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Managing Supply Chain Relations

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					Supply Chain Management

Relationship Management

Prof. Upendra Kachru

Firm’s Assets

In today’s world, competitive advantage is more often obtained from intangible assets than it is from tangible assets.

Why?

Intangible Assets
Prof. Upendra Kachru

Operations Management

Modern business management recognizes that individual businesses can no longer compete as solely autonomous entities, but rather collectively i.e. they can do it better collectively.

Modern Management - A Paradigm Shift
Prof. Upendra Kachru

Operations Management

The drivers for this paradigm shift are two factors:  Expectations of customers, and  Perceptions of managements.

Prof. Upendra Kachru

Operations Management

Customers want more!

Customers want increased value. This is reflected in:  Response time sensitivity,  Reliability,  Cost consciousness, and  Information sensitivity

Prof. Upendra Kachru

Operations Management

Firms perceive benefits due to:  Lower lead times and operational costs,  The use of information technology to enable significant change in distribution management processes;

Management’s have changed perceptions

 Continuous improvement by integrating activities and processes which lowers costs, and
 Reduction of inventories and better use of working capital, which significantly reduces costs leading to higher profits and better value for the customer. These changes provide alternatives to the firm to gain competitive advantage.

Prof. Upendra Kachru

Operations Management

Firm’s Assets

Competitive Advantage of a firm, therefore comes from two types of intangible assets. These are: • Relational Assets: Outcomes of relationships between a firm and key external and internal stakeholders • Intellectual Assets: Types of knowledge a firm possesses

Intangible Assets
Prof. Upendra Kachru

Operations Management

Relational Assets!
Relational assets arise from the interaction of the firm with entities in its environment i.e. with its stakeholders. Supply Chain is one facet of these relational assets. This is because the supply chain is basically a customer focused, value maximizing function within the organization.

Prof. Upendra Kachru

Operations Management

Relational Assets!
An efficient and successful supply chain is only possible if the organization has the ability to manage relationships on all fronts:
 Upstream suppliers,  Internal suppliers, as well as  Downstream customers.

Managing relationships is perhaps the most difficult of all the activities supply chain managers perform now.

Prof. Upendra Kachru

Operations Management

Supply Chain Relationships
SRM (Supplier Focus) Source Negotiate Buy Design Collaboration Supply Collaboration ISCM (Firm Focus) CRM (Customer Focus) Strategic Planning Market Trends Demand Planning Sales and Marketing Supply Planning Information on Customers Fulfillment Order Management Field Service Management

Prof. Upendra Kachru

Operations Management

All the three macro processes are aimed at serving the same customer. However, integration of the systems is to a large degree dependent on the organizational structure of the firm. In many firms, marketing is in charge of the CRM macro process, manufacturing handles the ISCM macro process and purchasing oversees the SRM. Integration between the three macro processes is crucial for successful supply chain.

Prof. Upendra Kachru

Operations Management

Relationship management has the following objectives:
 Improving the quality of interaction of organizations (e.g. Buyers and sellers),  Take steps so that they can cooperate and communicate better, they can develop trust, and  Mutually develop the types of governance structures that are necessary to contribute to the efficiency of the supply chain.

Managing Relationships

In a supply chain, these are ensured by managing relationships effectively.

Prof. Upendra Kachru

Operations Management

There are three types of relationships:
 Transactional: This type of relationship simply means that neither party is especially concerned with the well-being of the other.  Collaborative: Organizations perform a series of value-adding activities working together by recognizing the interdependency and need of cooperation, to provide benefits to both parties.  Alliance: They go one step further, the relationships are based when there is institutional trust between the buyer and the seller.

SUPPLIER RELATIONSHIPS

Prof. Upendra Kachru

Operations Management

Relationship Management
Type of relationship is often governed by the duration of the trading relationship  Short-term - Transactional
 

Oftentimes involves competitive bidding Minimal interaction, transactional mode Often involves an ongoing relationship Often involves greater cooperation at the level of the partner organizations



Medium-term - Collaborative




Long-term - Alliance


Prof. Upendra Kachru

Operations Management

SRM

Relationships

The profitability of the supply chain is based on the nature of the relationship between entities in the supply chain. The flows between the stages in a supply chain determine the value relationships add. If the quality of the flow is good, the entire supply chain benefits from the added value.
Prof. Upendra Kachru

Operations Management

SRM

Relationships

The focus on relationship management requires that all elements of relationship management, including trust building, communications, joint efforts, and planning and fostering interdependency, will be increasingly studied and managed to achieve competitive advantage in the relationship.
Prof. Upendra Kachru

Operations Management

Trust and the Supply Chain
Trust is critical to the proper functioning of the supply chain and the management of relationships.

Prof. Upendra Kachru

Operations Management

17

Relationship Management Matrix
Alliance or collaboration
Cooperative or Collaborative

Transactional
Prof. Upendra Kachru

Operations Management

Transactional

The goods and services in the lower left hand quadrant of the Relationship Management Matrix have transactional relationships.  Goods in this quadrant have a lower total value with a limited supply market.  You can create value here by reducing the transaction cost of the purchase.  Even when an item has many potential suppliers, the cost of searching for and comparing sources outweighs the value resulting from this effort. In reality, relationships are not a concern in this quadrant.
Operations Management

Prof. Upendra Kachru

Competitive

The lower right hand quadrant of the Relationship Management Matrix includes standard lower-to-medium total value items or services.  These are characterized by many suppliers and low supplier-switching costs.  Here competitive bidding, shorter-term contracting, reverse Internet auctions, and blanket purchase orders provide value. Relationships with the providers of these items are typically competitive and price focused.  Thus, pursuing a higher-level relationship here would be unproductive because the cost of the relationship would likely outweigh the resulting benefit.
Operations Management

Prof. Upendra Kachru

It is advantageous for items like commodities, standard products, low value items (C-category), and noncritical items. There is relatively less purchasing time and effort required to establish price, as these are established primarily by market forces. Lower skill levels of procurement personnel are required.

Transactional Relations When?

Though transactional relationships are formal and inflexible, in certain cases they provide advantages, as in most cases they lend themselves to e-procurement and, in some cases, reverse auctions.

Prof. Upendra Kachru

Operations Management

Transactional Relations
Virtually all buying firms have transactional relationships. The relationship is formal. The buyer and the seller see the relationship as a zero sum game i.e. what one party wins, the other loses.

Relationship is based on winning and losing

Prof. Upendra Kachru

Operations Management

Transactional Relations

The transactions are a series of independent deals made at arm'slength. Each transaction is entered into on its own merits. The focus is on price. Therefore, there is limited contact between the buyer and the seller. Since the prices are basically established by market forces, neither buyer nor supplier will rush to the other's assistance in bad times or when problems arise. Basic data relating to technical data, special features, costs, and forecasts, etc. are not shared. There is little or no basis for collaboration and learning from each other.
Prof. Upendra Kachru

Operations Management

In such relationships the supplier is not motivated to invest time and energy in the development of the potential buyer's products. Quality is only as good as required. Considerable investment in expediting and the monitoring of incoming quality is required. Transactional relationships are generally inflexible. Suppliers tend to provide the minimum service required. Little likelihood of investments in R&D and training as well as the procurement of new, more efficient equipment focused on the customer firm's needs.
Prof. Upendra Kachru

Transactional RelationsDisadvantages

Operations Management

Collaborative

Goods and services in the top right hand quadrant of the Relationship Management Matrix benefit from consolidating volumes with fewer supply chain members.  Longer-term contracts for larger volumes are typically used in this quadrant.  Contract negotiations should focus on factors that can affect supply chain performance such as cost, quality, delivery, packaging, logistics, inventory management, and service.  Depending on the item, a total cost rather than price focus is required. Relationships with suppliers that provide leveraged items should be cooperative.
Operations Management

Prof. Upendra Kachru

When collaborative relations replace transactional relations, there is overall improvements in many areas. There is:
 Controlled competition,  Benchmarking, and  Advanced supply management pricing practices.

Collaborative Relationships – Why?

The end results are:
    Lower total costs, Higher quality, Reduced time to market, and Reduced risk of supply disruptions.

Prof. Upendra Kachru

Operations Management

The awareness of the interdependence and necessity of cooperation is the key difference between collaborative relationships and transactional ones. Organizations perform a series of value-adding activities working together by recognizing the interdependency and need of cooperation, to provide benefits to both parties. These include cost reduction, improved quality, reduced time to market, and the leveraging of supplier technology.

Collaborative Relationships
Prof. Upendra Kachru

Operations Management

As both parties recognize their relationship is long term, their interdependence and the need for cooperation, is reflected in their continual effort to mutually work together towards cost reduction and improved quality. Such acts extend the relationship between the two parties.
Prof. Upendra Kachru

Operations Management

With a high level of certainty and continuity of demand, sellers are prone to explore improving processes and adopting technical innovations. They are also willing to work with their buyers on new ideas. This often results in cost reduction for both the buying and supplying organizations.

Prof. Upendra Kachru

Operations Management

Longer-term performance agreements are an incentive to suppliers to reduce their costs. Cost reductions result from value engineering and value analysis (VENA) in collaborative relationships. Continuous improvement is far easier to implement and manage with recognized interdependence and cooperation. .

Prof. Upendra Kachru

Operations Management

Collaborative Relationships Requirements

The most important factors required for a successful collaborative relationship between a buyer and a supplier are:
 Two-way communication,  Clear product specifications, and  Responsiveness to supply management's needs.

Prof. Upendra Kachru

Operations Management

Information exchange is perhaps the most important component of successful collaboration. The full benefits of collaboration are obtained when there is free exchange of data, operating plans, and financial information that is needed by each of the partner organizations. Information sharing should be realistic, informed, and detailed. This makes for improved decision-making and supply chain efficiency.

Prof. Upendra Kachru

Operations Management

The major disadvantage of collaborative relationships is the amount of human resources and thought that is required to develop and manage such relationships. It takes a lot of time and energy, judgment and managerial expertise to make collaborative relationships successful.

Disadvantage

Prof. Upendra Kachru

Operations Management

Alliances

The top left hand quadrant of the Relationship Management Matrix includes goods and services that consume a large portion of total purchase budget, are essential to a product's function, or help differentiate the product in a way valued by the end customer.  These goods and services often involve customization rather than standardization. Consequently, this quadrant features fewer suppliers that can satisfy a purchaser's requirements.  They represent a small portion that has a disproportionate effect on product cost or performance. Opportunities usually exist to create value through alliances or collaborative efforts.
Operations Management

Prof. Upendra Kachru

Supply Alliances

Supply alliances, go one step further than collaborative relationships, these are based when there is institutional trust between the buyer and the seller. A high level of recognized interdependence and commitment is present in such relationships. There is a visible atmosphere of cooperation. The buyer and the seller address potential conflicts and resolve them openly. The focus is a search for the root cause, not to assignblame.

Prof. Upendra Kachru

Operations Management

Supply Alliances

Alliances are not legal entities, but mutually beneficial and open relationships wherein the needs of both, the buyer and the seller, are satisfied. They are similar to collaborative relationships, but stronger. But, these are difficult to develop, because supply alliances only work when the buyer and the seller are able to develop and manage institutional trust.

Prof. Upendra Kachru

Operations Management

Some factors are important in determining when a special relationship is necessary:  If one supplier is head and shoulders above other suppliers in terms of the value it provides the firm, then an alliance is beneficial.  "Strategic" suppliers who provide a unique product, technology, or service and have a major impact on your competitive advantage in the marketplace.

When is this Special Relationship warranted?
Operations Management

Prof. Upendra Kachru

 When the company benefits greatly and the supplier is "integrally connected" i.e. their engineers are working side by side, or they are colocating their manufacturing facilities.  If customers require high degrees of flexibility and speed of responsiveness, it is a classic alliance driver for suppliers who can match the performance.  If the potential supplier possess economic power which it is willing to employ over its customers.
Prof. Upendra Kachru

When is this Special Relationship warranted?

Operations Management

An alliance is a living system that progressively evolves with the objective of creating new benefits for both parties. Supply alliances reap incredible benefits. Sellers are willing to invest in customized machinery, tools, information systems, delivery processes, etc., due to the long term relationship with the buyer. Buyers enjoy the benefits of early supplier involvement (ESI) in the development of new components.
Prof. Upendra Kachru

Operations Management

By improving the process, the manufacturing quality is raised, which results in improved quality at lower total cost. They accumulate specific knowhow of the buyers market and requirements by working together. The synergies result in reductions of direct and indirect costs associated with labor, machinery, materials, and overhead. Negotiations and renegotiations occur in a win-win manner.

Synergies
Prof. Upendra Kachru

Operations Management

The major disadvantage of alliances, like collaborative relationships, alliances are a very resource-intense approach to supply management. It takes cross-functional teams, early supplier involvement, target costing, improved communications through techniques such as co-location of supplier engineers, and a constant contact with the supplier. It takes a lot of time and energy, judgment and managerial expertise to make alliances work.
Prof. Upendra Kachru

Disadvantages

Operations Management

Relationship Element Communications Competitive Advantage Connectedness Contribution to New Product Development Difficulty of exit Duration Expediting Focus Level of Integration Level of Trust Number of Suppliers Open Books Quality Relations Resources Service Shared Forecasts Supply Disruptions Technology Inflows Type of Interaction Prof. Upendra Kachru

Transactional High potential for problems Low Independent Few Low Short Reactive Price Little or none Low Many No Incoming Inspection Inward looking Few – low skill Minimal No Possible No Tactical

Collaborative and Alliance Systematic approach to enhance communication High Interdependent Many- early supplier involvement Difficult- high impact Long Proactive Total Cost High or total High One or few Yes Design quality into system Concern with each other’s wellbeing Professional Greatly improved Yes Unlikely Yes Strategic Synergy

Operations Management

Relationship Management Strategy
Supply chain strategy, reflects relationship management attributes. It is significantly different from traditionally accepted company strategies. Traditional competitive and generic strategies including low cost, product distinctiveness, and/or innovation, require internal functional coordination. Supply chain strategy requires partners to provide support for each to reach their objectives. Inter-firm coordination becomes crucial.

Prof. Upendra Kachru

Operations Management

Firms voluntarily agree to integrate human, financial, or technical resources in order to create a better business model. They have something to gain. The gains that they expect are as follows:  Better demand planning,  Inventory visibility, and  New knowledge and skills.

Why Collaboration or Alliance?

Prof. Upendra Kachru

Operations Management

Measuring Appropriateness
There are 5 major categories which can be used to measure the appropriateness of the relationship strategy:  Stability of the prices, market, and buyer's demand.  Capability of potential suppliers.  Competition in the supply market.  Benefits to the buying firm from the relationship.  Internal Buy-In to partnership.

Prof. Upendra Kachru

Operations Management

These factors have to be considered on dependency matrix.
High

Organization’s Dependence

Partner Relatively Powerful

High Level of Interdependence

Low

Organization Relatively Powerful

Low Level of Interdependence

Low

Partner’s Dependence

High

As the reciprocal interdependence in the allocation of operational roles and decision rights becomes greater, it increases the chances of an effective relationship.
Prof. Upendra Kachru

Operations Management

46

In good supply chains, the positive uses of power tend to:  Lead to stronger supply chain relationships and improved performance.  Supply chain efficiency measured in reduced inventory and cost savings;  Supply chain effectiveness including improvements in customer responsiveness; and  Better access to target market segments.

Supply Chain depends on the Leader

Prof. Upendra Kachru

Operations Management

In Balance

What relationship best satisfies a particular requirement? Do benefits outweigh the effort, risk, and resources required? Some of issues that need to be considered in this context are:  Is the buyer willing to take the risk of reducing its supply base?  The shared values with the supplier. The supplier should not act in an opportunistic manner over time.  Are both supplier and buyer aligned in their respective visions to be able to make longterm commitments to each other?
Operations Management

Prof. Upendra Kachru

 Are both the purchasing and supplier organizations willing to keep attention focused on the joint customer, in order to establish supply chain objectives and goals?  Are both supplier and buyer aligned in what their ultimate customer considers to be valuable?  The resources of the firms to optimally share communication and information.

Prof. Upendra Kachru

Operations Management

 The training of personnel to manage an alliance relationship. Can the buyer and the seller present a joint marketing front for the links further downstream in the supply chain?  The knowledge, expertise, and resources, of the partner to stay current in the industry.  The type of cooperation envisaged in sharing risks for development of new technologies, sub-systems, products, processes, or service support.

Prof. Upendra Kachru

Operations Management

Successful supply chain firms require to:  Share information, resources, and certain degrees of risk in order to accomplish mutual objectives, and  Independent supply chain partners are involved in joint decision-making and jointproblem-solving. Use of databases, communication systems, and foremost advanced computer software are crucial for the development of a modern cost-effective integrated SCM.

Formula to Success

Prof. Upendra Kachru

Operations Management

Supply Chain Management


				
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Description: Different types of rlationships in a supply chain, with particular emphasis on supplier relationship and supplier relationship strategy