Type
Quiz
Book Title
Procurement, Principles & Management 11th Edition
ISBN 13
978-1292016016

978-1292016016 Chapter 8

July 25, 2020
37
CHAPTER 8
Sourcing strategies and relationships
Objectives of this chapter
To suggest the attributes of a good supplier
To examine the ‘relationships spectrum’, and the move towards more mutuality in
appropriate buyer/seller relationships
To discuss the advantages and disadvantages of different procurement policies
To outline the Bensaou model of managing relationships
To introduce the concept of tiering
List of Cases, Research Boxes and Figures in this chapter
Mini Case Studies
IKEA
The Body Shop
Best Practice Boxes
Intra-company purchases policy guideline
Figures
Figure 8.2 Supplier associations: known in Japan as ‘Kyoryoku Kai’
Figure 8.3 The principal characteristics of partnership sourcing (Source: Courtesy
Partnership Sourcing)
Figure 8.4 The principle of tiering suppliers
Figure 8.5 The shift in pattern of supply in high volume manufacturing
Bensaou model of Relationship Management
Teaching Notes
It would be possible to argue that the most important procurement decisions are concerned with
selecting the right sources of supply; that is, if the correct source decision is made in a particular
instance, then the buying company’s needs should be met perfectly.
In such circumstances it would receive the required goods or services at all times. However, the
very simplicity of this statement belies the complexity of source decision making, for in arriving
at the right decision many factors have to be considered.
This chapter is concerned with many of the issues that are involved, both pre-contract and post-
contact.
Key concepts included are:
Attibutes of a good supplier
The following list is given by way of suggestion only:
Delivers on time.
Provides consistent quality.
Gives a good price.
Has a stable background.
Provides a good service back-up.
Is responsive to our needs.
Keeps promises.
Provides technical support.
Keeps the buyer informed on progress.
Criteria for the supplier selection process
In most cases where such decisions are made the selection process is comprehensive. Included
among the criteria used by one company was the requirement that the supplier should have the
‘necessary capabilities and experience’. This meant that a potential supplier:
Was viable in the longer term financially, technically and in production terms.
Would be able to participate in the early phases of product design and development as a full
partner in the process.
Would openly share information on the functional, assembly and in-service requirements of
the parts, including cost and quality targets.
Would be orientated towards taking cost out of product and improving total system
performance to mutual benefit.
Would be able to develop prototypes as well as manufacture volume production.
Would be prepared to agree cost structure targets.
Would work with the buying company so as to increase their flexibility in meeting changing
demands and operate on a pull rather than a push basis in the process, reducing their own
wastes such as inventory holding, unnecessary inspection and excess work in progress as
well as those of the buying company.
Another multinational, seeking partner suppliers of the same kind, formulated the following
criteria.
© Pearson Education Limited 2015
The supplier should have:
Sound business sense and attitude.
A good track record in supplying the market in which the buyer operates (or similar).
A sound financial base.
A suitable technical capability with modern facilities.
A total quality orientation.
Cost-effective management.
Effective buying – acquisition and control.
Good morale among the workforce.
Effective logistical arrangements.
A customer service mentality.
Partnering
Partnership sourcing is a commitment by customers/suppliers, regardless of size, to a long-term
relationship based on clear mutually agreed objectives to strive for world class capability and
competitiveness.
Figure 8.3 includes the key characteristics of partnership sourcing.
The contract
Irrespective of whether the contract is for the provision of goods or services, or its complexity,
the terms and conditions should clearly indicate the rights and obligations of both parties. For
example, the contract might contain clauses such as the following:
An unambiguous description of the goods to be supplied or the work required to be carried
out.
The duration of the contract/specific delivery dates.
Quality standards and acceptance criteria.
Details of progress reports required, their scope and timing.
The price or pricing mechanism, and what the price includes.
Payment terms and a term to permit the recovery of any money owing.
Terms relating to intellectual property rights, confidentiality, security, publicity, right of
audit.
Indemnity and insurance provisions.
Terms relating to compliance with legal obligations, such as corrupt gifts and payments of
commission, unlawful discrimination, health and safety, etc.
The client’s right of termination in the event of the supplier or contractor’s default.
The customer’s right to break the contract, with the obligation to give written notice and pay
for work done, even in the absence of any breach on the part of the contractor.
A term to prevent the contractor from transferring the contract for completion by a third
party.
A term which describes when ownership and risk passes to the client.
A term stipulating which law governs the contract.
An arbitration or dispute resolution clause.
Supplier associations
Major Japanese manufacturers have for some time encouraged the formation of and participated
in ‘Kyoryoku Kai’ or supplier associations.
Early implementations of this idea were that suppliers were assisted in getting together by the
customer, but the association would then operate without the active involvement of the
customer. However, it is now generally the case that suppliers and their customers participate
together. The idea of supplier associations has, in recent years, been adopted by some American
and European concerns, and seems to be paying dividends. The basic thinking is that companies
with a common interest in meeting the needs of a particular customer can, through the
establishment of channels of communication and regular exchanges of ideas and information,
better develop effective methods of meeting customer needs, with profit for all concerned.
The participants are open and co-operative with each other, and usually work on a ‘self-help’
basis.
Figure 8.2 illustrates the principle of a supplier association, with the customer and the member
suppliers freely exchanging appropriate information.
Intra-company purchases/reciprocal trading
Tiering of suppliers
As is obvious from its name, this approach consists of organising supply through different
‘layers’ of supplier, with the immediate or direct suppliers being known as the first tier, with the
second and subsequent tiers each being a stage further removed from the major manufacturer.
Figure 8.4 illustrates the principle.
For many years now, companies have sought to reduce the number of suppliers with whom they
deal. ‘Reducing the vendor base’ was the jargon which accompanied this movement, and for
many organisations this process consisted of simply identifying the better suppliers, trying to
place more business with them, and discarding the rest.
Standardisation and variety reduction are linked to the idea of vendor base reduction; a narrower
range of products bought is likely, obviously, to lead to dealings with fewer suppliers, as well as
other economies. As an example of this policy in action, Volkswagen targeted the avoidance of
replications. Previously, the group used 26 different cigarette lighters in their various vehicles;
they now use five. Formerly, 53 different exterior mirrors were specified; now there are seven.
It is, perhaps, misleading to call the first tier companies merely suppliers. Supply is what they
do of course, but as key vendors they work very closely indeed with the original equipment
maker (OEM), collaborating in a great variety of ways, and becoming risk and benefit sharing
partners in the OEM’s business.
Nor are they simply contractors (though this might be a more appropriate description than
suppliers). There is a degree of mutual commitment and dependency which places them in the
position of stakeholders in the OEM’s business, with the investment being commitment,
development activity and, perhaps, dedicated assets, rather than financial. The dependency is, of
course, two way, with the OEM heavily reliant upon the services of the first tier suppliers.
The tiering process is, however, a much more complex process than simply reducing the number
of direct suppliers. It involves the identification of supplier, or groups of suppliers, who can
supply the OEM with systems, such as braking, electrical, trim, etc. and empowering the key
supplier to orchestrate the second tier suppliers to play their part in harmony. To some extent
the second tier suppliers may be encouraged to do the same thing with their suppliers.
So, tiering is not just (or even) about reducing the vendor base. In fact it might be found that
with the design and adoption of a structured, tiered supply framework, the number of suppliers
to an actual OEM may increase, though of course the vast majority of suppliers will have no
direct contact with the OEM. The direct vendor base can be reduced to very small numbers of
contractors indeed. At the time of writing, a leading Japanese automotive company is
envisaging a situation where, for a particular model of car, there will be fewer than ten suppliers
directly involved.
Figure 8.5 summarises the shift in the structure of supply in the automotive and similar
industries.
The Bensaou Model of relationship management
The Bensaou mode is based on a study of 11 Japanese and 3 US automobile manufacturers.
Bensaou suggests a framework for managing a portfolio of investments for the purpose of
enabling senior managers to answer two questions.
Which governance structure or relational design should a firm choose under different external
contingencies?
This is a strategic decision because it affects how a firm defines its boundaries and core
activities. What is the appropriate way to manage each different type of relationship?
This is an organisational question.
Bensaou suggests four buyer relationship profiles:
Market exchange
Captive buyer
Captive supplier
Strategic partnerships
For each profile, Bensaou identifies distinguishing product, market and supplier characteristics.
Finally, he suggests that the four profiles can be arranged in a matrix to indicate whether the
buyer’s and supplier’s tangible or intangible investments in the relationship are high or low.
Tangible investments, in this context, are buildings, tooling and equipment. Intangible
investments are people, time and effort spent in learning supplier-purchaser business practices
and procedures and information sharing.
Bensaou also identified three management variables for each profile, which are:
Information sharing practices
Characteristics of ‘boundary-spanner’ jobs
The social climate within the relationship
Students can review the model and assess for themselves the appropriateness of certain types of
relationships in different contexts.