Procurement Principles and Management in the Digital Age (PDF)

Procurement Principles and Management in the Digital Age Twelfth Edition Part 2 Key procurement issues Chapter 8 Sourcing strategies and relationships Ad...

Procurement Principles and Management in the Digital Age Twelfth Edition Part 2 Key procurement issues Chapter 8 Sourcing strategies and relationships Adapted by: Dr MSM Makaleng 2025 © 2022 Pearson Education Limited. All Rights Reserved.  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 models of managing relationships To introduce the concept of tiering To consider the impact of disruptions such as the Covid-19 pandemic on sourcing policy © 2022 Pearson Education Limited. All Rights Reserved.  CLASS ACTIVITY Why is it important to have critical success factors driving strategic sourcing? © 2022 Pearson Education Limited. All Rights Reserved.  Critical success factors for strategic sourcing Based around the three key areas of : ‒ people, ‒ processes ‒ technology: ‒ know the market and suppliers; © 2022 Pearson Education Limited. All Rights Reserved.  Critical success factors for strategic sourcing (Continued) – use technology to support the execution of strategy, such as digitalisation and advanced analytics; – obtain senior-level support; – establish a cross-functional team (CFT); – adopt a company-wide supply chain focus; © 2022 Pearson Education Limited. All Rights Reserved.  Critical success factors for strategic sourcing (Continued) – enforce compliance; – engage stakeholders; – encourage supplier innovation; – set up adequate reporting metrics to demonstrate success; – carry out continuous improvement © 2022 Pearson Education Limited. All Rights Reserved.  CLASS ACTIVITY Explain any other critical success factors in strategic sourcing. © 2022 Pearson Education Limited. All Rights Reserved.  Technology Big Data, e-procurement, AI and predictive analytics tools (see Chapter 18) are revolutionising the interface between procurement and supply chains, allowing procurement to capture and aggregate extensive data on suppliers and markets. Analytics will be able to track and predict third- party risk, such as that of a cyber security breach, assessing vulnerabilities across a range of areas and enabling better decision making. © 2022 Pearson Education Limited. All Rights Reserved.  Attributes of a good supplier While a definition of a good supplier which would be acceptable to everybody would be difficult to write, there are a number of attributes that might be regarded as desirable for a typical relationship. 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 good service back-up. Is responsive to our needs. Keeps promises. Provides technical support. Keeps the buyer informed on progress. © 2022 Pearson Education Limited. All Rights Reserved.  CLASS ACTIVITY What more attributes will you look for in a supplier? © 2022 Pearson Education Limited. All Rights Reserved.  Mini case study – IKEA IKEA, the Scandinavian-based international retailer of furniture and related products, attributes a share of the reasons for its success to its suppliers. IKEA has followed a policy of developing relations with the most economical suppliers rather than necessarily dealing with traditional suppliers to the furnishing business. As an example of this, the company chose to buy seat covers from a shirt manufacturer. © 2022 Pearson Education Limited. All Rights Reserved.  CLASS ACTIVITY What key performance indicators will you use to evaluate the performance of a supplier? © 2022 Pearson Education Limited. All Rights Reserved. Figure 8.1 Supplier evaluation © 2022 Pearson Education Limited. All Rights Reserved. Figure 8.1 Supplier evaluation (Continued) © 2022 Pearson Education Limited. All Rights Reserved. Figure 8.1 Supplier evaluation (Continued) © 2022 Pearson Education Limited. All Rights Reserved. Figure 8.2 Supplier associations: known in Japan as ‘Kyoryoku Kai’ © 2022 Pearson Education Limited. All Rights Reserved.  Carter’s 10 Cs model 1 Competency Procurement needs to be assured that the contractor’s staff have the competences such as technical training qualifications and/or experience. Does the contractor have its own system for ensuring it employs competent staff and subcontractors, including, for example, staff appraisals, training plans, and personal development plans? © 2022 Pearson Education Limited. All Rights Reserved.  Carter’s 10 Cs model (Continued) 2 Capacity Contractors must have sufficient and suitable resources in terms of people, plant, processes and knowledge, not only for present but also for future needs: What percentage of the contractor’s annual turnover do the contracts comprise? Do they have spare capacity? Does the contractor subcontract the majority of work, with the effect that you are contracting with one company and getting another? What lead times have they achieved? © 2022 Pearson Education Limited. All Rights Reserved.  Carter’s 10 Cs model (Continued) 3 Consistency Can contractors provide a consistent reliable requirement on time and in full(OTIF) every time? Is the specification inherently unsafe, inadequate, constantly changing, using yesterday’s technology? Do they deliver defects or carry out rework? © 2022 Pearson Education Limited. All Rights Reserved.  Carter’s 10 Cs model (Continued) 4 Control of process Is the contractor in control of his own systems such as resource control, inventory, costs and budget, procurement and production. Assess whether the contractor: Can cope with changes in both the quantity and types of requirements; Has any adequate plans in place for contingency and business continuity; Monitors actual performance against the process and has a corrective action programme. © 2022 Pearson Education Limited. All Rights Reserved.  Carter’s 10 Cs model (Continued) 5 Cost/Price In addition to cost/price, companies must calculate the total cost of ownership(TCO): Performance, maintenance and repair costs, overhead recovery rates, break-even points and learning curve calculations must be considered. When dealing with e-auctions especially, look out for prices/costs which are not sustainable in the long term. © 2022 Pearson Education Limited. All Rights Reserved.  Carter’s 10 Cs model (Continued) 6 Commitment to quality Evidence of commitment to quality consists of: ISO 9001 certification, quality manual, quality plans, drawings and procedures, inspections testing or surveillance of manufacturing processes, SPC, FMEA, Six Sigma, TQM and PPM and surveillance of site activities. Emphasis should be on prevention rather than detection. © 2022 Pearson Education Limited. All Rights Reserved.  Carter’s 10 Cs model (Continued) 7 Clean/CSR Do they have a corporate social responsibility (CSR) policy, and evidence of communication of the policy to stakeholders, and monitoring systems. e.g.: Health and safety policy Safety awards Sustainability policy Diversity and equality policies CIPS code of ethics. © 2022 Pearson Education Limited. All Rights Reserved.  Carter’s 10 Cs model (Continued) 8 Culture and relationships Is the contractor committed to communication and the principle of an open working relationship built on trust? Will you be able to build a good working relationship with the contractor’s staff? Does the contractor understand what benefits you are seeking and what value they can add? Is the contractor able to understand and work within your own cultural barriers, such as internal bureaucracy, restrictions of any EU directives, government regulations on health and safety? © 2022 Pearson Education Limited. All Rights Reserved.  Carter’s 10 Cs model (Continued) 9 Cash/Finances Financial analysis of ratios within the profit and loss account and the balance sheet should be carried out. Profit trends and liquidity ratios are examples of financial KPI’s to assess. 10 Communications Is the supplier fully integrated with information and communication technology (ICT). © 2022 Pearson Education Limited. All Rights Reserved. Carter’s 10 Cs model (Continued) The 10 Cs checklist Competency Capacity Consistency Control of process Cost/price Commitment to quality Cash/finances Clean Culture and relationships Communications © 2022 Pearson Education Limited. All Rights Reserved.  Case study – Vodafone Vodafone has suppliers’ commitments to diversity, inclusion and the environment counting for 20 per cent of its evaluation criteria when it tenders for new work. Suppliers have to prove that they support diversity in the workplace in terms of gender, ethnicity, LGBTQ+, age and disability criteria. (Allen, 2020) © 2022 Pearson Education Limited. All Rights Reserved. Figure 8.3 Customer supplier partnership bridge © 2022 Pearson Education Limited. All Rights Reserved. Figure 8.4 Increasing relationship strength © 2022 Pearson Education Limited. All Rights Reserved.  The Bensaou model 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: 1. Which governance structure or relational design should a firm choose under different external contingencies? 2. This is a strategic decision because it affects how a firm defines its boundaries and core activities. © 2022 Pearson Education Limited. All Rights Reserved.  The Bensaou model relationship management (Continued) 3. 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 © 2022 Pearson Education Limited. All Rights Reserved.  The Bensaou model relationship management (Continued) 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. © 2022 Pearson Education Limited. All Rights Reserved.  The Bensaou model relationship management (Continued) 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. Many large firms in manufacturing are moving away from traditional vertical integration and towards the external contracting of key activities. © 2022 Pearson Education Limited. All Rights Reserved.  The Bensaou model relationship management (Continued) As inter-firm relationships increase, firms cannot manage with one design for all relationships and so need to manage a portfolio of relationships. There are two kinds of successful relationship: high requirement – low capabilities and low requirements – high capabilities. There are also two paths to failure: under designed and over designed relationships. Over-design takes place when firms invest in building trust as a result of frequent visits and cross-company teams when the market and product context call for simple, impersonal control and information exchange. Such overdesign is both costly and risky, especially in terms of the intangible investments in people, information or knowledge. © 2022 Pearson Education Limited. All Rights Reserved.  The Bensaou model relationship management (Continued) Building or redesigning relationships, according to the Bensaou model, therefore involves the following three analytical steps: 1. The strategic selection of relational types to match the external conditions relating to the product, the technology and the market (see Table 8.1); 2. The identification of an appropriate management profile for each type of relational design; 3. Marching the design of the relationship, which could be over- or under-designed, to the desired management profile. © 2022 Pearson Education Limited. All Rights Reserved.  Supplier’s specific investment Capital Buyer – High Relationship Investment Product characteristics: ‒ Technical complicated ‒ Based on mature, well understood technology ‒ Little innovation & improvement to the product Strategic Partnership – High Relationship Investment Product characteristics: ‒ High level of customisation required ‒ Close to buyer’s core competency ‒ Tight mutual adjustments needed in key processes ‒ Technically complicated part of integrated subsystem ‒ Based on new technology ‒ Innovation leaps in technology, product/service ‒ Frequent design changes ‒ Strong engineering expertise required ‒ Large capital investment required © 2022 Pearson Education Limited. All Rights Reserved.  Supplier’s specific investment (Continued) Capital Buyer – Market Characteristics: ‒ Stable demand with limited market growth ‒ Concentrated market with few established players ‒ Buyers maintain an internal manufacturing capability Strategic Partnership – Market Characteristics: ‒ Strong demand and high growth market ‒ Competitive and concentrated market ‒ Frequent changes in competitors due to instability or lack of dominant design ‒ Buyer maintains in-house design & testing capability © 2022 Pearson Education Limited. All Rights Reserved.  Supplier’s specific investment (Continued) Supplier Characteristics: ‒ Large supply houses ‒ Supplier proprietary technology ‒ Few strongly established suppliers ‒ Strong bargaining power ‒ Car manufacturers heavily depend on these suppliers, their technology and skills Partner Characteristics ‒ Large multiproduct supply houses ‒ Strong supplier proprietary technology ‒ Active in research and innovation (R&D costs) ‒ Strong recognised skills and capabilities in design, engineering and manufacturing © 2022 Pearson Education Limited. All Rights Reserved.  Supplier’s specific investment (Continued) Market Exchange – (Low Relationship Investment) Product Characteristics ‒ Highly standardised products/Mature technology ‒ Little innovation & rare design changes/Technically simple products or well structured complicated manufacturing process ‒ Little or no customisation to buyer’s final product/Low engineering effort and expertise required ‒ Small capital investments required Captive Supplier – (High Relationship Investment) Product Characteristics ‒ Technically complicated products/Based on new technology (developed by suppliers)/Important and frequent innovations and new functionalities in the product category/Significant engineering effort and expertise required ‒ Heavy capital investments required © 2022 Pearson Education Limited. All Rights Reserved.  Supplier’s specific investment (Continued) Market Exchange – Market Characteristics ‒ Stable or declining demand ‒ Highly competitive market ‒ Many capable suppliers ‒ Same players over time Captive Supplier – Market Characteristics ‒ High growth market segment ‒ Fierce competition ‒ Few qualified players ‒ Unstable market with shifts between suppliers © 2022 Pearson Education Limited. All Rights Reserved.  Supplier’s specific investment (Continued) Market Exchange – Supplier Characteristics ‒ Small ‘mom and pop’ shops ‒ No proprietary technology ‒ Low switching costs ‒ Low bargaining power ‒ Strong economic reliance on automotive business Captive Supplier – Supplier Characteristics ‒ Strong supplier proprietary technology ‒ Suppliers with strong financial capabilities and good R&D skills ‒ Low supplier bargaining power ‒ Heavy supplier dependency on the buyer and economic reliance on the automotive sector in general © 2022 Pearson Education Limited. All Rights Reserved.  Management profile for each contextual profile Captive Buyer Information Sharing Mechanisms ‒ ‘Broadband’ and important exchange of detailed information on a continuous basis ‒ Frequent and regular mutual visits Strategic Partnership Information Sharing Mechanisms ‒ ‘Broadband’ frequent & ‘rich media’ exchange ‒ Regular mutual visits and practice of guest engineers © 2022 Pearson Education Limited. All Rights Reserved.  Management profile for each contextual profile (Continued) Captive Buyer Boundary Spanner Tasks Characteristics ‒ Structured tasks, highly predictable ‒ Large amount of time spend by buyer’s purchasing agents and engineers with supplier Strategic Partnership Boundary Spanner Tasks Characteristics ‒ Highly ill defined, ill structured ‒ Non-routine, frequent, unexpected events ‒ Large amount of time spend with supplier’s staff mostly on coordinating issues © 2022 Pearson Education Limited. All Rights Reserved.  Management profile for each contextual profile (Continued) Captive Buyer Climate & Process Characteristics ‒ Tense climate, lack of mutual trust ‒ No early supplier involvement in design ‒ Strong effort by buyer towards cooperation ‒ Supplier does not necessarily have a good reputation Strategic Partnership Climate and Process Characteristics ‒ High mutual trust & commitment to relationship ‒ Strong sense of buyer fairness ‒ Early supplier involvement in design ‒ Extensive joint action and cooperation ‒ Supplier has excellent reputation © 2022 Pearson Education Limited. All Rights Reserved.  Management profile for each contextual profile (Continued) Captive Buyer – Market Exchange Exchange Sharing Mechanisms ‒ ‘Narrowband’ and limited information exchange, heavy at time of contract negotiation ‒ Operational coordination and monitoring along structured routines Strategic Partnership – Captive Supplier Information Sharing Mechanisms ‒ Little exchange of information ‒ Few mutual visits, mostly supplier to buyer © 2022 Pearson Education Limited. All Rights Reserved.  Management profile for each contextual profile (Continued) Captive Buyer – Boundary Spanner Tasks Characteristics ‒ Limited time spent directly with suppliers’ staff ‒ Highly routine and structured tasks with little interdependence with supplier’s staff Strategic Partnership – Boundary Spanner Tasks Characteristics ‒ Limited time allocated by buyer’s staff to the supplier ‒ Mostly complicated, coordinating tasks © 2022 Pearson Education Limited. All Rights Reserved.  Management profile for each contextual profile (Continued) Captive Buyer – Climate and Process Characteristics – Positive social climate ‒ No systematic joint effort and cooperation ‒ No early supplier involvement in design ‒ Supplier fairly treated by the buyer ‒ Supplier has a good reputation and track record Strategic Partnership – Climate and Process Characteristics ‒ High mutual trust, but limited direct joint action and cooperation ‒ Greater burden put on the supplier © 2022 Pearson Education Limited. All Rights Reserved. Figure 8.5 Assessing supplier relationships © 2022 Pearson Education Limited. All Rights Reserved.  Self-assessment tasks 1. Outline the ten selection criteria in Carter’s 10 Cs. 2. Explain the concept and added value of tiering. © 2022 Pearson Education Limited. All Rights Reserved.