KENYATTA UNIVERSITY

DEPARTMENT OF
MANAGEMENT SCIENCE

COURSE CODE: BMS 423

COURSE TITLE: BUYER -

SUPPLIER RELATIONSHIPS.

INSTRUCTIONAL MATERIAL
1
 COURSE OUTLINE

BMS 423: BUYER AND SUPPLIER RELATIONSHIPS

Contact hours:

Purpose: To the provide an analysis of buyer supplier relationships and their impact on
the purchasing and supply function

Expected Learning Outcomes of the Course:

By the end of the course unit the learners should be able to:-
i) Identify and explain the components of the relationship spectrum
ii) Describe the natural life cycle of relationships and the implications in purchasing
and supply
iii) Discuss the importance of developing and maintaining good supply relationships
iv) Identify the constraints to relationship development

Course Content:
Relationship spectrum- adversarial, arms length, transactional, closer tactical, single and
outsourced, strategic alliance, partnership, co-destiny etc
Effective management of buyer supplier relationships- supplier positioning model,
supplier preferencing model, market management matrix, buyer supplier behaviors in
relationships
Natural life cycle of supply relationships
Supply philosophies and their impact n supply relationships
Developing and managing relationships with suppliers- causes of conflict and methods of
resolution, power and dependency in supply relationships, role of transparent
communication, impact of e-purchasing on supply relationships, international supply
relationship, measurement tools for supplier performance and strength of supply
relationships, supply relationship termination
Managing outsourced relationships- establishing, implementing and monitoring
performance, outsourcing relationship and relationship spectrum
CSR, ethical , technological, legal and environmental constraints on relationship
development

Teaching / Learning Methodologies: Lectures and tutorials; group discussion;

demonstration; Individual assignment; Case studies

Instructional Materials and Equipment: Projector; test books; design catalogues;

computer laboratory; design software; simulators
Course assessment
Examination 70%, continoues assessment test (CATs)- 20%; assignment – 10%. Total
100%

Recommended Text Books:

2
i) Nair (2002), Purchasing & Materials Management, Vikas Publishing House Pvt
Ltd
ii) Anand Kumar Sharma (2006), Purchasing And Materials Management,
Anmol Publications PvtMichael Quayle (2005), Purchasing And Supply Chain
Management: Strategies And Realities, Routledge, London

Text Books for further Reading:

i) Matthew Morris (2007), International Buyer-supplier Relationships, Routledge,
London

3
 COURSE CONTENT
WEEK ONE
1.0 CHAPTER ONE: BUYER-SELLER RELATIONSHIPS

1.1 Introduction

1.2 .2 Advantages Of Closer Buyer-Seller Relationship

1.3 Collaborative Buyer-Seller Relationships

1.4 Characteristics Of Successful Collaborative Buyer-Supplier Relationships
1.5 Evolving From Adversarial To Collaborative Relationship
1.6 Models Of Suppliers’ Relationship

WEEK TWO
1.6.1 The Cox Model
2.0 CHAPTER TWO: SUPPLY CHAIN PHILOSOPHY
2.1 Definition
2.2 Types Of Supply Chain

2.3 Supply Chain Management (Scm) Philosophy And Supplier Relations

WEEK THREE
2.4 Supply Chain Enablers
2.4.1 Organizational Infrastructure
2.4.2 Technology
2.4.3 Strategic Alliances
2.4.4 Human Resource Management
3.0 Chapter Three: Effective Management Of Buyer-Supplier Relationships
3.1 Introduction
3.2 Identifying The Critical Few To Ensure Activities Go Deep Enough
3.3 Portfolio Planning And Analysis
3.4 Purchasing Portfolio Management

4
3.5 Supplier Preferencing Model

WEEK FOUR
3.6 Market Management Matrix
3.6.1 How To Use It
3.7 The Balance Of Power
4.0 Chapter Four: Developing Supplier Relationships
4.1 Relationship Formation
4.2 Lifecycle Model Of Buyer –Supplier Relationship
4.3 Evaluation And Selection Of Suppliers
4.4 The Supplier Evaluation And Selection Process

WEEK FIVE
4.5 Various Sources Of The Information Used In Evaluation Of The Potential Supplier
4.6 Key Supplier Evaluation Criteria
4.7 Supplier Performance Measurement
4.7.1 Reasons For Evaluating/ Measurement Of Supplier Performance
4.7.2 What To Measure
4.8 Common Supplier Rating Methods
4.9 The Seven Cs Of Effective Supplier Evaluation

WEEK SIX
5.0 Chapter Five: International Buying
5.1 The Process Of Sourcing For Potential International Supplier/S.
5.2 Impact Of E-Procurement On Supply Relationships

5.2.1 E – Procurement

WEEK SEVEN: CAT ONE

WEEK EIGHT

5
5.3 Comparison Of Various E-Procurement Model And Impact On Suppliers’
Relationships

5.4 Inefficiencies Of Traditional Procedures That Made Many Organizations Embrace E

Procurement, E Commerce, E Business, And SCM
6.0 Chapter Six: Contractual Conflict
6.1 Sources Of Conflict

WEEK NINE
6.2 Strength Of Supply Relationships
6.3 Methods Of Conflict Resolutions
6.4 Termination Of Supplier Relationship

Week ten
6.5 Reasons For Termination
6.6 Aspects Of Termination Of Relationships
6.7 Succession Issues

WEEK ELEVEN
7.0 Chapter Seven: Outsourcing
7.1 What To Outsource
7.2 Implementing Outsourcing
7.3 Outsourcing Relationships/Partnerships

Week twelve
7.4 Drivers Of Partnerships Sourcing
7.5 Establishing Partnership Outsourcing
7.6 Types Of Partnerships Sourcing

WEEK THIRTEEN

6
7.7 Obstacles To Closer Buyer Seller Relationship
7.8 Chapter Eight: Ethical Issues Relating To Suppliers

7
TABLE OF CONTENT PAGE
Course outline…………………………………………………… 2
Course content……………………………………………… 4
Table of contents………………………………………… 8

1.0 chapter one: buyer-seller relationships…………………………… 11

1.1 Introduction……………………………………………… 11

1.2 Advantages of closer buyer-seller relationship………………………………

12

1.3 Collaborative buyer-seller relationships…………… 13

1.4 Characteristics of successful collaborative buyer-supplier relationships 13

1.5 Evolving from adversarial to collaborative relationships……… 15

1.6 Models of suppliers’ relationships…………………… 16

1.6.1 The Cox model…………………………………… 16

2.0 Chapter two: supply chain philosophy…………… 20

2.1 Definition of supply chain……………………………… 20

2.2 Types of supply chains……………………………… 20

2.3 Supply chain management (SCM) philosophy and supplier relations 23

2.4 Supply chain enablers………………………… 24

2.4.1 Organizational infrastructure…………………… 25

2.4.2 Technology……………………………………… 25

2.4.3 Strategic alliances…………………………………………… 25

2.4.4 Human Resource Management……………………………………… 26

3.0 Chapter three: effective management of buyer-supplier relationship 28

8
3.1 Introduction……………………………………………. 28

3.2 Identifying the critical few to ensure activities go deep enough… 29

3.3 Portfolio planning and analysis……………………………… 30

3.4 Purchasing portfolio management…………………………… 30

3.5 Supplier preferencing model …………………………. 33

3.6 Market management matrix……………………………… 35

3.6.1 How to use it…………………………………….. 35

3.7 The balance of power ……………………………………… 38

4.0 Chapter four: developing supplier relationships…………………….. 41

4.1 Relationship formation………………………………………………… 41

4.2 Lifecycle model of buyer –supplier relationship………………………… 42

4.3 Evaluation and selection of suppliers……………………… 43
4.4 The supplier evaluation and selection process…………… 44
4.5 Various sources of the information used in evaluation of the potential
supplier of the new purchase requirement are;……………………….…… 46
4.6 Key supplier evaluation criteria…………………………… 49
4.7 Supplier performance measurement …………………………….. 50
4.7.1 Reasons for evaluating/ measurement of supplier performance… 50
4.7.2 What to measure………………………………………………………. 50
4.8 Common supplier rating methods……………………………….. 51
4.9 The seven Cs of effective supplier evaluation. ………………………… 56

5.0 CHAPTER FIVE: INTERNATIONAL BUYING…………………… 58

5.1 The Process of sourcing for potential international supplier/s. ……… 58
5.2 Impact of E-procurement on supply relationships ……. 62

5.2.1 E – Procurement………………………………………………………. 62

9
5.3 Comparison of various E-procurement model and impact on suppliers’
relationships………………………………………………………………… 62

5.4Inefficiencies of traditional procedures that made many organizations

embrace e procurement, e commerce, e business, and SCM… 64
6.0 CHAPTER SIX: CONTRACTUAL CONFLICT…………………… 65
6.1 Sources of conflict…………………………………………………….. 67
6.2 Strength of supply relationships………………….. 69
6.3 Methods of conflict resolutions…………………………… 69

6.4 Termination of supplier relationships……………………………… 71

6.5 Reasons for termination…………………………………….. 72
6.6 Aspects of termination of relationships…………………………….. 73
6.7 Succession issues…………………………………………………… 74

7.0 CHAPTER SEVEN:OUTSOURCING…………………………… 76

7.1 What to outsource……………………………………………….. 77
7.2 Implementing outsourcing…………………………………. 77
7.3 Outsourcing relationships/partnerships…………………………….. 78

7.4 Drivers of partnerships sourcing……………………………………… 79

7.5 Establishing partnership outsourcing………………………………… 79
7.6 Types of partnerships sourcing………………………………… 81
7.7 Obstacles to closer buyer seller relationships…………………… 81
7.8 Ethical issues relating to suppliers…….. 82

Sample papers (main exam)…………………………… 86

Sample paper (supplementary exam)……………………. 87

10
 CHAPTER ONE

BUYER-SELLER RELATIONSHIPS

General objective

By the end of the chapter the learner should be able to explain the evolvement of

strategic buyer supplier relationships and explain their importance.

Learning objectives

By the end of this chapter the learner should be able to:

a) Define buyer supplier relationships

b) Explain advantages of closer buyer seller relationships

c) List types of collaborative relationships

d) Explain characteristics of successful collaborative buyer supplier relationships

e) Explain the evolvement of supplier relationships

1.1 Introduction

Buyer- supplier relationship refers to the act of integrating purchasing/procurement

professionals and firms keys suppliers in the firms decision making process with

respect to sourcing decisions (Amelia carr and John person 2002).

It can also be referred to as the process of managing interaction between two entities

one which is supplying things to the other. It is a two way process thus it should be

11
able to improve the performance of both the buying organization as well as the supply

organization. It involves proactively developing relationships with particular suppliers.

They traditional approach to buyer-sellers relationship which dates back to the 1920s for

most industries relies on using multiple suppliers for most purchased items. E.g. a

purchase might take three bids then play one supplier against another to get the lowest

price. This approach also features the use of short term contracts where purchasers are

unwilling to commit to a supplier over an extended period of time. It provides little

incentive for supplier to invest in longer term productivity or quality improvement.

Short term contracts encourage profit maximizing as quickly as possible minimal

commitments and trust does not exists between purchaser and seller which further limits

joints innovation and performance improvement. Buyer seller relationships can also be

referred to as customer seller relationships (CSR).

1.2 Advantages of closer buyer-seller relationship

1. Development of mutual trust: This is the foundation of all strong relationships.

While seemingly intangible, trust refers to the belief to the character, ability,

strength or truth of another party. It makes it possible for the example for the

seller to share cost data with the buyer which can result in a joint effort to reduce

supplier cost through mutual sharing of ideas. It cans also result in supplier

working closely with purchaser early in the design of a new part.

2. Opportunity to evaluate which supplier should receive long term contracts.

A long time contract provides and incentives for a supplier to invest in new plants

and equipments which makes the supplier more efficient and results in lower

12
 costs for the purchaser. Long terms contracts can also lead to the joint

development of technology, risk sharing and supplier capabilities.

3. Solving product quality problems: working together with the supplier enables

teams from both sides to assess the source of the problems through sharing of

ideas and by changing processes or improving them, the products can be of better

quality leading to low costs for the buyer.

1.3 Collaborative buyer-seller relationships.

Most purchasers and sellers now recognize a need for joint cooperation to achieve cost,

quality, delivery and time improvements. During the 1980s progressive purchasers

developed collaborative relationship or alliances with suppliers after eliminating poor or

marginal suppliers from the supplier base.

Collaboration is defined as the process by which two or more parties adopt a high level

of purposeful corporation to maintain a trading relationship over time. The relationship is

bilateral; both parties have power to shape its nature and future direction over time.

Mutual commitments to the future and a balanced power relationship are essential to the

process.

1.4 Characteristics of successful collaborative buyer-supplier relationships

i) One or limited number of suppliers for each purchased item or family of items:- The

suppliers often provide materials under long term contracts with agreed upon

performance improvement targets.

ii) A win- win approach to reward sharing.

ii) Joints efforts to improve supplier performance across all critical performance areas.
13
iv) Joints efforts to resolve disputes

v) Open exchange of performance: - This includes information about new products

suppliers, cost data and production schedules and forecasts for purchased items

vi) A credible commitment to work together during difficult times:-the purchaser doesn’t

results to old practices at the first sign of trouble.

vii) A commitment to quality, defect free product having design specifications that are

manufacturable and that the supplier’s process is capable of producing.

The table below compares the characteristics of traditional and collaborative buyer-

supplier relationship. While not all relationships between purchasers and suppliers should

be collaborative, the trend is towards greater use of collaborative approach.

Characteristics of buyer- seller relationships.

Traditional approach Collaborative approach

Suppliers Multiple sources played One of a few preferred

off against each other suppliers for each major
item

Cost sharing Buyer takes all cost Win-win shared rewards

sharing
Supplier hides cost
sharing

Joint improvement effort Little or none Joint improvement driver

by mutual interdependence

Dispute resolution Buyer unilaterally resolves Existence of conflicts-

disputes resolution mechanisms.

Communication Minimal or no two way Open and complete

exchange of information exchange of information

Market place adjustment s Buyer determines Buyers and sellers work

14
 response to changing together to adopt to a
conditions changing market place

Quality Buyer inspects at receipt Designed into the product

1.5 Evolving from adversarial to collaborative relationships

How do buyers and sellers move from an adversarial, arm’s – length relationship to one

of mutual trust and commitment?

Phase 1: Traditional schools of supply management:- each party views the other with

minimal trust or respect. Relations are frequently confrontational- ever hostile. Multiple

sourcing competitive bidding and short term contracts characterize purchasing strategy.

Purchasers quickly replace suppliers who cannot provide price reductions. Relationships

are described as antagonistic.

Phase 2: Mere suspicision rather than total distrust multiple sourcing still provides a level

of safety and control. Fragment sourcing changes still occur as purchasers search for the

source capable as providing the greatest cost reduction. Although an arm’s length

relationship still exists attitudes start to give way to the beginning of a working

relationship. Relationships are described as competitive or adversarial.

Phase 3: Closer buyers and sellers relations as a result of mutual goals. Purchasers begin

to recognize the advantages of maintaining a smaller supply base along with

sophisticated measurement, design and quality system, a purchaser encourages suppliers

to provide cost reduction ideas. Strategies focusing on lead time reduction become

popular. Relationships are described as cooperative.

15
Phase 4: total trust between purchasers and sellers both parties commit to working

together and emphasize strategies supporting world class performance levels. Purchasing

is responsible for managing a supply base that best support a firms performance

objective. Trust and informative sharing become common while both parties focus on

component on total cost to achieve joint cost reductions. The seller becomes an extension

of purchaser’s organization and vice versa. Relationships are described as collaborative.

1.6 Models of suppliers’ relationships

There are several classifications of which the following: by cox, Bensau and the IMP

group models are typical.

1.6.1 The Cox model

Cox presents a step ladder of external and internal relationships.

The steps in the ladder of contractual relationships each represent a higher level of assets

specialty and strategic importance to the form of the specific goods and services. Each

step also represents relative degrees of power between the relationships participants. The

first step (lowest step) in the ladder is adversarial arms length relationships, followed by

preferred supplier, then single sourcing, then network sourcing, and finally Strategic

suppliers’ alliance each at a higher step of the ladder than the preceding one.Stratgic

supplier alliance is the final stage before a firm considers a complementary supplier to be

so important that vertical integration through merger and acquisition is undertaken. Co-

destiny is a Japanese concept that describes a relationship in which the supplier is treated

as an extension of the buyer’s company and vice versa. These relationships are

16
characterized by extensive information sharing, long term partnering and a greater scope

of products purchased form one supplier. .

Adversarial leverage: Up to the mid 1980s approaching the market place on an

adversarial basis was the norm. Purchasers multisourced, negotiated short term contracts,

maintained secrecy regarding costs sales and product design and made (or received) no

improvement suggestions to (or from) suppliers.

Preferred suppliers: providers of complementary goods and services of medium asset

specify or strategic importance who have been placed by the purchases on a restricted list

of potential suppliers after a process of vender rating and accreditation.

Single sourcing: purchasing from a single supplier of medium asset specificity,

complementary good and services of relatively high strategic importance. The aim of

single sourcing is to reduce transaction costs and economize.

Network sourcing and partnership: According to Cox network sourcing is the idea that,it

is possible to create a virtual company at all levels of supply chain by engineering

multiple tired partnerships at each stage but without moving to vertical integration. A

network structure is a series of strategic alliances that an organization forms with

suppliers’ manufacturers and distributors to produce and market a product. Such a

structure enable an enterprise to bring resources together on a long- term basis, reduce

costs and enhance quality without the high expenditure involved investing in specialized

resources including research and design , dedicated technology or employment of an

army of managers and operatives.

17
Strategic supplier alliances: classically referred to as joint ventures, these are defined as

negotiated single sourced relationships with the supplier of a complementary product or

service. Such relationships form a completely new and independent legal entity distinct

from the firms comprising the alliance. As both partners have some degree of

proprietorship (not necessarily 50/50) in the outcome of the relationship the basis of such

relationships is power equivalence and high degree of complimentary.

Vendor co destiny:-In this arrangement both customers companies and suppliers gain

great operating efficiencies and quality improvements. Because each partner has a deeper

knowledge of the other and a lasting commitment to the relationship each can adjust its

business practices and even make long term investments to accommodate the others’

need. This way they change the fundamental operating paradigm and cost structure of

doing business together venders co-destiny produces the ultimate Win –win

REVIEW QUESTIONS

1. Define supplier relationships

2. State advantages of buyer supplier relationships

3. What are collaborative relationships? Explain the types of collaborative relationships

4. Explain characteristics of successful relationships

5 Explain the evolvement of supplier relationships

Suggested further readings

18
- Arjan, w. (2004). Purchasing and supply chain management. PVT publishers, New

Delhi

- Kenneth L. (2006). Purchasing and supply chain management. Pearson education

limited

- Leaders and fearon, (1992). Purchasing and supply management. Mcgraw-hill

international

19
 CHAPTER TWO

SUPPLY CHAIN PHILOSOPHY

General objective

By the end of the chapter the learner should be able to relate supply chains to

buyer supplier relationship.

Learning objectives

By the end of this chapter the learner should be able to:

a) Define supply chain

b) Explain types of supply chains

c) Relate supply chain to supply relationships

d) Discuss supply chain enables

e) Explain the role of communication in supply relationships

2.1 Definition

A supply chain is network of organizations that are involved through upstream and

downstream linkages in the different process and activities that produce value in the form

of products and service in the hands of the ultimate customer or consumers.

20
 An alternative definition of supply chain is a network of connected and interdependent

organizations mutually and cooperatively working together to control manage and

improve the flow of materials and information from suppliers to end users.

From purchasing stand point the procedures that comprise the supply chain as shown

below

Search Acquire Use Maintai Dispose

n

From suppliers stand point the processes are shown in the shown in the figure below

Research Design Manufacture Sell Service

2.2 Types of supply chains

Supply chins can be classified into numerous ways. An organization such as food retailer

will have many types of supply chains reflecting differences in products, services,

production and distribution methods, customer-supplier relationship and information

flow.

Supply chain may be classified according to four customer-supplier characteristics and

also in relation to virtuality ,scope, service, complexity, products purpose and value.

The four customer-supplier characteristics are:

i. Concentrated chain found in business such as the automotive industry that have

-Few customers but many suppliers.

-Customers with demanding requirements.

21
 -EDI system or requirement for JIT deliveries

ii. Batch manufacture chains that have:-

-many customer and many suppliers;

-Complicated relationships webs- an undertaking with which an enterprise that is in

contact may at different times be a customer, supplier, competitor or ally.

iii. Retail and distribution – chains that have

- Many customers but few suppliers

-customized methods such as vendor managed inventory (VIM) that facilitate dealing

with suppliers.

iv) Service chains that implement the mission statement of organization such as hospitals,

libraries and banks concerned with the delivery services, books information and financial

services or restaurants and cinemas, delivery food and entertainment for example,

essentially service chains are not different from manufacturing chains as every service

involves people, sometimes physical (an asset or part of some times performed) an action

and a time element.

Other characteristics

Virtuality: virtual is the opposite of real. Thus a ‘virtual ‘enterprise is the counter part of

a real, tangible business. A virtual supply chain is a series of relationships between

parties that is based upon the value added exchanges of information .Information replaces

the need of inventories. A mail order business may have no inventories and simply calls

for supplies from the manufacturers when orders are received from customers.

22
Scope: supply chain may be local, regional and international. Some suppliers for gas such

as BP have the ability to put together delivery chains to bring gas to many parts of the

world.

Complexity: There are three degrees of supply chain complexity which are direct

extended, and ultimate.

Direct supply chain composes of a company or supplier and a customer involved in

upstream and or down stream flow of products, services, finances and information.

Suppliers’ organization customer.

An extended supply chain includes suppliers of the immediate customer.

Supplier’s supplier supplier organization customer customers customer

Ultimate supply chain includes all organizations involved in all the upstream and

downstream flows as product ,services ,finances and information from ultimate

customers.

Efficient supply chains are primarily concerned with reducing costs of operations

Responsive supply chains are concerned with minimizing the delivery cycle. Note that

supply chains can vary widely according to end product. Examples are build to forecast

and build to order supply chains and ones for innovative and functional products.

2.3 Supply chain management (SCM) philosophy and supplier relations

As a philosophy of management, supply chain has the following three characteristics.

-A system approach to viewing the supply chain as a whole and managing the total flow

of goods inventory from supplier to the ultimate consumers.

23
-A Strategic Orientation towards cooperative efforts to synchronize and converge intra

firm and inter firm operational and strategic capabilities into a unified whole.

-A consumer focus to create unique and individualized sources of consumer value,

leading to consumer satisfaction

SCM as a set of management processes has eight processes involved which are

- Consumer relationship management (CRM)

- Consumer service management (CSM)

- Demand management

- Order fulfillment

- Manufacturing flow management

- Supplier relationship management

- Product development and commercialization

- Returns management

Supplier relationship management (SRM) is concerned with how enterprises interact with

supplier and therefore is the mirror image of CRM.

2.4 Supply chain enablers

The four key enablers of SCM are

- Organizational infrastructure

- Technology

- Strategic alliances

- Human resource management

24
2.4.1 Organizational infrastructure

How business units and functional areas are organized. Important attributes of

organizational infrastructure include

- Having a coherent business strategy that aligns business units towards the same

goal

- Having a formal process flow method to enable SCM improvements

- Having the right process metrics to guide performance of operating units towards

the strategic organizational SCM objectives.

2.4.2 Technology

The word ‘technology’ for IT, physical material management technology, material design

operations and materials handling. Important attributes of technology include

- Having operations marketing and logistics data coordinated within the company.

- Having data readily available for managers and the coordination of operations,

marketing and logistics data between supply chain members

2.4.3 Strategic alliances

This covers how extend companies are selected as business allies and how intercompany

relationships are built and managed.

Important attribute of Strategic alliance include

- Having expectations clearly stated/communicated understood and agreed upfront.

- Collaboration of supply chain design and product and service strategies

25
 - Having top management of partnering companies interface on a regular basis

- Having compatible IT systems

2.4.4 Human Resource Management

This involves managing how job descriptions are designed, positions filled, people are

recognized and compensated and career paths divided.

It’s important to note that among many other risks that make supply chain vulnerable

those touches on supplier relationship are

- Inertia risks: - these are risks due to lack of responsiveness by customers or

suppliers to changing environmental conditions and market signals with

consequential inability to react to competition moves are market opportunities.

- Supplier base reduction:- especially single sourcing in which an enterprise is

dependent on one supplier

- Acquisitions, mergers and similar alliances that may reduce supply chain

availability.

Thus in managing supply chain risks, the following factors in suppliers relations are

important.

- Diversification- multiple sourcing

- Supplier selection- more careful assessment of supplier capability and risks of

dealing with particular suppliers.

- Supplier development- working closely with supplier, sharing information and

collaborative initiatives.

26
 - Collaborative initiatives- spreading risks among grouped companies on an adhoc

basis or as part of a trade association.

Supply chains are essentially a series of suppliers and consumers. Every customer in turn

becomes the supplier to the next downstream activity or function until the finished

product reaches the customer.

Review questions

1. Explain supply chain

2. Discuss types of supply chains

3. Supplier relationships led to supply chain. Discuss

4. State and explain supply chain enablers

SEGGESTED FURTHER READINGS

- Kenneth L. (2006). Purchasing and supply chain management. Pearson education

limited

- Leaders and fearon, (1992). Purchasing and supply management. Mcgraw-hill

international

- Benton w. (2007). Purchasing and supply management. Routledge, london

27
 CHAPTER THREE

3.0 EFFECTIVE MANAGEMENT OF BUYER-SUPPLIER RELATIONSHIP

General objective

By the end of this chapter the learner should be able to explain how effectively manage

buyer seller relationships with different categories of suppliers.

Specific objectives

By the end of this chapter the learner should be able to:

a) describe supplier positioning model

b) describe supplier peferencing model

c) describe market management matrix

d) explain how the above models are used to identify types of suppliers

e) explain how to manage different types of suppliers using the models

f) explain buyer supplier behavior in every portfolio category

g) explain power and dependency in supplier relationships

3.1 Introduction

Effective supplier relationship calls for strategic suppliers’ relationship management

(SSRM). It is most applicable to relationship where there is a high dependency already,

where switching costs is prohibitive and where the product or service has a significant

material impact on the success of the business.

28
3.2 Identifying the critical few to ensure activities go deep enough.

SSRM involves recognizing your strategic suppliers as an extension of your business.

This is critical as the limited resources any business has to focus on SSRM activities must

be deployed where they will get the most returns and not spread thinly across a wide base

of suppliers. Therefore the critical starting point of any successful SSRM programme is

to correctly identify the critical few that are truly strategic.

However this is never as simple as the theory suggests and for many different

organizations, obtaining consistent and a clear view of which suppliers this should

involve and what strategic means is real challenge. Very often powerful stakeholders

disagree with recommended classification which often results into either procurement

completing segmentation behind closed doors or /and the proliferation of strategic

supplies to include 30, 40, or even more partners.

The process must be objective by following a robust decision making framework and by

utilizing input from key stakeholders across the business. As well as high supplier spend,

some common attributes associated with the selection of strategic suppliers should

include:

- The provision of goods and services that are critical to achieving the

organizational strategy

- Ownership of intellectual property and/or intellectual capital which can be used

for mutual gain.

- High risk associated in the failure of supplier.

29
 - A strong appetite to work collaboratively and become strategic partner.

3.3 Portfolio planning and analysis

Portfolio planning and analysis aim to assist with strategic decisions as to where to invest

scarce organizational resources among a number of completing business opportunities.

3.4 Purchasing portfolio management

a) Supply positioning model – the buyer perspective.

Also referred to as the Kraljic portfolio, its aim is to guide managers so that they can

recognize the weakness of their organization and formulate strategies for guarding

against supplies disruption.

Kraljic states that the profit impact of a given supply item can be defined in terms of:

- volume purchased

- Percentage of total cost.

- Impact on product quality or business growth.

Supply risk for the item is assessed in terms of

- availability

- number of suppliers

- competitive demand

- make or buy opportunities

- storage risks

- substitution opportunities.

30
These profit and risk factors enable all purchased items to be assigned to one of the four

quadrants shown by the figure below:

High (Strategic security ) (Strategic critical)

↑ Leverage products Strategic products

Purchasing

Importance
Tactical acquisition Tactical profit
(Exposure to
(Non critical or routine (Bottle-neck products)
Risk)
product)
↓

Low

Low (many supplier) ← supply risk → High (few suppliers)

(Relative cost to the buyer)

Generally matrix movements follow clockwise patterns from bottleneck products (tactical

profit products) to non-critical (tactical acquisition products) to leverage (strategic

security products) and finally to strategic products (strategic critical items)

Tactical profit quadrant (low purchasing importance, high supply risk)- suppliers of

bottleneck products which are relatively limited in value but present a danger of sudden

price rises.

They present a high risk due to:

- Few if any attentive suppliers.

31
 - Suppliers may be technology leaders.

- Supplier’s dominant segment.

- Secure long and short term supply.

- Seek alternative suppliers

Tactical acquisition quadrant (low purchasing importance, low supply risk)- suppliers of

non-critical (routine) products.

- Can require up to 80% of purchasing activity for 20% of purchasing turnover.

- Low products, high administrative costs.

- No risk due to many attentive suppliers and large product variety.

- Reduce number of suppliers.

- Use systems contracting and e- procurement solution.

Strategic security –(high purchasing importance ,low supply risk)

Suppliers of leverage products

- relatively large share of product price

- Small change in price has large impact on profit.

- Risk is small because of – many attention supplies

-Substitution is possible.

-Buyer dominated segment

-Competitive bidding.

Strategic critical (high purchasing importance, high supply risk

Suppliers of strategic products

32
 - Together with leverage products can account for 80% of turnover.

- Small changes in price will have an immediate and significant impact on costs.

- Risk significant due to high dependence on supplier.

- Balance of power may differ between purchasers and suppliers.

- This portfolio approach is helpful in positioning commodities/suppliers around

specific quadrant.

3.5 Supplier preferencing model

Supplier preferencing is a complimentary to portfolio analysis and assesses the

attractiveness of the buyer to the supplier in terms of current and future opportunity. The

approach is simple-using a grid to identify where the buyer is located relative to the

potential attractiveness of the account to the supplier or the current value of the business

to the supplier.

Supplier preferencing model helps define sourcing strategy-the best sourcing strategy –

the best sourcing techniques to use depend on supplier perception of the buyer company

as a customer. It also defines the relationship we need to have with our key suppliers, and

gives us an insight as to how these might be achieved.

Supplier preferencing model represents the suppliers perspective-How the supplier sees

the buying organization.

Its important to realize that suppliers segment their customers according to the value of

future business and by current attractiveness (a combination of current income and how

easy it is to do business with)

33
Exploitable (low attractiveness, high of business value)

- maximize today’s income by

o seeking short-term advantage

o risk losing the customer

o try to E-commodities

Development Core
Nurture the customer Look after the customer
- Expand the business - Fight to keep account
- Seek the opportunities - High level of service and
- Proactive service responsiveness

Nuisance Exploitable
Give low attention Maximize today’s income
- Happy to lose the customer - Seek short-term advantage
- Risk losing the customer
- Try to de-commoditise

Low ← current value of the business to the supplier → High

Nuisance (low attractiveness, low current value of the supplier )

- give low attention

-happy to lose the customer

Development (high attractiveness, low value of business to the supplier)

- Nurture the customer

- Expand the business

- Seek opportunities

- Proactive services

34
Core (high attractiveness, high value of business to the supplier)

- Look after the customer

- Fight to keep the account

- High level of service and responsiveness.

3.6 Market management matrix

Market management matrix is a graphical means of reconciling supply position and

supplier preferencing into one model.

3.6.1 How to use it

For each of the Supply Positioning - scenarios, we can explore what the implication of

each of the four Supplier Preferencing alternatives is in terms of whether the combination

is a good match or not and what are the most appropriate actions in each of the sixteen

possible combinations. In the matrix below we are focusing upon a category which is

Strategic Security in the buyer’s portfolio. The matrix describes the “fit’ between a

Strategic Security purchase from the buyer’s perspective with each of the potential

perspectives of the provider. So in the case of Strategic Security purchase by the buyer

from a provider who regards the buyers account as Core, (the top right quadrant) the

model describes the combination as a Good Match. The advice is to offer longer term

contracts and develop dose relationships but avoid dependency.

35
In the matrix to the below, we are focusing upon a category which is Tactical Acquisition

in the buyer’s portfolio. The matrix describes the fit” between a Tactical Acquisition

purchase from the buyers perspective with each of the potential perspectives of the

provider. So in the case of a Tactical Acquisition purchase by the buyer from a provider

who regards the buyers account as Development,(the top left quadrant) the model

describes the continuation as a good match, as the suppliers goals are to grow the

business and the buyer wants the supplier to manage the category with minimal

involvement. The advice is to offer incentives to the supplier to encourage better

performance (egcontract extension) or to increase mutual dependency.

36
In the matrix below, we are focusing upon a category which is Tactical Profit in the

buyer’s portfolio. The matrix describes the “fit” between a Tactical Profit purchase from

the buyers perspective with each of the potential perspectives of the provider. So in the

case of a Tactical Profit purchase by the buyer from a provider who regards the buyers

account as Nuisance, (the bottom left quadrant) the model describes the continuation as a

potential mismatch, as the suppliers goals are to minimize attention and the buyer wants

the supplier to drive down costs. The supplier must be bigger than the buyer, so the

advice is to monitor the power balance and to seek other sources or to develop alternative

Solutions.

37
3.7 The balance of power

They are real dangers if suppliers are more important to buyers than the buyers are to

them and a real opportunity if the balance of power is in the favour of the buyer. The

Bensau model captures the four buyer relationships profile characterized by different

power dependencies and behavior of both suppliers and buyers. The four profiles are

-market exchange

-captive buyer

-captive supplier

-strategic partnerships

38
Captive buyer Strategic partnerships
- Information sharing - Broad-band information sharing
mechanisms greatly used on - Frequent and reach media exchange
a continuous basis. - High mutual trust and commitment to
- Buyers maintain an internal relationships
manufacturing capability; - Strong sence of buyer fairness
- Concentrated market with - Early supplier involvement in design
few established players - Extensive joint action and cooperation
- Technically complicated - Supplier has excellent reputation
products
- Well understood technology
- Large supply houses
- Few strongly established
suppliers
- Strong bargaining power
- High supplier dependence
- Supplier does not necessarily
have a good reputation
Market exchange Captive supplier
- Highly standardized - There is little exchange of information
products - Few mutual visits mostly from supplier
- Little innovation and layer to buyer
design changes - Little time allocate by the buyer to
- Low engineering effort and supplier
expertise required - High mutual trust but limited direct
- Small capital investment joint action and cooperation
required - Great burden put on the supplier
- Narrow-band and limited - Heavy supplier dependence on the
information exchange buyer
- Limited time spent directly - Low supplier bargaining power
with suppliers
- Positive social climate
- No early supplier
involvement in design
- Supplier fairly treated by the
buyer
- Supplier has a good
reputation and track record
- Little interdependent with
suppliers
- Many capable suppliers
- Low bargaining power

39
 High

Customer dependence

low

Low ← customer dependency → high

Review questions

1. Explain how to identify critical few suppliers to develop a relationship with

40
 2. Explain supplier positioning model, supplier preferencing model and relate the

two to come with market management model.

3. Explain how to use market management model

4. What is balance of power and dependence? Explain their significance.

Suggested further readings

- Leaders and Fearon, (1992). Purchasing and supply management. Mcgraw-hill

international

- Benton w. (2007). Purchasing and supply management. Routledge, London

- Larry P. (2004). Sourcing solution. Routledge, London

CHAPTER FOUR

4.0 DEVELOPING SUPPLIER RELATIONSHIPS

41
General objectives

By the end of the chapter the learner should be able to explain how to develop and

manage supplier relationships

Specific objectives

By the end of this chapter the learner should be able to:

a) describe the process of relation formation

b) discuss life-cycle of supply relationships

c) describe the process of supplier evaluations and selection

d) explain sources of supplier information

e) explain methods used in performance, measurement of suppliers

f) give reasons for evaluating supplier performance

g) describe the criteria used in evaluating suppliers

4.1 Relationship formation

Holmlund et al(), classified interaction between two or more enterprise as taking place on

five different aggregation levels- actions, episodes, sequences, relationships and partner

base. These are hierarchical levels ranging from a single exchange to the port folio of

relationships of one particular enterprise.

a) Actions –These are individuals’ initiatives by the focal enterprise e.g. telephone

calls or plant visit that may relate to products, information, money or social

contacts.

b) Episodes- groups of interrelated actions such as negotiations encompassing a

numbers of actions.

42
 c) Sequences- These are large and more extensive entities of interactions. This level

may be defined in terms of a contract, product campaign or project. It can also be

related to the presence of a significant human action in either of the organizations.

A sequence may then end when a particular person is replaced by another in the

firm. Even if the relationship continues, the quality of the relationship may change

due to the influence of one single person. The completion of the sequence

constitutes a vulnerable period of time during which the parties make important

evaluation. The evaluation may cause a potential termination of the relationship

since a sequence represents a time-framed commitment

Relationship: comprises of all the sequences, which in turn are comprised of all related

episodes and actions in one particular relationship between two firms.

Partner base – The relationship portfolios of a particular enterprise. These are all the

relationship that a particular enterprise has at a particular point of time.

4.2 Lifecycle model of buyer –supplier relationship

A life cycle perspective of buyer-supplier relationship recognizes that they develop and

change over time. If this premise is accepted, then management of relationships may also

need to be varied at different stages in the life cycle.

David Ford considered that relationship development between buyer and seller can be

examined from the point of view of five stages. As the relationship progresses so

experience of each other performance helps to reduce uncertainty and social exchanges

increased trust between the parties. Also norms, values and working methods are brought

43
closer inline with each other as the times passes and each makes adaptation to the other.

He identified these stages as being the following:

1. Pre-relationship stage

2. early stage

3. Development stage

4. Long-term stage

5. final stage

It should be noted that the fifth stage is not meant as the ending of the relationship. On

the contrary, it is the relationship in its most developed form.

EVALUATION AND SELECTION OF SUPPLIERS

44
One of the most important processes performed in organization today is the evaluation
selection and measurement of suppliers
The overall objective of the supplier evaluation process is to reduce purchase risk and
maximize overall value to the purchaser. An organization must select suppliers it can do
business with over an extended period of time.

The degree of effort associated with selection is related to the importance of the
commodity as reflected in the commodity portfolio matrix(kraljic model- buyer
perspective model)

Depending on supplier evaluation approach used, it can be intensive effort requiring a

major commitment of resources such as time and travel budget. Formal supplier
evaluation can involve a team of experts from the purchaser. It may also involve
spending several days at suppliers work place.

The supplier evaluation and selection process

Recognizing the need for supplier selection
↓
Identifying key sourcing requirements
↓
Determine sourcing strategy
↓
Identify potential supply sources
↓
Limit suppliers’ in a pool
↓
Determine method of supplier evaluation and selection
↓
Select supplier

45
1. Recognizing the need for supplier selection

This is the first step of evaluation and selection process. It usually involves the
recognition that the requirement exists to evaluate and select a supplier for an
item or service. The complexity and value of a required purchaser will influence
the extent to which a buyer evaluates potential supply sources. It is also possible
that a supplier selection decision arises because the existing suppliers are failing
to perform as required. The term that describes changing suppliers for existing
items is suppliers switching.

2. Identify key sourcing requirements

Throughout the supplier evaluation and selection process it is important to

understand the requirements (specifications) that are important to that purchase.
These requirements often differ widely from item to item, organization to
organization or industry to industry.

3. Determining sourcing strategy

No single sourcing strategy approach satisfies the requirements of all purchases.

Due to this, the purchasing strategy adopted for a particular item or service will
influence the approach taken during the supplier evaluation and selection process.
Commodity sourcing strategy provides direction of the overall objective to be
achieved for the commodity such as number of suppliers that will used, the type
of contract ( long – term vs short – term) and the type of the supplier to be
evaluated. Several strategy options include
Single verses multiple sources
Long – term verses short – term
Choosing suppliers that provide product design support versus those that lack
design support capability
Developing a close working relationship versus traditional purchasing

4. Identify potential supply sources

46
 Purchases rely on various sources of information when identifying potential
sources of supply. The degree to which a buyer must search the information about
suppliers is a function of several variables as shown in the table below.

High Low
High Minor moderate information Minor information 11
search 1
Low Major information search iv Minor – moderate
information search 111

X axis -Strategic importance of technical complexity of purchase requirement

Y axis- Capability of existing supply base to satisfy cost, delivery, technology and
service requirement

Quadrants 1 and iv generally require a minor to moderate information search,

while 111 requires a major search. In quadrant 1, existing suppliers has the ability
to satisfy a strategic non routine purchase requirement . In this situation a buyer
may pursue additional information to verify he or she has considered the best
possible source of supply. In quadrant iv the purchaser requirement is less
strategic but the buyer has no current access to suppliers capable of satisfying the
purchase requirement. Given the nature of purchase in this quadrant the search

47
requirement will be lower compared to quadrant 111 but greater than in quadrant
11.

4.5 Various sources of the information used in evaluation of the potential

supplier of the new purchase requirement are;
-Current suppliers – buyer often look to existing suppliers to satisfy a new
purchase requirement. Selecting an existing supplier for a new purchase
requirement may be an attractive option if a list of preferred supplier is
maintained. Designation as a preferred supplier means that a supplier consistently
satisfies the performance and service standards defined by the buyer.

-Sales representatives

-Information databases; some companies maintain databases of suppliers capable

of supporting an industry or product line. Maintaining a supplier database is
particularly important in industries where technology changes rapidly.

-Experience; purchasing personnel may have knowledge about potential suppliers

from the experience. A buyer may have worked within an industry over many
years and familiar with suppliers perhaps including international suppliers

-Trade journals; most major industries have a group or council that publishes a
trade journal or magazine which routinely presents articles about different
companies. These articles offer focus or a company’s technical or innovative
development of material component, product, process or service.

48
 -Trade directories; almost all industry publish directories of companies that
produce items or provide services in an industry

-Industrial trade shows; buyers attending trade shows can gather information
about potential suppliers while also evaluating the latest technology
developments. Many contracts between industrial buyers and sellers occur at trade
shows

-Second party or indirect information; this source of information from other

buyers and /or other suppliers.

-Some purchasers publicly recognize the quality certified suppliers.

Recognition may come in the form of a newspaper advertisement that highlights
the achievement of superior suppliers.-

-Internal sources
Many large companies divide business lines into units, each with separate
purchasing operation. The sharing of such information can occur across units
through informal meetings, strategy development sessions etc.

-Internet searches; the internet is a powerful search engine capable of providing

reams of information. Buyers are increasingly using the internet to help locate
potential source, since seller also use the internet if a key part of their direct
marketing efforts.

5. Limit suppliers in a pool

The results or the information gathered, depending upon the item being
considered, a purchaser may have many potential supply sources from which to
choose from.

49
 A first cut or preliminary evaluation of potential suppliers is often used to narrow
the list before conducting an in depth formal evaluation. The first cut eliminates
those suppliers who are clearly not capable of meeting requirements based on
available information.
The following criteria is used in making the first cut.
-Final risk analysis
-Evaluation of previous and current supplier performance
-Evaluation of supplier – provided information through RFI (request for
information)
6. Determine the method of supplier evaluation and selection

Once an initial cut has eliminated suppliers that are not capable, the commodity
team must decide how to evaluate the remaining suppliers who may appear to be
equally qualified. This requires a finer level of evaluation details that is used in
the initial process. A number of way used at this stage are
A) Evaluation from supplier provided information

Buyers often receive and evaluate detailed information directly from potential

suppliers for the purpose of awarding a purchase contract. This information

may come from request for quotes- RFQs or request for proposals RFPs. A

more current approach is that of buyers requesting that suppliers provide a

detailed cost breakdown of their quote price in response to RFQ including

details on labor, material, overhead and profit.

B) Supplier visits

A team of cross-functional experts may visit potential suppliers and use the

key supplier evaluation criteria to evaluate the supplier. The advantage of a

cross functional team is that each team member contributes unique insight into

overall supplier evaluation.

50
 -Use of preferred supplier

The buyer does not have to re- evaluated a preferred supplier. A purchaser
should consider only its best suppliers only for preferred suppliers status.
-External and third party information
7. Select supplier

The final step of the evaluation and selection process is to select the supplier(s).
For routine items, this may simply require notifying and awarding a purchase
contract to a supplier. For major purchase, the process can become more complex.
The buyer and seller may have to conduct detailed negotiations to agree upon the
specific details of purchase agreement.

4.6 Key supplier evaluation criteria.

Most evaluations rate suppliers on three primary criteria.
a) Cost/price

b) Quality

c) Delivery

However for critical items needing in depth analysis of the suppliers evaluation study is
required. The following supplier performance categories will be considered further,
especially for strategic relationships.

-Supplier management capability

-Overall personnel capability
-Cost structure
-Total quality performance, systems and philosophy
-Process and technological capability including the supplier design capability
-Production scheduling and control system including supplier delivery
performance

51
 -Information system capability (eg EDI, bar coding, VMI, ERP, CAD/CAM).
-Suppliers purchasing strategies, policies and techniques
-Long- term relationship potential.

4.7 Supplier performance measurement

Once a supplier is selected, the focus must shift from the supplier evaluation to the
continuous measurement of supplier performance. An organization must have the tools
to measure, manage and develop the performance of its supply base.
Supplier performance measurement includes the methods and the systems to collect and
provide information to measure, rate or rank suppliers performance on a continuous basis.

4.7.1 Reasons for evaluating/ measurement of supplier performance.

1. Evaluation can significantly improve supplier performance

2. Assist decision making regarding when a supplier is retained or removed from an

approved list

3. Assists in deciding to which suppliers a specific order should be placed

4. Provides suppliers with an incentive for continuous improvement and prevents

performance slippage

5. Assist decisions regarding how to distribute the spend for an item among several
suppliers to better manage risk

4.7.2 What to measure

Central to all measurement systems is the decision about what to measure and how to
weigh the performance categories. An organization must decide which performance
criteria are objective (quantative) measures and which criteria are subjective (qualitative).

Most of the objective quantitative variables lie within the following three categories

52
 a) Delivery performance

Orders or material releases sent to a supplier have a quantity and material due date. A
buyer can track how well a supplier satisfies the quantity and due date commitment. A
buyer can also track a supplier material lead time. Quantity lead-time performance and
due date compliance help define a supplier’s delivery performance
b) Quality performance

A buyer can compare a supplier quality against some previously specified

performance objectives, track improvement rates and compare similar suppliers.
It’s important for a supplier to define clearly supplier quality requirement.
c) Supplier cost reduction

An organization can measure cost reduction in a number of ways. One common

method is to track a suppliers real cost after adjustment for inflation. Another way
is to compare a suppliers’ cost against others within the same industry

Other qualitative factors to be measured are;

- Problem resolution ability

- Technical ability

- Ongoing progress report

- Correction action response

- Suppliers cost reduction

- Supplier new product support

- Buyer seller compatibility

4.8 Common supplier rating methods

53
 1. Subjective – generally designed as questionnaires with numerical rating scale (say
1-5), completed by a number of reviewers. A simple approach for a small
business with small suppliers base.

Advantages
- Easy to develop and administer

- Cam be completed by an unlimited number

of reviewers

Disadvantages
- After 1st survey method loses its impact

- No objective basis and ratings may be

subjected to ‘halo’ effect and short term
memory

- Very involving- if 5 evaluators can answer

10 questions for 50 suppliers on quarterly
basis , there will be 10,000 data entry points
annually to enter into the data base.

2. Survey method
A purchased service in which research organizations contacts a number of other
customers and obtain their views on the performance of the supplier usually used by large
corporations.
Advantages
- Easy to implement

- Research organizations provides regular

updates

Disadvantages
- Expensive

54
 - Quality of data may be poor and depends on
the source from which data was collected

- Evaluation is based on experience of other

companies

3. Comparative method
Supplier is evaluated independently by evaluators on agreed factors such as price, quality,
delivery, etc. individual rating are then tabulated and a final rating awarded by the team.
Traditionally used to compare multiple suppliers prior to the award of the contract or
select from approved list.

Advantages
- Speed – can be used to quickly evaluate a
supplier on short term basis.

- Easy to develop

- May take suppliers historical performance

into consideration

Disadvantages
- Relative importance of various rating factors
are not considered

- Not applicable to long term evaluation of

suppliers performance

- Dependent on subjective opinions of the

evaluators.

- Easily rigged by an evaluator to give desired

outcome

55
4. Weighted points
A weighted factor is established for each of the areas in relation to each of the other
factors. A score is assigned to each factor that indicates the supplier’s performance. The
score is multiplied by weight and then averaged. Used primarily as a tool for long term
rating of the suppliers
Advantages
- Excellent tool for proposal evaluation

- Allows evaluators to take all factors into

account , yet provides the facility to
emphasis the importance of one factor over
another

Disadvantages
- Data entry my become excessively time
consuming

- Labor intensive

- The information has no objective basis and

may based short term period.

5. Percentage based method

Percentage system measure the percentage of quality defects or late deliveries – eg if a
supplier has made eight late deliveries out of 64, that supplier would be given a rating of
12.5 or 13.
Advantages
- Easy to accumulate data

- Provides compliance targets and

expectations, such as excellent – 95 – 100%
and acceptable 85 – 89 %

56
 Disadvantages
- Data may be accurate but misleading on the
number of receipts or types of problems
encountered by a particular supplier.

- Doesn’t reflect the severity of the quality

problems

- Doesn’t accurately reflect level of on time

performance eg if one delivery in 100 days
is late and three days in 60 days , the system
will give a percentage of 1 %

6. Cost based method

Evaluates supplier performance on total non-productive cost associated with each
supplier’s performance. Non productive costs are estimated cost of non-compliance, such
as cost of rejection. These are added to actual cost used to evaluate the performance of
individual suppliers as well as performance trend of the supplier base.
Performance index = purchase order + non productive cost / purchase order price.

Advantages
- Suppliers are held responsible for their
actions

- Promotes suppliers improvement more

rapidly than other methods

- Provides suppliers with the level of the

detail that they need to understand the issues
and additional costs associated with their
performance.

- Suppliers have greater motivation to

improve their performance

57
 Disadvantages
- Difficult to build data

- Difficult to determine non productive cost

range

4.9 The seven Cs of effective supplier evaluation.

Many of the aspects of suppliers appraisal are neatly summarized by carter as the seven
Cs of supplier evaluation;
- Competence of the supplier to undertake the
tasks received

- Capacity of the suppliers to meet the

purchasers total needs

- Commitment of the supplier to the customer

in terms of quality cost driving and service

- Control system in relation to inventory, cost,

budgets, people and information

- Cash resources and financial stability

ensuring that the selected supplier is
financially sound and is able to continue in
business in the foreseeable future

- Cost commensurate with quality and service

- Consistency – the ability of the supplier to

deliver consistently and where possible
improve levels of quality and service.

58
Review questions
1. Explain the process of developing supplier relationships
2. Explain relationships formation
3. Describe the life-cycle of a supplier relationships
4. Explain the importance of supplier performance measurements and the methods
used
5. Give reasons for evaluating supplier performance and state what to measure

Suggested further readings

Molczka et at (2002). Purchasing and supply management. Eastern press PVT
Kenneth L (1996). Purchasing. PITM publishers

59
 CHAPTER FIVE

5.0 INTERNATIONAL BUYING

General objective
By the end of the chapter the learner should be able to explain how to develop and
manage international supply relationships

Specific objectives
By the end of this chapter the learner should be able to:
a) explain the process of sourcing for potential international supplier
b) define E-procurement
c) explain the impact of E-procurement on supplier relationships
d) describe E-procurement models
e) discuss advantages of E-procurement

5.1 The Process of sourcing for potential international supplier/s.

1. There is a wide range of ways to indentify a suitable supplier.
a) Attending a trade exhibition

This enables the buyer to gauge the level of competition, price and
technology and provides an opportunity to meet the personnel on the
stand. Also it enables the buyer to study and evaluate arrange of exhibitors
and their products/ services and make valid comparison.

60
 b) Attending a sales conference or seminars

This may extend for several days while the speakers deliver papers on the
areas of current interest and development. It also enables networking to
take place.
c) Identifying supplier in a trade directory; such directories may be issued by
trade associations, government international agencies, professional
institutes, countries/ national chambers of commercial importers
associations and private companies. Many such sources now have direct
access through the internet

d) Journals newspapers and magazines are a good sources of suppliers

information, since they contain articles on recent developments and future
trends

e) Major suppliers circulate to their loyal buyers, house magazines and sales
bulletins- promotional materials

f) The internet is first growing aid to identify suitable global suppliers

g) Government chambers of commerce- trade association arrange inward

trade missions. This involves existing and potential buyers visiting as a
group, a specific country to meet exporters. Alternatively an outward
mission embraces exporters visiting a country to meet potential buyers or
selecting an import agent. An inward and outward trade delegations are
both government assisted

h) Trade a minister during their visits oversees tend to promote their

country’s products and put buyers in touch with suitable suppliers in their
country.

i) Business clubs offer endless networking opportunities together with

meeting guest speakers and attending seminars.

2. Selection of the oversees suppliers

61
Having established a list of potential oversea sources, the next stage will be to issue
inquiry which clearly and ambiguously indicates what is required. The following is a list
of areas which needs adequate evaluation to determine cost, risks, logistical focus and
acceptability.
 International supplier selection criteria. It involves

-Credit rating taken by an independent company

-International standards accreditation of products ISO 9001
-The companies position in the market place – market leader or laggard
-Major existing importers
-Qualification directors and quality management and the workforce
-Any litigation pending with clients
-Award received by the company
-Product availability and delivery time
-Evaluation of the production and manufacturing systems
-A visit to the company
-Companies last three annual reports
 Meeting directors/ managers and workforce

 Determining a general overview of the company and its management culture

 Conducing a product audit to determine the degree to which a company succeeded

in having a zero failure rate in accordance with the quality standards specified

 Process audit – a program to measure the extent to which the technical processes
are capable

 System audit – comparisons of the quality systems to the external standard

 An increasing number of suppliers develop jointly with the buyer, the product to
reflect the buyer’s environment. This involves several visits to the supplier’s
premises and the cost will include development and may be innovation

 Degree of sub-contracting and quality control and availability.

62
 Some buyers invite selected suppliers to give a presentation or demonstration of
the product.

 Currency- what currency should be used – the buyers currency ensures no risk to
the buyer with all the risks transferred to the seller and vice versa ; however the
euro currency – operative in twelve EU countries - eliminate all currency risks
undertaken in the euro zone.

 The geographical location of the supplier and /or the place of the supplier. The
point of supply will be the determining factor in import tariff duty terms and in
freight costs. A strategic focus is required on the supply source. In developed
market, such as G7 members there is a good infrastructure and technically trained
workforce. Convertible stable currencies are more likely with politically stable
government. Labor costs are relatively high. Developed markets have regulated
economy as in France and Germany or a regulated market as found in the USA
and the UK. Conversely a less developed market will have a less stable currency
which trade through the US dollar, poor infrastructure and low labor costs.

Also considered are a near and distant market and membership of custom unions
or economic bloc
 International distribution network

Oversee buyers need to examine very closely the available transport service and
costs, efficiency frequency and transit time.
 Which incoterms 2000 to use

 Payment arrangement – this may be via open account, documentary or bill

exchange.

 The supplier’s quotations need very careful evaluation. The specification must be
unambiguous

63
  The total cost needs careful evaluation. It includes product price , transportation,
insurance, documentation, custom clearance, import duty, VAT currency (risk),
forwarding agents commission, bank charges, packaging, etc

The criteria of the final choice of supplier will vary by product and buyer
circumstances. A visit to the sellers facilitates is a better evaluation that
determines whether a good working relationship can be developed.
The buyer must approach each suppliers’ country on an individual basis and have
paramount consideration of the international (ISO) and national (BSI) standards.
Ideally it is best to visit the supplier’s country and formulate a good relationship.

5.2 Impact of E-procurement on supply relationships

5.2.1 E – Procurement
Definition:-E procurement is using internet to operate the transactional aspect of
requisition, authorizing, ordering, receiving and payment processes for the
required services or products. According to CIPs , it is typically the focus of local
business administrators and covers the following areas of the buying process;
a) Requisition against agreed contract

b) Authorization

c) Order

d) Receipt

e) Payment

E procurement models include:

EDI networks, business to employees B2E requisition applications, corporate
procurement portals, first generation trading exchange,2nd generation trading exchange,3rd
generation trading exchange etc

64
 5.3 Comparison of various E-procurement model and impact on suppliers’
relationships

Trading model characteristics

EDI networks – handful of trading partners and customers
- Simple transactional capabilities

- Batch processing

- Raction and cost blue added network

changes

Business to employees – provide supplier management tools for the buyer

Make buying fast and hussle free

-Automated approval routing and standardization

of requisition procedure

Corporate procurement portals – custom negotiated prices posted n multisupplier

-Spending analysis and a multi- supplier catalogue
management

1st generation trading exchange – industry content, job posting and news
- Store fronts

- Product content and catalogue aggregation

services

2nd generation trading exchange - supplier, prices and products/ service available
- Catalogue and credit management

65
 - Automated requisition process and purchase
order transaction

3rd generation trading exchange – enable partners to closely synchronise operations

and enable real time fulfillment
- Process transparency resulting in
restructuring of demand and supply chain

- Substitute information for inventory.

Industry consortia and buyer supplier led.

5.4 Inefficiencies of traditional procedures that made many organizations embrace e

procurement, e commerce, e business, and SCM.
1. A sequence of non value adding clerical activities

2. Excessive time in processing orders both internally and externally

3. Excessive documentation for new purchases. A minimum of seven different

documents ( requisition, enquiry, quotation, order, acknowledgment, advice note,
goods received note, and invoice) are involved, with expensive copying for
purchase department records and information to other departments

4. Excessive costs of purely transactional activities.

Review questions
1. Explain the term international buying
2. Explain the process of sourcing for international suppliers
3. What is E-procurement? state its significance in supplier relationships
4. Explain E-procurement models

Suggested further reading

Allan E. (2002). International purchasing and management. Thompson learning
Leeders and Fearon (2006) . purchasing and supply chain management. Mcgraw-hill

66
Kenneth and Brian (2006) purchasing and supply chain management. Pearson education
limited.

CHAPTER SIX

6.0 CONTRACTUAL CONFLICT

General objective
By the end of the chapter the learner should be able to identify causes of conflict and how
they are resolved

Specific objectives
By the end of this chapter the learner should be able to:
a) Define conflict
b) Explain sources of conflict in supplier relationships
c) Explain methods of conflict resolutions
d) Explain reasons for termination of supplier relationships
e) Explain aspects of termination of relationships

Definition
Rex (1981), claims that the core issues of conflict is the situation in which A fully
understands what is expected from him, but rejects the lines of conduct that B requires.
Furthermore A is prepared to pursue both his owns goals and line of action by which he
proposes to achieve them. A shorter definition is suggested by Deutsch (1973), a conflict
exists whenever incompatible activities occurs. There are three attributes in
understanding conflict.

67
 1) Each conflict relationship is made up of a sequence of interlocking conflict
episodes

2) Conflict is intimately tied up with the stability of organization

3) Conflict may both be both functional and dysfunctional.

These episodes can be thought of as gradual escalation to a state of disorder consisting of

five stages
a) Latent conflict

b) Perceived conflict

c) Felt conflict

d) Manifest conflict

e) Conflict aftermath

Each of the above conflict is discussed below in relation to the strategic relationships
where complex projects may be undertaken by two parties.
The latent conflict
The conditions or underlying sources of conflict are found here. The latent conflict can be
based upon
- Competition for scarce resources, illustrated
by the project team competing for
unanticipated docking capacity interfering
with other ongoing projects

- It can be based upon drives for autonomy

where the project team seeks to insulate
itself from being controlled by the base
organization

68
 - A divergence of goals can emerge through
manpower rotation between supplier and the
project team

The perceived conflict-mind

These conflicts may or may not, stem from a latent conflict. If not the conflict result from
misunderstanding of each others position. This can be resolved by improved
communications.

The felt conflict

This is characterized by the personalization of conflict, which sometimes occurs in
business to business relations. Managers may be representatives for large organizations
involved in contractual battles challenging the value of their companies. This may cause a
tremendous pressure on the individuals increasing the risk personalizing the conflict
fueled by mass media. Project stories are full of high profiled individuals being accused
for enhancing conflict.

The manifest conflict

The most useful definition seems to be that behavior which, in the mind of the actor,
frustrates the goals of at least some of other participants. Various administrative and legal
resolutions processes are applied here. In a complex project the manifested conflict may
follow a path towards negotiations, voluntary mediation with third party assistance,
arbitration tribunal or finally ending up as a court decision. Conflict in complex projects
is well represented in all those stages of conflict escalation.

Conflict aftermath
Development of each conflict episode is determined by a complex combination of the
effects of preceding episodes and the environmental milieu. This implies that a conflict
between one project and a specific supplier may have an effect later in the same project,
or in succeeding projects. To what extend conflict experience in one project is carried in

69
to other projects are to a large extent dependent upon the extent of organizational
learning.

6.1 Sources of conflict

1. Domain dissent

One area of disagreement causing conflict is related to the dividing line of task
and responsibilities between the parties. A lack of understanding about the
domain of the parties may in turn lead to lack of understanding of the purposes of
the relationship. On the other hand the purpose of combining resources from the
parties may create a new domain. The challenge in creating proper dividing lines
(with increased risk of increasing conflict level) is further enhanced with
increasing activity and resource interdependencies. This is further enhanced
through technological innovation carried out in close cooperation between buyer
and supplier. Who owns and controls the innovation? Who has the right to change
crucial activity patterns and standards , the focal project manager or the seller of a
large system delivery package?

2. Goal incompatibility and lack of involvement

Goal incompatibility, commitment and involvement are three factors explaining

sources to conflict Rosenberg and stern (1971). Can a project include important
actors with contradictory goals? In economic exchange both parties interacts in
order to make money. This is encouraged by establishment of economical
incentives in order to secure projects progress. Willingness and ability to
cooperate connected to economical win-win for both parties.

3. Commitment for both parties

Lack of expectations of future transactions (due to competitive bidding) assumes

lead to reliance on formal and hierarchic mechanisms eg contracts. Contracts are
however difficult to specify under conditions of uncertainty and where partners
obligations are designed to change over time. The actors can thus enter a vacuum

70
 where they are unable to bridge the gap between requirement for commitment and
inadequacy of formal governance mechanisms.

4. Lack of joint Decision making

Rosenberg and stern 1971 suggest that parties having different perceptions of how
to make decisions in the dyad can cause conflict. Joint decision making is crucial
in a complex project context for at least two reasons.
- Activity structure and links between
activities can not be altered without
interfering with other activities performed
by other actors.

- A great number of decisions require mutual

perceptions. Hence one can easily argue that
different perceptions of how to deal with
interdependent activities may increase the
risk of conflict

5. The lack of reciprocal understanding of the other’s operations and following

resistance from unexpected sources

6.2 Strength of supply relationships

The parties’ satisfaction in the relationship is a result of their self control of the decision
areas and perceived cooperativeness in the channel. Satisfied partners are assumed to
reduce conflict. Actors in a complex project are in varying degree interdependent which
further implies that both parties do have power. The supplier may reduce the project
progress through maneuvers beyond their contractual obligations, and the project
team/project owner(s) has the power to exclude the supplier for future businesses. In this
perspective both parties have self-control of the decision areas. It is therefore a reason to
believe that a more or less balance of power (and self control) increases cooperativeness
and reduces the conflict. In an innovation-intensive project with high degree of

71
interdependencies between the parties one can thus argue the level of conflict is low due
to the parties self control and satisfaction.

6.3 Methods of conflict resolutions

All contracts no matter how carefully worded and prepared can be subject to some form

of dispute or disagreement. It is virtually impossible to negotiate a contract that

anticipates every potential source of disagreement between buyer and seller. Purchasing

managers should attempt to envision the potential for conflicts and prepare appropriate

conflict resolution mechanisms to deal with such problems should they arise. The

traditional mechanism for resolving contract disputes is grounded in commercial law

which provides a legal jurisdiction in which an impartial judge can hear the facts of the

case and led a decision in favor of one party or the other. Due to uncertainty cost and

length of time required to settle disputes in the legal system most buyers and sellers avoid

the problems associated with it and look for other ways to deal with situation.

Methods of settling contractual disputes

Action Description
1. Legal action File a law suit in a court
2. Non – legal actions;
Use of impartial third party to settle a
Arbitration
contractual dispute

Mediation Intervention by a third party to promote

settlement , reconciliation, or compromise
between parties involved in a contractual
dispute

An exchange of information between

72
 Mini-trial managers in each organization followed by
negotiation between executives from each
organization

A neutral party conduct a trial between the

parties and is responsible for the final
judgment
Rent a judge
A progressive schedule of negotiation
mediation arbitration and legal procedeeings
agreed in the contract.
Dispute prevention

They are a number of factors to consider when deciding which dispute resolution
mechanism to use;
1. Status of the relationships between the parties in case where relationships between
the parties is ongoing and expected to continue for the foreseeable future the
disagreeing parties will prefer to resolve the contract dispute through means that
will hopefully preserve the relationship

2. Type of outcome desired:- There may be a need to establish an appropriate

precedent to govern the purchasers action in future disputes a well as one at hand

3. Need to be directly involved in generating the outcome or resolution:-The

presence of the disputing parties is important to successfully resolve disputes
using techniques such as negotiations, arbitrations, mediation, mini-trials and
rent- a- judge proceedings. Active participation by all parties involved in a dispute
generally results in a more equitable and harmonious resolution

4. Level of emotion displayed by the principals:-When Emotions such as anger and

frustrations are high, the total cost of litigation in terms of time, money and
management effort may be more significant than originally anticipated.

5. Importance of speed in obtaining resolution:-. The alternatives to court

adjudication are quicker than litigation. Time pressures may force the disputing
parties to be more creative and understanding in reaching an appropriate solution

73
 instead of going the court way. There is a direct relationship between time
involved in settling a dispute and the cost involved

6. The information required to reach a settlement:-companies involved in dispute

may not be willing to spread out their dirty linen or trade secrets in public thus
they avoid court settlement. All of the conflict resolution mechanisms or
settlement options allow a greater degree of privacy to the parties involved than
that which can be attained in a court

6.4 Termination of supplier relationships

No relationship can or should be expected to last forever as organizations operate in a
dynamic environment. The ending of a relationship does not necessarily mean failure and
there may be positive as well as negative outcome for one or both of the parties involved.
6.5 Reasons for termination
1. Inadequate understanding of what partnership means

2. Changes in business direction – an existing supplier may no longer have value if

either the purchasing or supplier organization has shifted its strategic direction.

3. Product obsolescence – the product or service provided by the supplier is

becoming obsolete without any replacement option

4. The supplier is unable to meet service levels – certain objectives basic to the
partnership can no longer be met

5. Short term attitude- either partner may consider that the long-term benefits of the
partnership have not been realized sufficiently quickly or have been insufficient to
warrant a continued commitment to particular suppliers /purchaser.

6. Economic factors – a supplier has become at risk financially with the danger of
potential liquidation

7. External economies – recession may force suppliers to cut back on product

development training and other resources such as product engineers and

74
 consequently, they will be unable to meet the continuoes improvement objectives
of the partnership.

8. Mergers and acquisition

9. Corporate divestiture

10. Instability and inconsistency

In the last analysis however successful partnerships can only be built if trust and
cooperation exist between purchaser and supplier.

6.6 Aspects of termination of relationships

1. Timing – timing of the termination of relationship should be synchronized with
the expiration of the agreement currently on force. Giving to much advance
warning to a supplier can lead to a deterioration in service. Decisions have to be
made on whether the termination should be immediate or gradual.

2. Relationship aspect – terminations may be amicable or hostile Campbell and

Poland referred to the 3Ps that can aid in minimizing possible hostility
encountered in the termination process which are positive attitude, pleasant tone
and professional treatment.

3. Legal consideration which involves:

- The financial consequence of terminating

the agreement

- Confidentiality agreements where such

agreement are part of the contract terms,
they must be honored for the prescribed time

75
 - Intellectual property issues – drawings
designs prepared during the agreement,
computer software ect

- Capital property issues especially in relation

to materials or capital equipments located at
the suppliers site

- Security issues – it is necessary to change

passwords or security codes shared with the
other party

- Obtaining clear signed records of any

settlement

- Employee rights if they were transferred

under the transfer of undertakings
(protection of employment) (TUPE)
regulations.

6.7 Succession issues

Before deciding to terminate it will be necessary to consider the following to ensure
continuity of the supplies;
- Discussion with internal customer regarding
groups , systems and projects that will be
affected by the change of the supplier

- Reflecting on the lessons learned from the

terminated relationships

- Conduction market analysis to determine

other supply options

- Preparing specifications (possibly revised)

76
 - Selection of a new supplier

- Negotiation of a relationship agreement.

Review questions
1. Define contractual conflicts
2. What are the sources of conflicts in supplier relationships? Discuss ways to
resolve them
3. Discuss reasons for terminations of relationships and important issues to consider
while terminating a relationship

Suggested further reading

Leeders and Fearon (2006) . purchasing and supply chain management. Mcgraw-hill
Kenneth and Brian (2006) purchasing and supply chain management. Pearson education
limited.

77
 CHAPTER SEVEN

7.0 OUTSOURCING
General objective.
By the end of the topic a learner should be able to explain how to develop and manage
outsourced relationships

Specific objective
By the end of this chapter the learner should be able to:
a) Define outsourcing
b) List the activities most outsourced
c) Describe the steps of implementing outsourcing
d) Describe outsourcing relationships
e) Explain drivers of partnership sourcing
f) Describe steps in establishing partnership sourcing
g) List and explain types of partnership sourcing relationships
h) Explain challenges to buyer supplier relationships List ways in which ethical
issues relating to suppliers are handled
i) Explain how each ethical issue can be effectively handled

Definition
Outsourcing is a management strategy where by major non core functions are transferred
to specialist, efficient, external providers. Central to outsourcing are
- make or buy decisions

78
 - Partnership between purchasers and
suppliers

7.1 What to outsource

Outsourcing developed as a reaction to the over-diversification of the 1970s and early
1980s. These led many enterprises to review their core activities and concentrate on their
core competence-What the organization believe they can do best. The activities most
easily outsourced are those that are
- Resource intensive

- Relatively discreet

- Requires special competences

- Characterized by fluctuating work patterns

in loading and throughput

- Subject to quickly changing markets for

which it is costly to recruit, train and retain
staff

- Subject to rapidly changing technology

requiring extensive investment

7.2 Implementing outsourcing

After the decision to outsource the following steps should be followed to implement that
decision
1. Set up a working party to consider

- what to outsource

- Why

79
 - Cost comparison of internal and external
provision

- Anticipated benefit and problems

2. Prepare an appropriate a technical performance or technical specification.

3. Invite tenders against the specification

4. Evaluate tenders against predetermined evaluation criteria

5. Post tender negotiations. The following advice relating to outsourcing may be

followed

- Do not sign incomplete contracts

- Higher outsourcing experts

- Measure everything in the baseline period

- Develop service level measures

- Develop service levels reports

- Include penalties for non performance

- Determine growth

- Adjust charges to changes in business

volume

- Select your account manager etc

6. Award contract

7. Set up management control and monitoring process

7.3 Outsourcing relationships/partnerships

80
Partnership is a commitment to both customers and suppliers to long term relationships

based on clear agreed objectives to strive for world class capability. Outsourcing can take

the form of an alliance a kin to a partnership or joint venture. Not all outsourcing

agreement however are partnerships unless the contract is structured to reflect a true

relationship of strategic alliance. The characteristics of such alliance include close

working relationships built on trust, communication and mutual dependency, where both

parties have vested interest in reducing cost and achieving favorable business outcome.

7.4 Drivers of partnerships sourcing

1. Drive for lowest acquisition costs – not only price but all cost in use elements
such as the benefits or exposure , derived from actual product quality, delivery
performance and the administration burden

2. Reduction in supplier base – need to reduce a supplier base to a number that can
be managed effectively

3. Shortening of product life cycles – need for faster response times, need for
suppliers to be right first time and need for suppliers involvement from day one

4. Concentration on core business

5. Competitive pressures towards lean supply

6. Adoption of best practices creating dependence

7.5 Establishing partnership outsourcing

1. Identify purchased items potentially suitable for partnership sourcing such as;

- High spend items and suppliers – Pareto

analysis may show that a small number of

81
 suppliers account for a high proportion of
total spend

- Critical items where the cost of supplier

failure would be high – complicated items
involving technical and innovative supplies
where the coast of switching sources would
be prohibitive

- New buy items ,where supply involvement

in design and productions methods is
desirable from the outset

2. Sell the philosophy of partnership sourcing to top management, other functions

likely to be involved such as accounting and design.

3. Define standards that potential suppliers will be required to meet which include
among others a commitment to TQM, ISO9000 certification, in-house design
capability etc.

4. Select one of few suppliers as potential suppliers – do not attempt to launch to

many partners at once as a by – product of partnering is that a customer will be
more attentive to fewer suppliers.

5. Sell the idea of partnering to the selected suppliers by stressing the advantages of
doing so

6. If a commitment to partnership sourcing is achieved, determine on the basis of

joint consultation what both parties want from the partnership and decide
common objectives for pertinent issues. Agree performance criteria for measuring
progress towards objectives, administrative procedures and finally formalize the
partnership which should be on the basis of a simplified legal contract

82
 7. Review and audit the pilot project by – reviewing against objectives, quantifying
the gains to the business as a whole and finally reporting back to senior
management on what has been achieved

8. Extend the existing partnership by extending existing agreement, committing to

longer agreement and getting involved in joint strategic planning

9. Develop new partners for the future

7.6 Types of partnerships sourcing

Type 1 partnership – involving organizations that recognize each other as partners and on
a limited basis coordinate activities and planning. Such partnerships would generally
have a short focus and involve only a few areas within both firms
Type 11 partnerships – involving organizations that have progressed beyond coordination
to integration of activities. Such partnerships have a longer term view of the partnership
and involve multiples areas within both firms
Type 111 partnerships – involving organizations sharing a significance level of
operational and strategic integration. In particular each partner can make changes to
others systems without getting approval and such partnerships are of long term a
durations with no end in sight, each party viewing the other as an extension of its own
firm.

NB; The three types of partnerships reflect increased strength of long term orientation
and level of involvement between parties.

7.7 Obstacles to closer buyer seller relationships

A number of obstacles can prevent the development of closer relationships between a
purchaser and a seller. A firm must evaluate whether these obstacles are present and
identify ways to overcome them
The obstacles are;

83
1. Confidentiality – the need for confidentiality regarding financial product and
process information is frequently cited reason for not developing closer supplier
relationships. Purchasing managers are sometimes reluctant to share critical
information with suppliers who may sell to competitors. There is the possibility
that a supplier is a direct competitor or may become in the future. Also a
purchaser and a seller may simply not trust one another

2. Limited interest by suppliers – closer relationships may not interest all suppliers.
A supplier may have the power in some relationships particularly when they are
in a monopolistic or oligopolistic industry position. In such cases the purchaser
may be unable to pursue a closer relationships simply because of the relative size
or power position of the two firms

3. Legal barriers – in some industries , legal anti-trust may act as barrier or

obstacles to closer buyer seller relationships

4. Traditional approach to managing suppliers – entire generations of purchasing

professionals grew up using an arms’ length approach. Resistance to change is a
powerful force that takes time, patience and training to overcome. also firms that
practice traditional supply chain management may not have the skills or
knowledge in their work force to evolve towards closer supplier relationships

5. Avoidance of suppliers who are not technology or product leaders – a purchaser

should avoid those suppliers who are not capable of providing technology or
product leaderships. It makes little sense to pursue long term involvement if a
purchaser or supplier is not capable of meeting performance requirements
especially in hi-tech industries where products lifecycles are very short. The
choice of a supplier who cannot follow through on the technology promises can
effectively cause a purchaser to be completely locked out of a potential market
opportunity.

84
HANDLING ETHICAL ISSUES EFFECTIVELY
The provision of practical help and advice, prompt payment, honesty, and openness, e-
ethics and courtesy to supplier representative are ways in which ethical issues are
handled.
1. Provision of practical help and advice – this can take such form as ;

- Helping suppliers to procure their own

supplies more effectively and more
economically

- Assistance in finding alternative customers

to prevent too much reliance on a single
source

- Provision of feed-back on unsuccessiveful

tenders

- Supplier development etc

2. Prompt payment – an organization should help suppliers maintain their cash flow
by;

- Paying invoices on time

- Ensuring that both finance and purchasing

departments are aware of the organizations
prompt payment policy adhere to it

- Dealing with complaint as expeditiously as

possible so that payments are not needlessly
deferred.

3. Honesty and openness – are the opposite of deception. There are four types of
“bluffing” that some purchasing agents may adopt on the premise that, in
negotiations, their responsibility is obtain the best possible price, quality and

85
 delivery, and that deception and manipulation of the supplier is unacceptable
mean of achieving desirable end . The four examples of deception, give a force
impression to suppliers that other vendors are aggressively competing for a
particular contract, a competitor is offering a better deal, the selling firm is in
danger of losing the contract and the time limits for the completions of the
negotiations apply.

4. E-ethics – the internet is creating a new environment in which an ethical behavior

has greater implications for companies than it was the previously the case. In
particular the balance of power in e-trading as exemplified by e-auctions is
shifting in favor of the purchaser. With B2B E-commerce the issues of trust
access identity, security, privacy, property and confidentiality take on new
dimensions

5. Courtesy to suppliers representative – there is evidence that sales- representatives

often have a poor opinion of buyers. This is likely to be enhanced where sales
representatives are kept waiting unnecessarily. It should be appreciated by the
purchasing staff that, allowing for travelling time and discussions, a sales-
representative has relatively short working days in which to fit calls. Unsolicitated
sales calls tend to be unwelcome before 9.30am and 1.30pm and after 12.15 and
4.30pm. Other factors to bear in mind are using a suitable room for interviews,
giving information regarding the times between which the representatives will be
seen and providing them with honest information. Above all, a buyer should never
be patronising rude,or supercilious. Such behavior demeans both the
representative and the buyer and is not conducive to establishing supplier
goodwill.

6. Business gifts and hospitality – policies with the regard to the receipt by the
members of the purchasing staff vary widely. The three most common policies are
that members of the purchasing staff

– are forbidden to accept gifts of any kind and those received must be returned

86
 – May retain gifts that are clearly of advertising nature such as calenders ,
diaries, pencils and so on

– Are allowed to decide for themselves whether a gift of hospitality is an

appreciation of a cordial business relationships or an attempt of commercial
bribery. It is useful for all members of staff to receive guidance on ethical
practices from professional and an organizational ethical codes and ethical
training.

Review questions
1. Define the term outsourcing
2. Explain how to implement outsourcing
3. What activities should be outsourced and why?
4. Explain drivers of outsourcing relationships/ partnerships
5. Explain the types of outsourcing relationships
6. List the obstacles to closer buyer seller relationship
7. Discuss ethical issues relating to suppliers

Suggested further reading

Sudhi S. (2005). Sourcing Strategy: Principles, Policy And Designs. PVT Publisher, New

Delhi

Larry P. (2004) Sourcing Solution. Routlegde London

Elizabeth a 2007 Guide to Global Sourcing . Prentice Hal Chicago

87
SAMPLE PAPERS
DEPARTMENT OF BUSINESS AND SOCIAL STUDIES
Main exam
SPM 323: BUYER AND SUPPLIER RELATIONSHIPS

Instruction to candidates: answer question 1 (compulsory) and any other TWO questions

Question 1
a) Explain three types of collaborative relationships 6mks

b) Discuss four supply chains enablers 8mks

c) Write short notes on

i) Supply prefencing model 3mks

ii) Market management model 3mks

d) Explain six causes of conflict 6mks

e) Explain two ethical issues relating to suppliers 4mks

Question 2
a) State and explain obstacles to closer buyer supplier relationships 10mks

b) Explain sources of information for international supplier 10mks

Question 3
a) Define E-procurement 2mks

b) Explain the impact of E-procurement on supplier relationship 4mks

88
 c) Explain methods used in conflict resolution 14mks

Question 4
a) Describe the process of implementing outsourcing 10mks

b) Explain reasons for termination of supplier relationships 10mks

Question 5
a) Describe the life-cycle of supplier relationships 10mks

b) Describe stages in the involvement of supplier relationships 10mks

Sample paper

DEPARTMENT OF MANAGEMENT
Supplementary exam

Question 1
a) Differentiate between supplier positioning model and supplier prefencing model
4mks

b) Discuss three characteristics of collaborative relationships 6mks

c) Relate supply chain philosophy to supplier relationships 3mks

d) Explain three courses of conflict in supplier relationships 6mks

e) List four Cs of effective supplier evaluation 4mks

f) Give reasons why buyers are moving towards E-procurement and the precautions
to take 5mks

g) Discuss the role of communication in supplier relationships 3mks

Question 2
a) Explain the common rating methods used in supplier performance measurements
10mks

b) Explain the process of selecting a suppliers 10mks

Question 3
a) Explain the drivers of outsourcing 10mks

89
 b) State and explain the advantages of collaborative relationships 10mks

Question 4
a) Describe life-cycle model of buyer supplier relationships 10mks

b) Explain the process of outsourcing relationships 10mks

Question 5
a) Discuss ethical issues relating to suppliers and how to handle them 10mks

b) Discuss the importance of market management matrix and supplier relationships

10mks

90