still see Japan as a fragmented society. The myth of consensus and harmony or wa is not as advanced as some authors would have us believe. Styles of management - and supply management in Kyoto can be very different from those practised in Tokyo (Sugimoto1997). Indeed some authors have gone so far as to suggest that Japanese character and behaviour is based on the prefecture. When this paper talks about 'Japanese' style purchasing it does so in the context of the literature.

In considering 'Japanese' style purchasing we will suggest that purchasing and supply management cannot be considered in isolation, and that it in fact rests upon a particular model of social cohesion or social control. This section of the paper will advance the concept of ECLIPSE analysis, as a method to identify the key concepts of context in Pacific Rim Sourcing. ECLIPSE analysis identifies the economic, cognitive, legal, institutional, political, socio-cultural and environmental factors, which have both, dictated, and supported this particular model of supply management

Economic Factors

The economic factors which support what Sethi, Namiki and Swanson (1988) label the Japanese Business and Management System JABMAS - are particularly well chronicled. They range from the oligopolistic nature of Japanese automotive industry where in 1977 two firms Toyota and Nissan had a combined market share of 70.5% Hiroshi (1982) has also noted the closed nature of Japanese inter-corporate relations The fact that Japanese distribution kereitsu will only accept goods from manufacturers within their own keiretsu group (Koyama 1990) reinforces the overall reluctance of Japanese firms to work with foreign companies because of a lack of se'I or mixed understanding and respect (Takeuchi 1989, Lawrence1987, Ravenhill 1993). The holding of stock, interlocking directorships and group controlled financing are part of the infrastructure which supports the particular nature of Japanese sourcing.

Cognitive Factors

The literature on the psychological manifestations of the Japanese character is extensive. It ranges from group-psychological factors such as 'Trust' (Fukuyama 1996,) through to explanations of particular individual differences in the Japanese mindset such as those proposed by Dao (1977). Both of these approaches seek, however to explain mindset in terms of placing the group above the individual. These factors shade into socio cultural factors which in some areas offer an explanation of this allegedly unique approach. Other writers such as Lee suggest that Japanese have a uniquely 'miniaturising' mindset which enables them to create smaller products from bonsai to electronic components. Whatever the truth of these claims, the fact remains that there may well be a unique aspect of Japanese psychology which supports particular styles of management - and purchasing.

Legal Factors

In the Western World, litigation has been seen as a major industry. Authors such as Howard (1995) have noted that the threat of - and the actuality of - legal action have caused serious problems in social and organisational settings. In Japan there are, however serious structural and psychological barriers to litigation. This includes the limits to the number of lawyers and judges - both of which are regulated by educational and appointment 'filters' in Japan often means that civil litigation can take three years to come to court and cases of seven years waiting are not uncommon.

A further factor which supports Japanese style sourcing activity, is the way in which anti trust regulation is applied. As of 1990, during the 37 years of antitrust law in Japan only six criminal prosecutions had taken place, three of which were against cartels. Compared with anti trust activity in the USA, this is astonishingly low.

Institutional Factors

Within Japanese companies, we can see a range of institutional mechanisms which would seem to support a particular type of sourcing activity. We have already noted what Takahashi (1969) calls 'management through financial cliques' (p256) in the form of zaibatsu, which although outlawed after the Second World War, have seen some resurgence in the form of keiretsu. These keiretsu, are well supported by a range of methods including interlocking directorates, and shareholdings. Such structures support mutual surveillance -what Sugimoto calls 'Friendly Authoritarianism' in organisational and social life. In social life, the Han or jichikai systems provide a system of small groups at town block or village hamlet level which promotes the idea of small group mutual surveillance, reflected in the TQC movement at grass roots in organisations. These systems of mutual surveillance are designed to promote rentai sekinen or collective responsibility rather than self -aggrandizement.

Political Factors

Links between government and business in Japan are far more prevalent ithan are those in the West. Historically, business- government linkages have been strong since the Meiji period. Takahashi (1969) has noted the growth of seisho or politically oriented businessmen during the Togukawa shogunate. Coupled with this we can see the well known practice of Amakudari - Descent from Heaven' where government officials retire to take up positions with large companies. This process, although also extensive in the West is not as structured as in Japan. In 1991 a survey showed that ex-bureaucrats occupied 71.2% of a total of 354 executive positions(Seiroren 1991)

Socio -Cultural Factors

Another set of factors with regard to the implementation of Japanese purchasing methods are those involving social and cultural factors. Amongst these we would list interactional factors such as those identified by Asunama as long ago as 1989 He highlights the intensity and durability of relationships within the Japanese automotive industry. Here Nissan's core suppliers supply over 90% of its inputs, of the 150 suppliers in Toyotas Kyryoku Kai (supplier federation) only three left the supplier association in the twelve year period (1975 -1987) studied.

These characteristics of Japanese 'groupism' are also well documented. This can be seen in a number of factors. Perhaps the first of these is the degree to which the individual is seen to find security and identity through affiliation with a group. Historically, group affiliation is promoted and supported by a range of factors extending from Japanese educational and child care practices including the emphasis placed in Japanese schools on shakaijin or training children to be members of society through to Japanese policing practice..

Historically, too, we can see mechanism which support this group affiliation. Taxation systems, for example, during the Togukawa era (1658 - 1853) was based on the village or five family system where tax was not paid by individuals but by villages

Sheldon Goran (1997) has noted the effect that such taxation systems had upon the collective in driving out 'free riders' and inculcating a developmental thrust within the group which later emerged as Kaizen

Environmental Factors

In the last category we would identify broad environmental factors. These would include the growth and nature of Japanese markets, the reconstruction of Japanese industry after the Second World War ( Smitka 1992). This would link with the perceived threat of colonisation during the eighteenth century and the forced transition from feudalism to an industrial economy.

We can see then, that there is a complex web of contextual factors that might be said to support a particular style of purchasing and supply management. Whether this style is one of creating supplier dependency will be open to debate. Nonetheless, we would argue that all of these factors - and many more too numerous to mention here- will support a particular style of purchasing practice. Given the extensive nature of the contextual factors identified using ECLIPSE analysis, we can ask ourselves whether purchasing professionals should be employing such methods without being able to replicate these factors.

 We can suggest that in carrying out an ECLIPSE analysis of Japanese style purchasing that the presence of the factors identified above means that in fact supplier assessment in Japan carries out a very different function to that carried out in purchasing in the West. The strong inter-organisational ties present in Japanese society mean that 'Japanese' assessment does not need to gather information to mitigate or manage risk. In the West, the absence of similar ECLIPSE factors means that supplier and vendor assessment requires a much more robust and accurate methodology.

Functional Equivalence in Purchasing

Developing such a methodology means that purchasing professionals need to carry out a number of actions. Existing strategies for achieving' Japanese' style successes in purchasing do not rest solely upon longer term relationships, supply base reduction or 'partnership'. These attempts to replicate such practice are likely to fail without either the factors outlined above or some functionally equivalent factors. We would argue that effective assessment is critical to ensuring the success of purchasing in its relationships with both internal clients and suppliers.

There are a number of key activities in designing an effective universal assessment methodology. The first of these is to establish criteria for the choice of indicators used in the assessment. The second is to ensure that these selection criteria are used and regularly reviewed. The third is to be clear with regard to the objectives of the assessment, and to consider the way in which the assessment is perceived by the assessed party. The fourth is to ensure data collection methods are adequate. The fifth is to rely heavily on statistical methods in managing the data collected.

Using a 'scientific' approach to assessment will mean that predictive power and accuracy can be increased. This may overcome the shortcomings of existing assessment methodologies, and lend purchasing professionals one of the tools which will help them 'add value' to the organisations in which they work.

Without a more rigorous approach to the design of assessment systems, purchasing may well find itself marginalised. A continued reliance upon models of purchasing and supply management, which are not context supported, is unlikely to contribute to the ability of the purchasing function to make a significant contribution to organisational competitiveness. During the course of our research we saw that in many organisations, purchasing is being placed as a low level operational support function. Purchasing professionals need to act quickly to regain their position.

Bibliography

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