1. Supply Chain Management Lecture 11 – Relationships
David Sharpe

2. Lecture 9 - JIT, Lean, Agile Case Studies
Ford and Toyota Q: What changes would you propose?
TPS
Stepwise development of capacity and capability
Low reliance on technology
Make to order, pull through
70 body shell variants prior to painting
Work on reducing body shell variants?
Time to automate?
FPS
Investment to forecast with resulting overcapacity
Technology investment - hard links to supplier arrangements (automation before improvement?)
Painted body shells Made to Forecast
Push Pull arrangement with painted body shell buffer - reliant on correct buffer stock
12 unpainted body shells
Invest time now in process improvement rather than technology?
Better use of real demand information (including linkage back through suppliers)?
Maximise the pull through process – move buffer back to unpainted body shells?
Reduces buffer variants to 12 rather than 120
Better integration with suppliers?

3. Lecture 9 - JIT, Lean, Agile Case Studies
Smart Car Q: How has the order to delivery cycle time process been speeded up?
Design for process.
Generic car. Body frame + 5 main modules. Modules contain sub-modules / components
Small number of module suppliers
Some fully integrated and co-located
4.5 hours assembly time
Suppliers closely involved in development
Distribution focused on changing customer needs
Clients build their car interactively - Sales become consultative
Used to then forward the order to one of 5 distribution centres
MTO with distribution centres doing some late stage postponement activities
OTD < 1 day
Keep customers for life:
Modular concept allows replacement and upgrade
Car is a consumption product rather than a fixed capital investment

4. Lecture 11 - Learning Objectives
On completion you will be able to:
Recognise that for an individual firm a range of relationships will be required from arms-length to vertical integration
Discuss the advantages and disadvantages of single and multiple sourcing
Describe the role of power and trust in supply chain relationships
Identify some of the successful factors required for successful partnerships and transactional relationships
Recognise some of the disadvantages and risks of partnerships and close collaboration

5. Strategic Planning Steps
Partnerships or co-operative relationships involve
Trust
Shared culture, compatibility and understanding
Open book accounting
Shared goals
Shared risks
Recognition of interdependence
Mutual benefits
Information sharing
Co-ordinated planning
Integrated processes
Supply Planning
Supplier Selection
Contract &
Relationship
Strategy
Time 5

6. Longer Term Relationships Definitions of partnership
“A purchasing partnership can be characterised as an agreement between a buyer and a supplier which involves commitment and trust over an extended time-period and includes sharing of information, risks and rewards between these two parties.”(Ellram, 1991, p. 2)
“Companies working together with unprecedented intimacy to accomplish mutual goals” (Dull, S, 1995, p.64)
“Partners share sources, skills and ideas as they receive equivalent input into their own process and products.” (Davis, D, 1994, p. 4)

7. Two Approaches to Supply-Chain Design
TRADITIONAL APPROACH BY OEM
PARTNERSHIP APPROACH
Objective – lowest purchase price
Arms-length, adversarial relationships
Short-term contracts awarded using competitive tendering
Multiple suppliers for every item
Control of technology and product design retained by OEM
Large purchasing and logistics administration costs
If performance is unsatisfactory the contract is terminated
Very large supply base
Objective – lowest cost of ownership
Open relationships with trust
Longer term contracts awarded after lengthy evaluation process
Single or dual suppliers for every item
Design of sub-systems devolved to individual suppliers
Reduced administration costs but more effort developing partnerships
If performance is unsatisfactory the customer help develop the supplier
Very small supply base

8. Kraljic’s Supply Positioning Matrix (From ES2A6)
Low
High
Supply risk
Leverage products
Alternative sources of supply available
Substitution possible
Bottleneck products
Monopolistic market
Large entry barriers
Routine products
Large product variety
High logistics complexity
Labour intensive
Strategic products
Critical for product’s cost price
Dependence on supplier
Tough competitive stance by buyer
Competitive systems tendering + E-commerce
Performance based partnership
Secure supply +
search for alternatives
Buyer
Strength
Supply’s impact on financial results
Kraljic’s supply positioning matrix can be used to help identify where closer relationships are appropriate. Use additional axes – Buyer Strength, Number of Suppliers.
Strategic items – buyer has strength but there are few available suppliers.
Purchasing should use its strength carefully to draw suppliers into a relationship that ensures long term supply.
Bottleneck items – buyer has little power and there are few alternatives. Aim here is
reduce dependence on these items through diversification
find additional suppliers,
seek substitute items,
work with design teams to ensure that bottleneck items are avoided in new products
Routine (non-critical) items – good choice of suppliers
Traditional approach of competitive tendering
Leverage items – large number of available suppliers, buyer has high spending power. Leverage to reduce prices and demand preferential treatment.
Traditional market-based negotiations
Generally tough approach by purchasing - take care not to antagonise (in case favourable conditions change)
Suppliers must become strategically important to improve chances of participating in a partnership.
All relationships should be managed proactively with the minimum goals of fairness and efficiency in mind
Number of available suppliers

9. Adversarial, Transactional or systems contracting
Types of Relationship
Adversarial, Transactional or systems contracting
Partnerships
Integration
Arm’s
length
Co-operative Co-ordinated Collaborative
Joint
venture
Vertically
integrated
Emphasis on price
Emphasis on relationships
Emphasis on sharing risk and rewards through a legal entity
Supply chain owned & controlled by a single organisation
There is a spectrum of relationship types – broadly characterised into Adversarial, Partnerships and Integration.
Within partnership are a number of ‘styles’ of relationship – C3. Come on to these later.
Adapted from Tony Hines, “Supply Chain Strategies”, 2004, Elsevier, page 187

10. Transactional Relationships
Typically 80% of all relationships
For routine or leverage items
Goal – fair and efficient relationships
Good practice involves:
Behaviour
Tangible features
Information approach
Personal contact
Clear specifications
Open communication
Mutual consideration
Training
Confidentiality
Give and take
Timely payment
Equitable treatment
Feedback
Integrity
Even though for routine and leverage items the ‘power’ (never a good word to use when describing a relationship) sits with the buyer there is nonetheless a need for some form of good practice in having an effective relationship.
Based on Fawcett, Ellram and Ogden, “Supply Chain Management”, 2007, pp

11. Characteristics of Partnership Types
Activities
Time horizon
Scope of activities
Cooperation
Fewer suppliers
Short term contracts
Short-term
Single functional area
Coordination
Information linkages
WIP linkages
EDI exchange
Long-term
Multiple functional areas
Collaboration
Supply chain integration
Joint planning
Technology sharing
Long-term with no fixed date
Firms see each other as extensions of their own firm
Three stages of partnership development have been defined; cooperation, coordination and collaboration with increases in the time horizon and scope of activities involved.
These behaviours are defined as working together to bring resources into a required relationship
to achieve effective operations
in harmony with the objectives of the parties involved
resulting in mutual benefit
Partnerships have been characterised as being based on
Info sharing (the most important – should include demand and supply; ref. integration / collaborative working lecture)
Trust and openness
Co-ordination and planning
Mutual benefits and risk sharing
Recognition of mutual interdependence
Shared goals
Compatibility of corporate philosophies
Tony Hines, “Supply Chain Strategies”, 2004, Elsevier, page 188

12. Longer term relationships Dr Mari Sako, London School of Economics
Contractual Trust
Competence Trust
Goodwill Trust
Trust is a key aspect of B2B and other relationships. But what is trust? A complex entity, not easy to measure.
Sako (1992) compared trust across business relationships in the US, Japan, UK, Germany and elsewhere in Europe, and proposed three attributes of customer trust dimensions (contractual, competence and goodwill trust) noting significant differences for each.
Contractual – adherence to legal structures
Competence – ability to perform as expected
This reduces the cost of monitoring and enforcement and provides assurance a supplier can be trusted to carry out a task to the required spec and quality without expensive vetting
These are specified within existing technical and contractual relationships.
Goodwill – when someone is dependable and can be endowed with high discretion
can be entrusted to take initiatives while refraining from unfair advantage taking
extends beyond the existing relations and includes the transfer of new ideas and new technology. 54

13. Multiplying the benefits: C3 behaviour and Trust
High
Low
Win/Win [1+1=8 !]
Trust
Compromise [1+1=1.5 !]
Win/Lose or Lose/Win [1+1=1 !]
Trust and co-operative behaviours are known to be essential ingredients in securing an environment of continuous improvement.
A correlation between the two and the success of collaborative relationships exists.
Trust supported by credible actions should establish a virtuous circle of ever improving business relationship performance.
Covey proposed 3 generic levels of trust and C3 to a business relationship:
Win / Lose or Lose / Win
Defensive, protectionist, legalistic language contracts
attempt to cover all bases, full of qualifiers and escape clauses
Atmosphere promotes further reasons to defend and protect
Compromise
Mutual respect, confrontation avoidance
Polite but not emphatic communication
Creativity suppressed
Win / Win
Synergy, high trust and sincerity
Produces solutions better than the sum of the contributions
Participants enjoy a creative enterprise
C3 behaviour
Adapted from: Covey, 1989

14. Power and Relationships
Power Balance
Buyer Dominance
Buyer-supplier Reciprocity
Supplier Dominance
Arms-length
Short-term operational relationship
Buyer appropriates most of the value
Supplier is non-adversarial
Buyer accepts current market price + quality
Supplier accepts normal (low) market returns
Adversarial commercial relationships
Buyer pays whatever is required
Supplier appropriates most of the value
Collaborative
Long-term operational relationships
Buyer and supplier share value relatively equally
Both agree price and quality trade-offs
Both are non-adversarial
Buyer is non-adversarial
Way of working
Now look at power and relationship types.
Adapted from Cox, 2001

15. Partnership (90 onwards)
Lamming’s 5 phases of customer relationships in the automotive industry
Lean (late 90s?)
Nature of competition - global operation, local presence
contribution to product technology,
organic growth, mergers & acquisitions
Pressure - very high, self imposed
Partnership (90 onwards)
Nature of competition - collaboration, tiering, still dynamic
Pressure - very high, predictable
Resolved (82 onwards)
Nature of competition - closed, some collaboration, strategic
Pressure - medium, some sense of relief
Investing in relationships, and exchanging resources such as product and process technologies can improve the network position of both companies.
Consequently, supplier-client relationships become closer and more productive.
An example of this development is Lamming’s model (1993) in which the customer-supplier relationship in the automotive industry evolves from a ‘traditional’ phase to a ‘stress’ phase, then to ‘resolution’ phase, and ultimately resulting in a ‘partnership’.
The ‘stress’ phase followed the ‘traditional’ one. It was characterised by a desperate attempt to diminish costs, which led to a major struggle for economic survival.
In the ‘resolution’ phase various forms of JIT were introduced and thus the relationships between clients and suppliers improved.
The ‘partnership’ phase was achieved based on
reduced total value-chain cost,
improved quality,
continuous improvement
long-term commitment.
Stress ( )
Nature of competition - closed but deadly, chaotic
Pressure - high/unbearable, volatile
Traditional (pre - 75)
Nature of competition - gentlemanly, friendly
Pressure - low/medium, steady, predictable
Page 14 notes

16. Nishiguchi’s Tiered Structure Achieved Through Cluster Control
PRIME
MANUFACTURER
First
Tier
Second
Tier
Keiretsu – a Japanese business structure that has received a lot of Western interest. A supply chain model that helps explain organisation in the auto and electronics sectors.
Used to describe business consortia based on co-operation, co-ordination, joint ownership and control.
A network in which activities are organised by a lead firm. Characterised by the tiered arrangement – assembler only works directly with a reduced number of suppliers. These suppliers then take responsibility for managing the next tier down.
Compare with Kyoryoku Kai – similar and widely used within lean supply chain activity: is a group of the most important or vital suppliers to any particular company, who work jointly and together to develop more efficient supply methods with a base line aim of reducing production costs. Usually suppliers, who are part of such an association, meet on a regular basis to discuss improvements and production techniques
Partnership in the West has often been seen as requiring single sourcing and a rationalised and much reduced supply base, often involving using 1st tier suppliers to take over management of lower tier suppliers.
Studies of Japanese firms show that partnerships can be achieved with dual suppliers, provided there is sufficient volume being purchased.
Third
Tier
See Case study on Automotive Supply Chains

17. Traditional View of Single & Multiple Sourcing
Single-sourcing
Multi-sourcing
Advantages
Strong relationship and commitment
Potentially better quality
Better communication
Easier cooperation in new product development
High confidentiality
Economy of scale
Can drive price down by competitive tendering
Can switch source in case of supply failure
Wider sources of knowledge and expertise to tap in to
Disadvantages
More vulnerable to disruption if a failure to supply occurs.
Individual supplier more affected by volume fluctuations
Supplier might exert upward pressure on prices if no alternative supplier is available
Difficult to encourage commitment by supplier
More effort needed to communicate
Suppliers less likely to invest in new processes
More difficult to obtain scale economies
Partnership in the West has often been seen as requiring single sourcing and a rationalised and much reduced supply base, often involving using 1st tier suppliers to take over management of lower tier suppliers.
Studies of Japanese firms show that partnerships can be achieved with dual suppliers, provided there is sufficient volume being purchased.

18. The Mazda Seat Sourcing Case
Seats are sourced by model
2 suppliers; Delta Kogyo and Toyo Seat Company
Informal guarantee to each of 33%business
Remaining 33% awarded to the best performer over the life cycle of the previous car models
Criteria for awarding business includes amount of assistance given to the competitor and the kyoryoku kai
Equal sharing of profit throughout the network
If a supplier’s share falls to 33% engineers from Mazda and the competitor can be sent in to help

19. Chadwick & Rajagopal’s factors for successful partnership
Relationships factors
Mutual trust
Complete integrity
Shared objectives
Effective communications
Clear understanding
Resources
Chadwick & Rajagopal’s factors for successful partnership
Internal supplier factors
Commitment to quality
Flexibility to change
Financial security
Technical expertise
Philosophy of continuous
improvement
Commitment from top
management
Internal buyer factors
Company wide acceptance
of partnership
Total cost perspective
Commitment to total quality
Long-term perspective
Commitment from top
management
Successful
supplier
partnership
Enhanced competitiveness
Total cost reduction
Enhanced customer service
Technology
Quality Improvement
Reduced time-to-market
Risk reduction

20. Steele and Court’s buyer-supplier interdependencies
organisation
culture
Purchasing
organisation
culture
Purchasing
representation
Supplier
representation
Firms always depend to some extent on their trading partner.
Interdependence recognises that a buyer depends on a supplier, but the supplier also depends on the buyer.
Interdependence is where the interests of one party cannot be achieved without reliance on the other.

21. Advantages and Disadvantages of Collaboration
Reduced negotiations
Reduced monitoring
Better quality
Increased productivity
Shorter lead-times
Increased responsiveness
Encourage long-term investments
Disadvantages
Inability to price accurately qualitative matters
Efforts to establish and monitor the relationship
Risk of divulging sensitive information
Potential opportunism
Potential abuse of power
Read the case study on ‘How close is too close?’

22. For Friday
Read the case studies on Automotive Supply Chains and ‘How close is too close?’
Possible oral presentation questions
Are partnerships common in this industry?
Do the participants in this supply chain trust each other?
Are the relationships in this industry likely to change in the next 5 years?
How can relationships in this chain be improved?

23. Lecture 11, Key Points & Tips
Based on Harrison A. & van Hoek R., Logistics Management and Strategy, 2005, pp and Tony Hines, “Supply Chain Strategies”, 2004, Elsevier, p. 369.
Relationships between independent firms can vary from arms length with a focus on price and few points of contact to partnerships and joint ventures with shared risk and multiple points of contact.
Typically 80% of relationships will be transactional, focusing on efficiency and Kraljic’s supply positioning matrix can be used to help identify where closer relationships are appropriate. All relationships should be managed proactively with the minimum goals of fairness and efficiency in mind.
Partnership in the West has often been seen as requiring single sourcing and a rationalised and much reduced supply base, often involving using 1st tier suppliers to take over management of lower tier suppliers.
Studies of Japanese firms show that partnerships can be achieved with dual suppliers, provided there is sufficient volume being purchased.

24. Lecture 11, Key Points & Tips
The role of partnership can be described using factors such as sharing of information, trust and openness, coordination and planning, mutual benefits, sharing of risks, recognition of mutual interdependence, shared goals and compatibility of corporate culture philosophy.
Three stages of partnership development have been defined; cooperation, coordination and collaboration with increases in the time horizon and scope of activities involved.
Trust only exists when both sides agree that it does and be classified as contractual, competence or goodwill.
The benefits of partnership include; improvements quality, reduced total cost of ownership, enhanced customer service, reduced risks involved in procurement, technological superiority of the product, reduced time to market for the buyer’s products and improved competitive position.
Disadvantages of partnerships include: inability to price accurately qualitative matters, efforts to establish and monitor the relationship, risk of divulging sensitive information, potential opportunism and potential abuse of power.

25. Lecture 11, Key Points & Tips
You need to be able to discuss some of the factors involved in successful partnerships and be able identify where they are likely to be beneficial and where not.