George L. Harris
George L. Harris, President, Harris Consulting, Inc., Lexington, MA 01824, 781-674-0041, firstname.lastname@example.org.
Abstract. If you ask the typical purchasing professional to rate their supply base, chances are very great that they would indicate that their suppliers perform on an above average basis. I would take exception to that typical comment because it is based on only a small percent of the supply base. They are not commenting on suppliers who provide niche products, products and services with low value, the preponderance of MRO suppliers, and suppliers who are chosen outside the purchasing process (possibly legal, advertising, health care depending on the level of purchasing involvement).
If you ask that same typical purchasing professional to indicate the number of extent of their partnership relationships with their suppliers, they would say that partnerships have been in place for some time and that these partnership are working just fine. I would take exception to this comment as well because the definition of what constitutes a partnership differs almost by organization.
This paper attempts to describe a vision of a partnership relationship, the requirements for success, the resources required for implementation, and the methodology of establishing meaningful partnerships with suppliers.
Definition of Partnership. The effective management of the supply chain requires streamlined, partnership-based relationships with suppliers. These types of relationships require a substantial amount of resources and attention from both buyers and sellers but they hold the possibility of producing long-term, sustainable improvements in the supply chain. Few standardized techniques exist in assessing and optimizing the supply base so that effective partnerships can be established.
Partnerships between buyers and suppliers can be defined as:
"A definitive and well-published relationship between the parties based on mutual problem solving, cooperative sharing of information and resources, and the satisfaction of mutual goals which results in satisfactory levels of profits"
This definition is a result of both the review of the literature and with working with suppliers and buyers over the last 23 years. There are pre-conditions for the establishment of partnerships which include:
Without the above factors, any attempt at developing partnerships will result in failure. Many organizations also attempt to develop 100 or more so-called partnerships. This is simply not possible unless the definition used by those organizations only means a long term pricing agreement. One client recently told us that they were going to develop 300 partnerships within the next 9 months. This is simply not possible or feasible. Partners are few in number yet involve many people from both supplier and buyer organizations, if the above definition is used.
Partnerships require both organizations to manage problems which occur from time-to-time such as supplier delivery problems and buyer inaccurate forecasts. In these cases, the parties have what is commonly referred to as "stick-to-it-ness". They manage their problems effectively rather than pursue other partners.
The Partner Development Process. In an effort to provide a methodology to establish and maintain partnerships, we have developed a four step process. This process spans the gamut from partner identification and assessment to partnership measurement and improvement. It has been our experience that companies who follow a prescribed process will eventually become more successful in this area. The process is as follows:
The Partner Development Process.
Assessments - Optimization - Results - Measurement
The assessment phase entails the review of data on purchasing volume, part families, current suppliers, extent of competition, state of technology and supplier volatility and performance. Once this data is developed, a plan can be developed for execution. In the optimization phase, the company coverts to the best suppliers by using evaluation strategies such as stair-step, pass/fail, or continuous reduction. Results are collected and measures are mutually agreed upon and the supplier receives feedback on performance and the action plans are developed for improvement.
There is always some trepidation about optimizing the supply base as it could be viewed as increasing the risks taken by an organization. These risks include higher pricing due to single sourcing, lack of contingencies due to natural disaster, or sheer supplier non-performance and the ensuing lack of leverage. Measures of progress must be put in place to allow for periodic evaluation of performance.
Assessment Phase. This is clearly the most difficult phase because of the amount of data analysis required. A thorough market study must be conducted along with an assessment of supplier capabilities and the plans of competitors. The elements of this analysis would include the following aspects:
The competitor analysis is necessary because you should know whether your primary competitors have already approached key suppliers to establish partnerships with them. This might influence your supplier strategy and the methods you will use to attract your current suppliers.
Another outcome of this phase is a complete evaluation of the commodities that you purchase and the need to partner with your suppliers. Companies such as DuPont have used a method to identify those commodities which have the highest chance of partnering applications. An example of this method is as follows:
(graphic is not available in the text-only version of this paper)
By using a matrix like this one, procurement can identify commodities and markets that best lend themselves to partnership discussions. Other partner opportunities lie in sole source relationships, customer directed sources, geographic preferences, and volatile commodity situations.
Optimization Phase. Once the assessment phase has been completed, suppliers can be optimized. This commonly means that the number of suppliers are reduced to take advantage of consolidation, product family procurements, standardization, and supplier competencies. Goals are established for optimization taking into consideration the nature of the supply base and the goals of the organization.
There are three primary methods of reduction:
Varian Associates uses a three step process to arrive at potential partners. The first step is qualification followed by part certification. This means that the supplier must reach predetermined levels of quality performance before becoming certified. The third step is what they refer to as " Value managed Relations" which is embodied in an long term agreement, provides access to training, allows for technical assistance, and the goal to reduce administrative procedures. Rockwell International has a four tiered approach which follows the same type of process.
Timken signs contracts with local suppliers who establish plants near their primary factories with a term of 20 years. They jointly reduce costs and inventory.
Results. The partners are then chosen from the list of suppliers which are optimized over time. Companies that can truly commit to the definition of partnership and are proven performers over time become partnered suppliers.
The expectations of a partner are significant. The elements of a partnered relationship would include the following elements:
The reviews of performance would be accomplished every three months and attended by senior management of the supplier and buyer. Joint problem resolution strategies would be established.
Results would be tracked from both perspectives ( sellers and buyers ) and each party would express their view as to whether the expectations for the partnerships are coming into fruition. Any shortfalls will be evaluated and improved upon.
One of the key areas for implementation once the partnerships agreements is established is the need to properly transition parts or services previously provided by one supplier to the new partner. This takes a high level of focus, concentrated effort, and assurance that quality and continuity of supply are maintained. We are aware of many partnerships going awry because the implementation of the agreement and the improvement of the relationship between the partners does not occur.
The establishment of partners have reaped great results. Exxon claims double digit purchase cost savings by establishing agreements with only twelve commodity classes supporting their plants. General Motors is establishing a similar plan with its 12-13 suppliers. These suppliers are responsible for providing directly or subcontracting for the provision of all parts or services under a given commodity.
As is obvious from the above, the number of supplier must be kept to a chosen few. I would now recommend more than 20 company wide, particularly if they have the dimensions of the partnership arrangement envisioned by this paper.
Measurement. Measures and evaluation of performance take place on a regular basis. Measures are mutually agreed upon and are based upon the nature and extent of the partner agreement. We recommend that the terms of the partnership agreement be put in writing, given the mobility of procurement and supplier management personnel. The terms must survive the personnel turnover and relocation of staff originally involved in the setup of the agreement.
These measures would evaluate buyer and supplier performance. For example, the supplier would be evaluated on the extent of value analysis savings, lead time reduction, and delivery and quality performance. The buyer would be evaluated on forecast accuracy, order levels, new product involvement, and reduction of procurement paperwork and payment turnaround.
Some measures would also evaluate joint objectives such as training, technical assistance, process improvement, administrative improvements, inventory performance, and certification achievement. The total package of the measures are truly a combined measurement of the quality of the partnership.
In Summary. The establishment of partners should follow a logical process. The selected partners should be few in number and the requirements for the partners should be mutual and measured accordingly. Top management from both companies should be involved in evaluating the costs and benefits inherent in the relationship and improvement plans must regularly be put in place to sustain the improvement made over time. Companies can utilize the four step process identified in this paper to assist in the development and management of partnered suppliers.