1.1 - Differentiate between different types of commercial relationships in supply chains Flashcards
Supplier Relationship Management (SRM)
Holistic management of relationships formed between buyers and suppliers based on the criticality of goods or services being produced
Internal Supplier
A supplier that is part of the same company as its customer. It provides the products or services that coworkers within the organisation need in order to do their job
External Supplier
A supplier that is independent of the organisation and provides products or services to do it
Make or buy
The action of choosing whether to manufacture a product or provide a service in house or purchase it from an external supplier
What is the choice to use an internal supplier based on?
Make or buy decision
Describe products/services that are usually produced by an internal supplier?
Those that are considered core to the business
Why would an organisation want products or services produced in-house?
To keep a greater degree of control - especially if time critical or subject to frequent design changes
What are core products or services likely to do?
Provide the company with a competitive advantage
Competitive advantage
A benefit that an organisation can use to outperform its competitors in the marketplace
Stakeholder
An individual or organisation with either an interest or an influence (however slight) in, or who will be affected in any way by, the decisions and/or actions of a project, product, service or venture
What is involved in a make or buy analysis?
Comparison of the costs of producing the product in-house with the cost of procurement from an external supplier
What does the make or buy decision need to balance?
Cost and flexibility
Name 5 advantages of a business using an internal supplier
- Greater control and continuity of supply
- Sharing the same culture and values
- Improved quality control
- Potential lower costs as no external supplier margin is added to the cost of the product or service and there will be no, or limited, transaction costs
- IP is protected from passing to competitors
Name 5 disadvantages of using an internal supplier
- Unless the price is benchmarked against external supplier offering then there is no guarantee the internal supplier is offering value for money
- The internal supplier will have fixed and variable costs whereas external suppliers will only have variable costs
- Internal supplier may be less motivated to meet required performance standards
- Organisation can be out of touch with market trends and developments in technology and innovation
- Continual investment in the internal supplier such as new machinery etc
Name 4 reasons why an organisation may not be able to produce a product or service itself or to continue production internally
- High costs of production
- Legislative barriers
- Skill shortages
- The need for access to patented items
Should an internal supplier be evaluated, reviewed and managed in the same way as an external supplier?
Yes
ESG
Environmental, social and governance - a measurable sustainability assessment, similar to CSR but more measurable. Financial performance remains key and so can create a sustainable credit rating for the organisation and investors
Economies of scale
Cost savings made as a result of increased levels of production, alternatively the financial benefit gained from purchasing more units of an item resulting in lower unit costs
Name 3 main reasons for the procurement and supply department
- Selecting suppliers
- Having a contract with suppliers
- Managing suppliers
Name 5 factors taken into account when selecting an external supplier
- Purchase price
- Delivery lead time
- Quality of product or service
- ESG
- Previous experience of the supplier
Name 7 risks of using an external supplier
- Supplier insolvency
- Delivery delays
- Natural disasters
- Human rights issues
- Exposure to corrupt practise
- Environmental impacts
- Political instability
Name 6 advantages of using an external supplier
- Expert in their field
- May benefit from economies of scale
- Frees up internal resources
- Access to patents
- More flexible to meet changing levels of demand
- Useful for items where a small volume is required
Name 4 disadvantages of using an external supplier
- A degree of dependency on the supplier
- Potential damage to the buyers reputation
- Cost and risk of transportation
- Risk of relationship issues
What is the first step in actively managing supplier relationships
Classify the relationships that are in place
How can you classify supplier relationships
Use the CIPS relationship spectrum
CIPS Relationship Spectrum
A continuum showing the breadth and range of relationships that can exist between a buyer. These can vary from distant and non-committed to very close and aligned relationships
Name 5 key considerations that the different relationship types are dependent upon
- Levels of trust
- Levels of openness, transparency and information sharing
- Commitment of the buyer and supplier
- Extent of which they work together to manage and mitigate against risk
- Frequency and quality of communication
Name the 11 stages of the CIPS Relationship spectrum
- Adversarial
- Arms length
- Transactional
- Moderate
- Bespoke
- Single-source
- Outsourced
- Strategic
- Collaborative
- Partnership
- Co-destiny
What 2 tools can you use to assess how the supplier views the buyer?
- Kraljic
- Supplier Preferencing Matrix (Steele & Court)
Pareto principle
The theory that 80% of outcomes result from 20% of inputs, for example, 80% of sales are to the top 20% of customers
How can an organisation prioritise its efforts
Pareto principle
What percentage of suppliers should be an organisations strategic key suppliers?
20%
What is the Kraljic matrix used for?
Allowing the buyer to determine the type of relationship required with a supplier and can assess the levels of risk associated with the products of services they produce and the cost impact on the buyers business if they cannot be provided
What is the Steele and court supplier preferencing matrix used for?
So the buyer can assess how they are viewed by the supplier
Name 4 synergies between the Kraljic matrix and supplier preferencing (steele and court) matrix
- Strategic and core perspective
- Development and leverage perspective
- Bottleneck and exploitable
- Nuisance and routine
Name 4 factors that shape relationship types
- Duration of the relationship/contract
- Trust between the parties
- Frequency and detail of communication
- Levels of innovation
Negotiation tactics
Methods and strategies used by both buyers and sellers to enhance their commercial situation
Corneilius and Faire (1989)
There are 3 basic ways that a conflict can be worked out:
1. Win-lose
2. lose-lose
3. win-win
Jap 1999
Expanding the pie - win/win (parties get to a position that is beneficial for both)
Adversarial relationships (4)
- Price is more important than the relationship
- The gain of the buyer is at the expense of the suppliers profit margin
- Suppliers will be providing non-core products or the buyer may procure a one-off item
- Relationships chatacterised by poor communication, lack of trust and short term/one-off contracts
Arms length relationship (4)
- The type of supplier would be used infrequently and contracts tend to be short term
- Time taken to develop a collaborative relationship is not justifiable
- Both parties act independently of each other
- An example of this type of supplier is low-level construction trades on a building site
Leverage
To use the market to ones best advantage
Transactional relationships (2)
- Similar to arms-length relationship but the frequency or volume of purchase is higher but the products are still low-risk
- Relationship is characterised by markets that have a number of competing suppliers allowing buyers to undertake regular competitive tender processes to secure the best price
Moderate relationships (4)
- Similar to a transactional relationships but products are at a slightly higher risk
- There is more than one supplier for the product and so the time and resources required to develop a collaborative relationship are not justifiable
- Market place supply or demand may fluctuate and there may be times they are harder to source
- The buyer may have six monthly meetings with the supplier or may only meet in the event of supply disruption
Bespoke relationships (5)
- A supplier who produces a particular product or sevrice to a bespoke buyer specification
- Due to it being bespoke there will be higher costs associated with set up
- There will need to be a strong relationship to ensure the specification is communicated sufficiently
- May require interaction with other departments within the buyer and supplier organisation to ensure its compliant with the specification
- Although there may be other suppliers in the market, switching costs will be high
Single source
When a buyer chooses just one supplier to contract with from a number that exists in the market place
Dual source
A situation where just 2 suppliers are chosen from multiple options in a marketplace with the view of maintaining a degree of competition during the contract term
Sole source
A non-competitive situation where there is only one supplier of goods or services who can fulfil the requirement of the buyer at a specific time
TUPE Legislation
TUPE stands for Transfer of Undertakings (Protection of Employment). TUPE regs protect thr rights of the employees where work they were employed to undertake is transferred to a new business
Single-source relationships (4)
- Where one organisation purchases a product or service exclusively from one supplier obtaining commercial benefits such as volume discounts
- Decisions usually made at a strategic, top-management level
- Offering a supplier exclusivity requires a high level of trust
- It should not be confused with sole-source supplier. Sole source means that there is only one supplier able to fulfil the requirement.
Outsourced relationship (5)
- Where a service previously done in-house by internal staff is transferred to a supplier
- Main aim is to reduce costs
- Contracts are often outsourced to a supplier operating in lower-cost economies where labour costs are much lower
- Business will only outsource non-core activities
- TUPE legislation will have an impact
Strategic Relationships (3)
- Links to the pareto principle as it will be the key suppliers through an organisation directs the top 80% of its spend
- usually provide goods considered valuable
- Require close management and frequent communication involving the use of KPIs. Meetings often take place in form of QBRs
Collaborative relationships (4)
- Enhanced type of strategic relationship
- Will only work with a limited number of suppliers
- It differs from a partnership because there is less transparency and info sharing
- An example of a collaborative relationship is a strategic alliance which is where two or more suppliers join together to deliver a joint offering
Partnership Relationships (4)
- Its beneficial when procuring a high-risk, high-value product or service
- It will give a supplier a greater understanding of the buyers needs
- Both parties will keep the other informed of future plans and the relationship is long term. there is a commitment from top management on both sides
- Relationship is equal in terms of balance of power
Key Performance Indicators
Measurable values that will enable a buyer to track how well a supplier is performing. KPIs are tracked over time and will enable the buyer to decide when remedial action may be needed to improve performance
Symbiosis
An essential reliance on both parties to make the relationship work at a strategic level for its continued success
Co-destiny relationships (3)
- The buyer and supplier organisation will be very closely linked, making decisions about their future together and share a common destiny often called a symbiosis
- Results in a high level interdependence
- Joint ventures are an example of this
Relationship life cycle (Jaggaer)
- Onboarding / qualification
- Segmentation and risk management
- Performance management / phase out
- Development and innovation
Name the 2 main onboarding and selection processes of suppliers
- Request for information
- Request for proposal
What does the relationship cycle begin with?
The buyer searching the marketplace for a suitable supplier to meet their business requirement
When may an RFI be used?
If a buyer is unsure about the number of supliers in the marketplace or whether there are a large number in the market
When may a buyer go straight to RFP rather than RFI
If there are a known number of suppliers in the market and the scope is well defined.
When is an RFP used
When there is competition in the marketplace
What key model can buyers use to support them in building effective selection and qualification processes
Carters 10 C’s
Carters 10 C’s
- Competency
- Capacity
- Commitment to quality
- Control of processes
- Cash
- Cost
- Consistency
- Culture
- Clean
- Communication
Liquidity ratio
The ratio of liquid assets to liabilities
Gearing
A measure of how the business is being funded, based on its ratio of debt to equity, quality of debt or cost of debt
Whole-life costs
An estimate used to help buyers determine the end-to-end cost of providing a service, manufacturing or procuring a product. Also commonly referred to as total cost of ownership or total life cycle costs. The use of the terms vary dependent on industry and sector
Name 3 risks supply chain faces
- A key supply chain partner going out of business
- A supplier using child labour causing reputational risks
- An event such as flooding or a supplier staff strike affecting deliveries and component parts
Risk management
A process involving risk identification, assessment, management and mitigation
Name 6 examples of KPIs
- Safety
- Quality
- Delivery
- Cost
- Morale
- Environment
Supplier Development
The process of working with a supplier to improve its processes and or the products and services it delivers. The aim of supplier development is commercial benefits for the buying organisation however there will also be benefits for the supplier
Why does supplier development only happen with strategic suppliers
Its time consuming and resource intensive
Name 4 reasons why a buyer may undertake supplier development activities
- Previous performance issues with a key supplier resulting in quality issues that need to be addressed
- The buying organisation needs to improve its performance by redcuing waste in order to become more competitive in the marketplace
- The buyer wants the supplier to adopt some of its own technologies such as ordering systems, and the supplier will require support to do this
- The buyer wants to develop new products and services
Why should a supplier development programme result in measurable benefits
Because without them neither party will be able to track progress against the objectives
Name 3 benefits that supplier development has for both the buyer and the supplier
- It can reduce costs for a buyer and supplier
- Working together can result in elimination of waste from the supply chain, again reducing costs
- Long-term security of business can serve to increase the motivation of a supplier, which could lead to innovative benefits
Material breach
A material breach of contract is a failure of performance. This can be on the part of either the buyer or the supplier. This failure is considered so great that it gives the other party the right to terminate the contract and/or sue for damages depending on the situation
Name 4 potential reasons for the end of a relationship
- The contract comes to a natural end and there is no longer a requirement to purchase that product or service
- The contract is re-tendered and another supplier is able to provide a more competitive offer
- The contract with the supplier is terminated due to a material breach such as poor performance
- The supplier becomes insolvent - this can also be classed as material breach of contract and would enable the buyer to formally end the relationship
Name the 6 phases of the relationship cycle
- Onboarding
- Qualification
- Segmentation and risk management
- Performance management
- Development and innovation
- Phase out (if required)
