Managing Supplier Relationships

Question 1

What are the firm’s choices when a supplier is incapable of meeting the firm’s needs?

Answer 1

• Make rather than buy but might not have funds
• Switch suppliers - risky, might nit improve situation, you might be the problem
• Supplier development

Question 2

What is the difference between RBV and ERBV?

Answer 2

Seeing relationships as part of your firm’s assets, you own the relationship that gives you access to the assets

Question 3

How does Krause (1999) describe the process of supplier development?

Answer 3

Any effort of a buying firm with a supplier to increase its performance and/or capabilities and meet the buying firm’s short and/or long-term supply needs

Question 4

What is the development decision?

Answer 4

The idea that supplier development should not apply to all suppliers

• Does not make financial sense to develop suppliers of low value-added, non strategic commodities
• Should be used when it is difficult to switch (few alternatives, difficult to explain what you need) and transaction costs are high

Question 5

What are the reasons for supplier development?

Answer 5

• Supplier provides an innovative product
• Supplier provides an innovative process
• Supplier provides an innovative technology
• A long-term advantage exists in the buying firm
• To maintain flexibility in meeting changing market demands

Question 6

When does a performance gap exist?

Answer 6

When there is a gap between what the suppliers are capable of achieving and what they currently demonstrate through their cost controls, quality performance and customer responsiveness

Extent of performance gaps matters

Question 7

What are the supplier development options?

Answer 7

Direct involvement - improve supplier’s operational performance directly (short term goal) often unsustainable

Supplier capability development - improve the supplier’s capability to improve. Help them build the capability for change to enhance improvements over time

Question 8

How do the two supplier development options vary in terms of performance?

Answer 8

Developing supplier capability leads to better performance, sometimes slower but sustained performance

Direct improvement does help suppliers learn how to solve the problem. Sometimes rapid improvement then decline. Lack of sustained capability.

Question 9

What are the barriers to supplier development?

Answer 9

• Poor communication and feedback
• Who’s paying? Initiative fatigue
• Cost - human, technical investment in software and IT, process changes - supplier will expect you to pay for it
• Resources - opportunity cost, limitations
• Attitude of the suppliers; company values and ethics - competing priorities
• Bargaining power of suppliers
• Regulation - legal issues
• Different performance measures
• Selling the ROI if you don’t want to pay
• Taking it personally

Question 10

What is the supplier development process?

Answer 10

1) Identify critical products/services
2) Identify critical suppliers
3) Form cross-functional team
4) Meet with supplier top management
5) Identify key projects
6) Define details of agreement
7) Monitor status and strategies

Question 11

What does the first step of the supplier development process involve i.e identify critical products and services?

Answer 11

• Use a variety of frameworks e.g Kraljic
• Suppliers of strategic/critical products are more likely to be candidates for supplier development

Deciding who to try and develop

Question 12

What does the second step of the supplier development process involve i.e identify crucial suppliers?

Answer 12

Look at factors such as:

• Nature of components
• Likely length of relationship
• improving weakest suppliers
• Types of management /administrative process used by suppliers
• Ability to overcome barriers; performance gap not too great
• Supplier culture: willingness to learn
• Amount of expenditure

Question 13

What does the third step of the supplier development process involve i.e Form a Cross-Functional Team?

Answer 13

• Before selected supplier is approached, internal cross-functional team should be developed
• Consistent message
• Role of different functions
• Criticality of alignment with strategy

Question 14

What does the fourth step of the supplier development process involve i.e meet with supplier top management?

Answer 14

• Critical to get commitment from top management e.g for resource allocation, to drive change
• Can be resistance – have to acknowledge there is room for improvement
• Useful to demonstrate how development can improve performance
• Relationship development and alignment
• Key reason for failure – lack of top level management support

Question 15

What does the fifth step of the supplier development process involve i.e identify key projects?

Answer 15

• For cross-functional team to implement
• Evaluation of feasibility, risk and return, time and resource requirements
• Important to define problem appropriately – best to focus on area of highest priority with greatest impact

Question 16

What does the sixth step of the supplier development process involve i.e define details of agreement?

Answer 16

• Aim: creation of value
• Needs to be shared by supplier and buyer so metrics need to be decided prior to initiation
• Important for buyer and supplier to use same criteria to evaluate success and failure

Question 17

What does the seventh step of the supplier development process involve i.e monitor status and modify strategies?

Answer 17

• On-going metrics for continuous improvement to be embedded = metrics – measurable to see if improvement is happening, provide evidence for further improvement
• Sustained improvement occurs when training has taken place in capability development and the buyer maintains oversight/monitoring
• Can modify to ensure strategy stays aligned

Question 18

Where do supplier development strategies need to be focused?

Answer 18

Partnerships: short /long/ permanent - considerable integration between partner companies

Lower level of closeness than alliance and ownership (joint venture/vertical integration)

Higher level of integration than standard outsourcing

Question 19

How do inter-organisational relationships work as multi-tired agency configurations?

Answer 19

Organisation A (buyer) = (employment contract) –> Procurement manager (personal relation) –> Professional service user –> (employment contract)

Organisation B (supplier)= (commission compensation) –> Sales manager (personal relation) –> Service person (piece-rate compensation)

Org A to Org B - formal contract to supply service

Procurement man to sales manager - arms-length relationship

Professional user to service person - professional relationship

Horizontal relationships influence vertical relationships

Question 20

How does the principle-agent problem perspective traditionally work in a supply chain context?

Answer 20

• Management of relationships is determined by inter-organisational dependencies
• Suppliers will collaborate if they know what payoff will will give them advantage and they will act opportunistically when they believe they can gain advantage from doing so
• Explains why suppliers will always resort to opportunistic behaviour when it is advantageous

Question 21

What are the common responses to the agency problem?

Answer 21

• Monitoring systems
• Incentives and penalties

However, despite extensive study into optimal governance mechanisms, agency (supplier) failures continue

Question 22

What is the alternative perspective on the agency problem?

Answer 22

• Agent (supplier) failures are not always a consequence of opportunism
• Bounded rationality and dual information asymmetry can also lead to ‘honestly incompetent’ forms of failure
• Bounded rationality = not understanding the other party’s needs and requirements

Question 23

What are the drivers of opportunism framing in agent (supplier) failure settings?

Answer 23

• Assumption of opportunism
• Assumption of single-sided asymmetry
• Misleading antecedents
• Hostile framing and attribution bias
• Empirical method biases

Theory based on economics, ignores social dimension - people aren’t always rational

Question 24

What is the alignment and misalignment of agent framing and action ?

Answer 24

Opportunistic agent + incompetence framing = Naive principal, i,o - mismatch

Opportunistic agent + opportunism framing = opportunistic agent, o,o - match

Incompetent agent + incompetence framing = honestly incompetent agent, i,i - match

Incompetent agent + opportunistic agent = cynical principle, o,i - mismatch

Question 25

What does the alignment and misalignment of agent framing and action mean?

Answer 25

Misalignment - wrong reaction: thinking they’re opportunistic rather than incompetent. Misaligning the reaction with the cause.

Not all failure is opportunistic - need to understand why they failed before you respond