Ch 4 Ed.docx

Ch 4 Ed.docx

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Ch4Ed

Chapter4

SupplierRelationsandStrategicSourcing

4.1TheBasicsofSupplierRelations

Nomatterhowbigandpowerfulacompanyis,itwillhavesomesuppliersandpartnersasanintegralpartofitsbusiness.Inthissense,supplychainrelationshipsareperhapsthemostdifficultaspectofsupplychainmanagement.Thetermsupplychainimpliesthatafirmisseekingoutsidesuppliersorpartnerstobettersustainitsoperationsandfulfillcustomerorders.Well-establishedpartnershipscanoffersignificantopportunitiesinmostsupplychainstoquickenthepaceofnewproductdevelopmentandproduction.Ontheotherhand,poorlyexecutedsupplierrelationshipscanhavenegativeimpactonthecompanyandthesupplychainaswell.

4.1.1Typesofsupplyrelations

Whilecompaniesareinterestedindecentralizing,downsizing,andforgingalliancestodevelopandproduceproductsordeliverservices,thedecisionofoutsourcingorestablishingvirtualintegrationwithsuppliersshouldbebasedonthenatureoftheproductacompanyproducesanditsproductionsystem.Whenaproductcanbedevelopedwithoutrelyingonsuppliers,verticalintegrationandautonomousdivisionsaregoodchoices.However,whenaproductcanbeproducedonlyinconjunctionwithrelatedsuppliersandcomplementarypartsandcomponents,alliancesandvirtualintegrationwillbeabetterchoice.

Asacompanymovestowardself-sustainedcentralizationandrelieslessonsuppliers,itsabilitytocoordinateactivitiesandsettleconflictsincreases,whileitsincentivetotakeriskdecreases.Furthermore,whenacompanychoosestooutsourcemostofitsoperations,itsabilitytomanagemarketcompetitionincreases.Table3.1presentssixpossiblesupplierrelationships.Verticalintegration,autonomousdivision,arm’slengthrelationship,jointventure,strategicalliances,andvirtualintegrationareallwaysthataproductcanbeproducedorservicebedelivered.

VerticalIntegration:

thedegreetowhichafirmhasdecidedtodirectlycontrolmultiplevalue-addstagesfromrawmaterialproductiontothesaleoftheproducttotheultimateconsumers.Themorestepsinthesequence,thegreatertheverticalintegration.Amanufacturerthatdecidestobeginproducingpartsandcomponentsthatitnormallypurchasesissaidtobebackwardintegrated.Likewise,amanufacturerthatdecidestotakeoverdistributionandperhapssalestotheultimateconsumerisconsideredforwardintegrated.PerdueFarmsthatwediscussedinChapter1isanexampleofverticalintegrationcompany.

AutonomousDivisions:

betweentheverticallyintegratedcorporationandthejointventureistheautonomousdivision.Productcanbemanufacturedindependentlyfrompartsandcomponentsproducedwithinthedivisionofalargecorporation.NipponSteelCorporation,theworld'slargestintegratedsteelmaker,discussedinChapter2isanexampleofautonomousdivisions.

Arm’slength:

arm’slengthisatransactionrelationship.Thesellerusuallyoffersstandardizedproductstoawiderangeofcustomers.Negotiationfocusesonlowprice.Whenthetransactioniscomplete,therelationshipends.

JointVenture:

jointventureisanagreementbetweentwoormorefirmstosharerisksinequitycapitalinordertoachieveaspecificbusinessobjective1.Boeinghasjointventurerelationshipswithitslarge-accountcustomer’snativecountries.Forexample,Japanesecompanies,suchasMitsubishiHeavyIndustries（MHI）,KawasakiHeavyIndustries（KHI）andFujiHeavyIndustries（FHI）havesuppliedBoeingformorethan30years.

StrategicAlliances:

strategicallianceisalong-term,goal-orientedpartnershipbetweentwocompanieswhosharebothrisksandbenefits.Forexample,insteadofpushingforapricecut,Toyotabuildsstrategicallianceswithsuppliersandfocusesonavalue-basedsupplyrelationship.Bydoingthis,Toyotahasbeenatopsellingautomakerinthemarketplace.

VirtualIntegration:

virtualcompaniescoordinatemuchoftheirbusinessthroughthemarketplace,wherefreeagentscometogethertobuyandselloneanother’sgoodsandservices.Thus,virtualcompaniescanharnessthepowerofmarketforcestodevelop,manufacture,market,distribute,andsupporttheirofferingsinwaysthatfullyintegratedcompaniescannotduplicate.DellInc.’sdirectmodelisanexampleofvirtualintegration.

Table4.1TypesofSupplyRelationships

SupplyRelations

OrganizationalStructure

Commitment

VerticalIntegration

Centralizedorganization

Directlyownsmultiplevalue-addstageswithinthecompany

AutonomousDivision

Moderatelycentralized

Betweenverticallyintegratedcorporationandjointventure

Arm’slength

Nojointcommitmentandoperationsbetweenthesellerandbuyer

Whenthetransactioncompletes,relationshipends

JointVenture

Certainlevelofcommitment

Agreementtosharerisksinequitycapital

StrategicPartnership

ModeratelyDecentralized

Long-termrelationships,sharingbothrisksandbenefits

VirtualIntegration

Decentralizedorganization

Coordinatemuchofthebusinessthroughthemarketplace

4.1.2Strategicsourcing

Strategicsourcinggoesbeyondjustpurchasingande-procurement.Strategicsourcingplaysaproactiveroleinimplementingafirm’soverallgoalsandbusinessobjectives.Thelong-termfocusistoestablishcooperativesupplierrelationshipstomatchafirm’scompetitivestance.Sourcingperformanceismeasuredintermsofcontributionstothefirm’soverallsuccess.

Strategicpartnersinvolvedinstrategicsourcingusuallyhaveahighdegreeofunderstandingbetweentradingpartnerswithrespecttoeachother’sgoalsandbusinesspractices.Thereisahighdegreeofconfidenceandwillingnessbetweenthetradingfirms,andanagreementregardingmattersofbenefitsandrisk.Strategicpartnershaveahighdegreeofcompatibilityofactivities,resources,andgoals.Thecommunicationprocessbetweenstrategicpartnerstendstobetimelyandcredible.Activitiesaresmoothlycoordinatedbetweenthepartners.

Strategicsourcingaffectseveryfunctionofanorganization.Firmsneedtothinkabouttheirrelationshipswiththeirsuppliersandreconsidertheirentiresupplychainfromsupplierstocustomers.Thecomplicatednatureofstrategicsourcingcausescompaniestorethinkwhatmaterialsandservicestopurchase,outsource,orproducein-house.Oncethesedecisionsaremade,computersystemsneededtoaccommodatesourcingactivitiescanbeselectedaccordingly.

Strategicsourcinghasalsobeenpopularizedintheserviceindustry.Forexample,AlabamaPowerhasmadeallianceswithsomeofitskeysuppliers,includingthosethatgivetheutilityprioritywhenitneedsmaterial.TheyestablishedacoalitiongroupcalledtheMutualEmergencyMaterialSolutions（MEMS）.MembersofMEMScollaborateduringemergenciesandshareinformationonmaterialsources.

4.1.3Supplybasedevelopment

Thesupplybasereferstoalistofsuppliersafirmusestopurchasematerials,services,orinformation.Manyorganizationshavecometorealizetheimportanceofhavingasupplierbasethattheycanrelyontoprovidematerialsandservicesthatmeetthedesignspecifications,toconsistentlyoffercompetitiveprices,andtodeliverproductsontime.Thissupplierbasereliesonstrategicpartnerships.Thepartnersarenotonlywillingtogotheextramileforeachother,butalsoaretruthfulaboutquality,prices,promises,andduedates.Thisrelationshipforgesloyaltyamongthepartnersandcreatesfinancialsuccessinthesupplychain.

Manycompanieshavecometorealizethatiftheypurchasealargequantityfromasmallersupplierbase,itwillenablethemtoachievevolumediscounts,reduceadministrationcosts,andcooperateonproductdevelopment.Thereissomereportedevidenceoftheadvantagesofsupplybasereduction.Forexample,world-classmanufacturersintheautomotivesectorhavereducedtheirsupplierbasetypicallyby50%andhavemovedtosingle-sourcingandonesupplierperpartthroughoutthemid1990s.Inthe1980s,Xeroxreduceditssupplybaseby90%toconsolidatevolumeintooneorfewersuppliers.

Toyotaiswell-knownforitssupplierbasemanagement.Unlikesomelargemanufacturerswhoputpressureforcostcuttingdisproportionatelyontosuppliers'shoulders,Toyotaconcentratesonavalue-basedsupplierbasemanagementtobuildandmaintainacollaborativesupplierstrategy.Bydoingthis,Toyotaismorecompetitiveinthemarketplace.

Aimedatcostandqualitycontrolattheprocesslevel,ToyotarecognizesthatfulfillingtheenterprisepotentialoftheToyotaProductionSystemrequiresasubstantialculturalshifttowardsuppliercollaborationandcontinuousimprovement.Forinstance,Toyota's$800millionfacilityinTexasassemblesthefull-sizedTundra.Supplierproximitywasaconcernthatwassolvedbyincorporatinganon-sitesupplierparkthataccommodates21suppliers.Toyotahasdemonstratedacommitmenttostrengtheningitssuppliers.WhenVisteonandDelphiwereseparatedfromFordandGM,Toyotacontinueditscommitmentofclosecollaborationwiththetwocompanies,includingincreasingitsequitypositioninthesuppliers.

Cultivatingasuccessfulsupplierbaserequiresafirmtohaveagoodunderstandingofitscorecompetenceandconductabaselineanalysisofitsbusiness.Afterthecorecompetencehasbeenidentified,afirmisabletodeterminewhatshouldbeoutsourcedandwhatshouldbeproducedin-house.Then,ananalysisofbusinessactivitiescanbeconductedtodeterminethebaselinecostandperformance.Forexample,StarwoodHotels&ResortsWorldwideisaleaderinthehospitalityindustry.Itscompetitivesuccessisdependentuponitsabilitytoattractandretainguests.Afteranalyzingitscorecompetency,StarwoodHo