CHAPTER 3- CREATING & MANAGING SUPPLIER RELATIONSHIPS Principles of Supply Chain Management: A Balanced Approach Prepared by Daniel A. Glaser-Segura, PhD

© 2005 Thomson Business and Professional Publishing Learning Objectives You should be able to: Discuss the current state & future challenges of SCM. Explain why Supply Chains are becoming more global. Describe how firms are expanding their SCM efforts to second-& third-tier members of their supply chains. Discuss why & how supply chains are making greater efforts to become more environmental responsible. Explain how supply chains are becoming faster. Explain why firms are outsourcing some or all SCM processes. Describe some of the ways supply chains are reducing total costs. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

© 2005 Thomson Business and Professional Publishing Learning Objectives You should be able to: Explain the importance of supplier partnerships and strategic alliances Understand factors for developing successful partnerships Develop a supplier evaluation & certification program Explain the importance of a supplier awards program Understand the capabilities of supplier relationship management technology Explain the benefits of using SRM software to manage suppliers Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

© 2005 Thomson Business and Professional Publishing Chapter Three Outline Developing Successful Partnerships Building Trust Shared Vision & Objectives Personal Relationships Mutual Benefits & Needs Commitment & Top Management Support Change Management Information Sharing & Lines of communication Capabilities Performance Metrics Continuous improvement Supplier Evaluation & Certification The Weighted-Criteria Evaluation System ISO 9000 & ISO 14000 Supplier Development Supplier Awards Supplier Relationship Management Software Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

© 2005 Thomson Business and Professional Publishing Introduction “Supply, sourcing, and purchasing professionals in companies nationwide believe strongly that more and stronger supplier partnerships are critical to achieving competitive corporate performance” Purchasing Magazine Supplier partnerships involve “a mutual commitment over an extended time to work together to the mutual benefit of both parties, sharing relevant information and the risks and rewards of the relationship” Institute for Supply Management Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Developing Successful Partnerships Reasons given for failure of alliances: Overly optimistic Poor communications Lack of shared benefits Slow payback results Lack of financial commitment Misunderstood operating principles Cultural mismatches Lack of alliance experience. Survey of CEOS- The Conference Board Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Keys to Successful Partnerships Building Trust With trust, partners are more willing to work together, find compromise solutions to problems, work toward achieving long-term benefits for both parties, and, in short, go to the extra mile.   Shared Vision and Objectives Both partners must share the same vision and have objectives that are not only clear but mutually agreeable. The focus must move beyond tactical issues and toward a more strategic path to corporate success. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Keys to Successful Partnerships- Cont. Personal Relationships It is people who communicate and make things happen.   Mutual Benefits and Needs Partnership should result in a win-win situation, which can only be achieved if both companies have compatible needs. An alliance is much like a marriage, and if only one party is happy, then the marriage is not likely to last. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Keys to Successful Partnerships- Cont. Commitment and Top Management Support Commitment must start at the highest management level. Partnerships tend to be successful when top executives are actively supporting the partnership. Change Management Companies must be prepared to manage change that comes with the formation of new partnerships. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Keys to Successful Partnerships- Cont. Information Sharing & Lines of Communication Both formal and informal lines of communication should be set up to facilitate free flow of information. With high trust, information systems serve more effectively. Confidentiality of sensitive financial, product, and process information must be maintained.  Capabilities Key suppliers must have the right technology and capabilities to meet cost, quality, and delivery requirements. In addition, suppliers must respond quickly to changing customer requirements. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Keys to Successful Partnerships- Cont. You can’t improve what you can’t measure. Measures related to quality, cost, delivery, & flexibility are used to evaluate suppliers. Metrics should be:1) understandable, 2) easy to measure, and 3) focused on real value-added results A multi-criteria approach is best to measure performance.   Total cost of ownership (TCO), made up of all costs associated w/acquisition, use, & maintenance of a good or service Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Keys to Successful Partnerships- Cont. Examples of Performance Metrics Cost/Price- Competitive price & availability of cost breakdowns Quality- Zero defects, Fit for use, ISO 9000 Delivery- Fast, Reliable/on time Responsiveness & Flexibility- Responsiveness to customers & to changing situations Environment- Environmentally responsible, ISO 14000 Technology- Superior product/service design Business Metrics- Reputation, information sharing Total Cost of Ownership Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Keys to Successful Partnerships- Cont. Continuous Improvement The process of evaluating suppliers based on a set of mutually agreed-upon performance measures provides opportunities for continuous improvement making a series of small improvements over time results in the elimination of waste in a system. Buyers and suppliers must be willing to continuously improve their capabilities in meeting customer requirements of cost, quality, delivery, and technology. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supplier Evaluation and Certification A process to identify best and most reliable suppliers. Sourcing decisions are made based on facts and not merely on perception. Providing frequent feedback on supplier performance can help avoid surprises and maintain good relationships. Suppliers should be allowed to provide constructive feedback to the customer Supplier Certification refers to “an organization’s process for evaluating the quality systems of key suppliers in an effort to eliminate incoming inspections.” -Institute for Supply Management. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supplier Evaluation and Certification- Cont. Criteria Used in Certification Programs No incoming product lot rejections (e.g., less than 0.5 percent defective) for a specified time period. No incoming non-product rejections (e.g., late delivery) for a specified time period No significant supplier production-related negative incidents for a specified time period ISO 9000/Q9000 certified or successfully passing a recent, on-site quality system evaluation Mutually agreed-upon set of clearly specified quality performance measures Fully documented process and quality system with cost controls and continuous improvement capabilities Supplier’s processes stable and in control Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supplier Evaluation and Certification- Cont. The Weighted-Criteria Evaluation System Select the key dimensions of performance mutually acceptable to both customer and supplier. Monitor and collect performance data. Assign weights to each of the dimensions. Evaluate performance measures between 0 and 100. Multiply dimension rating by weight and sum overall score. Classify vendors based on their overall score: Unacceptable, Conditional, Certified, & Preferred Audit and perform ongoing certification review. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supplier Evaluation and Certification- Cont. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supplier Evaluation and Certification- Cont. ISO 9000 Developed by International Organization for Standardization (ISO)- series of management & quality standards in design, development, production, installation, and service. U.S. companies wanting to sell in the global market seek ISO 9000 certification.   ISO 14000 A family of standards for environmental management. The benefits include reduced energy consumption, environmental liability, waste and pollution, and improved community goodwill. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

© 2005 Thomson Business and Professional Publishing Supplier Development Supplier development refers to buyer’s activities undertakes to improve a supplier’s performance and/or capabilities based on the following approach: Identify critical products and services Identify critical suppliers Form a cross-functional team Meet with top management of supplier Identify key projects Define details of Agreement Monitor status and modify strategies Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

© 2005 Thomson Business and Professional Publishing Supplier Awards Companies should recognize and celebrate the achievements of their best suppliers. Award winners exemplify true partnerships continuous improvement, organizational commitment, and excellence. Award-winning suppliers serve as role models for other suppliers. Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supplier Relationship Management Software Supplier relationship management (SRM) software improves profits and reduces costs. SRM refers to “extended procurement processes such as sourcing analytics (e.g., spend analysis), sourcing execution, procurement execution payment and settlement, and-closing the feedback loop-supplier scorecarding and performance monitoring.” Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing

Supplier Relationship Management Software- Cont. Five key points of an SRM system: Automation Integration spans multiple departments, processes, and software applications. Visibility of information and process flows Collaboration through information sharing Optimization of processes and decision making Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan. © 2005 Thomson Business and Professional Publishing