Chapter 3: Creating and Managing Supplier Relationships You should be able to ∙ Explain the importance of supplier partnerships ∙ Understand the key factors for developing successful partnerships ∙ Develop a supplier evaluation and certification program ∙ Explain the importance of a supplier recognition program ∙ Understand the capabilities of Supplier RelatioWe also discuss several other topics like math 110 berkeley frenkel
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nship Management ∙ Explain the benefits of using SRM software to manage suppliers Hard SRM: hard stuff, day to day tactical. Where are you spending money, best suppliers, how does it relate to the market Soft SRM: relationship. How to limit the number of suppliers and how to choose; how will they benefit you Supplier Development ∙ A buyer’s activities to improve a supplier’s performance and/or capabilities based on the following 7 step approach 1. Identify critical products & services a. Who are those suppliers? b. Asses the importance of the goods and services c. Goods and services purchased in high volume and don’t have substitutes are critical supplies 2. Identify critical suppliers a. Identify critical supplier not meeting performance requirements b. Rank performance of suppliers i. Suppliers not meeting MINIMUM performance in quality, timeliness, cost, technology are targets for SUPPLIER DEVELOPMENT INITIATIVES 3. Form a cross-functional team a. Should be a relationship between the products you are looking at and the suppliers b. Specialized employees with expertise in that field c. Team must agree on what the supplier development initiatives are 4. Meet with top management of supplier a. Things don’t get done at the junior level b. Has to be ownership and a level of support from the top down c. Need to discuss details of strategic alignment with top management 5. Identify key projects a. Specific training you want to look at b. How do employees understand the companies?c. Rank supplier development projects d. Supplier development opportunities are identified and resources e. They are then evaluated in terms of feasibility, resource and time requirements f. The most promising projects are selected 6. Define details of Agreement a. Performance metrics are now jointly agreed upon to be monitored (i.e. percent improvement in quality) 7. Monitor status & modify strategies a. Is the company in a safe place? b. Management must actively monitor progress c. Promote exchange of information and revise the development strategies as conditions demand Supplier Recognition Programs Three Attributes ∙ Companies should be able to recognize and celebrate the achievements of their best suppliers. ∙ Award winners exemplify true partnerships continuous improvement and excellence. o Suppliers love that because they can market that award ∙ Award-winning suppliers serve as role models for other suppliers. ∙ Award-winning suppliers serve as role models for other suppliers. Supplier Relationship Management ( SRM) ∙ Improves profits and reduces costs ∙ Refers to extended procurement processes such as sourcing analytics, sourcing execution, procurement execution, payment and settlement, supplier score carding and performance monitoring ∙ Strives to help companies recognize their most important suppliers o Ones they want to keep and treat well ∙ Streamlining the processes and communication between the buyer and supplier and using software applications to enable process to be managed more effectively (SAP) o Vending machine example Supplier Relationship Management (SRM) Software ∙ To give information that you can use that is accurate, clean, organized, and helpful ∙ Who are our current suppliers? ∙ Who are our best suppliers?∙ What are suppliers’ performances in respect to kpis (key performance indicators)? ∙ Can we consolidate our buying? ∙ Do we have consistency in suppliers and performance across different locations? ∙ What goods and services do we purchase? ∙ What purchased parts can be used in new designs 5 Key Points of an SRM System 1. Automation handles routine transactions 2. Integration spans multiple departments, processes, & software applications 3. Visibility of information & process flows 4. Collaboration through information sharing 5. Optimization of processes & decision making though enhanced analytical tools such as data warehousing 2 Types of SRM Transactional- ∙ Enables organizations to track supplier interactions (ie. Order planning, payments, returns) ∙ Short term reporting ∙ What did we buy yesterday ∙ What supplier did we buy from ∙ What was the cost of the purchase? Analytic- ∙ Allows the company to analyze the complete supplier base ∙ Which suppliers should the company develop long term relationships ∙ Which suppliers would make the company more profitable? ∙ Where were we yesterday? ∙ Where are we today? ∙ Where do we want to go? Trends in SRM ∙ Sourcing & procurement are increasing in importance in organizations. They are becoming more strategic ∙ More companies expect more cost reductions to come from their procurement functions ∙ Staff is being reallocated from low-level transaction activities to more strategic & higher value-added positions∙ Companies with effective transaction activities tend to reduce costs better & have strategic & automated systems Benefits Short Term ∙ Strategy enhancement per category ∙ Increase contracted spend ∙ Improve accuracy of savings goal ∙ Identify and implement new catalogs Long Term ∙ Demand management ∙ Increase compliance by monitoring category spend ∙ Commodity portfolio and supplier management ∙ Improve link between business need and GPChapter 4: STRATEGIC SOURCING FOR SUCCESSFUL SUPPLY CHAIN MANAGEMENT You should be able to – ∙ Describe the difference between purchasing and strategic sourcing ∙ Describe how strategic sourcing plans are developed and implemented ∙ Define and describe the terms green sourcing, VMI, JIT II, in-sourcing, co-sourcing, and co-managed inventories ∙ Describe sourcing’s role in managing key supplier relationships ∙ Describe the performance criteria used in assessing suppliers. ∙ Describe how strategic supplier relationships can impact the firm. ∙ Describe how a reverse auction works. ∙ Understand the importance of sharing the benefits of strategic partnerships. ∙ Understand the strategic role played by the purchasing function in developing & improving the supply chain. Introduction Sourcing- all of a firm’s activities used to manage external resources Strategic Sourcing- managing the firm’s external resources to support firm’s long term goals Drivers of Strategic Sourcing: ∙ Reduce costs & delivery cycle times ∙ Improve quality & long-term financial performance ∙ Increase number of global competitors ∙ Increase customer focus ∙ Reduce high costs of globalization & materials, ∙ Deliver more innovative products more frequently & cheaply than competitors Business Ethics is the application of ethical principles to business ∙ Utilitarianism: an ethical act creates the greatest good for the greatest number of people. ∙ Rights and Duties: some acts are right in themselves irrespective of the consequences. o Recognizing the rights of others ∙ Corporate Social Responsibilities is the practice of business ethics ∙ Ethics Sourcing is that which attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior.Ethical and Sustainable Sourcing Strategies Ethical Policies should include: ∙ Determining where all purchased goods originated and the manner in which they were made ∙ Knowledge of the suppliers’ workplace principles ∙ Inclusion of ethics as a performance rating ∙ Independent verification of vendor compliance ∙ Report of supplier compliance to stakeholders ∙ Provision of detailed ethical sourcing expectations to suppliers Sustainability Sourcing ∙ Green purchasing is aimed at ensuring products or materials meet environmental objectives e.g. waste reduction, reuse and recycling ∙ Sustainability is the ability to meet current needs of the supply chain without hindering the ability to meet future needs in terms of economic, environmental, and social challenges o Considers worker safety, wages, working conditions, human rights ∙ Should seek to: o Grow revenues New sustainable product introduction o Reduce costs Increase resource efficiencies o Manage risk Link brand to social consciousness of consumer o Build intangible assets Build social and environmental responsibility ∙ Functional Products - MRO items & other commonly low profit margins with relatively stable demands & high levels of competition ∙ Innovative Products - characterized by short product life cycles, volatile demand, high profit margins, & relatively less competition Framework for ethical and sustainable sourcing strategy development Step 1 – Establish corporate ethical and sustainable sourcing strategies Step 2 – Train purchasing staff and implement policies Step 3 – Prioritize items based upon ethical and sustainability opportunities and ease of implementation Step 4 – Develop performance measurement systemStep 5 – Monitor progress and make improvements. Increase use of green and fair trade products Step 6 – Expand focus to include other departments ∙ Supply base rationalization (AKA supply base reduction or supply base optimization) is often the initial supply chain management effort o The opportunity to get rid of low performers o Eliminate redundant performers o Allows you to drive efficiency o Brings better price positions o Buyer-supplier partnerships are easier with a rationalized supply base & result in: Reduced purchase prices Fewer supplier management problems Closer & more frequent interaction between buyer & supplier Greater levels of quality & delivery reliability ∙ Supplier certification programs are used to identify strategic supplier alliance candidates ∙ Firms use in-house formal certification programs, & most require ISO 9000 / 14000 or similar certifications as part of the certification process ∙ Buyers can monitor quality assurance methods & specify the type of acceptance sampling & statistical process control methods used ∙ Outsourcing allows firms to: o Concentrate on core capabilities o Reduce staffing levels o Accelerate reengineering efforts o Reduce management problems o Improve manufacturing flexibility o Risks of outsourcing Loss of control ∙ Production decisions and intellectual property ∙ Increased reliance on suppliers ∙ Increased need for supplier management o In-sourcing (backsourcing): Reverting to in-house production when quality, delivery, and services do not meet expectations o Co-sourcing (selective sourcing): The sharing of a process or function between internal staff and an external provider & provides flexibility to decide what areas to outsource, when, and for how long. Early Supplier Involvement Early supplier involvement (ESI) highly effective supply chain integrative techniques ∙ Key suppliers become more involved in internal decision making processes Value Engineering activities help the firm to reduce cost, improve quality and reduce new product development time. Vendor Managed Inventory (VMI): Suppliers manage buyer inventories to reduce inventory carrying costs and avoid stockouts for buyer ∙ From the buyer-firm’s perspective: o Supplier tracks inventories o Determines delivery schedules and order quantities ∙ From the supplier’s perspective o Avoids ill-advised customer orders o Supplier decides inventory set up and shipments o Opportunity for the supplier to educate customers about other products ∙ Co-managed inventories o Suppliers work from customers’ storage areas or at the point of assembly or sale o Bar codes and scanners update computer counts ∙ Electronic data interchange (EDI) o Allows a supplier to profile demand & determine accurate forecasts o EDI also provides reorder point data to permit timely deliveries ∙ Supplier co-location or JIT II o Supplier’s employee is embedded in buyer’s purchasing department to forecast demand, monitor inventory & place orders with access to sensitive files & records Strategic Alliance Development Alliance development, an extension of supplier development which refers to increasing a key or strategic supplier’s capabilities Supplier alliances result in better market penetration access to new technologies & knowledge, & higher return on investment Alliance development eventually extends to a firm’s second-tier suppliers, as the firm’s key suppliers begin to form their own alliances. Collaborative negotiations (aka integrative negotiations) – ∙ Both sides work together to maximize the outcome or create a win-win result∙ Requires open discussions and a free-flow of information between parties Distributive negotiations: Refers to a process that leads to self-interested, one-sided outcome Use of e-procurement systems Primary benefits of e-procurement include Cost savings Frees-up time to concentrate on core business e-procurement systems: ∙ Concentrate large volumes of small purchases with a few suppliers, using e- catalogues, available to the organization’s users. Reverse auctions: ∙ Pre-qualified suppliers enter Web site & at pre-designated time & date, try to underbid competitors, monitoring bid prices until the session is over. Rewarding Supplier Performance Rewarding suppliers provides an incentive to surpass performance goals Punishment is a negative reward, may be to reduce future business; or a bill-back amount equal to the incremental costs resulting from a late delivery or poor quality Strategic supplier agreements can reward suppliers by allowing – ∙ A share of the cost reductions ∙ More business and/or longer contracts ∙ Access to in-house training seminars & other resources ∙ Company & public recognition Benchmarking Successful Sourcing Practices Benchmarking: Measuring what other businesses do best and matching their performance is an effective approach to improving supply chain performance. Benchmarking data regarding sourcing practices can be obtained in any number of ways, both formal & informal.Resources for learning about & implementing sourcing practices: ∙ The Center for Advanced Purchasing Studies. ∙ Supply-Chain Council. Assessing & Improving the Firm’s Purchasing Function ∙ The purchasing function is one of the most value-enhancing functions in any organization o It is preferable to periodically monitor the purchasing function’s performance against set standards, goals, and/or industry benchmarks. o Surveys or audits can be administered as self-assessments among purchasing staff as part of the annual evaluation process. o Skill set requirements of purchasing proffessionals 1. Interpersonal communication 2. Ability to make decisions 3. Ability to work in teams 4. Analytical skills 5. Negotiation skills 6. Customer focus 7. Ability to manage change 8. Influencing & persuasion skills (Critical) 9. Strategic skills 10. Understanding business conditions o