Purch Supply chain management
Major event impact:
If the Pound goes down compare with the Euro, for Bentley that is British and manufactures in
the U.K. if buys in Euro then it would be a bad news since it has to pay more money.
Products are going to be cheaper after Brexit and the fall of the Pound so that they can be more
competitive but at the same time they have to buy components from outside so they have to
pay more and it become a bad news.
- you buy according to the need; it is appropriate when the prices are
falling or when a change in design is imminent.
- increase the stocks beyond quantities required by normal production.
To benefit from economic order quantities (EOQ)
o When saving on future price increases are greater than opportunity costs and
o storage costs
To prevent suspension of production due to strikes or shortages
o To secure materials for future requirements when the opportunity arises.
Specialist buyers and service providers: https://www.kairoscommodities.com/
Raw materials and the sustainable challenge:
- Food commodities, such as coffee beans, soya or palm oil, are often sourced from
o Require supply market monitoring and engagement with local communities
- Sourcing of wood (timber) for paper and pulp or furniture, poses particular challenges
- But, this is not limited to sourcing from developing countries: sourcing of, for example,
fish is an example of a diminishing natural resource where buyers need to be highly
focused on the sustainability of fish stocks.
Diminishing natural resources:
- 75% of global fisheries are fished at or beyond capacity – ever growing consumption
will accelerate this.
- Aquaculture has grown nearly 10% per year over the past 30 years and now represents
more than half of the seafood consumed.
- Cotton is the largest money-making non-food crop produced in the world.
- The annual turnover of timber and other wood products from forests is valued at more
than US$200 billion. 27
- The annual rate of natural forest loss is about 13 million hectares.
- Bio-fuel production could increase by 50% the amount of land under agriculture or
“monoculture” forest plantations by 2050.
- Negative implications of soya production:
o Loss of biodiversity, pollution
o Disregard for community and indigenous rights, and displacement of small
o holder subsistence crops
Capital intensive and large scale
- WWF and Round Table on Responsible Soya
UK supermarket Waitrose was first to commit to WWF’s campaign and the RTRS targets:
“Producers aren’t going to pursue RTRS certification until they know people want to buy it ...
we and our customers need to be confident that Waitrose is part of the solution, not the
problem. By aligning ourselves with WWF on this issue, we know we are” Quentin Clark,
responsible for sustainable sourcing at Waitrose
Many fashion companies are positioning in the market according to sustainable provision of
Components, parts and assemblies
We do not tend to favour collaboration but to put barriers. When buying very specific
components, these very often implies high level of both costs and risks. They tend to be related
to single sourcing: the piece is made only by one supplier. A highly customized component can
be a positive feature appreciated by the customer that look at it as unique (e.g. computers).
- Standard components are generally readily available.
- Specific components (customized):
Offer opportunities for liaison between design and purchasing
o May be jointly developed by purchaser and supplier
o May involve negotiation over aspects such as tooling costs (special tooling may
o be need)
Should always be subject to value analysis
o Raise make or buy issues (ownership of equipment is convenient?)
o Can often be combined into subassemblies
Maintenance, Repair and Operating items – MRO: it is referred to maintenance and repair
requires; generally, it is a specifically requirement. For consumables and MRO the purchasing
- Liaise with maintenance staff to ensure that information for critical.
- Advocate a policy of standardization.
- Suggest alternatives such as outsourcing of catering and cleaning which can eliminate
the need to hold stocks.
- Analyse maintenance contracts offered by suppliers and give advice. 28
Intangible economic activities that imply an interaction between provider and consumer. It is
a riskier purchase than goods:
- Buyers know what they have bought only after buying decision
- High level of human involvement, difficult standardization
- More challenging specifications
- Cost analysis and negotiation are more difficult
- Increased out sourcing: becoming a large amount of total spend
Types of services (categories are not exclusive):
- Business services
- Communication services
- Construction and related engineering services
- Distribution services
- Educational services
- Environmental services
- Financial services
- Health-related and social services
- Tourism and travel-related services
- Recreational, cultural, and sporting services
- Transport services
STRUCTURAL SOURCING STRATEGIES: MULTI-SOURCING, SINGLE SOURCING AND
Best practice category management approaches: total cost consideration
it depends what kind of costs calculations we made: we can compare prices only or the total
costs of ownership (it considers also the duration of the item, the price, …).
If we think about makes the cost – in order to reduce the overall cost, we can:
- Buy less - challenge the requirements: by buying less we can reduce all the costs
- Negotiation: reduce the supplier mark-ups. We can compare different suppliers and
make them compete against each other.
- Reduce the production costs by outsourcing from suppliers with lower costs.
- Optimize specification and standardize: e.g. how we order.
Example: indirect purchasing – travel category 29
“We do not need to travel”. Not all the people need to travel in business class, for example. Or
people in companies may be told to travel by train only (company policies). We can reduce
costs in this way.
Thinking in terms of total costs:
- Demand management: how to avoid travelling?
Centralization, standardization of channels
o Using online tools to minimize travel agency fees
o Company policies
o Inform and communicate
- Contracts with travel agencies, hotels, airlines.
What is sourcing strategy?
- Structural decision: how many suppliers should be used for the purchase of the same, or
very similar, items?
- Differentiating different approaches for different purchase items/categories.
Multi-sourcing: the use of several suppliers for buying the same or very similar
products. It is a traditional sourcing strategy and avoids dependency on any single
supplier and spreads the risk as much as possible. It creates competition by
playing off suppliers against each other. It is focused on getting the best deal: low prices.
Multi-sourcing strategy is useful in order to spread the risk. It is done to minimize dependence
and exposure and to reduce the risk.
Many companies shifted into the single-sourcing. We just rely on one supplier for that
Single-sourcing: fulfilment of all corporate requirements for a particular product by one
Benchmark studies of Japanese auto manufacturers showed widespread single-sourcing: focus
on long-term collaboration instead of competition.
Pros: economies of scale. It enables economies of scales and reduces transaction costs.
Cons: complete dependence on the supplier. It means we accept a high degree of buyer-supplier
Further studies of Japanese method (Richardson, 1993) showed that Toyota only
single-sourced 28% of vehicle components. Generally, Toyota used parallel
...two or more suppliers with similar capabilities are concurrently sole-
source suppliers for very similar components. While using a sole source for a component, the
assembler establishes parallel sources to provide performance comparisons and competitive
bidders for the next model cycle. (Richardson, 1993, p. 342).
Keep options open, explore other sources and out constant pressure on single-source supplier.
Network sourcing You watch at the entire supply network. Network sourcing consists in using
multiple suppliers for groups od similar components and to distribute
volumes to the best performing supplier. (Hines, 1995). It is based on focal
firm-supplier collaboration; supplier-supplier collaboration and competition; delegated tiered
supply structure; parallel/dual sourcing to spread risk.
A reversal to Multi-Sourcing?
Heavy reliance on single sourcing is high risk especially in turbulent situations where flexibility
and agility are required
2000 lightning hit a telecoms supplier factory:
- Nokia, who pursued a multi-sourcing strategy, switched its chip orders to other
- Ericsson, who pursued a single-sourcing strategy, was locked-in to the struggling
supplier with no back up source of microchip supply and forced to stop production with
heavy losses (app. $400 million).
Increasing focus on supply risks highlights risk of single sourcing – always keep a backup
Trend Toward Long-Term Supplier Relationships
- Single sourcing leads to longer term and more intensive – strategic - supplier
- But all suppliers are not strategic
- One-dimensional buyer-supplier relationships dichotomy is too simplistic:
KRALJIC MODEL APPLICATION
It is a key tool for managing purchasing and
sourcing strategies. Two dimensions have to
- Supply risk/difficulty: e.g. high number
of suppliers means that it is easy to find
to the risk and difficulty indicator is
- Importance of purchase: the value of
what we are buying. 31
Four quadrants face different challenges and have to be managed in difference ways; for
example, strategic items have a small number of suppliers but at the same time a high
To manage bottleneck items, it is possible to standardize them, reducing uniqueness of the
product or find sources at the global level. Or in case the company doesn’t have suppliers, the
company can start making the item internally, in-sourcing.
The final aim is to reduce risk: it is possible by redesigning and resourcing. In the following
table, characteristics and appropriate strategies for the four categories:
Example: sourcing floor lamp components
- Spear floor lamp in mat chrome with opal white glass shades
- Height 135 cm
- 4 pieces’ halogen bulbs 12V / 20W - G4 mat
- Electronic transformer with switch & dimmer
- Alternative electronic touch transformer with dimmer function 32
Kraljic Criticism: application challenges
- There are only two variables: how can supply relationships be reduced to two variables?
- Apparently similar supply situations within each box may require different
- What about supply inter-dependencies?
Only deals with direct suppliers.
- Demarcation problems and category movers.
- Do suppliers have a say in anything?
- Krajic focuses on given ‘items’ – not relationships.
Cousin relationship portfolio model
Revised Kraljic Model: A Sustainability Perspective 33
Portfolio Model Recommendations
- Analysis needs cross-functional input
- Outcome of analysis needs reflection on consequences
- Use more than one measure for each dimension but don’t over-complicate
- Ensure two dimensions don’t overlap
- Measures need weighting: subjective
- Need to combine with different models
TBL: triple bottom line
Exercise: Apple product: iPhone
Components Risk Cost Category Strategy
Camera Low High Leverage Approved Suppliers
Glass/Screen Low Low Non Critical Multi-Sourcing
Touch ID Low High Leverage Approved Suppliers + Cost-
Phone case High High Strategic Single-Sourcing
Memory Low Low Non-Critical Multi-Sourcing
Accelerometer Low Low Non-Critical Multi-Sourcing
Microphone Low Low Non-Critical Multi-Sourcing
Battery Low Low Non-Critical Multi-Sourcing
Headphones High High Strategic Parallel-Sourcing
Processor High High Strategic Parallel-Sourcing
Apple’s strategy: vertical integration. 34
MAKE OR BUY, OUTSOURCING
Outsourcing can be considered as the ‘do or buy’ decision. Is it better if we do or if we supply
something from someone else? Strategic decisions have to be made by every organization
whether public or private. How do you draw the boundaries of your organization?
What is the ‘do or buy’ decision?
Cousins et al (2008) defines ‘make or buy’ as ‘where to participate in the overall value adding
process in the supply chain. Each organization transform resources (inputs) adding a certain
amount of the total value in a supply chain: each organization in the supply chain add a part of
the final value (e.g. automotive manufacturing: where do they add value? In the assembling
process; e.g. Harrods and all the others have the same structure: they outsource from brands,
different outsources in the same place; e.g. legal service: there is a set of experts that examine
evidences, there are testimonies analyzed by experts can be considered as many outsource
Is ‘Do’ – in-house transformation activity? We are transforming resources into product or
services, through a process.
Any business makes an initial decision: initial ‘in-house’ or not decision. It is possible also to
change mind and start outsourcing activities that were made internally: the contracting out of
activities previously conducted in-house.
Different forms of outsourcing are: contracting, sub-contracting, licencing (e.g. to expand the
market), franchising, privatisation (something conducted by the government that then decide
to have private sectors; not considered by everyone as outsourcing), liberalisation (attempt to
free up the market, loss of government control).
TRENDS AND IMPLICATIONS
Outsourcing has increased progressively. Outsourcing of components has increased
progressively over the years. Some industries have been outsourcing for an extended time:
- Fashion Industry (Nike) (all manufacturing outsourced)
- Electronics Industry
Cisco (major suppliers across the world)
o Apple (over 70% of components outsourced)
¼ of European/US companies now use 3 party Procurement Service Providers (PSPs) for e.g.
hosting e-sourcing and e-procurement applications: expected to grow.
Outsourcing in public sector referred to as ‘privatisation by stealth’: if the government pushes
all of them to the boundaries.
‘Deloitte Global Sourcing Survey’,
From the the top trends business practitioners should know
about: innovation is crucial (in the past was mainly a cost saving issue), cyber security, etc.
Benefits of outsourcing:
- Economies of scale for suppliers (giant suppliers). But it can also come to be a
- Reduce demand uncertainty risk: smooth demand.
- Reduce capital investment.
- Focus on your core.
- Increase flexibility: you can choose. 35
- Focus on smaller set of tasks: a source of competitive advantage.
- Access new ideas and expertise.
- Free from historical constraints: every organization has its history and sometimes it can
constrain in terms of several things.
- Free from cultural constraints.
Risks of outsourcing:
- Expected benefits are not always realized.
- Costs escalate.
- How close to core can you go? You can outsource too much.
- What is core may change over time.
- Dependence on suppliers for service: risk of being overly dependent.
- Skills to manage contract are lacking.
- Employees see as threat, and lowers morale.
- Loss of ‘corporate memory’ by getting rid of the more expensive people.
- Difficult to insource again.
- May need to manage relationships that have gone wrong.
- Unwittingly choosing the same supplier may lead to supplier dominance (e.g. EDS: UK
governance encouraged outsourcing of public sector so they simultaneously went to the
The point is you can’t outsource risk. Many companies outsource to get rid of the risk and
give it to the supplier but it is not like this: if someone is performing a service for you, you
take the risk as well.
OUTSOURCING DECISION MAKING PROCESS
When you outsource, you add the lever of choice in your decision making. Generally, companies
to not outsource 100% of something. The process of do or buy:
Example: The Rolls-Royce Engines Approach
Think about what is critical and what capabilities we have in the company in order to make
strategic decisions. There are different approaches in practice. 36
Theory 1: Transaction Cost Economics
It was created by Coase in 1937: transaction costs matter. Instead of doing something in-house,
we can contract but the cost of the transaction matter; the groups of costs that matter:
- Search and information costs: find the supplier and information.
- Bargaining and decision costs: time to get the better deal.
- Policing and enforcement costs: time to police the relationship and manage the
relationship and the contract.
Most appropriate governance mechanism:
When does the company use the market to carry out its business activities, rely on its onwn
organization, or use a mixed mode model? Market or Hierarchy?
It depends on several aspects:
- Assumes capabilities pre-exist: it is not necessarily true.
- Assumes capabilities can be developed equally in all firms.
- Focuses on cost minimization, not value maximization.
- Assumes people always act with ‘guile’ and ‘opportunism’.
- Assumes costs are constant: costs of contracts can vary depending on several aspects.
- Presumes good knowledge of transaction costs – activity based costing?
Theory 2: Core Competences
In any organization we have layers: from the outer to the inner core.
Outsourcing must be considered as a strategic decision
rather than a short-term cost-saving solution (Lonsdale
and Cox, 1997; Gadde and Håkansson, 2001).
Outsourcing is not about finding someone who can do it
cheaper: it’s about leveraging knowledge capabilities
Companies seek to nurture and develop core
competencies internally, leaving those that are ‘non-
core’ to be developed and supplied by external
companies (Quinn and Hilmer, 1994; Quinn, 1999).
Core Competence: Criticisms
- Core competence often seen as past strengths (core rigidities: they lock in the past,
- ‘Dynamic capabilities’ needed (Teece et al, 1997): don’t get paralysed by past strengths,
develop new ones for dynamic conditions. 37
- The more companies collaborate with other companies, the less independent they
become: we start to loose identity.
- Difficult to insource if you’ve lost capabilities.
- Where do you draw the line? How close to core could you go?
Virtual organization: similar to virtuous.
o Hollow organization: characterized to have over-outsourced and lost things.
Theory 3: Resource based View (RBV)
A firm can be considered a collection of productive resources, and growth depends on how
slack resources are utilized (Penrose, 1959). Any organization is its collection of its resources.
A firm’s competitive position depends on its ability to gain and defend advantageous positions
concerning resources. The resources which provide a sustained competitive advantage could
be termed core competences (Prahalad and Hamel, 1990): core competencies are defined
through critical resources. Key resources are valuable, rare, inimitable or non-substitutable.
RBV approach to Make-or-Buy decision:
Integrated outsourcing approach:
Theory 4: Network approach
Not in-house vs. outsource but network configuration. It is about the capacity to co-ordinate
change in complex production systems and supply chains, capacity to explore and exploit
emerging new technologies through complex supply chain relationships. Core competencies
vested in inter-firm relationships in networks. Resources are network resources, not your
resources. Strongly bonded networks minimize transaction costs. 38
Example: General Acute Hospital. What would you keep in house and what would you
- Car Park: BUY
- Security: BUY
- Information point: MAKE
- Shop: BUY
- Restaurant/Café: BUY
- Lifts (part of the equipment): BUY
- Cleaning: BUY
- Laundry: BUY
- Meals for patients: (nurses serving: MAKE; preparation of the meal: BUY)
- Porter: MAKE
- Blood tests: it depends
- Accident and Emergency: MAKE
- X-Ray: MAKE
- Surgery: MAKE
- Patient Ward (equipment as beds): BUY
COMPANY CORE: MAKE
CORE-CLOSE: patient ward, blood tests, cleaning
CORE-DISTINCT: meal, security, lifts
Cisco’s Value Network
- Forced to announce a $2.2 billion write-down for obsolete inventory.
- 8,500 employees were laid off.
Significant reduction in demand for telecommunication infrastructure. Problems in its virtual
global manufacturing network:
- Long supply lead time for key components
- Would have impacted delivery to customers
- Cisco carried component inventory which were ordered long in advance of the
- Competition on limited supplier capacities
Long-term contracts with its suppliers
IBM – an outsourcing step too far?
- Mix of benefits and costs
- IBM outsourced components in PC development
Intel – microprocessor
o Microsoft - operating system
- IBM strong in short term
- Intel and Microsoft benefited in long term
- Benefits accrued to outsourced suppliers
- Opportunism - open IBM architecture led to ‘IBM compatible PC’ competitors
- Little left on which to establish competitive advantage
- Sold PC business to Lenovo, China’s biggest PC manufacturer 40
SUPPLIER ASSESSMENT AND DEVELOPMENT
WHY SUPPLIER ASSESSMENT?
Supplier assessment and development since having reliable suppliers is fundamental in order
to have an efficient and effective supply chain. Since we are usually thinking about long-term
relationship with suppliers, when we detect problems in their performances, we are helping
them to improve and grow.
Which are the main KPI's we evaluate suppliers about?
1) Delivery: on-time (reliability), lead-time, flexibility.
2) Quality: compliance, failure rate, PPM, quality. standards (ISO).
4) Sustainability: environmental (pollution...), social
5) Innovation: R&D budget, new products per year, #patents, engineers’ employment...
6) Supplier relationship: trust, communication...
- ‘What you measure is what you get’: if we don't measure we don't know what we get,
with numbers we can back up and analyse.
- ‘What gets measured gets done’
- ‘What gets measured is only what gets done’: the higher dedicated attention will always
be put in what is measured, that's a natural tendency e.g. if we want sustainability we
have to measure it.
- ‘What gets measured gets managed’
- ‘What gets measured gets improved’
Carefully designed assessment measures can drive performance in right
o direction - supporting corporate strategy
Poor measures can have opposite effects
Supplier Assessment Impact
Measuring outcomes, consequently is measuring processes that deliver outcomes. Looking at
failure rate, we speak about the outcome of the process; if we look at the quality standards, we
are looking at the process itself (if they have a total quality program, lean production...).
Having performance measurement data won’t make any difference: it is what you do with the
data. What matters is what we do with the measured data like rewards, penalties and so on.
Action speaks louder that words: decision making must be consistent with performance
Supplier assessment can have motivational impact.
Two good examples from Siemens and Intel:
METHODS OF SUPPLIER ASSESSMENT
Setting targets: the KPI tree 41
Weighted points techniques: example
Financial value: having a financially stable supplier is very important.
Relationship characteristics 42
Some companies did this in the U.K. aerospace industry: a consortium called SCRIA for
collaborating; they introduced the RAP model to assess performances of relationships. The
importance of strategic relationship of suppliers is increasing and so it's increasing the
importance of assessing the mutual relationship.
SUSTAINABILITY PERSPECTIVE: SUPPLIER MONITORING
- Auditing factories
- Supplier questionnaires: questionnaires for the suppliers could be made for instance to
understand how the supplier works, why it had some problems and so on... it's a typical
practice. The limitations could be related to possible false answers.
- Gathering information and reports on suppliers’ environmental performance.
- Inspecting suppliers’ materials for environmental performance.
- Stipulating that suppliers achieve environmental management system accreditation e.g.
EMAS and ISO 14001.
- Risk of “green washing”; "white-washing" is done to cover up things through firms,
"green-washing" is related to environmental issues: firms using suppliers to cover up
pollution for instance: firms may state they don't have fault since they did
questionnaires or audits.
- Suppliers having to deal with conflicting customer sustainability demands and
Watch the video and have a look at the website. Since suppliers have different customers they
usually have to be compliant with different many standards. it would be much better to
introduce a shared policy. 43
ETHICAL AUDITING: NOKIA CASE
Video originally shown in BBC, not meant to be published because the supplier doesn't look
good and Nokia had some concerns. The video represents a situation which could be found in
China, India... but also in Italy and other not low-cost countries Applying an ethical model could
imply many issues.
Task: Groups to discuss
1. What are the challenges of doing supplier sustainability audits and how can a company
can overcome these?
Geographical distance, time-consuming, it's difficult to measure that, differences in
standards for different countries, obtain real information.... solution could be: real visit
to the firms to have a closer look, higher communication about sustainability standards,
2. Do you think Western companies have the right to audit (and judge) suppliers in
developing (low cost) countries?
They probably have the right to audit and control them, but they cannot force them to
adopt the same standards.
3. What are the pros and cons of firing non-complying suppliers v. sticking with non-
The problem with this supplier was also about the mentality: they actually don't seem
to care about the welfare of the employees.
4. What are the advantages and disadvantages of using a 3rd party to assist with supplier
SUPPLIER DEVELOPMENT BEST PRACTICES AND PITFALLS
Supplier Sustainability Assessment
Ethical assessment of suppliers is different from ‘normal’ supplier assessment: new skills
Doing your own assessment raises questions of legitimacy.
Need to collaborate other industry players and 3rd party providers e.g. Sedex, Ecovadis or
Risk of ‘Western Imperialism’ attitude.
European work situation was not very different from the Chinese one if we look back at just
some years ago. Involving a third party could add legitimacy and expertise to the process.
To what extend do you evaluate direct suppliers’ sustainability performance? 44
How far back into the supply chian do you audit?
The concept of supplier development
Supplier development is related to the effort a company does to make a supplier improve their
capabilities. Helping and training suppliers to improve is something which started from the
- The concept of supplier development can be traced to lean Japanese car assemblers
pursuing Continuous Improvement - or kaizen - in their suppliers.
- Supplier development is concerned with improving the suppliers’ capabilities:
rooting out wasteful (non-value adding) activities
o achieving long-term improvement of suppliers’ quality, cost and delivery
Supplier Development at Toyota
- ‘Once nominated as Toyota suppliers, they should be treated as part of Toyota...Toyota
shall carry out business with these suppliers without switching to others, and shall make
every effort to raise the performance of these suppliers’ (Toyota 1939 Purchasing
- Operations Management Consulting Division cascades TPM/continuous improvement
to suppliers through lectures, seminars and training courses, individual assistance, and
Jishuken groups (joint problem solving supplier groups): short and long-term capability
- Suppliers allowed to keep profit resulting from improvement even though Toyota gains
total cost transparency.
- Many suppliers in turn have own OMCD-like operations, cascading their learning further
The OMCD division tried to make suppliers improve: the savings obtained were left to the
suppliers; Toyota just received high transparency in terms of costs and good long-term
Helping Suppliers Implement Toyota Production System
- Help suppliers build streamlined and competitive production and logistics systems and
to develop human resources capable of continuous improvement.
- Implement TPS among suppliers, holding lectures and seminars in Japan: seminar series
held twice a year at Central Japan Industries Association is in its 27th year, and includes
the “Basic TPS Concept” lecture, as well as “Improvement Exercises Based on TPS”. 45
- Overseas, various specialized divisions in North America and Europe carry out similar
- Through these activities, Toyota seeks to contribute to environmental improvement
through more efficient production and logistics operations, and elimination of
unnecessary materials and energy costs.
Toyota Global Suppliers Convention
- Toyota Global Suppliers Convention held every year to convey purchasing policies to
suppliers. 656 people from 411 companies, including 72 overseas companies, attended
convention held in Japan in February 2006.
- Toyota presented “Ensuring Safety” and “Ensuring Quality” as key initiatives, and
explained importance of creating a dangerfree workplace and thoroughly adopting basic
policies of “Customer First” and “Quality First.”
- Awards to suppliers who demonstrated significant achievements in quality, cost,
technological development, etc.
- Similar conventions held at affiliates all over the world.
Best practices in Supplier Development
- Create dedicated supply development teams: usually part of operations or SCM
departments (e.g. Lean experts).
- Teach a supplier how to develop itself after initial guidance from supplier development
- Focus on underlying causes of long cycle times.
- Focus on wasteful activities.
- Involve suppliers in product and process development.
- Provide training programmes and time.
- Provide education programmes.
- Provide improvement-focused seminars.
- Provide tooling and technical assistance.
- Provide supplier support centres.
- Loan executives, such as process engineers and quality managers.
- Drive out fear of supplier’s workforce toward supplier development.
- Share savings with suppliers from improvements.
- Provide feedback loop for suppliers to encourage efforts
SUSTAINABILITY PERSPECTIVE: SUPPLIER MENTORING
Mentoring Suppliers for Improved Sustainability Performance
Companies are becoming better at matching these two issues: it can be done with the
involvement of third parties as well (NGO, consultancy and so on...).
- Educating and training supplier personnel
- Involving suppliers in product eco-design providing financial assistance for suppliers to
improve environmental performance
- Mutual problem solving, and knowledge and expertise sharing with suppliers.
Resource and time consuming.
Partner with NGOs for specialised capabilities and to help to ensure legitimacy:
It's a company committed to sustainability and recently introduced a bio-degradable plastic
New Plant-based Actimel Packaging
- New Actimel packaging introduced in France 2011 developed by Brazilian
petrochemical company Braskem.
- Uses sugarcane-based renewable bio-plastic with international certification.
- Has reduced carbon footprint of Actimel by at least 70 % (42,000 tonnes of CO2).
- No different in appearance, colour or texture.
- The launch forms part of Danone’s wider sustainability goal to reduce CO2 emissions
by 30 % over four years.
1996-2011: business transformation
An undisputed leadership worldwide
Reduction in packaging weight 47
Danone Sustainability compass
- Using the Supplier Ethical Data Exchange (SEDEX) website and relying on external
audits, DANONE has put in place a program called RESPECT: a tool to evaluate the firm’s
suppliers based on key principles
RESPECT program introduced in 2005 to assure that the FSP (Fundamental Social
- Principles) as defined by the International Labor Organization were respected across
the entire supply chain
- Risk mapping of suppliers.
- Inspection visit to “at risk” suppliers.
- External social audits for “at risk suppliers”.
- Set up of corrective action plans when needed.
RESPECT Monitoring & Control 48
SUPPLIER RELATIONSHIP MANAGEMENT
Corporate and Supply strategy is composed by five man components that have to be aligned to
have good results. One of the core part is the relationship between suppliers and buyers. Below,
the strategic supply wheel.
Issues to be discussed:
- At that level (or levels) should the relationship be defined?
There is an asymmetry of understanding between the buyer and the supplier. To define
the level: from firm level to the group or product/commodity team which is more
complex but close to reality.
- Interpersonal relations?
Level of person: rules, professional and personal ethics.
Relationships can be considered as a process with input (resources: people, raw materials, etc.)
and output (cost reduction, quality improvement, etc.).
Inter-firm relationships are a set of complex business that require
from the buyer and supplier to achieve a set of outputs. These outputs and
inputs may be depending on the desired outcomes for the buyer and supplier. In
addition, these relationships will be influenced by their respective and
constrained by the parties’ strategies, goals and power mechanisms. 49
To better understand how to behave in such a complex environment, we can use a model based
Strategic Focused Outcomes
on two dimensions (strategy focus, business outcomes), called
Model (SFOM). Strategic Relationship
Another model for managing dependencies and certainties is the
Positioning Model (SRPM).
Below, a description of the dependencies and certainties: 50
Sako (1992) identified a classification of trust and classifies it in three types:
- – the trust that the other party will adhere to the explicit and implicit points
of the contact as agreed
- – the trust that the other party has the ability, or competence, to be able to
produce what the contract requires
- – the trust that the other party will perform tasks in excess of the agreed terms
IMPLEMENTATION OF RM: The partnership
- Embryonic: focused on overcoming
the barriers and establish connections
- Growth: traditional management and
- Maturity: the stage with the higher
level of strength of the partnership
- Decline: which follow the evaluation of
IMPLEMENTATION OF RM: The Partnership Expectations Model
IMPLEMENTATION OF RM: The Partnership Desert Effect 51
Strategic Supplier Portfolio
They were made to overcome risks, trade-offs and interdependencies. It includes three basic
o Specification of individual
o supplier relationships
Configuration of the supplier base
o Supplier development
o Integration of suppliers
- Monitoring & Control
o Measuring behaviours or actions
Strategic supplier portfolio management process – where and why a supplier is positioned in a
firm’s portfolio matrix, and how the strategy is developed, implemented over time, and
THEORETICAL APPROACHES FOR UNDERSTANDING SUPPLIER RELATIONSHIP
1. Webster and Wind (1972) and Sheth (1973) organizational buying behaviour theories.
2. Van de Ven (1972) and Williamson (1975)
inter-organizational theory new institutional
how external environment can influence.
3. (1970s- 1980s): interaction model.
Industrial Marketing and Purchasing group
IMP interaction model: ARA – Actors, Activities and Resources
Strong connections between each other:
- Actors: bonded
- Activities: linked
- Resources: tied 52
The Kraljic Portfolio Model
The Kraljic Model Revised: A Sustainability Perspective
- True commodities: the item has a high impact only on one element of TBL
- Transitional commodities: items with temporarily high supply risk
- Strategic commodities: critical commodities with non-economic attributes that could be
leveraged into a long-term competitive advantage 53
SOURCING INNOVATION FROM SUPPLIERS
CASE AIRBUS A380
INTRODUCTION TO CONCEPT OF EARLY SUPPLIER INVOLVEMENT (ESI) IN NEW
PRODUCT DEVELOPMENT (NPD)
Open and Closed Innovation
Traditionally, innovation is companies is a closed process, controlled by R&D people. And the
fundamental idea of innovation is that companies have to do it internally, control it and protect
it; in these days we are shifting to open innovation: companies tend to develop new ideas in
collaboration with external actors (customers, suppliers, joint ventures, etc.).
The two mindset of innovation are closed innovation and open innovation:
e.g. FaceBook, Skype, Google and LinkedIn are examples of open innovation. It is all about the
business model: for example, Google makes money thanks to advertising.
Supplier Involvement in New Product Development (NPD)
NPD may refer to just new generations of products or to some real innovation.
Supplier involvement refers to the resources both physical and non physical (capabilities,
investments, information, knowledge, ideas) that suppliers provide, the tasks they carry out
and the responsibilities they assume regarding the development of a part, process or service
for the benefit of a buyer’s current and/or future product development projects
et al, 2008, Journal of Product Innovation Management).
We go to suppliers because they have specialized resources: we give task to them and give them
Why supplier involvement in NPD?
Suppliers can contribute specialized product technologies and process capabilities: important
as products become increasingly complex. There is evidence that supplier involvement can
reduce new product cost and time to market, and improve product quality: major factor in
explaining Japanese advantage.
Early Supplier Involvement (ESI) enables design for manufacture and helps to prevent, reduce
or introduce costly design changes earlier: 'first time right’.
Why early supplier involvement? (‘Stage Gate Cooper’):
We have a number of different stages
1- Concept development
2- Product planning
3- Product/process engineering
4- Pilot production, testing, ramp-up, launch 54
We have two different trends: over time, costs of design changes are low ate the beginning
(creating stage: we do not commit a lot), then they grow until the final stages in which they are
more expensive; flexibility, instead, tend to decrease over time.
Generally, companies involve suppliers in the final stages.
CASE AIRBUS A380 55
- What does Airbus gain through supplier involvement?
Take advantage of the suppliers’ knowledge and competences (specialized product
technologies and processes) related to the different sectors (e.g. engine): take from the
best; lower costs (fixed costs: R&D costs): economies of scale of suppliers; reduce the
risk of failure share the risk and the investments; reduce time to market (parallel
suppliers, etc.); concurrent engineering.
- Why don’t they develop the A380 on their own?
Costlier and time consuming (they were running out of time for the first launch).
Supplier already has knowledge and know better what can be improved and how.
- What’s in it for the supplier?
It is an advantage for them as well: incentives to develop new technologies (supplier
capabilities increase), economies of scale, advantages also to make agreements and
partnerships with other companies.
From the supplier point of view better planning (since they are involved before), they
can become production supplier; they can gain recognition.
FROM THE CASE TO THE THEORY
Timing of supplier involvement
Timing is one of the key issues.
Mentality shift within Airbus: earlier and closer involvement of key suppliers: Airbus asked
suppliers for solutions (instead of just giving instructions). shared space within
Airbus buildings for ESI suppliers. Some involvement during concept development but also
‘Very Large Commercial Transport’
even earlier through feasibility study (VLCT) commenced
by group of aerospace companies in January 1993. It is still not early enough: they should have
involved even before.
Supplier involvement in product development: mixed evidence
The Big Picture of early supplier involvement
Roots in Japanese automotive research but upsurge in cross-industry/country research,
including large scale surveys and data from both customers and suppliers. Much evidence to
support early and extensive supplier involvement as key explanatory factor of superior new
product performance. US and European shift towards ‘partnership’ supplier relations initially
too one-dimensional: different levels of supplier involvement required. Latest research
confirms supplier involvement performance benefits but also major management challenges
e.g. internal coordination, supplier selection processes, and long-term relationship adaptation
to create supplier relationships with high levels of trust and commitment. Conditions of
technological uncertainty i.e. high level of innovation a major research theme since Eisenhardt
& Tabrizi’s (1995) study. 56
Spectrum of Supplier Involvement
Points of supplier involvement
The different categories of suppliers intervene and are involved at different stages. The black
box is more critical and strategic: only the most important suppliers are involved early.
Supplier roles in Airbus A380
– Traditional arms-length relationships where supplier is issued with fully detailed drawings
– Regular consultation meetings and design reviews to encompass supplier capabilities and
‘Design and Build’:
– Risk sharing partners
– Early and close involvement e.g. some suppliers part of original feasibility study ‘Very Large
Commercial Transport’ (1993)
– Resident engineers during concept phases
– Partial supplier authority to design, develop and manufacture components or assemblies in
partnership with Airbus
– Integrated design and development
For the aero-space engineering there are lots of regulations because in this industry they are
obsessed with safety.
Risk and Reward Sharing on A380 Programme
Prior to A380 procurement strategy was primarily European and driven by competitive
bidding. By expanding supply base globally Airbus had opportunity to offer work share
packages e.g. Chinese airlines demanded percentage of local manufacturing. 57
partners’: several contracts based on full return of contribution and finance spread over 750
delivered aircraft; estimates suggest 15 years to break even. Risk sharing agreements and long
design and development period placed greater emphasis on contracting: a challenge due to
design modifications. Risk sharing arrangements reinforced with ‘open book’ policy but only
The Right Supplier Relationships
Successful supplier involvement requires customers to qualify and evaluate supplier
capabilities: complementarity. Supplier involvement in agreeing technical metrics & targets:
supplier Supplier relationships need careful nurturing for supplier involvement
benefits to materialize: takes long time to develop but an instant to destroy through
Supplier Involvement success factors
Some general lessons
- Need to learn how to make the most of suppliers in PD
- Lack of internal collaboration
- ‘Not invented here’ syndrome - supplier involvement seen as threat
- Suppliers selected on price rather than innovative capability
- Attempting to involve too many suppliers
A Process-based Framework for Supplier Involvement: a check-list 58
9 mesi fa
I contenuti di questa pagina costituiscono rielaborazioni personali del Publisher franciig_ di informazioni apprese con la frequenza delle lezioni di Purchasing and Supply Chain Management e studio autonomo di eventuali libri di riferimento in preparazione dell'esame finale o della tesi. Non devono intendersi come materiale ufficiale dell'università Politecnico di Milano - Polimi o del prof Johnsen Thomas E..
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