Sourcing Strategy & Supplier Relationships

1. Sourcing Strategy & Supplier Relationships Prof Mickey Howard Professor of Supply Management

2. Agenda • Sourcing strategy and Kraljic • Single, multiple & delegated sourcing • What constitutes a supplier relationship? • How have they evolved? • Buyer-supplier relationships • Triadic dynamics • Power, trust and dependence • Supplier Relationship Management (SRM) • Models & theory

3. Sourcing strategy • Concerns the structural decisions over how many • suppliers should be used during purchasing • Develop an approach that is appropriate for item/s • Different purchase categories and situations Figure 4.1 Sourcing strategies compared (p99)

4. sd Leverage Strategic Importance of Purchase E.g. cost, value, profitability Non-Critical Bottleneck Supply Risk E.g. no. of suppliers, product novelty/complexity Kraljic’s portfolio model • Can also apply to the type of supplier relationship as well as the type of purchase, product or service Materials Management Supply Management Supply continuity Cooperation Purchasing Management Sourcing Management Efficiency ‘Best deal’ Figure 4.2 Source: adapted from Kraljic (1993) seep101-102

5. Sourcing methods • Sourcing structures can be defined into a number of broad areas: • SINGLE SOURCING • MULTIPLE SOURCING • DUAL / PARALLEL SOURCING • DELEGATED SOURCING

6. Single Sourcing The use of one source per product/service offering Advantages: Increased buying power/economies of scale Fits lean supply and partnership approach (high investment/adaptation) Reduced indirect (transaction) costs  May ultimately control cost better - and even risk? OEM / ‘Prime’ Tier 1 Nishiguchi, T. (1994) Strategic Industrial Sourcing, Oxford & New York, Oxford University Press

7. Multiple Sourcing • Several suppliers per product/service offering • Focus on price and delivery - best deal • Advantages: • Reduces dependency on individual suppliers • Increases inter-supplier competition • Increases flexibility • Spreading risk • Maintain supply

8. Dual/Parallel Sourcing • The Japanese didn’t single source but parallel source (Richardson, 1993): Toyota only single sourced 28% of parts • Parallel sourcing: using two suppliers for two similar parts across two product families • A way to combine benefits of single and multiple sourcing: creative tension of co-operation and competition(Hines, 1995) Richardson, J. (1993) Parallel Sourcing and Supplier Performance in the Japanese Automobile Industry, Strategic Management Journal.

9. Parallel sourcing OEM Model 1 Model 2 Component A Component A Component B Component B Supplier 2 Supplier 1

10. Key aim: supply base rationalisation Rationale… • Reduce purchase order volume • Enhance relationship development with preferred suppliers • Work more closely with fewer suppliers • Reduce overall transaction costs Delegated Sourcing

11. Delegated sourcing strategy OEM / ‘Prime’ ‘Systems integrator’ Tier 1s ‘Tiered Structure’

12. Suppliers as ‘Full Service’ integrated systemsproviders Through-life management e.g. MoD: “delivering a fully integrated…capability”, “managing the project throughout the life-cycle” Rolls Royce: “By harmonising our products & services we are stepping towards total service solutions, ranging from traditional support such as spare parts, to engine leasing and state of the art predictive maintenance services…” Supplier selection is a matter of through-life capability or total solution evaluation

13. Triadic dynamics • The role of a third party significantly multiplies relational and contractual complexity. • (Wu et al., 2010, Choi & Wu 2009, Obstfeld 2005,) • Major implications for performance based contracting, as contracts are essentially dyadic. • For example: UK defence industry has evolved from a dyadic MoD-industry relationship, to.. • The rise of a third player: Systems Integrator (SI) • Emphasis on outsourcing & supplier capability • Oligopolistic or limited markets • (See: Caldwell & Howard, 2014)

14. Stage 1 ‘Formation’ (1998) MoDreceives approval from government to commence ‘initial gate’ and form carrier project team ‘CVF’ Stage 2 ‘Co-opetition’ (2002) MoDdecides to award the initial design contract to two principle competing firms who agree to work together collaboratively for the duration of the project.. MoD (Procurement) Government MoD (Buyer) MoD (Buyer) Strong link Strong link Weak link Weak link Strengthening (Defence policy) Government Industry (Bidding ) BAE Systems (Principle MRO support) BAE Systems (Supplier) Royal Navy (Frontline user) Thales Marine (Supplier) .. The initial ‘weak link’ becomes stronger throughout the design period as the two firms learn to work together more effectively. Stage 3 ‘Consortium’ (2005) An alliance charter is signed by all five CEOs/head of organization to begin carrier construction. NB: Babcock and VT agree to a merger/acquisition as ‘BVT’ c. 2008. Stage 4 ‘Operational’ (2015) QEAircraft Carrier due to go into naval service supported by BAE as the principle MRO support contractor (Defence policy) Thales BAE Government MoD .. BAE learns to work with naval personnel & build relationships with military as carrier goes through sea trials and improves operational capability Babcock Vosper Thornycroft (VT)

15. What is a relationship? • A relationship is not an entity it is a process • Processes can be managed, streamlined and focused • Need to understand the parameters within which the relationship sits • Firms now need to think about relationships with customers and suppliers • ..But how can we actually define a relationship in the buyer-supplier context?

16. Relationship as a process • Relationships are complex interaction processes that have inputs & outputs • In order to achieve and be successful, firms need to evaluate the output of these relationships in relation to the inputs Skills & knowledge Technology Input/ Output Input/ Output Firm B Firm A Communication Culture

17. * Z ? No! A B X Y * A W The complex reality ..exist between firms or in chains ... .. or networks ..or, perhaps a mess!

18. Supplier Relationship Management (SRM) a complex process… Reasons for failure: • Overly optimistic • Poor communications • Lack of shared benefits • Slow payback results • Lack of financial commitment • Misunderstood operating principles • Cultural mismatches • Lack of relationship experience • Q: Are all firms ‘snakes’ i.e. self-interest seekers?

19. The importance of SRM • Firms don’t possess all the necessary capabilities and thus, turn to suppliers: • Absorb suppliers’ knowledge base • Achieve learning effects of scale/scope • Access new, different capabilities • Access tacit knowledge • Learn about new technologies • Reduce risks of product development • The paradox in supply…. • Firms are competitors and collaborators at the same time e.g. Co-opetition • Each can only manage itself but must rely on activities in the others • This makes the management process of the these relationships more complex and risk averse

20. Transparent Integrated Planned Cooperative Negotiated Shared Traditional relationship Collaborative relationship Tactical relationship Adversarial Secretive Bids The nature of the interaction between players in supply chains is changing Information Price Relationship Time This means higher stress levels, not lower! Source: Slack (2000)

21. Types of Supplier Relationships Vertically Integrated Operation Do Everything Traditional Supply Management The character of Operations & Supply Activity Resource Scope Resource Scope Do Everything Important “Partnership” Supply Management Virtual Spot Trading Long-term Virtual Operation Do Nothing Market Relationship Transactional - Many Suppliers Close - Few Suppliers Type of Inter-firm Contact Source: Slack (2000)

22. Lean supplier partnerships (Lamming 1994) • Removal of waste: not wasting opportunities in buyer-supplier relationships • Adherence to disciplines in the operation: elimination of opportunism & moving towards trust • ‘Voice of the customer’ vs. ‘voice of the supplier’ • Kaizen (continuous improvement) in buyer-supplier and supplier-supplier relationships • Successful partnerships between can result in renewed contracts & work on long-term NPD

23. Relationships and theory • As manufacturing processes have developed, so to has the relationship process • Mass productionLean Agile ‘Hybrid’ • There is no one School of Thought that focuses on relationship management • Writings can be traced through a variety of subject areas and disciplines • Current in-vogue thinking has made firms focus on ‘partnership’ approaches to dealing with suppliers • Global marketplace • Japanese influence i.e. Lean partnerships (Lamming 1993)

24. Short-term orientation Transaction-based Emphasis on price, quality and delivery Moderate supplier contact Little sharing of information Reverse auctions may be applicable Long-term orientation Co-operation based Emphasis on operational dimensions, plus joint improvement activities High supplier contact High trust Significant sharing of information Reverse auctions generally inapplicable Spectrum of relationships Adversarial Collaborative

25. High degree of trust Robust and efficient communication Collaborative problem solving Higher degree of mutual understanding Conflicts and tensions surfaced early Differences in goals, culture and competencies are expected Disagreement resolved through mutual persuasion, not coercion Emphasis on diagnosing contribution – not assessing blame Reduced compliance monitoring costs Reduced transaction costs Greater value through leveraging assets and capabilities Fewer damaging or costly surprises Reduced switching costs Problems spotted early on and resolved effectively ‘Good’ Relationships = Value Characteristics of Healthy Relationships Dimensions of Relationship Value

26. Approaches to modelling relationships Portfolios Spectrums Frameworks Models: Kraljic 1983 Sako 1992 IMP 1976-2004 Cousins 2002 Bensaou 1999 Lamming 1993 Cox 1999 Models of relationship management

27. Interaction Model • Background of the ‘IMP’ Group • IMP: Industrial Marketing & Purchasing • Prof Ford - founder • Focus on Business-to-Business marketing • Developed the concept of network management • Key focus on relationship management • Developed the Interaction Model • Concept was developed in the early 1980s

28. Interaction Process The IMP Interaction Model Social Structure Market Structure ENVIRONMENT Dynamism Position in Mnf Chain ATMOSPHERE Power Expectations Co-operation ORGANISATION Technology Structure Strategy INDIVIDUAL Aims Experience ORGANISATION Technology Structure Strategy INDIVIDUAL Aims Experience Short-Term Exchange Episodes Long-Term Relationships Institutionalization Dependence Closeness Note: see Hakansson’s model (1982) on p109

29. Sako(1992) • Spectrum as opposed to matrix positoning e.g. Kraljic • Focus on an economic perspective • Empirical work developing the concept of trust within types of relationships as a basis for transaction • Relationships are illustrated on a spectrum from arms length contractual relationships (ACR), to obligational contractual relationships (OCR) • Risk management, reward recognition, investment in relationship – all key elements of this model….however, trust is the central tenet • And the research is based almost exclusively on the global automotive sector

30. Sako Model Arms Length Contractual Relationships (ACR) Relationship moves Through this spectrum Obligational Contractual Relationships (OCR) Source: Sako (1992)

31. Sako’s Development of Trust • Sako’s research generated THREE distinct types of what she called “trust” • Contractual Trust • Perform to the contract • Competence Trust • Ability to perform the task • Goodwill Trust • Willingness to work above and beyond the contract. • These elements of trust are linked to the spectrum of relationship development and the degree ofASSET SPECIFICITY

32. Linkage of Trust Elements ACR OCR Contractual Trust Competence Trust Goodwill Trust LOW Asset Specificity HIGH Source: Sako (1992)

33. Critique of Sako Advantages: • Views relationships on a spectrum • Allows us to think of factors influencing the relationship • Takes an economic, analytical view • Built on empirical as opposed to conceptual research • Provides definitions of trust Disadvantages: • But is this approach too linear? • But there may be more factors than trust and asset specificity • What about other views or perspectives, such as Relational? • Rather too rigid? • What about the influence of power in relationships?

34. Power and Dependence • Relationships seldom completely balanced • However, power and dependence have many dimensions and underlying factors • Company size and business volumes • Alternatives to other party (monopoly) • Control over or access to unique assets (technical resources, human resources, intangibles (e.g. image/credibility) • One party may be the powerful in one respect, the other in another respect

35. Dependency–Certainty Model (Cousins,1999) • Focuses on relationship drivers and motivators • Management of relationships through inter-organisational dependencies • Teams will collaborate if they know that the payoff will give them advantage and they will only compete when & if they believe they can gain advantage from doing so (Axelrod, 1964) • Explains why firms will always resort to opportunistic behaviour when able to • A way for firms to think of how to select and manage their collaborative relationships, then can decide whether to change or keep it

36. Dependency-Certainty Model One-Sided Mutual Highly Dependent Opportunistic Behaviour Strategic Collaboration Level of Dependency Tactical Collaboration Adversarial Independent Uncertain Certain Level of Certainty Source: Cousins (1999)

37. Conclusions • Sourcing strategy concerns the structural decisions over how to use suppliers effectively • Requires a developmental approach appropriate to the purchase category and specific situation • Relationships are a process not an entity • ‘SRM’ is a very complex process: dynamic, difficult to define, measure & manage ..but key to SCA • Need to examine the output & design the relationship to fit • Think about academic models: how are they constructed? What do they say? Common features? • Effective Supplier Relationship Management involves a cascade of positive results for both parties through trust • Remember all firms are ‘snakes’: maximisers and satisfiers concerned with own survival & self interest

38. Summary • Sourcing strategy and Kraljic • Single, multiple & delegated sourcing • What constitutes a supplier relationship? • How have they evolved? • Buyer-supplier relationships • Triadic dynamics • Power, trust and dependence • Supplier Relationship Management (SRM) • Models & theory

39. Sourcing Strategy & Supplier Relationships Prof Mickey Howard Professor of Supply Management