Strategic Sourcing and Supplier Relationship Management Notes PDF

CHAPTER ONE STRATEGIC SOURCING OVERVIEW Dr. Yeshiwond Golla Department of LSCM Bahir Dar University  Strategic Sourcing A structured and collaborative process of analysing an organization’s spend and using the information...

CHAPTER ONE STRATEGIC SOURCING OVERVIEW Dr. Yeshiwond Golla Department of LSCM Bahir Dar University  Strategic Sourcing A structured and collaborative process of analysing an organization’s spend and using the information to make business decisions about acquiring commodities and services more efficiently and effectively.  Strategic sourcing is a process that creates efficiencies across all spend categories, minimizes supply risks with improved supplier selection, and gives visibility into pricing and forecasting. Supplier Relationship management  Overview Introduction Strategic sourcing principles Strategic sourcing methodology 1.Introduction  2.Strategic Sourcing: Concepts, Principles and Methodology To successfully implement strategic sourcing, companies must know their most important goods and services and determine how vital they are to day-to-day operations, as well as to achieving longer-term business goals. Strategic sourcing takes on a new approach of collaboration of constituents across supply chain to better serve downstream customers that would result in enhancing longer-term profit enhancement.  2.1 Strategic Sourcing Concepts Strategic sourcing is the process of developing channels of supply at the lowest total cost, not just the lowest purchase price. It expands upon traditional purchasing activities to embrace all activities within the procurement cycle. Strategic sourcing is a supply chain management process that ultimately helps organizations obtain the maximum value from their purchasing decisions by gathering and organizing all helpful data in a way that aligns with their business goals and purchasing strategy. Although strategic sourcing focuses primarily on reducing costs, its foundation is building longer term, win-win relationships with key suppliers to give buyers a competitive advantage. It is critical that both buyer and supplier work together and share information to identify opportunities that will significantly increase savings over time. The transformation from traditional purchasing methods to a strategic-sourcing focus requires three fundamental philosophies.These include: Focus on the total delivered value, not the purchase price -not focusing on ‘’How Much? ‘Rather what is the net value to you as a buyer? Collaborative approach to dealing with suppliers, rather than oversight- switching from oversight (reactive) to collaborative (proactive) approach. Focus on enhancing profitability, rather than cost savings - from cost savings to enhancing profitability.  2.2 Strategic Sourcing Principles A procurement strategy’s overall objective is to support the ultimate goal of achieving and sustaining a company’s competitive advantage. The three prevailing principles in formulating and executing strategic sourcing are as follows: 1.Expenditure Category Strategy Formulation A product or service’s strategic importance is determined by whether it has an impact on a company’s core business and future competitiveness. Formulating an expenditure category strategy requires a company to assess how important a resource is to the company’s competitive position. However, critical resources may not be instrumental to running a company. They may be necessary, but they provide no competitive advantage in the marketplace and may have very little to do with a company’s goals or mission.  In addition to understanding the strategic importance of purchasing key products, a company must also pay attention to the supply side. This will act as a guideline for specific strategies to use and the amount of time and effort that should be spent purchasing any particular item. Items with a simple supply market (high availability, large number of suppliers and plenty of substitution possibilities) are easy to purchase. Therefore, a company should devote minimal time and effort to buy them. Items with high market complexity are most likely to be high value goods or recurring needs. As the dollars spent in the long term can be significant, companies should spend the necessary time to reduce the total cost of these purchases. A supply market’s complexity is determined by how difficult it is to buy a certain item. Buying becomes difficult when a small number of suppliers are dominant and very little competition exists; buyers encounter high switching costs and lack negotiating power due to small purchase volume; suppliers have more power due to their ability to provide inputs that are important to the industry; and the supply market has high entry barriers Fig. 2.3 Expenditure category strategic approach  A more detailed methodology for determining the importance and complexity of an expenditure category are illustrated here. 2.Total Supply Cost The Strategic Sourcing concept considers the total cost of supply. This concept unveils the total cost incurred by the buyer when purchasing materials and services. The Total Supply Cost (TSC) is an assessment of all costs— direct and indirect—involved with an item over the product life TC=price +usage cost +administrative and processing cost  The benefits of using TSC include: Helps focus on total value, core business, quality, yields and cycle time reduction Helps in understanding technical issues beyond price Makes it easy to negotiate and communicate based on facts Drives suppliers to work on the right issues To calculate TSC, one must first establish a framework and assumptions that will guide the work. This includes defining the needed item (or service) and determining who will use it, estimating how long the item will be in use, calculating quantities and usage rates and determining the scope of process and areas that will incur costs from using the item  In general, three costs categories are involved in calculating the TSC. They are: 1) Incurred costs: These are either known or can be estimated to a reasonable degree of accuracy. Incurred costs include a quoted price, transportation costs, spare parts and supplies, brokerage fees and customs duties. 2) Performance factors: These include areas such as delivery performance, quality and requirements for service or maintenance. 3) Policy factors: These encompass all issues the buying company chooses to incorporate to reflect business or social policy directives. Typically a supplier or product either meets or does not meet the policy criteria, and a firm’s policymakers must establish a dollar value for it..  Several other factors must be considered in determining TSC that can affect the absolute cost comparisons between supplier A and supplier B, as well as item X and item Y. These additional factors are: 1.Attributes of Performance: To select suppliers that can make strategic contributions to a buyer’s business, buyers need to sort out the performance variables. However, buyers should also be concerned about a supplier’s respect for recycling, handling hazardous materials, safety and demographics. For example, a buyer may have a commitment to do business with minority and female-owned businesses, and we must factor these demographics into a supplier’s performance.. 2.Total Processing Cost: For example, order processing costs are not the same from supplier to supplier. Importing/exporting costs and correction costs can also vary. Inventory costs depend on whether the supplier carries the costs or if the buyer takes ownership of the goods. 3.Weighting and Method : After establishing the attributes of performance and cost ownership, the buyer needs to create a weighting system that converts all supplier data into a structure for making richer, better informed decisions 3. Negotiating Philosophy The successful implementation of strategic sourcing relies largely on the ability to undertake fact-based negotiations. This method takes a total-cost-of-ownership (or TSC) approach to selecting suppliers rather than focusing on the purchasing price alone. The objective of the negotiation is to rely on analytical support of data and facts to address multiple issues that will develop a long and lasting relationship between the buyer and supplier. Strategic sourcing represents a major shift from a win- lose to a win-win negotiating philosophy 2.3 The Strategic Sourcing Methodology Strategic sourcing methodology consists of the following four distinct stages.  Internal analysis: Analyses to understand the roles each purchased category plays in meeting strategic business objectives. Expenditure category strategy: This stage involves determining the strategic approach, portfolio of buying options and tactics for each buying category. Supplier strategy: Supplier strategy determines the overall approach for dealing with suppliers; this includes the number of suppliers, the focus of a Request for Proposal (RFP) and negotiations. Fact-based negotiation strategy and execution: A structured analytical framework arms the negotiating team with all facts necessary to reach the desired outcome.  These stages consist of the following: – Negotiation strategy and case building: Defines the leverage points of buyers and suppliers and formulates strategies for countering a supplier’s leverage points. – Supplier response and positioning: Involves anticipating supplier responses and mapping out negotiation tactics for countering a supplier’s responses. – Negotiation planning, discussion and resolution: This process prepares a company for the actual negotiations by mapping out the logistics of engagements. – RFP/RFQ (Request for Quotation) preparations: RFP/RFQ provides a formatted vehicle for collecting competitive information from suppliers to aid in the negotiations. – Supplier selection and evaluation: This stage involves developing processes and criteria for evaluating individual suppliers. This requires a complete understanding of value received from CHAPTER TWO STRATEGIC SOURCING: INTERNAL ANALYSIS Dr. Yeshiwond Golla Department of LSCM Bahir Dar University  Strategic Sourcing: Internal Analysis In the first stage of strategic sourcing, the focus is on gathering information through various analyses to serve as a foundation for much of the work required in later stages. The three major internal analyses are: 1.Expenditure category analysis 2.Supply market analysis 3.Supplier analysis  1. Expenditure Category Analysis This involves understanding the situation of various current expenditure categories, which may include basic information on price, volume, product specification, current purchasing process and purchasing constraints (such as government-approved suppliers and a customer-imposed vendor list). Other analyses that proved useful include; A cost breakdown analysis, Supplier concentration analysis, Category material substitution analysis and current purchasing contract review.  i. Cost Breakdown Analysis  This will provide a starting point for understanding current cost position and drivers of lower costs, which could help a company influence a product’s cost.  This analysis shows the costs per unit of the major representative products being purchased, indicating the major material inputs, labor, overhead and others that make up total costs.  If the cost is sensitive to scale or volume, then it is helpful to draw several cost bars at low, medium and high volume levels.  It is important to show cost elements that relate to the actual manufacturing process. It is also useful to put individual cost elements in two different categories. a. First, are the costs variable, fixed or semi-fixed? Which cost elements can be controlled by the supplier and which by the company? b. Second, which elements are uncontrollable? An example would be wage rates in a union plant. Cost drivers can also serve as a means to ultimately allow a company to implement measures to influence cost.  ii. Supplier Concentration Analysis This helps identify specific scale opportunities (other than overhead) whenever the production of a material is generally independent. Sole-sourced materials and services should be reviewed to ensure proper risk management and alignment with the right supplier. In short, this analysis allows a company to better understand the volume of materials being purchased from each supplier. Armed with this information, a company can then spot opportunities to consolidate its supplier base or diversify suppliers to gain leverage for bargaining.  iii. Material Substitution Analysis The objective here is to determine if alternative products can fulfil a company’s purchasing requirements. Substitution may occur in three areas: Products that function the same but cost less: Although this is the most obvious substitution, one must be aware of the total system cost. Standardization of materials: A company may find opportunities to reduce the number of SKU’s purchased without affecting quality or end- user requirements. A standard product will lead to fewer inventories and less obsolescence. In addition, suppliers may benefit from dedicated lines or economies of scale. Product redesign: A supplier may offer a similar product that doesn’t meet the company’s exact specifications but does meet quality standards and end-user requirements. Once alternative materials are identified, a company must rigorously analyse the pros and cons to determine the economic potential. Often suppliers are very willing to work with a company; executives should consult with them early and often in the process.  iv. Current Purchasing Contract Review At the time a contract is written, its provisions are usually clear and both companies understand the implications. However, over time both the requirements and competitive environment may change. Contracts can sometimes lead to behaviour that is unexpected or inconsistent with today’s needs. The objective of contract review is to understand how they affect a company’s purchasing behaviour and competitive position; whether any constraints exist to changing practices; and what incentives—positive or negative—they provide for suppliers. When reviewing a contract, key considerations should be given to the following: – Terms: Does a contract’s length provide the supplier with the right economic incentive to invest in the company’s business? What investment is relevant? What’s the payback? How long will the technology stay relevant? For example, a contract lasting 5–7 years may induce a supplier to make a major investment in a plant, but anything less than 5 years makes a modest renovation more reasonable. What are the pros and cons of locking up supply and possibly price ceilings? What does the industry and analysis suggest about future supply and demand?  Cont.… – Pricing: What are the downstream implications of any pricing mechanism? What would happen in periods of inflation? Or if excess supply pushes down the price? Are there any price guarantees such as Most Favoured Nation status? Is a guaranteed price competitive with any other pricing schemes offered to other customers? For longer-term contracts, is experience curve efficiency built into pricing mechanisms? Are any costs or savings passed through and are they monitored? How will changes in supplier volume affect the company’s fixed costs? – Volume: What happens if there are sudden or unexpected changes to a company’s output? Can the risk of volume shifts be shared? For example, it is less risky to assign a percentage of a company’s volume rather than a fixed level. What’s the upside of committing volume to a supplier? For example, for suppliers with high fixed costs like can plants, maximum volume commitments (and minimal flex) should result in lower price commitments. – Admin: What are the hidden costs of system-type requirements and are they necessary? What’s the true cost of a scheduling procedure or audit to both the supplier and the company, and are these benefits worth the cost? – Changes: What are the provisions for change? Can they handle emergencies? At what cost? Are suppliers being fairly compensated for changes?  2. Supplier Market Analysis Understanding the supply market situation is a prerequisite to forming relationships with suppliers as it could give key leverage in negotiations. For example, competition among suppliers will become stronger if product demand grows slowly. This gives the buyer an opportunity to leverage its bargaining power—especially if the amount represents a significant proportion of the supplier’s total production capacity. To understand the market situation, a variety of analysis frameworks are required. Market Dynamic - Several analyses can determine growth, overall trends, market power, profitability and bargaining leverage of the supply market. 1. Supply industry size and growth analysis: This determines industry trends and how they impact the market environment. Market size and growth provides the first insights into how suppliers view their industry and where they fit. For example, different market segments, products or regions may grow at varying rates. These trends have both cost and pricing implications, and they also may impact a supplier’s desire to enter into different types of relationships. The key to understanding the market is not only its total size but also the size of the segments within it. An analysis of growth trends highlights the degree of competitiveness in an industry’s environment. 2. Substitution analysis: The objective of this analysis is to understand which similar products can be substituted and evaluate the impact of that trend on the marketplace. Two key issues dictate product substitution: Customer needs and system costs. If the customer perceives no difference in quality, there may be no reason to substitute. With system costs, the use of one product versus another may increase or decrease overall costs. 3. Supply industry profitability analysis: This aims to identify industry standards for profitability and understand the reasons for any variability or trends that impact industry pricing. Industry profitability and returns highlights an industry’s competitive dimensions. It can describe a fair level of return for an industry, as well as point out cycles or any other trends. If any variations exist, then a company will need to determine their impact on pricing. It will also identify value opportunities when a supplier’s returns are consistently above normal levels. If a company understands what factors drive an industry’s profitability, it can find leverage opportunities as a customer. It can evaluate profitability, return on sales, return on assets and return on equity.  4. Market fragmentation/consolidation analysis: An industry’s degree of fragmentation creates more sophisticated relationships and determines proper pricing. Has the industry consolidated? What are future trends? In a consolidating industry, large customers must ensure they are aligned with the winners. Evaluating the likelihood of consolidation requires thorough knowledge of an industry’s barriers to entry. Industries with high barriers are more likely to consolidate than those in which companies can enter with ease. 5. Supply industry technology analysis: This determines what role technology plays in an industry’s competitive dynamics and the accessibility of that technology to all players. As a purchaser of a particular product, a company must ask these questions about the technology: Will it improve product quality? Does it decrease the price per unit? Technology leadership may be linked to cost leadership. It may be valuable for a company to link up with the technology leader, and design a strategy to capture or share the cost savings. This analysis may involve evaluating the role of technology in an industry, tracing its evolution and its impact on quality and cost, as well as determining the accessibility of key technologies and the role of individual companies in R&D. 6. Suppliers/Customer Buying Practices: Comparing a customer’s relative strengths with a supplier’s relative strengths may explain the different types of relationships and the power balances in them. Two analyses in particular are worth exploring to understand the supply industry: – Industry customer analysis: This analysis determines the role the customer plays in the industry’s competitive environment. Relative customer leverage may help influence underlying economic conditions and marketplace complexity. Exploring the customer market will explain details about an industry’s competitive dynamics. Do one or two large customers dominate an industry or specific market segments? A company may gain some additional leverage if the supplier faces a high cost of reconfiguring a product to meet another customer’s specifications. – Buying practice analysis: To analyse purchasing patterns within an industry, look for demand trends on a weekly or monthly basis. This could be compared to segment purchasing to determine if any peculiarities or differences exist between the two. Buying patterns may indicate seasonal variations in price and may significantly impact capacity constraints within an industry. At this level of analysis, however, it is important to understand how much the variation is driven by customer purchase patterns versus fundamental supply issues – Industry Economic/Pricing: An understanding of price and cost drivers within an industry allows buyers to compare the price curve with the supplier’s cost curve. The differences may present an opportunity to further negotiate for price concessions or increase delivery values for products.  Two analysis frameworks are commonly used: a. Experience curve: Marketplace dynamics drive price. Changes in the supply/ demand balance, competition and consumer value perception relative to substitution products all cause real prices to fall over time. Experience curves measure the relationship between the increase in accumulated experience and the drop in the unit price (or cost). Thus, on a log-log scale, prices will fall by x% every time the accumulated volume doubles. Experience curves illustrate the decline in real prices over time at a fairly constant rate under the assumption that competitive and supply/demand conditions are normal. If prices do not decline at the same time rate, the supplier may build a “price umbrella.” This may provide the customer with an opportunity to “break” the umbrella and cause prices to continue declining steadily. b. Industry cost bar analysis: The objective is to understand roughly what factors play a key role in driving costs. Determining an industry’s cost structure and the underlying cost drivers is vital to understanding particular elements of an industry’s economics and may provide key input into areas to focus supply chain efficiencies. Precision will not be as valuable as relative importance. Thus, if cost data is not readily available, conversations with industry associations and experts may be sufficient. These conversations may also suggest some specific cost drivers.  3. Supplier Analysis For expenditure categories, the search for viable suppliers is a continuous process as new suppliers will always enter a profitable market. Information about individual suppliers serves as a cornerstone for deploying the most appropriate sourcing strategy and negotiation tactics. Before a company conducts a detailed analysis on individual suppliers, the number of suppliers should be systematically screened from all possible suppliers. This means a firm should cast a wide net to include current, alternative and non-traditional suppliers to capture all viable suppliers for detailed analysis. i. Current suppliers are those with established relationships and baseline expenditures. ii. Alternative suppliers are often the competitors of current suppliers that offer similar goods and services. iii. Non-traditional suppliers are candidates with a relatively untested capability to supply the needed products. The number of suppliers varies according to the expenditure category.  To screen suppliers, the first step is to send a request for information (RFI) to possible suppliers so a company can develop a short list. The RFI may include General information about the company, Product lines, Service levels, Capability, Quality control and other requirements deemed appropriate.  In addition to information requested through an RFI, a company needs details on supplier profitability. This is used to estimate supplier cost structure and annual cost changes by product line, as well as to determine the supplier’s financial capability and stability. This information is collected from public information sources like financial statements, industry publications, public comments, industry contacts and corporate reports. After reviewing the available information, a company should cut down the list of suppliers to a reasonable number using “go no-go” criteria. These include whether a supplier is too small, doesn’t have enough capacity, has insufficient distribution coverage, has a poor track record with the buyer, has a poor market image or has an unsophisticated quality control program.  An in-depth analysis of each supplier is necessary for a company to determine their strengths and weaknesses within the context of the buyer bargaining position. Individual suppliers can be analysed in three ways: capability, cost and profitability: 1. Supplier Capability Supplier capability is one of the most important factors that determine how a supplier will behave during the negotiation process. Understanding a supplier’s capability will serve as the basis for formulating negotiation tactics that could lead to a win-win outcome. To better understand a supplier’s capacity, a company should perform the following analyses: A. A supplier size and market share analysis determines a supplier’s market presence. A company must first know the size of each supplier within the industry. Suppliers that need to grow and gain market share will value the company’s business more than other suppliers. Some suppliers may dominate only one segment of the market and wish to expand into other segments if given the opportunity. In addition, in industries where economies of scale are important, the market leader will have lower costs than other suppliers. Buyers can take advantage of this in price negotiations. B. When a supplier’s strategic direction is aligned with a company’s purchasing needs, it increases the opportunity for reaching a win-win outcome. Knowing a supplier’s strategy helps a company predict what a relationship or partnership may look like. Ideally, the supplier’s strategic outlook should complement the company’s purchasing strategic outlook. A true mutual competitive advantage can be created when the company works with suppliers whose strategic imperatives are best met by serving the company rather than another customer. C. A company must know the importance of its business to a supplier so it understands its place and potential within the supplier’s customer portfolio. The company’s relative importance to the supplier can determine how much leverage the company has in negotiations. A supplier that is increasingly dependent on the company’s business should be more responsive to its buying demands than other suppliers. Furthermore, if scale is vital to a supplier’s cost position, it will be cheaper for it to serve large customers than smaller clients. These advantages must be weighed against the risk of relying too heavily on only one supplier, which include unexpected business interruptions and the lack of competitive bidding or market pressure. A buyer may calculate what percentage of a supplier’s business it accounts for by looking at sales, unit volume or profit. Is the buying company the supplier’s largest customer? Or is the largest customer in a supplier’s market segment? D. The specific supplier technology analysis determines a supplier’s short- term and long-term competitiveness. If technology leadership is essential to a company’s costs or quality standards, then it should identify opportunities to work with the technology leaders. The purchasing approach (such as alliance, backward integration or supplier development) must help the supplier make on -going investments in the latest technology so both sides can share the savings. The importance of technology varies by industry. Advances and improvements occur over different time horizons. Analyzing specific supplier technology requires the buying company to identify the range of technologies used in an industry. A company must assess each supplier’s capabilities and then determine the approximate cost and quality benefits associated with the latest technology, as well as the penalty incurred from using old technology. Then the company can compare the benefits of technology to the required investment to understand which suppliers are likely to make those investments. E. To assist in supplier selection, a company should conduct a supplier quality and service analysis. Quality and service levels are not easy to quantify. Most of the analysis is based on ranking or perception. But for issues such as reliability and turnaround time, suppliers should be ranked relative to one another. In these cases, it is important to decide which issues are the most important to both the purchasing department and also the user (the plant). A supplier may have a reputation for providing excellent new products, but the plant may be more interested in flexibility. 2. Supplier Cost Analysis Understanding a supplier’s cost structure is useful to a buyer because it can collaborate with the supplier to bring down costs and share the savings. In addition, knowing which supplier is the most cost competitive (with the record of bringing down costs the fastest), the buyer can expect to benefit from lower purchasing prices. Finally, every manufacturing operation has an optimal economic run (the optimal amount of quantity produced in a production run). A buyer who can determine the optimal quantity can take advantage of this by matching the purchased quantity with the supplier’s optimal economic run. The sections below provide examples of selected supplier cost analyses. The supplier cost drivers analysis helps identify a supplier’s costs. This analysis is most useful when the buyer has a choice of suppliers and/or can collaborate with suppliers to bring costs down. It is relevant in a competitive bidding situation where price—not cost—is the main issue.  The process begins by selecting costs that can be cut easily, usually those that are the largest and most controllable. Identify what activity or condition accounts for the difference in cost. For example, in raw materials the key factor might be volume purchase, whereas in labor, the key factor might be throughput. In general, a company should work with suppliers that are set up to offer lower costs. If a supplier is well suited for long runs and the company needs short runs and maximum flexibility, the low cost supplier will not be suitable. The company should then work with suppliers to find opportunities to lower costs in a way in which both sides can share the savings. The supplier experience curve analysis can be conducted to determine the supplier’s competitiveness. The basic principle behind the experience curve is that costs to provide a given product should decline as the supplier becomes more experienced providing that product. A buyer can benefit from understanding the particular cost drivers that lead to low costs in scale operations. Every manufacturing technology has some sort of scale curve, meaning that high volumes cost less per unit than small volumes. However, the appropriate unit of scale varies according to product and technology. Generally, scale effects occur when significant fixed costs are linked to the process. 3. Supplier Profitability Analysis Understanding a supplier’s financial condition allows a buyer to determine if price reductions are possible and if the supplier can finance investments in new technology. Specific supplier profitability analyses are presented below: A ratio analysis can be used to understand a supplier’s financial strengths and weaknesses. This best serves as a preliminary check on a supplier’s profitability, financial liquidity and leverage, fixed asset management and shareholder returns. It can identify whether a price reduction possibility exists with a particular supplier. The analysis is also important for understanding whether a supplier faces financial troubles. It’s crucial for a buyer to know the profit a supplier earns from each transaction to avoid paying a price premium. Ideally, the buying company’s goal would look to gain a pricing advantage while allowing the supplier to realize normal or above-normal profits over the long term. It is important for the supplier to achieve hurdle rate returns. Buyers want to avoid paying a price premium that the supplier can use to buy (subsidize) other businesses. A company must determine if suppliers earn more profit from its business than from other firms. A supplier may be reluctant to provide cost data in the form of cost per unit. Usually, all the buying company will know about its price. If the supplier gives the buying company a discount to its competitors, it may appear that the buying company’s business is actually less profitable to the supplier. However, the supplier’s profitability is determined by both price and cost. For some products, the company’s purchases may be significantly cheaper to produce than another firm’s purchases. Some cost drivers that can make a buying company’s business more profitable include: Large volumes that allow for economies of scale; Easier designs that can be run faster; A previous investment in a plant and equipment; and a predictable volume. I Identifying these factors requires the buying company to determine areas where its business gives the supplier a cost advantage compared to other customers. In some cases, an entire manufacturing line or plant may be devoted to a company’s business, and the cost data may be provided. In that case, a buyer can make a rough estimate of its costs by dividing the total cost of the line or plant by the purchased volume.  A supplier cash flow analysis determines a supplier’s health. The cash flow will reveal whether or not a supplier can afford necessary investments, and whether it has sufficient funds to invest in new technology. In addition, a supplier with excessive cash flow can cut prices for the buying company. A supplier in financial distress may represent a poor risk for the buyer. Two types of cash flow analyses can be conducted: Operating cash flow and financial cash flow. Cash flow equals the sum of operating cash flow plus financial cash flow. Operating cash flow measures the ability of a supplier’s recurring operations to generate cash. As a formula, it looks like this: Operating profit +non-cash expenses included in operating profit − capital expenditures − increases in non-cash operating working capital accounts − taxes paid. Financial cash flow captures all the non-operating cash changes experienced during the year and provides information on how a company funds its operations. It includes debt-related transactions (issuing or paying off debt), equity-related transactions (issuing or purchasing the company’s stock), long- term asset and liability transactions (buying or selling non-operating items) and one-time events (like asset sales). END!!  CHAPTER THREE SUPPPLIER EVALUATION AND SELECTION Dr. Yeshiwond Golla Department of LSCM Bahir Dar University  Definition Supplier Evaluation: A systematic approach to assess potential suppliers. Steps: 1. Identify requirements 2. Research potential suppliers 3. Collect data (RFI/RFQ) 4. Evaluate supplier capabilities 5. Make a decision  Step 1: Identify Requirements Quality , quantity, delivery timelines, etc 1. Quality : The degree to which the supplier's products or services meet specified requirements and standards. Evaluation Criteria**: i. - **Certifications**: Look for industry-specific certifications (e.g., ISO, Six Sigma). ii. - **Product Testing**: Assess the supplier's quality control processes and testing methods. iii. - **Reputation**: Research reviews, case studies, and testimonials from other clients. iv. - **Samples**: Request product samples to evaluate quality firsthand. v. - **Consistency**: Analyze historical data on the supplier’s quality performance. 2. quantity, *Definition**: The supplier's ability to meet your volume requirements consistently. Evaluation Criteria: I.Production Capacity**: Understand the supplier’s manufacturing capabilities and scalability. II.Inventory Management**: Assess how the supplier manages inventory and stock levels. III.Flexibility: Evaluate their ability to adjust production levels based on demand fluctuations. IV.Lead Times: Understand how quickly they can ramp up production if needed. 3. Delivery Timelines Definition: The supplier's ability to deliver products or services within agreed-upon timeframes. Evaluation Criteria: I.On-time Delivery Rate**: Review historical delivery performance metrics. II.Logistics Capabilities: Understand their logistics and transportation methods. III.Communication: Assess how well they communicate about potential delays or issues. IV.Lead Time Consistency: Evaluate whether they consistently meet lead times across different orders.  Step 2: Research Potential Suppliers Market analysis, referrals, online resources.  1. Market Analysis. - **Industry Trends**: Understand current market trends affecting your industry, such as demand fluctuations, technological advancements, and regulatory changes. - **Competitive Landscape**: Analyze competitors’ suppliers to identify potential partners and understand their strengths and weaknesses. - **Pricing Analysis**: Evaluate pricing structures across different suppliers to ensure competitive rates while maintaining quality. - **Supplier Diversity**: Consider the benefits of working with diverse suppliers (e.g., minority-owned, women-owned businesses) for broader perspectives and innovation. - **Risk Assessment**: Identify potential risks associated with suppliers, such as geopolitical issues, economic stability, and supply chain vulnerabilities.  2. Referrals - **Networking**: Leverage your professional network to get recommendations from colleagues, industry contacts, or trade associations who have experience with potential suppliers. - **Testimonials**: Seek feedback from businesses similar to yours regarding their experiences with specific suppliers. - **Partnerships**: Engage with industry partners who might have insights into reliable suppliers or those that align with your values and requirements. - **Conferences and Trade Shows**: Attend industry events to meet suppliers in person, gather referrals, and establish relationships.  3. Online Resources - **Supplier Directories**: Use online directories like ThomasNet, Alibaba, or Global Sources to find potential suppliers based on product categories and geographical locations. - **Review Platforms**: Check platforms like Trustpilot or G2 for reviews and ratings of suppliers to gauge customer satisfaction and reliability. - **Social Media**: Utilize platforms like LinkedIn to research suppliers, view their company updates, and connect with their representatives. - **Industry Reports**: Access market research reports from firms like IBISWorld or Statista to gain insights into supplier performance and market conditions. - **Webinars and Online Forums**: Participate in webinars or forums related to your industry to gather insights from experts and other businesses about reputable suppliers.  Step 3: Collect Data Request for Information (RFI) or Request for Quotation (RFQ). 1. Request for Information (RFI) An RFI is a formal process used by organizations to gather information about potential suppliers and their capabilities. It helps in understanding the market landscape and identifying suitable suppliers for future procurement needs. Purpose: To collect information about suppliers’ products, services, and capabilities. To assess the market and understand available solutions. To prepare for a more detailed procurement process (like an RFQ or RFP).  Key Components: - Company background and experience. - Product or service descriptions. - Technical capabilities and certifications. - Pricing models (if applicable). - References from previous clients. When to Use: - When you are in the early stages of supplier evaluation. - When you need to gather general information about potential suppliers before making a decision. - When exploring new markets or technologies.  2. Request for Quotation (RFQ) Definition: An RFQ is a formal document sent to suppliers to request a detailed price quote for specific products or services. It is typically used when the specifications are clear and well-defined. Purpose: - To obtain pricing information from multiple suppliers. - To compare costs and terms before making a purchasing decision. - To finalize supplier selection based on price and terms. Key Components: - Detailed specifications of the products or services needed. - Quantity required. - Delivery timelines and terms. - Payment terms and conditions. - Instructions for submitting quotes. When to Use: - When you have a clear understanding of what you need and can specify it precisely. - When price is a primary factor in the decision-making process. - When you are ready to make a purchase and need competitive quotes. Aspect RFI RFQ 1. Purpose Gather information Obtain price quotes 2. Stage in about suppliers Later stage, often Early stage of Process finalizing choice supplier evaluation 3.Detail General information Specific product Level Supplier capabilities /service details 4. Focus and offerings Pricing and terms  Step 4: Evaluate supplier capabilities Evaluating supplier capabilities is a critical step in the procurement process, ensuring that you choose the right partners who can meet your organization’s needs effectively. Key Supplier Evaluation Criteria - Quality of Products/Services - Cost Competitiveness - Delivery Performance - Financial Stability - Technical Capability - Customer Service and Support  Approach To Evaluating Supplier Capabilities Here’s a structured approach to evaluating supplier capabilities: a.Define Evaluation Criteria b.Gather Information c. Analyse and Score d.Conduct Risk Assessment e.Make Comparisons f. Engage in Dialogue  a. Define Evaluation Criteria Before assessing suppliers, establish clear criteria based on your organization's needs. Common criteria include: i. - Technical Capabilities: Assess if the supplier has the necessary technology, equipment, and expertise to deliver the required products or services. ii. - Quality Standards: Evaluate their adherence to industry standards and certifications (e.g., ISO, Six Sigma). iii. - Financial Stability: Review financial statements or credit ratings to ensure long-term viability. iv. - Experience and Reputation: Consider their track record, industry experience, and customer references. v. - Capacity and Scalability: Determine their ability to meet current and future demands. vi. - Delivery Performance: Analyze their history of meeting delivery timelines and order fulfillment rates. vii. - Customer Service: Evaluate responsiveness, support systems, and communication effectiveness.  b. Gather Information Use various methods to collect data on potential suppliers: 1. - Request for Information (RFI): Send out RFIs to gather detailed information about suppliers’ capabilities. 2. - Supplier Questionnaires: Develop questionnaires focusing on key evaluation criteria. 3. - Site Visits: Conduct site visits to assess facilities, processes, and overall operations first hand. 4. - References and Case Studies: Request references from existing clients and review case studies that demonstrate their capabilities. 5. - Online Research: Investigate online reviews, industry reports, and news articles related to the supplier.  c. Analyse and Score Once you have collected data, analyze it against your defined criteria: - Scoring System: Develop a scoring system (e.g., 1-5 scale) for each criterion to quantify supplier capabilities. - Weighting Criteria: Assign weights to different criteria based on their importance to your specific needs (e.g., quality may be more critical than cost).  d. Conduct Risk Assessment Evaluate potential risks associated with each supplier: 1.- Financial Risks: Assess their financial stability to avoid supply chain disruptions. 2.- Operational Risks: Consider risks related to production capacity, quality control, and delivery issues. 3.- Compliance Risks: Ensure suppliers adhere to legal and regulatory requirements relevant to your industry.  e. Make Comparisons Compare suppliers based on the scores and analysis: - Strengths and Weaknesses: Identify the strengths and weaknesses of each supplier. - Benchmarking: Compare suppliers against industry benchmarks or best practices.  f: Make a decision Decision-Making Process: - Weighting criteria based on importance. - Scoring suppliers against criteria. - Methods: - Weighted scoring model. - Multi-criteria decision analysis (MCDA).  6. Engage in Dialogue After initial evaluations, engage with shortlisted suppliers for further discussions: - Clarify Doubts: Ask questions to clarify any uncertainties regarding their capabilities. - Negotiate Terms: Discuss terms of service, pricing, and delivery expectations.  5. Final Selection Based on your comprehensive evaluation, make an informed decision: - Select Suppliers: Choose suppliers that best meet your criteria and align with your organizational goals. - Document Findings: Keep detailed records of evaluations for future reference and audits.  Factors Influencing Selection - Alignment with company values. - Long-term partnership potential. - Innovation and sustainability practices.  Reducing Supplier Evaluation and Selection Criteria Streamlining Process: - Focus on critical criteria that align with business goals. Benefits: - Faster decision-making. - Reduced complexity and costs. Strategies for Reduction - Prioritize criteria based on project needs. - Use a tiered approach for different supplier categories. - Implement technology for data analysis. END!! CHAPTER FOUR SUPPPLIER QUALITY MANAGEMENT Dr. Yeshiwond Golla Department of LSCM Bahir Dar University  Supplier Quality Supplier quality is a supplier's ability to deliver goods or services that will satisfy customers' needs. Supplier quality management is defined as the system in which supplier quality is managed by using a proactive and collaborative approach. Process of ensuring that suppliers meet quality standards.  Factors Affecting Supply Management in Managing Supplier Quality - 1. Supplier Selection - Criteria for choosing reliable suppliers. - 2. Communication - Importance of clear communication channels. - 3. Quality Assurance Processes - Establishing standards and protocols. - 4. Relationship Management - Building strong partnerships with suppliers. - 5. Regulatory Compliance - Adhering to industry standards and regulations. Supplier Quality Management Using TQM What is Total Quality Management (TQM)? - A management approach focused on continuous improvement. - Key Principles of TQM in SQM - Customer focus, employee involvement, process approach. - Implementation Steps - Training suppliers, regular audits, feedback loops. - Benefits - Improved quality, reduced waste, enhanced supplier relationships. Quality Defined Quality is a degree or level of excellence. -The Oxford American Dictionary Quality is a subjective term for which each person has his or her own definition. -The American Society for Quality (ASQ) Technically, quality can have two meanings: 1) The characteristics of a product or service that bear on its ability to satisfy stated or implied needs and 2) A product or service free of deficiencies. I. Quality from the Customer’s Perspective Product quality is determined by what the customer wants and is willing to pay for. This results in a commonly used definition of quality, i.e. fitness for use. – It indicates how well does a product do what the user thinks it is supposed to do and wants it to do. Products are designed with intentional differences in quality to meet different wants. This is called the quality of design – degree to which quality characteristics are designed into the pdt. Dimensions of Quality for Manufactured Products 1. Performance: Basic operating characteristics of a product. – Example: how well a car handles or its gas mileage. 2. Features: The “extra” items added to the basic features. – Example: a stereo CD or a leather interior in a car. 3. Reliability: The probability that a product will operate properly within an expected time frame; – Example: a TV will work without repair for about seven years. 4. Conformance: The degree to which a product meets pre- established standards.  Cont… 5. Durability: The product’s life span before replacement. – Example: A TV, with care, might be expected to last a lifetime. 6. Serviceability: The ease and speed of getting repairs, the courtesy and competence of the repair person. 7. Aesthetics: How a product looks, feels, sounds, smells, or tastes. 8. Safety: Assurance that the customer will not suffer injury or harm from a product. 9. Other perceptions: Based on brand name, advertising, etc. Dimensions of Quality for Services Evans and Lindsay (2005) identified the following. 1. Time and timeliness: How long must a customer wait for service, and is it completed on time? 2. Completeness: Is everything the customer asked for provided? 3. Courtesy: How are customers treated by employees? 4. Consistency: Is the same level of service each time?  Cont… 5. Accessibility and convenience: How easy is it to obtain the service? 6. Accuracy: Is the service performed right every time? Example: Is your bank statement correct every month? 7. Responsiveness: How well does the company react to unusual situations? II. Quality from the Producer’s Perspective Quality of conformance: – how effectively the production process is able to conform to the specifications required by the design Examples of the quality of conformance: – If new tires do not conform to specifications, they wobble. – If a hotel room is not clean when a guest checks in, the hotel is not functioning according to the specifications of its design; it is a faulty service.  Cont… Achieving quality of conformance depends on a number of factors, including: – the design of the production process, – the performance level of machinery, equipment and technology, – the materials used, – the training and supervision of employees, and – the degree to which statistical quality-control techniques are used. A Final Perspective on Quality Total Quality Management (TQM) TQM originated in the 1980s as a Japanese style management approach to quality improvement, It is strategy for continuously improving performance at every level, and in all areas of responsibility. TQM is a philosophy for managing an organization centered on quality and customer satisfaction – as “the” strategy for achieving long-term success. It requires the active involvement, participation and cooperation of everyone in the organization. The Basic Principles of TQM 1. Quality can and must be managed. 2. The customer defines quality, and customer satisfaction is the top goal; it is a requirement and is not negotiable. 3. Management must be involved and provide leadership. 4. Continuous quality improvement is “the” strategic goal. 5. Quality is the responsibility of every employee 6. Quality problems are found in processes, and problems must be prevented, not solved. 7. The quality standard is “no defects.” 8. Quality must be measured using quality tools especially SPC Old and New Concepts of Quality Time line showing the differences between old and new concepts of quality Continuous Improvement Kaizen is the Japanese term for continuous improvement. The original meaning of Kaizen is “change for the better.” Kaizen represents involving everyone in a process of gradual, organized, and continuous improvement. If an improvement is not part of a continuous, ongoing process, it is not considered kaizen. Employees are the real experts in their immediate workspace.  Cont… The three approaches that can help companies with continuous improvement: A. The plan–do–study–act (PDSA) cycle, B. Benchmarking and C. The quality circles A. The Deming Wheel (PDCA Cycle) The plan–do–study–act (PDSA) cycle describes the activities a company needs to perform in order to incorporate continuous improvement in its operation.  Cont… This cycle, shown in previous figure, is also referred to as the Shewhart cycle or the Deming wheel. The circular nature of this cycle shows that continuous improvement is a never-ending process. Steps in the cycle are explained as follows: Plan: evaluate the process and make plans based on any problems found. Do: Implement the plan and collect data about improvements. Study evaluate the data to see whether the plan achieved the goals Act: communicate the results to other members B. Benchmarking The method of by studying business practices of companies considered “best in class” is called benchmarking. The ability to learn and study how others do things is useful for continuous improvement. The company does not have to be in the same business, – as long as it excels at something that the company doing the study wishes to emulate. Example: many companies have used American Express to benchmark conflict resolution. C. Quality Circles A quality circle is a small, voluntary group of employees and their supervisor(s), comprising a team of about 8 to 10 members from the same department. A circle meets about once a week during company time to work on problems of their own choice. These problems may not always relate to quality issues; They focus on productivity, costs, safety, or other work-related issues in the circle’s area. They follow an established procedure for identifying, analyzing, and solving problems.  Cont… A graphical representation of the quality circle process The Cost of Quality The costs of quality are those incurred to achieve good quality and to satisfy the customer, as well as costs incurred when quality fails to satisfy the customer. In general, quality costs fall into two categories: 1. The cost of achieving good quality  also known as the cost of quality assurance, and 2. The cost associated with poor-quality products,  also called cost of not conforming to specifications. 1. The Cost of Achieving Good Quality These are of two types: A.Prevention costs: – costs of trying to prevent poor-quality products from reaching the customer. – Prevention costs include: Quality planning costs: to apply quality management program Product-design costs: to design products with quality characteristics Process costs: to make the productive process right Training costs: training for employees and management. Information costs: to get and maintain data related to quality.  Cont… B. Appraisal costs: – costs of measuring, testing, and analyzing materials, parts, products, and the productive process to ensure that quality specifications are being met. – Appraisal costs include: Inspection and testing costs: to test and inspect materials, parts, and the product at each stage Test equipment costs: to maintain the testing machine. Operator costs: time spent by operators to gather data for testing product quality 2. The Cost of Poor Quality These are of two types: A. Internal Failure Costs: – when defect is detected before delivered to the customer. – Internal failure costs include: Scrap costs: poor-quality products that must be discarded Rework costs: to fix defective products. Process failure costs: To diagnosis the process for problems Process downtime costs: stopping the process to fix the problem. Price-downgrading costs: selling poor-quality products for low price.  Cont… B. External Failure Costs: – incurred after the customer has received a poor-quality product – They are primarily related to customer service. – External failure costs include: Customer complaint costs: to satisfactorily respond to a customer Product return costs: to replace poor-quality products Warranty claims costs: to comply with product warranties. Product liability costs: Litigating costs results from harm Lost sales costs: when customers make no additional purchases  Pursuing Six Sigma Supplier Quality - What is Six Sigma? - A data-driven approach to eliminate defects. - DMAIC Methodology - Define, Measure, Analyze, Improve, Control. - Application in Supplier Quality Management - Identifying defects in supplier processes and implementing corrective actions. - Benefits of Six Sigma in SQM - Increased efficiency, reduced variability, enhanced product quality.  Six Sigma Six Sigma is a data-driven methodology aimed at improving processes by identifying and eliminating defects, reducing variability, and enhancing overall quality. The term "Six Sigma" refers to a statistical measure that represents how much a process deviates from perfection. The term "Six Sigma" refers to a statistical measure that signifies a process that produces fewer than 3.4 defects per million opportunities, indicating a high level of quality. Key Components: 1. DMAIC Methodology: a) - Define: Identify the problem and project goals. b) - Measure: Collect data and determine current performance. c) - Analyze: Identify root causes of defects and issues. d) - Improve: Develop solutions to eliminate root causes and enhance performance. e) - Control: Implement controls to sustain improvements over time.  Roles in Six Sigma: 1. - Green Belts: Employees trained in Six Sigma principles who work on projects part-time. 2. - Black Belts: Full-time professionals who lead projects and mentor Green Belts. 3. - Master Black Belts: Experts who provide training and guidance across the organization. Benefits of Six Sigma - Improved Quality: Reduces defects and enhances product/service quality. - Cost Savings: Minimizes waste and inefficiencies, leading to cost reductions. - Customer Satisfaction: Increases customer satisfaction through consistent quality. - Data-Driven Decisions: Empowers organizations to make informed decisions based on data analysis.  Importance of Supplier Quality: Supplier quality refers to the ability of suppliers to provide products or services that meet specified requirements. It is crucial for maintaining the overall quality of the final product, reducing costs, and ensuring customer satisfaction. How Six Sigma Enhances Supplier Quality: 1. Defect Reduction: - By applying Six Sigma principles, organizations can identify defects in supplier processes and work collaboratively with suppliers to eliminate them. 2. Data-Driven Decision Making: - Six Sigma emphasizes the use of data to understand supplier performance, enabling more informed decision-making regarding supplier selection and management. 3. Process Improvement: - Organizations can use Six Sigma tools to analyze supplier processes, identify inefficiencies, and implement improvements that lead to better quality outputs. 4. Collaboration with Suppliers: - Six Sigma encourages strong relationships with suppliers, fostering collaboration on quality initiatives and continuous improvement. 5. Sustaining Quality Improvements: - The Control phase of DMAIC ensures that improvements made in supplier quality are maintained over time through monitoring and feedback mechanisms.  Using ISO Standards to Assess Quality Systems Overview of ISO Standards (e.g., ISO 9001) - International standards for quality management systems. - Importance of ISO Certification - Provides a framework for consistent quality assurance. Assessment Process - Internal audits, supplier evaluations, continuous improvement. - Benefits of Using ISO Standards - Improved credibility, global recognition, enhanced customer trust. END!!  CHAPTER FIVE SUPPPLIER MANAGEMENT AND DEVELOPMENT Dr. Yeshiwond Golla Department of LSCM Bahir Dar University  Supplier Management Supplier Management** refers to the systematic approach to managing an organization's interactions and relationships with its suppliers. It encompasses the processes and strategies used to select, evaluate, develop, and maintain supplier partnerships to ensure that the goods and services provided meet the organization's quality, cost, and delivery requirements. Supplier Management Includes;  1. **Supplier Selection**: Identifying and choosing suppliers based on criteria such as quality, reliability, cost, and capacity. 2. **Performance Evaluation**: Regularly assessing supplier performance using metrics like delivery times, quality of products, and responsiveness. 3. **Relationship Management**: Building and maintaining strong relationships with suppliers to foster collaboration and mutual benefit. 4. **Risk Management**: Identifying potential risks in the supply chain and developing strategies to mitigate them. 5. **Supplier Development**: Working with suppliers to improve their capabilities, processes, and performance through training, technology sharing, and joint initiatives. 6. **Continuous Improvement**: Regularly reviewing and refining supplier management practices to enhance efficiency and effectiveness.  Effective supplier management is essential for ensuring that organizations can meet their operational goals while minimizing risks. Here’s a structured approach to managing suppliers, focusing on results, risk management, and supplier reviews. 1. Managing for Results - **Performance Metrics**: Establish clear Key Performance Indicators (KPIs) to measure supplier performance. Common metrics include on-time delivery, quality of goods/services, and responsiveness. - **Continuous Improvement**: Foster a culture of continuous improvement by encouraging suppliers to innovate and enhance their processes. Regularly review performance data and discuss improvement opportunities. - **Collaboration**: Work closely with suppliers to align goals and strategies. Joint planning sessions can help in identifying shared objectives and ensuring both parties are invested in achieving results. 2. Supplier Risk Management - **Risk Identification**: Identify potential risks associated with suppliers, such as financial instability, geopolitical issues, compliance risks, and operational challenges. - **Risk Assessment**: Evaluate the likelihood and impact of identified risks. This can involve scoring suppliers based on various criteria, including their financial health and operational capabilities. - **Mitigation Strategies**: Develop strategies to mitigate identified risks. This may include diversifying the supplier base, establishing contingency plans, or requiring additional guarantees from suppliers. - **Monitoring and Review**: Continuously monitor the risk landscape and supplier performance. Utilize tools like dashboards for real-time insights into supplier health. 3. Supplier Review - **Regular Performance Reviews**: Conduct periodic reviews (quarterly, bi-annually) to assess supplier performance against established KPIs. Use these reviews to provide constructive feedback and set future expectations. - **Feedback Loop**: Create a structured feedback loop where both parties can share insights and suggestions for improvement. This fosters transparency and strengthens the relationship. - **Action Plans**: If performance issues are identified, develop action plans collaboratively with suppliers to address shortcomings. Set timelines for improvements and follow up on progress. - **Recognition and Rewards**: Acknowledge high-performing suppliers through recognition programs or incentives. This encourages continued excellence and fosters loyalty.  Importance of Supplier Management: Ensures a reliable supply of goods and services. Improved product quality and innovation Stronger, more resilient supply chains Reduces costs through better negotiation and consolidation. Enhances responsiveness to market changes and customer demands. Strengthens competitive advantage by optimizing the supply chain.  Supply Base Rationalization and Optimization Definition: Streamlining the number of suppliers to enhance efficiency and reduce costs. **Objectives**:  - Reduce complexity in the supply chain  - Lower procurement costs  - Improve quality and reliability **Steps**: 1. Analyse current supplier base 2. Identify underperforming suppliers 3. Evaluate strategic importance of suppliers 4. Consolidate purchases with top-performing suppliers  Benefits of Supply Base Rationalization Cost savings through bulk purchasing Improved supplier relationships Enhanced negotiation power Streamlined processes and reduced lead times  Supplier Performance Measurement Importance: Regular assessment ensures alignment with business goals. Key Metrics: a.Quality (defect rates, returns) b.Delivery (on-time performance, lead times) c.Cost (pricing competitiveness, total cost of ownership) d.Responsiveness (communication, issue resolution) Tools for Measurement - Scorecards and dashboards - KPIs (Key Performance Indicators) - Regular performance reviews Implementing Performance Measurement - Establish clear criteria for evaluation - Schedule regular review meetings with suppliers - Use feedback to drive improvement  Supplier Development - **Definition** Supplier Development : Collaborating with suppliers to enhance their capabilities and performance. - **Objectives**:  Increase quality and efficiency  Foster innovation and collaboration  Align supplier capabilities with business needs - **Strategies**: Training and education programs Joint improvement projects Technology sharing and integration  Benefits of Supplier Development - Improved product quality and innovation - Stronger, more resilient supply chains - Enhanced competitive advantage END!!  CHAPTER SIX SUPPPLIER RELATIONSHIP MANAGEMENT Dr. Yeshiwond Golla Department of LSCM Bahir Dar University  Supplier Relationship Management Supplier relationship management is the systematic, enterprise-wide assessment of suppliers’ assets and capabilities with respect to overall business strategy, determination of what activities to engage in with different suppliers, and planning and execution of all interactions with suppliers, in a coordinated fashion across the relationship life cycle, to maximize the value realized through those interactions. “Supplier relationship management is the process that defines how a company interacts with its suppliers. As the name suggests, this is a mirror image of customer relationship management (CRM). Just as a company needs to develop relationships with its customers, it also needs to foster relationships with its suppliers. The desired outcome is a win-win relationship where both parties benefit.” “SRM is understood as the sourcing policy-based design of strategic and operational procurement processes as well as the configuration of the supplier management.”  “Purchasing and Supply Management is defined as a strategic, enterprise- wide, long-term, multi-functional, dynamic approach to selecting suppliers of goods and services and managing them and the whole value network from raw materials to final customer use and disposal to continually reduce total ownership costs, manage risks, and improve performance (quality, responsiveness, reliability, and flexibility).” The focus of SRM is to develop two-way, mutually beneficial relationships with strategic supply partners to deliver greater levels of innovation and competitive advantage than could be achieved by operating independently or through a traditional, transactional purchasing arrangement. In many fundamental ways, SRM is analogous to customer relationship management. Just as companies have multiple interactions over time with their customers, so too do they interact with suppliers – negotiating contracts, purchasing, managing logistics and delivery, collaborating on product design, etc. The starting point for defining SRM is a recognition that these various interactions with suppliers are not discrete and independent – instead they are accurately and usefully thought of as comprising a relationship, one which can and should be managed in a coordinated fashion across functional and business unit touch-points, and throughout the relationship lifecycle.  Why Supplier Relationship Management? Supplier relationship management (SRM) is about integrating the right technology, processes, resources, and tools needed to align your organization with your suppliers to create stronger and more loyal relationships. It allows for greater focus on what is critically important to your business. But, for some reason, it’s not as well understood or formally adopted, as it should be. With a greater focus on customer relationship management, higher sales, and greater profits, many organizations forget how important their relationships with their suppliers truly are. They do not see suppliers as being strategically critical to success, and unfortunately, neglect supplier relationship management at their own peril. The fact is supplier relationship management is one area of business that needs to become a top priority. It can have significant positive effects. Adopting a strategic approach with both key suppliers and smaller vendors can lead to enormous, long-term benefits. Here are just a few of them. Reduce Spend If you looked at the numbers, you’d probably realize that your organization actually spends more with suppliers than on other internal costs. When your spend in any category is that significant, you need to be working to reduce it. Supplier relationship management can help. Having great relationships with your suppliers can save your company money. Increased Efficiencies Effective supplier relationship management can increase efficiencies, which is critical in today’s fast -paced and competitive marketplace. With automation, you can eliminate much of the unproductive administrative effort needed to manage suppliers, reduce the risk of errors, increase communication, increase control, allow for categorization, ensure tasks are performed in a consistent manner, resolve issues promptly, and increase visibility that will facilitate sourcing and other aspects of the process. The higher your organizational efficiency, the better you can run your business—it’s that simple. Loyalty It isn’t easy to find good suppliers. Once you are doing business with them, the last thing you want is to lose them and have to source new suppliers who might not be as pleasant to work with, as cost-effective, or as efficient. By properly managing and strengthening your relationships with the suppliers that you want to keep on a long-term basis, you can keep them happy and on board. Your suppliers play a major role in your business, whether you realize it or not, and it’s crucial that you do what you can to keep the good ones around. Think of them as more than just companies that supply goods or services—think of them as allies that can influence your success. Improved Value The ultimate goal of procurement is to receive the best value for your dollar from suppliers. Through structured, strong supplier relationship management, that’s exactly what you will get. The intelligence you will receive through automation in particular will allow you to gain insights that will allow you to make the best decisions that will provide the greatest value. You will get greater visibility into supplier performance, including risks, behavioral patterns, and service levels, so you can see potential issues before they arise in order to promptly rectify them. You’ll also be able to see new mutually beneficial opportunities as they show themselves.  Factors in SRM Here are five secrets about SRM you need to know now to start cultivating meaningful supplier relationships: The focus is on the relationship. In today’s world, managing the supply base is about strengthening relationships that can make or break your business. Earning your suppliers’ trust with honest communication, listening to their concerns and involving them in your processes ultimately make them a vested partner in your business. Expectations are changing. Procurement is expected to know where they are vulnerable and bolster their teams for success. Teams that put a greater emphasis on qualitative and quantitative supplier data analysis will be able to quickly and succinctly identify weak spots, risks and opportunities in the global supply chain - improving the strategies and plans needed to manage the suppliers, and ultimately both businesses, for continued success. it’s mutually beneficial. If you are aligned with your suppliers and treat them as partners, both businesses will experience higher success rates, decreased risks and enhanced collaboration and innovation. Studies have found the top procurement teams that have successfully aligned with their key suppliers have improved supplier capabilities of innovation, quality, reliability and costs/price reductions and agility to reduce risk factors. Greater value can be achieved for both businesses, something that would be difficult to achieve if operating independently. It delivers big opportunities. Successful SRM yields a faster time to market, transactional efficiency, competitiveness, risk management, and large financial gains - all of which not only contribute to your bottom line, but also allow you to deliver a quality and cutting edge product, putting you ahead of the market. Technology can simplify the process. The key to effective SRM is having a system in place that makes it easy to view your suppliers and analyze all of the risk factors. Using SRM technology provides you with full and unparalleled visibility into your supplier base, giving you a detailed picture of what is impacting your supply chain and making it easy to mitigate the risk.  Components of Supplier Relationship Management How well do you know your suppliers? Besides your contracts, contacts, locations and perhaps their latest performance, what else do you know about your suppliers? The answer to these questions, are critical to your business because without the right information your organization is at risk of meeting objectives. Here we look at five critical components of supplier relationship management (SRM). 1. Getting to Know You 2. Tools of the Trade 3. Governance & Compliance 4. Value 5. Measurement  The Right Relationship Effective relationship management is crucial for maintaining healthy interactions, whether in personal or professional contexts. Here’s a breakdown of key components: - **Alignment of Values**: Ensure that both parties share similar values and goals to foster a strong foundation. - **Clear Expectations**: Establish mutual expectations regarding roles, responsibilities, and outcomes to avoid misunderstandings. - **Open Communication**: Maintain transparent and honest communication channels to facilitate trust and collaboration.  Staying in Control of the Relationship - **Regular Check-ins**: Schedule periodic meetings to assess the health of the relationship, discuss progress, and address any concerns. - **Feedback Mechanisms**: Implement systems for providing and receiving feedback to ensure both parties feel heard and valued. - **Setting Boundaries**: Clearly define boundaries to maintain professionalism and respect within the relationship.  1. Getting to Know You Once the sourcing process is complete, the contracts are signed and the suppliers are on board to deliver the products and services you require, the relationship must be consistently managed. Many companies think managing the relationship is nothing more than monitoring the transactions, quarterly business reviews and audits as needed. Unfortunately this over-arching passive approach only gives you points for a process, not relationship management. You need to know your suppliers. You courted, dated and have a marriage but how much do you really know about your supplier? Do you know all of their products and services? Do you know their current direction and plans for the next five years? Do you know their financial situation beyond meeting their payment terms? Are they investing in new businesses or innovative techniques, buying others or just meeting payroll? Are they compliant with local laws and regulations that pertain to your industry? Do they have labor issues – human slavery, child labor or union contract issues? This is just a smattering of questions but all of these are pertinent to really know your supplier.  2. Tools of the Trade As you get to know your supplier it is time to apply this knowledge using some basic tools. Segmenting your suppliers is critical to your supplier relationship management structure and process. A simple segmentation, as noted below, can quickly categorize your suppliers into Strategic, Commodity, Transactional and Critical Risk suppliers.  Supplier performance and scorecards are critical tools to look at your supplier’s performance over time and at a point in time. Setting performance criteria thresholds from delivery to quality to innovation to savings are important aspects of the supplier scorecard. In conjunction with the scorecard are audits that you may require if you want to add more business to a supplier on a new product. And just to be clear that both your company and the suppliers are on the same page, a periodic supplier review maintains communication between both teams. Many companies call these quarterly business reviews. Strategic procurement teams recognize that supplier relationship management is easier, more efficient and effective when Supplier Relationship Management (SRM) technology is used. The right SRM technology can handle your segmentation, scorecards, compliance, store your information and provide details that can be lost when done manually or when using too many disparate systems. The right technology system provides value on all levels including the supplier’s lifecycle and the management of it.  3. Governance & Compliance Once you have your supplier segmentation complete you need to set up a governance structure. Think in terms of the business processes and the decision making at each step in the process. Risk is a great avenue to use when laying out your governance structure. Let’s say you have a strategic supplier who has a few weeks of low performance and they are calling, asking to be paid right away. Warning bells go off. What do you do? You might send out a team to discuss the supplier’s performance, look at the production and meet with their top management to find out why their overall performance and finances is questionable. All of this can be built into your SRM process. Below is a guidance and escalation model.  4. Value Now that you know your suppliers, utilize the right tools with the appropriate governance and compliance aspects, you are now ready to step into a real strategic procurement role. The next step is the enabler to mutually beneficial, innovative and collaborative supplier relationships. It is value. What is the value you desire from your supplier and what does he desire from you? Value comes in many shapes and sizes. For most businesses, supplier value is calculated in cost savings, plus cost control and increases in revenue. Cost control and increases in revenue can be defined further into their components that bring the value: Reduced Costs Increased Revenues Process efficiencies Product innovation Total cost reductions Speed to market Reduced inventory & carrying New market access costs Price reductions Supplier investment  5. Measurement The last area to consider is measurement. How do you measure your supplier’s performance? Yes, a scorecard is a great place to start but make sure you look at the innovation and collaboration aspects of the relationship, including risk sharing, supply assurance, quality and service levels and complexity reduction. All in all you want to measure what is important but also set the baseline of measurement so each party gains from the relationship. Without a mutually beneficial relationship, the enabling relationship factors of trust, respect, understanding and communication factors will be uneven, yielding a less than desirable supplier relationship.  Issues in SRM 1. **Supplier Segmentation** - **Categorization**: Classify suppliers based on their importance to your business (strategic, preferred, transactional). - **Tailored Strategies**: Develop specific engagement strategies for each category to optimize resource allocation and management efforts. 2. **Performance Measurement** - **KPIs**: Establish Key Performance Indicators to evaluate supplier performance, such as quality, delivery time, cost management, and compliance. - **Scorecards**: Use scorecards to provide a visual representation of supplier performance over time. 3. **Collaboration and Communication** - **Open Dialogue**: Foster transparent communication channels for sharing feedback, expectations, and updates. - **Joint Initiatives**: Collaborate on initiatives such as product development, process improvements, or sustainability efforts. 4. **Risk Management** - **Risk Assessment**: Regularly assess potential risks associated with suppliers, including financial stability, geopolitical factors, and compliance issues. - **Contingency Planning**: Develop plans to mitigate risks, such as identifying alternative suppliers or creating backup strategies. 5. **Innovation and Continuous Improvement** - **Encouraging Innovation**: Engage suppliers in brainstorming sessions to explore new ideas and solutions that can benefit both parties. - **Feedback Mechanisms**: Implement feedback loops to gather insights from suppliers on process improvements and innovations. 6. **Contract Management** - **Clear Agreements**: Ensure contracts are clear about expectations, deliverables, and performance metrics. - **Review and Renewal**: Regularly review contracts to ensure they remain relevant and beneficial for both parties.  Strategies for Effective SRM 1. **Build Strong Relationships** - Invest time in building trust and rapport with key suppliers through regular meetings and social interactions. - Recognize and celebrate milestones together. 2. **Leverage Technology** - Utilize SRM software tools to automate processes, track performance metrics, and facilitate communication. - Data analytics can provide insights into supplier performance trends and areas for improvement. 3. **Engage in Strategic Partnerships** - Move beyond transactional relationships to strategic partnerships that focus on long-term goals and shared success. - Collaborate on joint ventures or co-development projects where applicable. 4. **Training and Development** - Provide training opportunities for suppliers to enhance their capabilities and align them with your organizational goals. - Share best practices and industry insights to foster growth. 5. **Regular Reviews and Feedback** - Conduct regular performance reviews to assess progress against KPIs and discuss areas for improvement. - Use surveys or interviews to gather feedback from suppliers about the relationship and processes.  Best Practices in SRM - **Establish Clear Objectives**: Define what you want to achieve through your supplier relationships—whether it's cost reduction, innovation, or improved quality. - **Document Processes**: Maintain clear documentation of all processes related to supplier management to ensure consistency and accountability. - **Foster a Culture of Collaboration**: Encourage cross- functional teams within your organization to work together on supplier management initiatives. - **Be Proactive**: Anticipate challenges that may arise in supplier relationships and address them before they escalate.  Conflict & Dispute Management - **Proactive Conflict Resolution**: Address conflicts early before they escalate. Encourage open dialogue to understand differing perspectives. - **Active Listening**: Practice active listening to fully understand the other party's viewpoint, which can help in finding common ground. - **Collaborative Problem Solving**: Work together to identify solutions that meet the needs of both parties rather than adopting a win-lose mentality. - **Mediation**: If conflicts cannot be resolved directly, consider involving a neutral third party to facilitate discussions and find a resolution. END!!  CHAPTER SEVEN STRATEGIC COLLABORATION RELATIONSHIP(SCR) Dr. Yeshiwond Golla Department of LSCM Bahir Dar University Strategic Collaboration Relationship (SCR) A **Strategic Collaboration Relationship (SCR)** is a long-term partnership between organizations or entities that focuses on achieving mutual goals through shared resources, knowledge, and capabilities. It emphasizes trust, open communication, and a commitment to working together to address challenges and seize opportunities.  **Characteristics of SCR:** 1. **Mutual Goals**: Both parties share common objectives and are aligned in their vision and mission. 2. **Trust and Transparency**: Open communication and trust are foundational, enabling honest exchanges and risk- sharing. 3. **Long-term Orientation**: Focus on building sustainable relationships rather than transactional interactions. 4. **Resource Sharing**: Willingness to share resources, knowledge, and capabilities to achieve mutual benefits. 5. **Flexibility and Adaptability**: Ability to adapt to changing circumstances and respond to new challenges collaboratively. 6. **Joint Problem-Solving**: Collaborative approach to addressing issues and leveraging each other's strengths.  Benefits of SCR - **Innovation**: Combining diverse perspectives can lead to creative solutions. - **Efficiency**: Shared resources can reduce costs and improve processes. - **Risk Mitigation**: Collaborative efforts can help distribute risks associated with projects or initiatives. - **Market Advantage**: Strengthened partnerships can enhance competitive positioning.  Key Components of Supplier SCR 1. **Shared Vision and Goals** - Establish a common understanding of objectives that align with both parties’ strategic goals. - Create joint performance metrics to measure success. 2. **Open Communication** - Foster transparent communication channels for sharing information, feedback, and best practices. - Regular meetings to discuss progress, challenges, and opportunities. 3. **Joint Development Initiatives** - Engage in co-development projects that leverage the strengths of both parties. - Collaborate on research and development (R&D) initiatives to drive innovation. 4. **Integrated Processes** - Align processes between organizations for smoother operations, such as inventory management or product design. - Utilize technology to facilitate real-time data sharing and communication. 5. **Mutual Trust and Respect** - Build a foundation of trust through reliability, integrity, and ethical practices. - Recognize and respect each other’s contributions and expertise.  Strategies for Effective SSCR 1. **Identify Key Suppliers** - Focus on suppliers that are critical to your business success and have the potential for strategic collaboration. - Assess their capabilities, culture, and willingness to engage in a collaborative relationship. 2. **Develop a Collaboration Framework** - Create a structured approach that outlines how the collaboration will function, including roles, responsibilities, and decision-making processes. - Define clear objectives and key performance indicators (KPIs) to track progress. 3. **Invest in Relationship Management** - Allocate resources to relationship management activities, such as regular check-ins and joint workshops. - Use dedicated teams to oversee collaboration efforts and ensure alignment. 4. **Leverage Technology** - Implement collaborative tools and platforms that facilitate communication, project management, and data sharing. - Use analytics to monitor performance and identify areas for improvement. 5. **Encourage Continuous Improvement** - Foster a culture of continuous improvement by regularly reviewing processes and outcomes. - Solicit feedback from both sides to identify opportunities for enhancement.  Building SCR: 1. **Identify Potential Partners**: Look for organizations that align with your strategic goals and values. 2. **Assess Compatibility**: Evaluate cultural fit, operational compatibility, and strategic alignment. 3. **Establish Trust**: Foster open communication, share information, and engage in joint activities to build trust. 4. **Define Objectives**: Clearly outline mutual goals and expectations for the collaboration. 5. **Formalize Agreements**: Develop contracts or memorandums of understanding that outline roles, responsibilities, and shared benefits. 6. **Continuous Engagement**: Maintain regular communication and engagement to strengthen the relationship.  The “5 A” SCR Process: 1. **Awareness**: Recognizing the need for collaboration and identifying potential partners. 2. **Alignment**: Ensuring that both parties have aligned goals, values, and expectations for the collaboration. 3. **Agreement**: Formalizing the relationship through contracts or agreements that outline roles, responsibilities, and objectives. 4. **Action**: Implementing collaborative initiatives and activities based on the agreed-upon terms. 5. **Assessment**: Regularly evaluating the ffectiveness of the collaboration and making adjustments as needed to improve outcomes.  Best Practices in SSCR - **Establish Governance Structures**: Create governance frameworks that define how decisions are made and how conflicts are resolved. - **Celebrate Successes Together**: Acknowledge milestones and achievements in the collaboration to strengthen the partnership. - **Be Flexible and Adaptable**: Be willing to adjust strategies based on changing circumstances or new insights. - **Focus on Long-Term Value**: Prioritize long-term benefits over short-term gains to build sustainable relationships.  International Standards for SCRs: While there may not be specific international standards solely dedicated to Strategic Collaboration Relationships, several frameworks and standards can guide organizations in establishing effective SCRs: 1. **ISO 9001 (Quality Management Systems)**: Provides guidelines for quality management practices that can enhance supplier relationships. 2. **ISO 44001 (Collaborative Business Relationship Management Systems)**: Offers a framework for establishing collaborative relationships between organizations. 3. **ISO 31000 (Risk Management)**: Provides guidelines for risk management that can be applied to collaborative relationships to mitigate risks. 4. **CIPS (Chartered Institute of Procurement & Supply) Standards**: Offers best practices for procurement and supplier management that can enhance collaborative efforts. By adhering to these standards and principles, organizations can foster successful Strategic Collaboration Relationships that drive innovation, efficiency, and competitive advantage. END!!