Jon Hughes, M.I.P.M., M.I.T.D.
Jon Hughes, M.I.P.M., M.I.T.D., Chairman ADR International Purchasing Consultants, Bracknell, Berkshire, UK, RG12 1RP, 44/1344/303078.
William L. Michels, C.P.M.
William L. Michels, C.P.M., Director of North American Consulting ADR International Purchasing Consultants, Ann Arbor, MI 48106, 313/449-2010.
Systematic Source Management. The aim of this paper is to guide the reader through a number of key features of strategic relationships. It will enable you to assess, profile and challenge your purchasing approaches with key suppliers in this area.
However, this is a subject which cannot be disengaged from the broader field of systematic source management. It is where commercial relationships, negotiating skill and long-term business needs overlap. It is about challenging the traditional thinking that often dominates the purchasing area. Developing strategic relationships is characterized by the building of fundamentally different ways of working with suppliers, creating breakthrough change, and structuring agreements that truly reflect the longer term goals of both sides. ADR International Purchasing Consultants argues that this reflects the full utilization of the purchasing resource achieving a business or competitive advantage.
World Class Tools for Change. It is true to say that significant changes have occurred worldwide in this area. Many long-established practices, beliefs, tools and techniques are being challenged and questioned. Major organizations across Europe, North America and the Asia Pacific region are becoming increasingly aware of the potential to improve organizational and business performance dramatically, by turning the spotlight on the purchasing and supplier management process. In turn, this calls for a systematic review of the different types and possibilities of supplier relationship that are available to the purchasing professional.
These leading organizations have demonstrated that when senior executives pay real attention to sourcing, the supply market and supplier management, this leads to fundamental changes in the way in which they operate. However, these drives have to be planned and managed carefully, with structured and reliable implementation of proven world-class methods and tools. And, they need to be fully supported by just in time training and development for the considerable numbers of staff who can influence suppliers.
However, a lot of purchasing thinking and practice in developing effective supplier relationships has pursued a simplistic approach. It has tended to focus on skills and behavior in isolation from the business context in which those relationships are operating. If an organization is going to derive maximum benefit from its suppliers, real added value, then there has to be a systematic framework for developing and taking forward clearly defined sourcing strategies.
Indeed, developing strategic relationships, almost by definition, is not so much about a deal being negotiated; it is about the way in which two or more parties intend to work together over the longer term. In essence, it is about developing a robust and rigorous business relationship that is capable of being tested against specified deliverables. Indeed, the crucial outcome of the process can often best be gauged in the quality of the relationship, and the commitment to the deliverables, by both the purchaser and the supplier. And that is something which has to make sound and significant business sense for both sides. So, let's look at the nature of supplier relationships in more detail.
Options in Supplier Relationships. There is a continuum in supplier relationships from competitive leverage, through to preferred supplier status, then to performance partnership, and, finally, to strategic alliance.
i) Competitive Leverage. Traditionally, competitive leverage is the heartland of tactical negotiation. Such leverage is characterized by an easy market place, where there are many suppliers to choose from, and where the purchaser is spending significant amounts of money. Therefore, the prime purchasing practices tend to be multiple sourcing, frequent and tough negotiation and lots of positioning and bargaining. Full use of competition is one of the main persuaders adopted by purchasers in this market place. It is an area where we find lots of competitive bids and full use of inquiries.
However, this traditional competitive purchasing approach is appropriate in many situations. Furthermore, there have been striking examples of competitive leverage purchasing in recent years, such as the major initiatives launched by automotive companies such as General Motors and their PICOS teams - their program for improvement and cost optimization of suppliers. Despite the howls of anguish from Detroit, a radical shake-up of the way in which General Motors was organizing its automotive parts purchasing across North America was long overdue. Many suppliers had become substantially less competitive than those in Europe, Japan and the rest of the world. So-called partnerships had become cozy, inwardly focused and out of touch. There was a need to drive huge productivity improvements, and fully implement global benchmarking of price, performance and supplier capability. To achieve the rapid breakthroughs that were required, competition and fierce re-bidding of suppliers were justified in the context of global competition to determine which ones were prepared to put the customer first in terms of quality, service, and very importantly, price.
Competitive leverage still has an important part to play in modern purchasing. But let's look at some alternative approaches, which move us into a more strategic focus on the supply market.
ii) Preferred Suppliers. Even in the competitive leverage area, it may make sense to concentrate on a smaller number of preferred suppliers, particularly where companies have systematically tested the performance of suppliers through structured appraisal, evaluation and regular benchmarking on costs. As a result of this appraisal process, the decision can be taken to select a smaller number of suppliers for preferred supplier status. Although they may have different names for their programs, organizations such as Toyota, BMW, British Airways and SmithKline Beecham have been pursuing this type of process with significant success. For example, when Toyota made a strategic decision to invest heavily in motor manufacture in the UK, they focused on their potential supplier network several years ahead of components actually being required for volume car production. In line with best practice, they majored on very structured supplier evaluation of quality, cost, technological expertise and, very interestingly, their suppliers' management styles, commitment and capability. Furthermore, they found through the joint investment with their preferred suppliers, that they had improved supplier relationships, significantly reduced defects and cycle times, and stimulated faster new product introduction times.
iii) Performance Partnerships. Having decided to concentrate on preferred suppliers, and having tested the quality and price performance in comparison with the best companies in the market place, it is a relatively straightforward step for an organization to select an even smaller group of suppliers for co-development through performance partnership agreements. Excellent examples can be seen in companies such as Motorola, Intel, Digital and Texas Instruments, in a sector where there has been major transformation in relationships between the semiconductor suppliers and their customers. Such companies have pursued similar routes, in terms of supplier rationalization, joint definition of improvement plans and priorities, the creation of joint purchaser-supplier fusion teams with specific improvement objectives, and a focus on maximizing strategic value within the context of total cost of acquisition. Significantly, in such companies, the direction and leadership have come from the top. Joint business steering teams are in place, with representatives being drawn from both companies and their suppliers.
However, it is worthwhile correcting a serious misunderstanding on such partnerships. As we have seen, they are only one of a number of approaches towards the management of the supply market. Furthermore, there needs to be a number of important preconditions and tests which are applied to suppliers, and also the purchasing organization, if they are to succeed. There has to be a commitment to openness on both sides, particularly on pricing, target costs, future business plans and investment. And all of this has to be benchmarked against developments elsewhere within increasingly competitive market places.
ADR International Purchasing Consultants' approach in this area is to advocate "performance partnerships", which explicitly map out the required performance, establish principles on continuous improvement, and which define an agreed process for evaluating the success of the agreement and the deliverables from both sides over a designated period of time.
In summary, with such partnership relationships, we are invariably talking about single or reduced sourcing, a joint focus on quality and value, technology sharing and dedicated resources, from top management down.
iv) Strategic Alliances. Finally, companies may get into a full strategic alliance. At this stage, there is likely to be cross share ownership, single sourcing, joint investment strategies, and even co-location and co-manufacturing. Not surprisingly, in most organizations there is limited scope for this approach. However, putting in place a successful strategic alliance is one of the most demanding, and satisfying, features of strategic purchasing.
The Evolution of Strategic Relationships Over Time. A very important perspective on the range of potential strategic relationships available to companies, is that they should not necessarily be regarded as fixed. They can change over time. They can become closer, and they can also become more arm's length. After all, you may, or may not, have full control over them, depending on changes in the market place, changes at senior management level, changes in your own products or product technologies. Furthermore, there are usually only a small number of suppliers who actually have the capability and the management commitment for you to enter into a full performance partnership or strategic alliance with them.
Indeed, a theme that has been running through this analysis of the continuum from competitive leverage, to preferred suppliers, to performance partnerships and then full strategic alliance, is the need for clear and strong guidelines on how you, as a purchaser, should be analyzing and mapping relationships with your suppliers. In Figure 1, a structured profile of relationship factors is provided to facilitate this process.
Linking Strategic Relationships to the Business Plan. One of the starting points for developing more effective supplier relationships is the definition and linking of business needs to the purchasing and supply chain, through an explicit source plan.
This provides a very sharp focus on what you are trying to achieve. Let's look at some examples. It could be:
However, it is very important to develop some clear rules of engagement. One approach can be the framing of broad guiding principles into a detailed relationships agreement that states how both sides should be working together. ADR International Purchasing Consultants has found that particularly in strategic relationships, the framing of such principles and criteria can be used to resist the parties' slipping back into positional bargaining and very tactical responses. The development of such principles provides a very robust and rigorous process. Let's look at a number of examples in more detail.
Similar principles can be developed to cover speed to market, access to a supplier's technology, transfer of expertise, joint collaboration on new product development and design, improved speed of response times, or labor productivity and efficiency. They are then integrated into the sourcing plan for that supplier.
Ten Keys to Success. It is quite timely to map out a number of keys to success in the whole area of strategic relationships. ADR International Purchasing Consultants believes that ten are crucial.
Both authors of this article wish to encourage increased networking on leading edge strategic tools. They can be contacted at the offices listed at the beginning of this paper.
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