Supply Chain Management Lecture 11 – Relationships

David Sharpe

Lecture 9 - JIT, Lean, AgileCase Studies

Ford and Toyota Q: What changes would you propose?

TPS– Stepwise development of capacity and capability– Low reliance on technology– Make to order, pull through– 70 body shell variants prior to painting

– Work on reducing body shell variants?– Time to automate?

FPS– Investment to forecast with resulting overcapacity– Technology investment - hard links to supplier arrangements (automation before improvement?)– Painted body shells Made to Forecast– Push Pull arrangement with painted body shell buffer - reliant on correct buffer stock– 12 unpainted body shells

– Invest time now in process improvement rather than technology?– Better use of real demand information (including linkage back through suppliers)?– Maximise the pull through process – move buffer back to unpainted body shells?

• Reduces buffer variants to 12 rather than 120– Better integration with suppliers?

Lecture 9 - JIT, Lean, AgileCase Studies

Smart Car Q: How has the order to delivery cycle time process been speeded up?

1. Design for process. • Generic car. Body frame + 5 main modules. Modules contain sub-modules / components• Small number of module suppliers

─ Some fully integrated and co-located• 4.5 hours assembly time• Suppliers closely involved in development

2. Distribution focused on changing customer needs• Clients build their car interactively - Sales become consultative

− Used to then forward the order to one of 5 distribution centres− MTO with distribution centres doing some late stage postponement activities

• OTD < 1 day

Keep customers for life:– Modular concept allows replacement and upgrade– Car is a consumption product rather than a fixed capital investment

Lecture 11 - Learning Objectives

On completion you will be able to:• Recognise that for an individual firm a range of

relationships will be required from arms-length to vertical integration

• Discuss the advantages and disadvantages of single and multiple sourcing

• Describe the role of power and trust in supply chain relationships

• Identify some of the successful factors required for successful partnerships and transactional relationships

• Recognise some of the disadvantages and risks of partnerships and close collaboration

Time

Strategic Planning Steps

Supply Planning

Contract &RelationshipStrategy

Supplier Selection

Partnerships or co-operative relationships involve

• Trust• Shared culture, compatibility

and understanding• Open book accounting• Shared goals• Shared risks• Recognition of interdependence• Mutual benefits• Information sharing• Co-ordinated planning • Integrated processes

Longer Term RelationshipsDefinitions of partnership

“A purchasing partnership can be characterised as an agreement between a buyer and a supplier which involves commitment and trust over an extended time-period and includes sharing of information, risks and rewards between these two parties.”(Ellram, 1991, p. 2)

“Companies working together with unprecedented intimacy to accomplish mutual goals” (Dull, S, 1995, p.64)

“Partners share sources, skills and ideas as they receive equivalent input into their own process and products.” (Davis, D, 1994, p. 4)

Two Approaches to Supply-Chain Design

TRADITIONAL APPROACH BY OEM

Objective – lowest purchase price

Arms-length, adversarial relationships

Short-term contracts awarded using competitive tendering

Multiple suppliers for every item

Control of technology and product design retained by OEM

Large purchasing and logistics administration costs

If performance is unsatisfactory the contract is terminated

Very large supply base

PARTNERSHIP APPROACH

Objective – lowest cost of ownership

Open relationships with trust

Longer term contracts awarded after lengthy evaluation process

Single or dual suppliers for every item

Design of sub-systems devolved to individual suppliers

Reduced administration costs but more effort developing partnerships

If performance is unsatisfactory the customer help develop the supplier

Very small supply base

Kraljic’s Supply Positioning Matrix (From ES2A6)

Supply’s impact on financial

results

Low

Low

High

High

Supply risk

Leverage products• Alternative sources of supply available

• Substitution possible

Bottleneck products• Monopolistic market• Large entry barriers

Routine products• Large product variety• High logistics complexity• Labour intensive

Strategic products• Critical for product’s cost price

• Dependence on supplier

Tough competitive stance by buyer

Competitive systems tendering + E-commerce

Performance based partnership

Secure supply + search for alternatives

BuyerStrength

Number of available suppliers

Types of Relationship

Arm’s length

Co-operative Co-ordinated Collaborative Jointventure

Verticallyintegrated

Adversarial, Transactional

or systems contracting

Partnerships Integration

Emphasis on price

Emphasis on relationships

Emphasis on sharing risk and rewards through

a legal entity

Supply chain owned &

controlled by a single

organisation

Adapted from Tony Hines, “Supply Chain Strategies”, 2004, Elsevier, page 187

Transactional Relationships• Typically 80% of all relationships

• For routine or leverage items

• Goal – fair and efficient relationships

• Good practice involves:

Behaviour Tangible features Information approach

Personal contact Clear specifications Open communication

Mutual consideration Training Confidentiality

Give and take Timely payment

Equitable treatment Feedback

Integrity

Based on Fawcett, Ellram and Ogden, “Supply Chain Management”, 2007, pp 349-351

Characteristics of Partnership Types

Partnership Type

Activities Time horizon Scope of activities

Cooperation • Fewer suppliers• Short term

contracts

• Short-term • Single functional area

Coordination • Information linkages

• WIP linkages• EDI exchange

• Long-term • Multiple functional areas

Collaboration • Supply chain integration

• Joint planning• Technology

sharing

• Long-term with no fixed date

• Firms see each other as extensions of their own firm

Tony Hines, “Supply Chain Strategies”, 2004, Elsevier, page 188

Longer term relationshipsDr Mari Sako,

London School of Economics

Contractual Trust

Competence Trust

Goodwill Trust

Multiplying the benefits:C3 behaviour and Trust

High

Low

Low HighC3 behaviour

Trust

Win/Lose or Lose/Win [1+1=1 !]

Compromise [1+1=1.5 !]

Win/Win [1+1=8 !]

Adapted from: Covey, 1989

Power and Relationships

Adapted from Cox, 2001

Buyer Dominance

Buyer-supplier Reciprocity

Supplier Dominance

Arms-length •Short-term operational relationship

•Buyer appropriates most of the value

•Supplier is non-adversarial

•Short-term operational relationship

•Buyer accepts current market price + quality

•Supplier accepts normal (low) market returns

•Adversarial commercial relationships

•Short-term operational relationship•Buyer pays whatever is required•Supplier appropriates most of the value

Collaborative •Long-term operational relationships•Buyer appropriates most of the value•Supplier is non-adversarial

•Long-term operational relationships•Buyer and supplier share value relatively equally•Both agree price and quality trade-offs•Both are non-adversarial

•Long-term operational relationships•Supplier appropriates most of the value•Buyer is non-adversarial

Power Balance

Way

of

wo

rkin

g

Lamming’s 5 phases of customer relationships in the automotive industry

Traditional (pre - 75)Nature of competition - gentlemanly, friendlyPressure - low/medium, steady, predictable

Stress (72 - 85)Nature of competition - closed but deadly, chaotic

Pressure - high/unbearable, volatile

Resolved (82 onwards)Nature of competition - closed, some collaboration, strategic

Pressure - medium, some sense of relief

Partnership (90 onwards)Nature of competition - collaboration, tiering, still dynamic

Pressure - very high, predictable

Lean (late 90s?)Nature of competition - global operation, local presence

contribution to product technology, organic growth, mergers & acquisitions

Pressure - very high, self imposed

Nishiguchi’s Tiered Structure Achieved Through Cluster Control

PRIME MANUFACTURER

FirstTier

SecondTier

ThirdTier

See Case study on Automotive Supply Chains

Traditional View of Single & Multiple Sourcing

Single-sourcing Multi-sourcing

Advantages • Strong relationship and commitment

• Potentially better quality• Better communication• Easier cooperation in new product

development• High confidentiality• Economy of scale

• Can drive price down by competitive tendering

• Can switch source in case of supply failure

• Wider sources of knowledge and expertise to tap in to

Disadvantages • More vulnerable to disruption if a failure to supply occurs.

• Individual supplier more affected by volume fluctuations

• Supplier might exert upward pressure on prices if no alternative supplier is available

• Difficult to encourage commitment by supplier

• More effort needed to communicate

• Suppliers less likely to invest in new processes

• More difficult to obtain scale economies

The Mazda Seat Sourcing Case

• Seats are sourced by model • 2 suppliers; Delta Kogyo and Toyo Seat Company• Informal guarantee to each of 33%business• Remaining 33% awarded to the best performer over the life

cycle of the previous car models• Criteria for awarding business includes amount of

assistance given to the competitor and the kyoryoku kai• Equal sharing of profit throughout the network• If a supplier’s share falls to 33% engineers from Mazda and

the competitor can be sent in to help

Relationships factorsMutual trustComplete integrityShared objectivesEffective communicationsClear understandingResources

Successfulsupplierpartnership

Enhanced competitiveness Total cost reductionEnhanced customer serviceTechnologyQuality ImprovementReduced time-to-marketRisk reduction

Internal buyer factorsCompany wide acceptanceof partnershipTotal cost perspectiveCommitment to total qualityLong-term perspectiveCommitment from top management

Internal supplier factorsCommitment to qualityFlexibility to changeFinancial securityTechnical expertisePhilosophy of continuous improvementCommitment from top management

Chadwick & Rajagopal’s factors for successful partnership

Purchasingorganisation

culture

Supplierorganisation

culture

Purchasingrepresentation

Supplierrepresentation

Steele and Court’s buyer-supplier interdependencies

Advantages and Disadvantages of Collaboration

Advantages• Reduced negotiations• Reduced monitoring• Better quality• Increased productivity• Shorter lead-times• Increased responsiveness• Encourage long-term

investments

Disadvantages• Inability to price accurately

qualitative matters• Efforts to establish and

monitor the relationship• Risk of divulging sensitive

information• Potential opportunism• Potential abuse of power

Read the case study on ‘How close is too close?’

For FridayRead the case studies on Automotive Supply Chains

and ‘How close is too close?’

Possible oral presentation questions• Are partnerships common in this industry?• Do the participants in this supply chain trust each

other?• Are the relationships in this industry likely to change

in the next 5 years?• How can relationships in this chain be improved?

Lecture 11, Key Points & TipsBased on Harrison A. & van Hoek R., Logistics Management and

Strategy, 2005, pp. 268-269 and Tony Hines, “Supply Chain Strategies”, 2004, Elsevier, p. 369.

• Relationships between independent firms can vary from arms length with a focus on price and few points of contact to partnerships and joint ventures with shared risk and multiple points of contact.

• Typically 80% of relationships will be transactional, focusing on efficiency and Kraljic’s supply positioning matrix can be used to help identify where closer relationships are appropriate. All relationships should be managed proactively with the minimum goals of fairness and efficiency in mind.

• Partnership in the West has often been seen as requiring single sourcing and a rationalised and much reduced supply base, often involving using 1st tier suppliers to take over management of lower tier suppliers.

• Studies of Japanese firms show that partnerships can be achieved with dual suppliers, provided there is sufficient volume being purchased.

Lecture 11, Key Points & Tips• The role of partnership can be described using factors such as

sharing of information, trust and openness, coordination and planning, mutual benefits, sharing of risks, recognition of mutual interdependence, shared goals and compatibility of corporate culture philosophy.

• Three stages of partnership development have been defined; cooperation, coordination and collaboration with increases in the time horizon and scope of activities involved.

• Trust only exists when both sides agree that it does and be classified as contractual, competence or goodwill.

• The benefits of partnership include; improvements quality, reduced total cost of ownership, enhanced customer service, reduced risks involved in procurement, technological superiority of the product, reduced time to market for the buyer’s products and improved competitive position.

• Disadvantages of partnerships include: inability to price accurately qualitative matters, efforts to establish and monitor the relationship, risk of divulging sensitive information, potential opportunism and potential abuse of power.

Lecture 11, Key Points & Tips•You need to be able to discuss some of the factors involved in successful partnerships and be able identify where they are likely to be beneficial and where not.