Supplier Relationship

Development

J.NGERA,MCIPS
Introduction

• This chapter looks at how buyers can help to develop suppliers

and develop their own relationship with suppliers. Performance
measurement can play an important part in both of these
processes.
Supplier development.
This is a process of assisting suppliers to effectively and
efficiently serve the buyers through improved quality and
reduced price.

This is achieved through effective communication, team work

approach and development of collaborative relationship
Forms of supplier development
Forms of supplier development Percentage of organizations surveyed who
practice this form of supplier development
Monczika, Trent & Monczika &Trent(1990)
Handfield(1998)
Enhancing working relationships (e.g. improved communication) 72.1% *
Increasing performance goals (e.g. reducing waste) 68.1% 68%
Requiring supplier capability improvements (e.g. improved quality) 51.5% *
Providing support personnel (e.g. to help in meeting quality 27.9% 12%
targets)
Conducting training programmes 25.3% 47%
Agreeing to contingent liability (e.g. sharing failure costs) 17.6% 4%
Providing equipment 11.8% 3%
Providing capital 10.3% 6%
Providing payments during the development of a project or product 8.8% 3%
Cost and benefits of supplier development: Buyer’s
perspective
Costs Benefits

Management time expended in research and Reduction in waste along the supply chain, with
identifying potential suppliers favorable impact on the buyer’s profits

Management time spent with the supplier Improvements in products and services, including
discussing the relationship and its possible reduction in time to market and new product
development development

Cost of equipment and systems designed to run Reduction in production and process costs
the new relationship successfully

Risks involved in sharing information such as Additional sales arising from improvements to
abuse of intellectual property, disclosure of products or reductions in selling prices
trade secrets
Cost and benefits of supplier development: Supplier’s
perspective
Costs
Management time expended in research and
identifying potential customers
Management time spent with the customer
discussing the relationship and its possible
development
Cost of equipment and systems designed to run
the new relationship successfully
Risks involved in sharing information such as
abuse of intellectual property, disclosure of
trade secrets
Restrictions on supplying competitors of the new
customer
Benefits
Reduction in waste along the supply chain, with
favorable impact on the supplier’s profits
Improvements in service to customers arising
from greater sharing of information e.g. on
scheduling
Reduction in production and process costs
Additional sales arising from improvements to
customer service which can be used to attract
other customers
Longer time security of business
Supplier development in practice
• A buyer wants to use purchase cards but some of his suppliers do
not have the capability. The buyer may purchase the electronic
terminals for the suppliers concerned. This may be less costly
than generating paper based orders.
• A buyer pays for his supplier’s manufacturing processes to be
updated in return for discounted supplies in future. The supplier
loses profit on sales to this buyer but makes significant savings
through lower cost supply to his other customers.
• A buyer outsources production of a particular module, and gives
the supplier the machinery previously used in manufacture. Buyer
and supplier share in the revenue generated by sales to other
customers produced by the machinery.
Performance measurement as a
motivating factor
• Supplier development is a process that carries costs as well as benefits. To
ensure that effort is not wasted, buyers will undertake development activities
only with key suppliers. They are often determined by measurement processes
such as vendor rating, pareto analysis and kraljic matrix among others. The
following are some of the motivating factors that may lead the buyer to engage
in supplier development:
• If a buyer enhances working relationships by improved communication routines, he
would expect to see measureable benefits: Fewer late deliveries, fewer part
deliveries, fewer mistakes on supplier invoices, more rapid supplier response when
problems arise etc.
• If a buyer increases performance goals, he would expect to see measureable
benefits such as reduced waste, shorter delivery lead times, less production
downtime while waiting for suppliers etc
• If a buyer provides support personnel, he would expect to see measureable
benefits: Improved quality of output, greater responsiveness to changes in
schedules etc.
Benefits of good supplier relations
• Motivated suppliers are encouraged to invest in research and development.
This leads to lower cost solutions

• Use of multiple sourcing and competitive bidding involves the buyer in

elaborate and lengthy communications and training with a wide variety of
suppliers. The process is much streamlined and waste is avoided, if just a few
reliable suppliers are used instead.

• Long term agreements mean that the supplier’s production costs will fail as a
result of the learning effect. This gives scope for price reductions that will
benefit the buyer.
Supplier management process
1. Supplier-buyer meeting. This is meant to discuss and clarify the following; Rules
and procedures, Staff planning, invoice and payment procedures, Buyer’s
responsibility, supplier’s responsibilities, procedures and time tables etc.
2. Identifying weakness and problems. This is done by monitoring the progress of
the supplier to ensure that all contractual agreements are filled to the desired
standard.
3. Developing the relationship further. Discussing with supplier the possible
developments that may be important in their relationship and developing trust.
4. Continuous improvement. This is achievement of small incremental
improvements as opposed to radical improvements.
5. Performance measurement. This enables each party to gain a better
understanding of the constraints, deadlines and problems affecting the
relationship.
Qualitative aspects of supplier performance

• Standards
• Benchmarking
• Research and development capability
• Cultural adaptation
Standards
• The buyer can measure supplier by assessing the level of compliance with the set standards
(Industry, National or International standards)

• Example of standards:
• ISO 9001: Quality management standards
• ISO 14001: Environmental management standards
• ISO 27000: Information technology standards
• ISO 22000: Food safety management standards
• ISO 50001: Energy standards
• ISO 13485: Medical equipment standards
• ISO 31000: Risk management standards
• ISO 26000: Corporate social responsibility standards
Benchmarks
• The buyer can measure supplier in comparison to the benchmarks such as:
• Internal benchmarks: comparison of an existing vendor with a similar vendor in the same organization.

• Competitive benchmarks: Direct competitor to competitor comparison of a product, service, process or

method. Measuring performance of a vendor in comparison with competitors vendors.

• Functional benchmarks: Comparison to similar or identical practices within the same or similar functions
outside the immediate industry. Comparing vendor’s specific function with other vendors in the industry

• Generic benchmarking: Unrelated business processes or functions

• Once the buyer settles on an appropriate indicator, he should implement the system in
comparison with the benchmarks. If a shortfall is realized, action should be taken to
investigate and remedy the problem.
Research and development capability
• The buyer can measure performance of a supplier through
their investment in research and development. The following
are some of the practical R&D factors that can interest the
buyer:
• Extent of the supplier’s financial investment in R&D
• The number of R&D staff employed
• The quality and extent of the facilities visible in the R&D function
• The supplier past record in R&D innovations
Cultural adaptation
• Relationships are facilitated if the two organizations have a compatible cultures.

• Compatible culture include the organization structure, management style, staffing policies,
and corporate social responsibilities (CSR).

• Cultural compatibility can be gained from a simple inspection of a supplier’s published

account and a physical visit to the supplier’s facility. For example
• Budget allocation on CSR

• Allocation on staff training and development

• Supply chain orientation

• Supplier’s record on health and safety issues

• Employee turnover

• Relationship style adopted by the supplier when dealing with the buyer
Measuring achievement of service levels

• Service agreements

• Service quality

• Evaluation reports
Service agreements

• How often is the service to be provided?

• During what hours will the service be carried out and will there be any disruption to
office activities?

• How far will the service extend?

• What qualifications are needed by the staff members providing the service?

• What speed of response is expected from the supplier when customer makes a
request?

• How will disputes be resolved?

Measuring achievement of service quality
• Tangibility: Appearance of physical facilities, equipment,
personnel and communication materials
• Reliability: Ability to perform the promised service dependably
and accurately
• Responsiveness: Willingness to help customers and provide
prompt service
• Assurance: Knowledge and courtesy of employees and their
ability to convey trust and confidence
• Empathy: Caring, individualized attention the firm provides its
customers
Evaluation reports

• This is a use of regular and simple reports to highlight areas where

supplier is meeting or failing to meet agreed targets.

• The reports are derived from standard templates and data such
delivery times, number of rejects etc. The system automatically
flags the extent to which the supplier has failed to achieve service
levels and provides the basis for ongoing dialogue with a view to
continuous improvement.