L4M6- Chapter 1- Relationships in supply chains Flashcards
When would you want to create something internally?
Part of the make or buy decision
Internal normally are products and services that are core to the organisation
You want a high degree of control
Continuity of supply
The relationship is internal
Improved quality due to control of production
Potential for lower costs
Protection of IP
What are the disadvantages to creating something internally?
Unless benchmarked against external you do not know if you are getting value for money
Could argue that internal has both fixed and variable cost, where getting external could be transactional so could just be variable
No money is changing hands so could be less motivated
Could become out of touch with trends
Requires investment internally e.g. ownership of machinery
Why might an organisation not be able to make something in house?
High cost
Legislative barriers e.g. requirement for license
Skills shortage
Access required to patented items
What is ESG?
Environmental, social and governance
It is a measurable sustainability assessment, similar to CSR but more measurable and specific
A set of standards for company behaviour
What are the advantages of using an external supplier?
Experts in a field
Cost effective (economies of scale)
Free up internal resource
Access to patents
Flexibility to meet challenges
useful for small volumes (e.g. if you made in house the equipment would be prohibitive
What are the disadvantages of using an external supplier?
Dependency on the supplier
Damage to reputation if supplier is unethical
Cost/risk of transport
Relationship management risks
What is the CIPS relationship spectrum?
A continuum that shows the breadth and range of relationships that can exist between supplier and buyer.
Ranks level of commitment of the supplier and level of commitment of the buyer
Starts at adversarial (low on both) and goes up a linear graph to co-destiny
What are the 5 things that define the relationship types in the CIPS relationship spectrum?
Trust level
Transparency/openness
Commitment to the relationship
How risk is managed
Frequency and quality of comms
Will also need to consider:
Spend level
Risk of product
Duration of contract
Level of innovation required
What is the Kraljic matrix?
Allows a buyer to determine the level of relationship required with a supplier
Compares level of risk v level of spend
1) Routine
2) Leverage
3) Bottleneck
4) Strategic
What is the Steele and Court matrix?
Used by a buyer to assess what the supplier views the buyer.
It helps to determine negotiation styles, communication strategy, T&Cs etc
In a good relationship the two matrix should align e.g. core and strategic across the matrix
Compares attractiveness and proportion of spend
1) Nuisance
2) Development
3) Exploitable
4) Core
What are negotiation tactics?
Methods and strategies used by both buyers and sellers to enhance their commercial situation
What are the three basic ways that conflict can be worked out?
Win-lose- One party gets what they want at the expense of the other aka the supplier/buyer gets a bigger piece of the pie
Lose-lose- neither party gets what they want aka both getting a smaller piece of pie than they wanted
Win-win- Beneficial to both aka expanding the pie
What are the 6 stages of a typical supplier relationship?
Qualification- Reaching out to the marketplace, Carters 10 Cs
----->>>>On boarding- Once identified RFI and RFW help identify those worth selecting
Segmentation and risk management- Second phase is looking at the products a supplier provides and understand the type of relationship that is required
Performance management- periodic review of the suppliers performance, part of contract management
Development and innovation- time consuming so only for strategic suppliers, should be a two way process, should have measurable benefits
----->>>Phase out (if required)- inevitably some relationships will end, could be due to end of contract, retendering process, termination due to a material breach, supplier becomes insolvent
What are carters 10 Cs?
Clean
Capacity
Culture
Cost
Cash
Communication
Consistency
Control
Commitment
Competency
What is gearing?
A measure of how a business is doing based on a ratio of its debt to equity, quality of debt and cost of debt
What is supplier development?
The process of working with a supplier to develop its products and services it delivers. The primary aim is commercial gains for the buying organisation, but it will also be wins for the supplier
It is time consuming and therefore should be saved for strategic suppliers relationships
What benefits can be achieved from supplier development?
Can benefit both buyer and supplier
Reduce costs
Elimination of waste, improving value
Long term business security
Motivation
What is a material breach?
Within a contract this is failure of performance. It tends to be so great that it gives the other party the right to terminate the contract and sue for damages potentially
What is TUPE legislation?
Transfer of undertakings protecting employment
These protect the rights of the employees if a business is transferred to say new ownership
What are the 3 types of matric that will help do portfolio analysis?
Kraljic- Supply positioning of risk vs importance
Steele and court- supplier preferencing
Market management matrix
Why would a procurement department do an exercise to understand positioning of suppliers/ portfolio?
Focus on available resources that add value
Opportunities to develop a competitive advantage
Providing a framework for decision making
Improving risk management
What is on the kraljic matrix and how is it measured
Supply positioning and can be used to judge the importance of products and segment purchases to use appropriate strategies
Measures:
Importance- e.g. using ABC
vs
Risk- e.g. risk management like STEEPLED
You can segment products in value order and do the importance vs risk and plot on the matrix to get a picture of the organisations procurement strategy
How is risk identified and managed?
Can use STEEPLED
Monitored on a risk register
Identify
Assess
Control
Mitigate
Risk = probability x impact
What is a call off contract?
An overarching agreement with regards to price and T&Cs that allows an organisation to order stock or services as required over a period of time.
Useful when volume over a period of time is unknown
What are some drawbacks to the Kraljic matrix?
Markets are complex and not everything is easy to classify
There is subjectivity involved in classification
The analysis is only a snapshot as the environment will change
It is applied to products/services specifically not necessarily the supplier
Can be risks outside of the buyer/supplier relationship
Why might a supplier not want to work with a buying organisation/ find the buyer an attractive proposition?
Unprofitability
Knowledge from the industry e.g. late payments
Large organisation who doesn’t need the business/ at capacity
Why might a supplier find a buying organisation attractive?
Profitable
Good PR e.g. working for olympic games projects
Growth opportunity
Stability and predictability
Reputation
ESG and ethical practices
Collaborative
Low risk
What is the supplier preferencing tool?
Also called the Steele and Court matrix and looks at how the supplier views the relationship with the buyer. It is limited by being a snapshot in time, non quantifiable and also from the buyers perspective
Ranks from the suppliers perspective:
Attractiveness of buyer
vs
Value of business
Nuisance
Development
Core
Exploitable
What is the benefit to the buyer of being a preference of the supplier?
Top of allocation list for products/services in short supply
Access to NPD
Better collaboration on cost reduction
What is the market management matrix?
This is a combination of the Kraljic and the steele and court matrix
Gives a holistic view of supply positioning and supplier preferencing
Benefits:
- Further chance to evaluate relationships and where opportunity lies
- Indicate where action needs to be taken
- indicate where a change of relationship rather than a change of supplier might be required
How could a buying organisation who is seen unfavourably (e.g. as a nuisance) in the suppler preference matrix become more important?
These would be resolved via Supplier Action Plans
Increase the volume/value of the business (there are risks with single source)
Involve the supplier in innovation and development programmes
communicate with the supplier to understand why they may be considered a nuisance and what issues need to be prioritised to change that
What are porters 5 forces? What is it used for?
Understanding the attractiveness of an industry and ultimately inform whether there is opportunity to make a profit in an industry
Threat of substitution
Competition
New Entrants
Power of Buyer
Power of Supplier
What is a monopoly, duopoly and oligopoly?
Monopoly is where there is only one supplier
Duopoly is where there are two suppliers in the market
Oligopoly is where the market is dominated by a few large suppliers
Give information about monopolies
One large supplier in a market
Buyers have to sole source (no choice but to use the 1 supplier)
Example in the UK is water companies
In the UK it is monitored closely by the competition commission to monitor this (think about Asda and Sainsburys)
Suppliers have all the bargaining strength
Patents can generate monopolies
Give information about duopolies
2 suppliers in a market
Can result in uncompetitiveness through unofficial commercial alliances
Historically this would have been airbus and boeing before comac entered the market
Give information about oligopolies
Where a few large suppliers dominate the market as cost of entering the market is large
Examples are the oil industry
Actions of one company can significantly affect the others
Supplier power is still strong
Governments have responded with controls to try and prevent price fixing and collusion
What is imperfect competition?
There are a number of suppliers in the market, but they are not selling similar services or products reducing the amount of competition
Each seller could therefore follow a differentiation strategy
Monopoly and oligopoly are examples
What is perfect competition?
Large number of suppliers selling identical products and services
It is hypothetical where competition is at its greatest
There is perfect market knowledge (all buyers have easy and instant access to prices)
There are no barriers to entry
All companies are price takers (do not influence prices charged)
There is a cost to competing, e.g marketing costs
Example is agricultural produce
What is monopolistic competition?
Companies in the market offer similar products or services but not perfect substitutes
Comapnies have the same low level of market power
Prices are elastic (where when prices are lower demand is higher- normally occurs when there are a number of substitutes)
Examples of this are restaurants, hair dressers, clothing, taxis
Sits somewhere between monopoly and perfect competition
What is oligopsony?
This is where there a few large BUYERS/CUSTOMERS dominating the market
What is a monopsony?
Only one buyer in the marketplace which will have strong market power e.g. manufacturer of brain scanners that are only affordable to the NHS. However, now football teams have invested in brain scanners meaning it is becoming an oligopsony
Example in america could be a very large supermarket like walmart
What can affect rivalry between companies in a market?
Industry growth/decline
Product differences/ brand identity
Switching costs
Diversity of competitors
Exit costs
What are barriers to entry?
This prevents the threat of new entrants, e.g. in oil and gas where barriers are too high
Economies of scale
Start up costs
Licenses/permits
High switching costs for existing customers
Access to distribution networks
Knowledge and skills
Government policy (which may protect national industries)
What will influence the threat of substitutes?
Linked to barriers to entry, if barriers are low there will be more players and more substitute options. Suppliers will want to defend against substitute threat, whereas buyers want more choice to drive competition (which increases quality and reduces cost)
Relative price performance of substitutes (e.g. if an android phone is cheaper than Apple)
Switching costs for buyers
Trends e.g. fashion, technology
Buyer propensity to substitute and risk
What is power of suppliers and when is it strong?
Supplier power is at its strongest in a monopolistic market
Example is an OEM as the buyer has no choice but to use them
When supplier power is strong they have little or no reason to invest in building relationships with buyers
Power is strong when:
- Supplier can differentiate its offering
- Switching costs for buyers is high
- Lack of substitutes
What is power of buyers and when is it strong?
When there is competition in the marketplace
Where branded products do not need to be used
The market is a monopsony
Large purchase volume
Large amount of information
Threat of backward integration
There are substitute products available
What is backward, forward, vertical and horizontal integration?
Backward = buyer purchases supplier
Forward = An organisation purchases a customer
Vertical = When a buyer owns companies within its supply chains. Can be forward/ backward vertical integration
Horizontal = Where an organisation buys or merges wit a competitor (usually to increase volume)
What is the matrix used to assess buyer/supplier power
It ranks buyer power vs supplier power
Independence = Bottom left
Buyer dominance = top left
Interdependence = top right
Supplier dominance = bottom right
What is STEEPLED used for?
This is to assess the factors that apply to a supply chain, and helps analyse any external influences and risks that could affect a company.
What does STEEPLED stand for?
Social e.g. consumer tastes, trends, fashions
Technological
Economic
Environmental
Political
Legislative
Ethical
Demographic e.g. ethnic mix, social class, gender, aging population
What is a business cycle?
This is the rise and fall over time of output in an economy as measured by GDP (gross domestic product)
What influences where a supplier relationship sits on the relationship spectrum?
Level of trust
Level of openness (transparency + info sharing)
Commitment
Mitigating risks (who manages and mitigates)
Frequency and quality of communication
What is added value?
Non cash releasing benefits generated via procurement and SRM. Sometimes considered as something that you would otherwise pay extra for
It can also be a justification for spending time and resources on building relationships with suppliers
What is RORI?
Return on relationship investment- financial benefits for a buyer of establishing, developing and maintaining a supplier relationship
Developing strong supplier relationships can support added value outcomes- procurement can support the delivery of a number of benefits, what examples could they be?
Cash savings/ cost avoidance e.g. by reducing waste
Risk management
Improved efficiency
Improved ESG
What is the value chain?
The coordinated processes, people and resources within an organisation which generates corporate value
Porter developed the model with the support and primary activities
What is PDCA?
Plan, do, check, act
Used for continuous improvement cycles
What is a value network?
Described as economic ecosystems- a set of connections between organisations interacting which benefit the whole group. Buyers and suppliers can work together to serve the needs/interests of the group.
How can procurement add value?
Price/cost management
Improving quality
Timescales- e.g. lead times, reduced late deliveries, prevention of bottlenecks
Quantities- Right quantity, storage, holding, etc
Place of delivery
ESG
How can procurement add value to the pricing/cost management?
Specification development (making sure it is fit for purpose, not over specified)
Run competitive tenders
Review WLC not acquisition prices only
use E-sourcing
Negotiate- usually following the tender
Contract management
How can value be added through quality?
Improving costs that are needed for rework or faulty components
Costs of downtime
Poor quality products reaching the end customer
What is the difference between quality control and quality assurance?
QC = developed first to control variation, used to control the quality of the output
QA = Process of managing quality involving systems and processes e.g. spot checking or mystery shoppers
Why would you add value through holding stock?
Ensures supply is available if something severe happens in the SC
Can reduce lead times
Discounts for bulk buying
Safety against price fluctuations
Better demand management
HOWEVER
There is a cost to storage
Capital is tied up and you need the capital in the first place
Risk of obsolescence
Lost opportunity cost
How can ESG negatively impact an organisation?
NEGATIVES:
- Human rights issues in the SC
- Irresponsible waste disposal
- Unnecessary carbon emissions
- Use of non renewable materials
- Lack of equality and diversity
- Bribery/corruption
In addition to the 5 rights, procurement can add value through effective ESG, which ESG processes may add value?
Specification- including standards, packaging requirements, social value (positive local impact), T&Cs
WLC- Particularly in relation to running costs, the longevity of the asset and end of life costs (disposal)
Supplier selection and award- Code of conducts, ESG policy, code of ethics, labour policies, accreditations
When is an RFP used?
When there is known competition in the market and the scope is well defined
What is price elasaticity
A measure of change in demand for a product or service in relation to changes in its price
if it is more elastic the more the price goes down the more demand increases. There tends to need to be a lot of substitutes for the price to be elastic
What is forward, backward, vertical and horizontal integration?
Forward is where the supplier buys the retailer/customer
Backward is where the buyer purchases the supplier
Vertical is where an organisation owns multiple companies in the supply chain
Horizontal is where there is a merger with a competitor
In what ways could you add value from a cost/price perspective?
Reduce costs
Mitigate a CPI
Get more for the same amount
Amend terms e.g. move from 30 to 60 days payment to improve your cash flow
Reviewing that there is not overspecification
Running effective tendering
Negotiation
Contract management
Give examples of documents that procurement professionals could request to assess a suppliers ESG credentials
Code of conduct
Code of ethics
Labour policies
Accreditations e.g. Fairtrade international
