Principles of Supply Chain Management (5e)

Chapter 3

CREATING AND
MANAGING
SUPPLIER
RELATIONSHIPS

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 Principles of Supply Chain Management (5e)

CHAPTER 3
LEARNING OBJECTIVES

You should be able to:

• Explain the importance of supplier partnerships
• Understand the key factors for developing successful partnerships
• Develop a supplier evaluation & certification program
• Explain the importance of a supplier recognition program
• Understand the capabilities of Supplier Relationship Management
• Explain the benefits of using SRM software to manage suppliers

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

CHAPTER OUTLINE

• Introduction
• Developing Supplier Relationships
• Supplier Evaluation & Certification
• Supplier Development
• Supplier Recognition Programs
• Supplier Relationship Management

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 Principles of Supply Chain Management (5e)

Keys to Successful Partnerships

Strong supplier partnerships

• Important to achieving win-win competitive performance for the buyer
and supplier -- these require a strategic perspective as opposed to a
tactical position

• Involve “a mutual commitment over an extended time to work together

to the mutual benefit of both parties, sharing relevant information and
the risks and rewards of the relationship”

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otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Keys to Successful Partnerships (Continued)

Building Trust
 With trust, partners are more willing to work together, find compromise
solutions to problems, work toward achieving long-term benefits for both
parties, &, in short, go to the extra mile.

Shared Vision & Objectives

 Both partners must share the same vision & have objectives that are not
only clear but mutually agreeable. The focus must move beyond tactical
issues & toward a more strategic path to corporate success.

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 Principles of Supply Chain Management (5e)

Keys to Successful Partnerships (Continued)

Personal Business Relationships
 It is people who communicate & make things happen
 Whoever is interfacing with the other company, they are the company

Mutual Benefits & Needs

 Partnership should result in a win-win situation, which can only be
achieved if both companies have compatible needs. An alliance is like a
marriage, if only one party is happy, then the marriage is not likely to last

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Keys to Successful Partnerships (Continued)

Commitment & Top Management Support
 Both parties must dedicate their time, best people, and resources to make
the partnership succeed
 Partnerships tend to be successful when top executives are actively
supporting the partnership

Change Management
 Companies must be prepared to manage change that comes with the
formation of new partnerships

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Keys to Successful Partnerships (Continued)

Hewlett Packard identified several key steps to ensure better

change management
• Identify internal champions
• Secure executive buy-in
• Coordinate internal communication and support teams
• Train and survey impacted managers
• Conduct business reviews with key client groups

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Keys to Successful Partnerships (Continued)

Information Sharing & Lines of Communication
 Both formal & informal lines of communication should be set up to facilitate
free flow of information
 Confidentiality of sensitive information must be maintained

Relationship Capabilities
 Suppliers must have the right technology & capabilities to meet cost, quality,
& delivery requirements
 Suppliers must flexible to respond quickly to changing customer
requirements

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Keys to Successful Partnerships (Continued)

Performance Metrics
You can’t improve what you don’t measure
 Measures related to quality, cost, delivery, & flexibility are used to
evaluate suppliers.
 Metrics should be:1) understandable, 2) easy to measure, & 3) focused
on real value-added results
 A multi-criteria approach is best
 Total cost of ownership (TCO), is made up of all costs associated
w/acquisition, use, & maintenance of a good or service

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Keys to Successful Partnerships (Continued)

Continuous Improvement
 Making a series of small improvements over time results in the
elimination of waste in a system
 Buyers & suppliers must be willing to continuously improve their
capabilities in meeting customer requirements of cost, quality, delivery,
sustainability & technology
 Partners should work proactively toward eliminating mistakes

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 Principles of Supply Chain Management (5e)

Keys to Successful Partnerships (Continued)

Monitoring Supplier Relationships

 The organization should have a firm grasp of the key issues surrounding
supplier relationships which may include
• Creativity
• Stability
• Communication
• Reliability
• Value

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Supplier Evaluation & Certification

 A process to identify best & most reliable suppliers

 Sourcing decisions are made on facts & not on perception
 Frequent feedback can help avoid surprises & maintain good relationships
 Suppliers should be allowed to provide constructive feedback to the
customer
• Supplier Certification refers to “an organization’s process for evaluating the
quality systems of key suppliers in an effort to eliminate incoming inspections.”
-Institute for Supply Management

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 Principles of Supply Chain Management (5e)

Supplier Evaluation & Certification (Continued)

Criteria Used in Certification Programs
 No incoming product lot rejections (e.g., less than 0.5 percent defective) for a
specified time period.
 No incoming non-product rejections (e.g., late delivery) for a specified time period
 No significant supplier production-related negative incidents for a specified time
period
 ISO 9000/Q9000/14001 certified or successfully passing a recent, on-site quality
system evaluation
 Mutually agreed-upon set of clearly specified quality performance measures
 Fully documented process & quality system with cost controls & continuous
improvement capabilities
 Supplier’s processes stable & in control

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 Principles of Supply Chain Management (5e)

Supplier Evaluation & Certification (Continued)

The Weighted-Criteria Evaluation System
1. Select key dimensions of performance mutually acceptable to both
customer & supplier.
2. Monitor & collect performance data.
3. Assign weights to each of the dimensions.
4. Evaluate performance measures between 0 & 100.
5. Multiply dimension rating by weight & sum of overall score.
6. Classify vendors based on their overall score: Unacceptable, Conditional,
Certified, & Preferred
7. Audit & perform ongoing certification review.

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Supplier Evaluation & Certification (Continued)

Supplier Scorecard Used for the XYZ Company
Performance Measure Rating  Weight = Final Value
Technology 80 0.10 8.00
Quality 90 0.25 22.50
Responsiveness 95 0.15 14.25
Delivery 90 0.15 13.50
Cost 80 0.15 12.00
Environmental 90 0.05 4.50
Business 90 0.15 13.50
Total score 1.00 88.25
(Example 3.1. )

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 Principles of Supply Chain Management (5e)

Supplier Evaluation & Certification (Continued)

ISO 9000
 Developed by International Organization for Standardization (ISO)
 Series of management & quality standards in design, development,
production, installation, & service
 Companies wanting to sell in the global market seek ISO 9001
certification

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otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Supplier Evaluation & Certification (Continued)

Standards in the ISO 9000 family
• ISO 9000:2015 - covers the basic concepts and language
• ISO 9001:2015 - sets out the requirements of a quality management system
• ISO 9004:2009 - focuses on how to make a quality management system
more efficient and effective
• ISO 19011:2011 - sets out guidance on internal and external audits of quality
management systems

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Supplier Evaluation & Certification (Continued)

ISO 14000
 Family of standards for environmental management
 Benefits include:
Reduced energy consumption
Environmental liability
Reduced waste & pollution
Improved community goodwill

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Supplier Development
Supplier development
Activity buying firm takes to improve a supplier’s performance and/or
capabilities to better meet its needs

Seven-step approach to supplier development

1. Identify critical products & services
2. Identify critical suppliers not meeting performance requirements
3. Form a cross-functional team
4. Meet with top management of supplier
5. Rank supplier development projects
6. Define details of Agreement
7. Monitor status & modify strategies

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Supplier Recognition Programs

Three Attributes –

 Companies should recognize & celebrate the achievements of their

best suppliers
 Award winners exemplify true partnerships continuous improvement,
organizational commitment, & excellence
 Award-winning suppliers serve as role models for other suppliers

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Supplier Relationship Management

Supplier Relationship Management (SRM)
• Streamlining processes and communication between buyer and
supplier using software applications

• SRM software automates the exchange of information resulting in:

• improved procurement efficiency
• lower business costs
• real-time visibility
• faster communication between buyer and seller
• enhanced supply chain collaboration

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Supplier Relationship Management (Continued)

Five key points of an SRM system

1. Automation handles routine transactions

2. Integration spans multiple departments, processes, & software
applications
3. Visibility of information & process flows
4. Collaboration through information sharing
5. Optimization of processes & decision making

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Supplier Relationship Management (Continued)

• Transactional SRM - used to track supplier interactions

such as order planning, order payment and returns
• focuses on short-term reporting and is event driven

• Analytic SRM allows the company to analyze the complete

supplier base
• focuses on long-term procurement strategies

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

Supplier Relationship Management (Continued)

Benefits derived from automating procurement activities
 Significant cost savings as buyers move toward managing processes by
exception

 Greater procurement visibility from using SRM software also translates into
smoother processes reduced product development
faster cycle times streamlined purchasing
improved time to market reduced inventory costs

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 Principles of Supply Chain Management (5e)

End of Chapter 3

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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