CIPS
Level 4
QUICK START GUIDE
Managing Purchasing
and Supply
Relationships
First edition for new syllabus May 2006
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CHAPTER 1
Relationships in Context
1 Internal and external relationships
This study module is concerned with the commercial relationships that exist between buyers and suppliers. The relationships that we will be studying are usually entered into for the purpose of making a profit. However, it is worth noting that some of the organisations with which buyers are concerned are not dominated by a profit motive. For example, this is true of charities and government departments.
As buyers, we are mostly interested in relationships with suppliers. A supplier is usually an external organisation providing us with quality goods or services for use in our business, in return for a consideration that will boost its own profits. However, purchasing also deals with internal customers and suppliers.
The concept of the internal customer is that within an organisation, internally-delivered goods and services, as well as externally-obtained goods and services, should meet the requirements and expectations of the internal customer. To do this, the needs of the internal customer have to be identified. Effective purchasing will therefore make use of cross-functional teams (CFTs), with representatives of the internal customers included within the team.
2 The relationship spectrum
A relationship with a supplier can be either competitive or collaborative.
In a competitive relationship, the buying organisation seeks to obtain the best price possible from the supplier, for the required quality and delivery standards. The buyer tries to squeeze the supplier’s profit margins. A competitive approach can be seen as a win-lose situation, where any gains for the buyer are at the expense of the supplier.
Competitive relationships are associated with transactional purchasing. Features of transactional purchasing are as follows.
• Competitive bidding for contracts.
• Many competing suppliers.
• Typically, standard products.
• Wide supply markets.
• No benefit from or need for a high degree of trust between buyer and supplier.
• No supplier power. The cost of switching from one supplier to another is low.
In a transactional relationship there is a simple exchange between supplier and buyer. The supplier provides goods or services; the buyer provides money in payment. This differs from a collaborative relationship in which the benefits of doing business together arise from ideas of sharing as well as exchanging.
In a collaborative approach, the buyer organisation seeks to develop a long-term relationship with the supplier. The strategic view is that the buyer organisation and the supplier share common interests, and both can benefit from seeking ways of adding value in the supply chain. There is a win-win situation, where buyer, supplier and end-customer can all benefit. The supplier will participate with the buyer in looking for improvements and innovations, secure in the knowledge that any benefits that are achieved will be shared
In practice, buyers will choose to adopt a competitive approach with some suppliers and a collaborative approach with others. These are the two ends of a relationship spectrum that can be illustrated as follows. We elaborate on this in the Reference Text.
The relationship spectrum
3 Transactional relationships
There are situations where the trouble and expense of developing a long-term collaborative relationship is simply not justified. If the product has little or no strategic importance to the buyer then a simple transactional model is appropriate. This might apply, for example, to purchases of office stationery.
Another case where the transactional model is appropriate is that of items which are purchased only rarely. Developing a collaborative relationship involves continuous interaction with the supplier, and this is not justified when purchases are rare.
Of course, just because a transactional model is adopted does not mean that the buyer should relax his efforts to maximise the benefits to his employer. The buyer will still wish to manage the relationship in the most efficient way. To do so, he can make use of modern developments that help to keep down costs and streamline processing. For example, small-value orders may best be handled by use of corporate purchasing cards. Savings may also be available by electronic purchasing.
4 Collaborative relationships
It was recognised in the 1980s that developing a customer-supplier relationship could generate enormous mutual benefits for both the customer and the supplier. However, the successful development of customer-supplier relationships was all too often hindered by the win-lose attitude towards the purchasing transaction. Either the customer ‘won’ with a low price or the supplier ‘won’ with a high price.
The DTI and the CBI therefore launched a Partnership Sourcing initiative in September 1990. The aim of the initiative was to encourage businesses to recognise the potential benefits from adopting a philosophy of win-win, where both parties in the relationship stand to gain from working together.
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Chapter 1: Relationships in Context
Partnership sourcing is defined as ‘a commitment by customers/suppliers, regardless of size, to a long-term relationship based on clear mutually agreed objectives to strive for world class capability and effectiveness’.
The CBI and DTI list the principal characteristics of partnership sourcing as:
• top level management commitment
• involvement by all the relevant disciplines/functions
• customer and supplier working together
• a spirit of openness and trust between customer and supplier
• clear joint objectives
• a long-term relationship
• taking a proactive approach to improvement and developing the partnership, not a reactive approach to dealing with problems after they have happened
• a total quality management philosophy
• flexibility.
A buyer organisation might decide to form a long-term relationship with a supplier, possibly by setting up a joint venture or partnership. A joint venture might be a jointly-owned company, in which the buyer and the supplier each have an equity stake.
A co-destiny relationship is even closer: the two organisations recognise that their interests are so closely linked that their futures depend on each other. If one succeeds, so will the other.
5 Relationships and organisational success
Effective procurement, based on appropriate commercial relationships with carefully chosen suppliers, can be an important factor in overall organisational success. In particular, it can help an organisation to achieve lean supply.
As Saunders expresses it: ‘The main goal of being “lean” is to obtain the same output from half the resources used by older methods – half the number of workers, half the number of design engineers, and half the level of inventory, for example’.
Implications of this new approach were that high-volume production of standard models was no longer enough to satisfy ever more demanding customers, and that higher levels of quality and shorter time to market in new product development were achievable targets.
Lean supply is based on the concept of eliminating waste. Waste is any activity that uses resources but adds no value. Examples of waste are excessive inventories, rectifying defective output, unnecessary procedures, which are time-wasting, and so on. Lean supply is associated with the principles of just in time manufacturing and purchasing. JIT is also known as ‘lean operations’.
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Chapter 2: Managing Relationships between Purchasers and Suppliers
CHAPTER 2
Managing Relationships between Purchasers and Suppliers
1 The supply positioning model
A supply positioning model is a tool for determining what kind of supply relationships we should seek in relation to the various items we purchase for our organisation. The aim is to distinguish between the criticality of the different items purchased and to use this information in establishing suitable relations with the organisations that supply us.
The model relevant to your syllabus maps the different items purchased onto a two-dimensional grid. For each item we determine the level of risk we run in using that item (measured along the vertical axis of the grid) and the cost of the item (measured along the horizontal axis of the grid)
The basic idea is that for items that are critical in terms of their risk, or in terms of the amount of spend, we must adopt a type of relationship that secures supply. By identifying items that are critical we ensure that management time and effort is directed most effectively.
For items with high supply risk and high cost (strategic critical items) it is vital to ensure security of supply at a good price, and this suggests a need for long-term collaborative relationships with a very small number of suppliers. At the other extreme, tactical acquisition items are those with low supply risk and relatively low cost. In terms of the relationship spectrum we probably need a supply relationship at the transactional or competitive end of the spectrum.
2 The supplier preferencing model
The supply positioning model above of course illustrates the buyer’s perspective on the items to be purchased. This will often differ significantly from the supplier’s perspective: what is very important to the buyer may be relatively unimportant to a particular supplier.
Once again, we will be looking at a two-by-two matrix. In this case, the vertical axis measures how attractive it is to the supplier to deal with the buyer; while the horizontal axis measures the monetary value of the business that might be available from the buyer.
Buyers who are not inherently attractive to the supplier, nor valuable in terms of volume business, are labelled nuisance customers. The situation usually is that the customer takes more effort and cost to service than the value of the business justifies.
At the other extreme are core customers. These are the organisations attractive in their own right, and offering valuable levels of business to the supplier. Naturally, the supplier will do all that is possible to stay in favour with these organisations.
Buyers can learn a great deal by trying to view relationships from the perspective of their suppliers. It should not be difficult to guess where in the grid a buyer stands: the general attitude of the supplier’s sales staff should give plenty of clues.
3 The market management matrix
The supply positioning model classifies our purchases into four different categories. The supplier preferencing model identifies four different attitudes that our suppliers may have towards us. If we combine the two models there are potentially 16 different situations that may face the buyer.
The result of combining the two models is called the market management matrix. It has been claimed that this model helps buyers to analyse the markets in which they operate and to choose appropriate supply relationships for all their different purchases.
As an example, suppose that we are considering a purchase that falls into the ‘strategic critical’ quadrant of our supply positioning model. This is an item vital to our commercial success and we are very concerned to ensure reliable and high quality supply. We should feel very exposed if the supplier currently providing us with this item regards us as a nuisance customer.
4 Challenges and changes in supply relationships
An adversarial relationship means that buyer and supplier attempt to get the best possible deal for their respective organisations, even if the gains they achieve are matched by losses for the other party. The relationship will be characterised by a minimal amount of trust, information exchange, and flexibility in dealing with requirements.
An arm’s length relationship is similar, but implies less direct contact between the parties. Purchases may be infrequent. These relationships are envisaged to be for the short term, because the buyer will be looking for opportunities to do a better deal.
Transactional relationships typically apply to items in the tactical acquisition quadrant of the supply positioning model (low supply risk, low value). The buyer’s objective is to obtain these items with as little trouble and at as little cost as possible. Both buyer and supplier will be aware that the deal could be of long-term duration, provided it works well for both. To achieve this, they will normally work closely together to set up a smooth arrangement, then will simply let it run into the future.
In a closer tactical relationship, the chosen supplier may be one of the various suppliers with whom the buyer has transactional relationships. The task for the buyer is to identify one such supplier who performs particularly well, and to engage more closely. In some cases the chosen supplier may take responsibility for a wider range of purchase items, perhaps coordinating other suppliers in a tiering arrangement.
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Chapter 2: Managing Relationships between Purchasers and Suppliers
Single-sourced relationships typically apply in the low-cost half of the supply positioning model. The buyer hopes to gain greater commitment and preferential treatment from the supplier by offering the supplier exclusivity.
An outsourced relationship is appropriate when the buyer believes that a supplier can do something better than his own organisation can achieve. He expects to achieve cost savings or improved efficiency or both, as well as enjoying the freedom from managing the service in-house. Owing to the long-term and strategic nature of the decision, buyers must proceed very carefully, with full investigation of the existing arrangement and proposed new arrangement.
A strategic alliance will apply in the strategic critical quadrant of the supply positioning model. A buyer wishes to ally himself with a supplier because he believes that they can work together to achieve long-term mutual benefit. Like all strategic relationships, an alliance of this kind is based on a high level of trust and mutual commitment.
In a partnerhsip relationship buyer and supplier work together to achieve mutual benefits. Each party is committed to continuous improvement, and elimination of waste in the supply chain. The relationship is designed to achieve rewards that will be shared by both parties. Partnership relationships will apply only to items in the strategic critical quadrant of the supply positioning model.