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Factors for Strategic Supplier Partnerships

3481 words (14 pages) Business Assignment

9th Oct 2020 Business Assignment Reference this

Tags: Business AssignmentsBusiness

Introduction:

Multi-national firms have faced global competition for years and it continues to put increasing pressures on their profits.  This global competition has pushed in further into common businesses that are not multi-national or even have a presence outside their region.  As this competition and pressures continue to increase it has made it necessary for many more companies to find ways of being more efficient and save on resources.  Finding and developing key suppliers who can become a strategic partner with the buyer is a way firms can develop a strategic advantage over others in their industry.  Through this strategic partnership the buyer and supplier can optimize their relationship and maximize their team efforts to improve processes, decrease waste and increase profits.  These relationships are challenging but if nurtured properly a strategic partnership will benefit both the buying and selling firm, improving both organizations’ ability to be successful in a demanding global economy.

Types of Suppliers:

There are basically three categories of suppliers that buyers from the purchasing organization will select to conduct business with.  The categories are: Basic; Approved and Key suppliers.  Basic suppliers are “…those where alternatives exist and resourcing exposes an OEM to only routine cost and order fulfillment risk.  These suppliers are non-strategic”.   (Ericksen, 2017, p. 1).  These would be suppliers who provide basic support to the purchasing company but could be replaced by numerous other suppliers if the buyer wished.  These suppliers have no special agreements with the purchaser, although there would be basic purchase order and business practice agreements between the two companies.  The next category of supplier, a higher level, is the Approved Supplier.  “Approved suppliers are those where alternatives exist and resourcing exposes an OEM to average cost and order fulfillment risk”. (Ericksen, 2014, p. 1).  These approved suppliers typically have a long-term agreement with the buying company and normally an established history of adequate support to the buying organization.  Often there are established purchasing agreements which are normally rolled over each time they expire, assuming the supplier has met the previous agreements.  The standard contractual agreements between the purchasing and selling companies are well established and don’t change much but are formally accepted with each purchase order agreement.  The next category of supplier is the Key Suppliers.  They are a higher level of importance to the purchasing company.  “Key suppliers are those where alternatives exist but resourcing would expose a purchaser (assume OEM) to above average cost or order fulfillment risk”.  (Ericksen, 2014, p. 1).  This level of supplier is very important to the purchasing organization in terms of success for them.  The relationship between the purchaser and supplier has typically been well established for some time.  The supplier has proven itself to be an ally for the buyers.  The final category for a supplier is Strategic Supplier, also referred to as a Partner.  “When two companies agree to work together and share physical and/or intellectual resources, they form a strategic partnership.  Their relationship is usually formalized by a business contract.  This type of agreement aims to help both parties accomplish their goals”.  (Picincu, 2018, p. 1).  This partnership is the highest level between the selling and buying companies.  Typically to obtain this level of partnership the teams have a vested interest in the success of each other, which is why it’s a true partnership.  They have faith and confidence that the partnership is significant on both sides of the team.                 

Measuring Suppliers:

 Not all suppliers will move up or down this sliding scale of hierarchy, nonetheless the purchasing company needs to establish a process to measure of these suppliers and their success or failure.  The measurement process needs to be established internal to the purchasing company but clearly defined and presented to the suppliers prior to any orders being placed.  With a clear grading process established up front, all vendors will have the goals known prior to any agreements between the buyer and seller.  This will eliminate any confusion when initiating a purchase order.  A Balanced Scorecard is one way of measuring a supplier’s ability to meet the buyer’s expectations.  This balanced scorecard was developed by Robert Kaplin and David Norton in 1992, “utilized measures that are leading indicators of performance instead of solely on financial measures”.  (Monczka, Handfield, Giunipero, & Patterson, 2016, p. 774). 

  There should be at a minimum three categories the buying company should list on their supplier scorecards, see the example in figure 1;

  1.       Supplier delivery performance; based off the accepted purchase order that lists the delivery due date and purchased quantity.  During the grading process the buyer should confirm in their purchase order database on whether or not the supplier met these requirements. 
  2.       Supplier cost reduction; this is based off the purchase order as well.  In this case the buyer should consider and inflation or exceptional data that would drive costs up such as a significant climb in energy prices.  These circumstances may not be relevant if the purchase order is a fixed price but could be if the order is based off fair market value at delivery.   
  3.       Supplier quality performance; quality can be subjective.  In this case the buyer will have to establish internal processes within their organization to ensure stakeholders take part in the quality measurement and have quantifiable tools to use in the assessment.  Some companies use Supplier Quality Engineers to assess purchased materials or Subject Matter Experts to assess purchased services.  Regardless the standards need to be clearly defined, quantifiable and shared with the supplier at the on-set of the purchase order. 

Figure 1. Supplier scorecard ("Flexible Supplier Scorecard Template," 2017, p. 1)

Strategic Suppliers:

Why should organizations spend the time and resources developing strategic relationships with suppliers?  By developing relationships with the correct supplier there can be a reduction in costs, improve quality and develop a competitive advantage over their competitors.  “Firms that have similar values, beliefs and practices can achieve synergy”.  (Jack & Powers, 2015, p. 1).  These benefits can be a significant incentive for not only the purchasing but also suppling companies.  A strategic supplier is one who has proven performance capabilities and considered critical for success of the buying company.  The supplier has been chosen as part of a competitive advantage, using their core competencies in support of the buyer’s overall strategy.

 “OEM dependence on strategic suppliers usually creates an uneasy alliance since these suppliers have something the OEM needs and can’t readily purchase elsewhere.  This can put the supplier in a position of relative power with their customer.  Lack of control in a supplier relationship is something most OEMs aren’t used to and in my experience doesn’t handle very well”.  (Ericksen, 2014, p. 1).  It is important that both supplier and purchaser manage this relationship effectively.  Techniques to properly manage the strategic partnership will be discussed later in this research paper.  Management of this partnership will require significant efforts for both sides of the team.  It is imperative both teams put their more experienced members towards the effort to ensure success.  Typically these partnerships are 5-15% of the overall supplier support, if exceeding 15% buyers should review their program.  (Ericksen, 2014). 

Industries Utilizing Strategic Suppliers:

Using strategic suppliers is becoming more prevalent as global competition expands.  “Strategic supplier management is one of the most important means to drive competitive advantage for modern multi-national corporations”.  (Webb, 2018, para. 1).  As we advance into the 21st century more companies understand the advantages of developing these relationships with their suppliers.  The Japanese automotive industry has been a steadfast example of professional OEM processes and activities.  “Toyota has turned excellent supplier management into a competitive edge and it has propelled them to be the largest automotive company in the world”.  (Sutton, 2018, para. 4).  If multi-national organizations don’t develop strategic partnerships, they are surely going to struggle in the modern marketplace.

This global competition is a challenge even in the wide-body jet manufacturing market.  Most people have brand recognition with Boeing and Airbus, understanding they are industry leaders.  This doesn’t mean either company can ignore their supply network or key partnerships.  Both Boeing and Airbus are facing stronger competition from Russia’s United Aircraft Corporation (UAC0 who is working with China’s Commercial Aircraft Corporation (COMAC) on a wide-body-short-range aircraft to meet the needs for short domestic flights.  (Chabanon, 2016). 

With the burdens of global competition on these large manufactures, they in turn have put more pressure on their suppliers to improve the overall supply chain support.  With consolidating aircraft manufacturing supply base with qualified suppliers, outsourcing and co-development of complex systems this business model has become a “win-win” situation.  The aircraft manufacturer focuses on the assembly of aircraft and the supplier expands their repertoire products and services leveraging larger product lines for growth.  (Chabanon, 2016).  In the aircraft manufacturing industry there are four tiers of suppliers.  On the top are engine and aircraft manufacturers.  Tier 1 suppliers are companies that are system integrators who specialize in developing navigation system, manufacture engine modules or aircraft aero-structures.  Tier 2 suppliers manufacturer various types of sub-assemblies for the Tier 1 group.  Tier 3 suppliers are the source for necessary sub-components and materials to the Tier 2 groups.  “In 2007, Airbus was using 200 tier 1 suppliers for the production of its famous double-deck, wide-body A380.  In 2012, this number was reduced to 90 Tier one suppliers for its A350 model, representing less than half of the suppliers used in 2007”.  (Chabanon, 2016, para. 6). 

Advantages:

“If you develop the right relationship with your supplier base, you can have 10,000 additional brains thinking about ways to improve your product and generate cost savings.  And that is very powerful”.  (Monczka et al., 2016, p. 219).  This partnership will allow the buying company to receive superior products and services; the suppler will benefit also with increased sales, more growth opportunities and improve their processes since the partnership will advance teamwork and collaboration.  When this partnership is effective the business creates a more cooperative relationship that will result in greater productivity from both sides of the team.  Another advantage would be suppliers help in development of new products or markets.  “There’s a variety of ways in which supply chain can positively impact the development of new products, beyond what something costs”.  ("Beyond," 2019, p. 1).  When suppliers are involved at the inception of product development, they can share their expertise to lower risks involved in new product or market development.  These efforts could also shorten the implementation timeline of this new work.  

Disadvantages:

There are some disadvantages for both the buying company and the supplier they should considered before entering a strategic partnership.  First, is this a good fit for their company?  Will it result in bottom line profits?  Do both firms have the internal as well as external support and true commitment for the success of this venture?  All stakeholders within both organizations should have mitigation process in place to reduce the accompanying risks involved in this partnership.  “Resourcing business from a strategic supplier exposes a purchaser to excessive cost or order fulfillment risk” (Ericksen, 2014, para. 1).  From the suppliers perspective they too have risks.  “Tying up with specific customers could force a supplier into a niche and preclude it from servicing all possible opportunities.  The level of investments made by the supplier in a relationship might far exceed the long-term gains to the supplier”.  (Kalwani & Narayandas, 1995, p. 1). 

Often when these disadvantages to a strategic supplier relationship are considered they are outweighed by the overall benefits gained to both companies.  When the disadvantages are not able to be overcome, the buying firm may elect to discontinue the maturing of the relationship and default to resuming the preferred supplier relationship (Kalwani & Narayandas, 1995).  While this is discouraging to the potential supplier the purchasing firm supports this decision with policy, supplier balanced scorecards and other available criterion-based logic.  Despite the numerous benefits to suppliers the customer is frequently difficult to satisfy and intolerant to any signs of inadequacy shown by the supplier (Kalwani & Narayandas, 1995).

Methods to Manage the Strategic Supplier Relationship:

The strategic supplier partnership is like any other relationship, it needs to be worked on together for it to be successful.  There needs to be clear communications at all times.  This success will come from managing expectations with both the buyer and supplier.  These expectations need to be clearly expressed and agreed to by all key stakeholders within both organizations.  This buy-off and unwavering support from senior management in both companies is absolutely necessary.  It is also essential that goodwill and trust be established as early as possible, preferably in the initial stages of general business practices between the two companies, long before the decision to move towards a strategic partnership.  It works best if the two companies had a solid relationship prior as “basic” and “key” supplier / buyer which are described in the Type of Suppliers discussed previously.  During those phases both teams work well together, thus advancing into the next more intimate level of the partnership.  By time the decision by both sides to move into the strategic supplier phase, the relationship should already been solid with trust of the other organization.  “…trust and dependence play key roles in determining the long-term orientation of firms in a relationship and that both similarities and differences exist across the two sides with respect to the effects of several variables on long-term orientation, dependence, and trust”. (Kalwani & Narayandas, 1995, p. 1).  The bottom line to success of the partnership is solid communications, clear expectations and defined measurements of performance from both the supplier and buyer.  It is just prudent for both organizations to trust but verify the business transactions between each.     

Growing Trends:

There is increasing pressure globally on organizations to improve their supply chain network.  This is driven by the competition for available resources and other challenges such as: sourcing of raw materials; supply disruption; modernization of technologies; shortage of skilled workers.  Obtaining raw materials at a sustainable price is becoming a greater challenge.  “No one country has a monopoly of the supply of these metals because the markets are widely distributed in different regions around the globe”.  (Brand, 2018, para. 6).  Getting these limited materials has had it important for organizations to have solidified supply networks that can draw from more than one source.  Another challenge is to mitigate the risk of disruptions in the supply chain.  “There is always the risk of supply being constrained or limited due to incorrect prediction of future demand, inaccurate pricing projections, design change, and political disruptions or geo-environmental issues such as climate and natural disasters”.  (Brand, 2018, para. 8).  A comprehensive threat analysis and mitigation plan for known risks is necessary in case there are activities that mandate the execution of these plans.  The aerospace industry is an advanced profession naturally because it is often on the cutting edge of technology.  “Aerospace supply chain players are struggling to keep pace with modernization technologies such as automation, robotics, and standardization”. (Brand, 2018, para. 10).  It is essential that the supply chain network keep pace with the technologies necessary to support the industry.  That leads into the last challenge of skilled workers.  “Training is not rapid enough to advance the needs of the workforce and there are limited skill sets available in managing complex projects”.  (Brand, 2018, para. 11).  Recruiting and retaining skilled workers to support the advanced aerospace supply chain network is vital to operate the network successfully.            

Conclusion:

As global competition continues to grow it puts increasing pressures on organizations to improve their processes and decrease their costs.  One way to do this is to find key suppliers who can be brought in as strategic partners.  As partners the two firms can develop processes and procedures to most efficiently support both sides of the team.  Capitalizing off the collaboration from all parties can decrease costs and improve profits.  There is also the collaborative advantage in development of new market places or even new produces.  The strategic partnership can bring success to both parties for countless business cycles.  It can be that “win-win” solution so often spoken about in business circles around the world, but it will require commitment and trust of the entire team from both organizations.  It is not an easy task but is a necessary venture if suppliers and buyers want continued success in the future.

References

  • Brand, S. (2018). 4 Must-Know Aerospace Supply Chain Management Issues. Retrieved from https://www.cmtc.com/blog/4-must-know-aerospace-supply-chain-management-issues
  • Chabanon, M. (2016). The Aerospace Supply Chain Revolution - How Market Trends Affect Aircraft OEM And Tier Suppliers. Retrieved from https://www.strategicsourceror.com/2016/05/the-aerospace-supply-chain-revolution.html
  • Enabling Purchasing Power for Professional Buyers. (2017). Retrieved from https://blog.purchasingtoolpak.com/2017/04/28/flexible-supplier-scorecard-template/
  • Ericksen, P. (2014, 16 Septemer 2014). The Strategy Behind Choosing Strategic Suppliers [blog]. Industry Week. Retrieved from https://www.industryweek.com/blog/strategy-behind-choosing-strategic-suppliers
  • Jack, E. P., & Powers, T. L. (2015). Managing strategic supplier relationships [Magazine]. The Journal of Business and Industrial Marketing . https://doi.org/10.1108/JBIM-08-2011-0101
  • Kalwani, M., & Narayandas, N. (1995). Long-term manufacturer-supplier relationships: Do they pay off for supplier firms? Journal of Marketing, 59. Retrieved from https://search-proquest-com.ezproxy.libproxy.db.erau.edu/docview/227827125?pq-origsite=summon
  • Monczka, R. M., Handfield, R. B., Giunipero, L. C., & Patterson, J. L. (2016). Purchasing and Supply Chain Management (6th ed.). Boston, MA.: Cengage Learning.
  • Picincu, A. (2018, 26 Oct 2018). What Is the Meaning of a Strategic Partner? Bizfluent. Retrieved from https://bizfluent.com/about-6511465-meaning-strategic-partner-.html
  • Supply Chain + Product Development. (2019). Retrieved from http://www.beyonddesignchicago.com/supply-chain-product-development/
  • Sutton, D. (2018, 7 August 2018). Remarkable Supplier Relationships are Built on Story, Strategy and Systems. Top Right, Transformational Marketing. Retrieved from https://www.toprightpartners.com/insights/remarkable-supplier-relationships-are-built-on-story-strategy-and-systems/
  • Webb, J. (2018, ). How To Manage Strategic Suppliers. Forbes. Retrieved from https://www.forbes.com/sites/jwebb/2018/03/30/how-to-manage-strategic-suppliers/#1ab7cb997994

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