Supplier management test 1

Chapter 1 – Introduction to Supplier Management

Supply Management and Purchasing:

 Supply management starts by identifying what the organization needs and

ensures it gets the right items or services.
 Purchasing is the process of buying goods, services, or equipment from another
organization.
 Choosing the right supplier is the most important decision in purchasing. As a
poor supplier can lead to issues like low quality, high costs, and late deliveries.

What is a supply chain?

 A supply chain is a system of companies like suppliers, manufacturers, distributors

and retailers, working together to deliver products to customers.
 Within a company, all key departments (marketing, operations, finance, IT, etc.)
help fulfil customer needs.
 The customer is a key part of the supply chain.
 It involves the movement of products, information, and money between suppliers,
manufacturers, and distributors.
 It’s sometimes called a supply network or supply web because it's more than just
a simple chain.

What is supply chain management?

Supply Chain Management is about making sure everything needed to create and deliver
a product, from raw materials to the finished item, works smoothly across different
companies. The goal is to meet the customer’s real needs by creating a process that
adds value at every step, from design to delivery to achieve a sustainable competitive
advantage.

- Focal firm - In a supply chain is company sees themselves as a focal firm

meaning each company focuses on its own relationships with suppliers and
customers. Any company in the chain (supplier, manufacturer, or retailer) can be
the focal firm.
- 1st Tier supplier - supplies materials directly to the company
- 2nd Tier supplier – supply to the first tier suppliers
- Upstream: Activities positioned earlier in the supply chain.
- Downstream: Activities positioned later in the supply chain.

Supply Chain Operations (SCOR) model:

1. Plan: This involves figuring out how much product is needed and how to get it. It
balances customer demand with supply to create a plan for sourcing materials,
producing goods, and delivering them.

2. Source: This is about buying the goods and services needed to meet customer
demand. It includes finding suppliers and making purchases based on what was
planned.

3. Make: This process is about turning raw materials into finished products. It focuses
on manufacturing items to match customer demand.
4. Delivery: This is the process of getting finished products to customers. It includes
managing orders, transportation, and distribution to ensure products reach their
destination on time.

5. Return: This involves handling returns of products from customers. It covers

everything from receiving returned items to providing support after the sale.

Supply chain flows:

- Information flow: Sharing data customers needs so we can then buy the
necessary raw materials to make products. We use the info to search and
negotiate with suppliers.

- Products flow : We buy the right materials and goods from our suppliers, We
make & sell the products to the customers.

- Finances flow: The customers then pay us, We can pay our suppliers.

Chapter 2 – Organizational Positioning of Supply Management

Centralized Purchasing:

- Definition: All purchasing activities are coordinated through one central location.
- Examples: Major retailers, automotive manufacturers, technology companies.

Advantages:

- Lower costs due to quantity Disadvantages:

discounts.
- Increased buying power with - Engineers may need to be
large purchase quantities. involved in location-specific
- Better use of purchasing decisions.
professionals. - Difficult to coordinate with
- Easier monitoring of industry local production schedules.
changes. - May miss out on local supplier
- Simplified supplier evaluation benefits.
and training programs.

Decentralized Purchasing:

- Definition: Purchasing authority is spread throughout the firm.

- Example: Heavy highway construction.

Advantages: Disadvantages:

- Faster decision-making and - Loss of negotiating power due to

business responsiveness. smaller quantities.
- Inconsistent sourcing.
- Department managers can make
immediate purchases.
The Link Between Supply Management and Other Departments:

1. Engineering: 2. Operations:

- Supply management helps - Supply management ensures

procure the right materials for timely ordering of materials
product specifications. based on production
schedules.
- Know which suppliers can
provide the right materials - They need to provide supply
management with the correct
- Involves strategic suppliers in information concerning
new product development production needs
(NPD- new product
development). - Delays can lead to increased
costs or production
shutdowns.

3. Quality: manufacturing function is

outsourced.
- Quality teams work with
supply management from 4. Marketing:
product development to
involvement in sourcing and - Supply management impacts
supplier monitoring. with the sales by ensuring timely
aim of minimizing quality product launches.
problems throughout the - Sales forecasts drive
supply chain. production and material
- Ensures suppliers meet quality schedules.
standards. - The sales forecast also
- Quality’s role changes influences a firm’s capital
significantly when the equipment budget as well as
its advertising campaigns.

5. Finance: 6. Information Technology (IT):

- Finance approves supplier - IT supports procurement

discounts and ensures timely processes and database
payments. management.

- Finance is responsible for - Coordination between IT,

obtaining funds and supply management, and
overseeing their use. operations is crucial.

- Good financial management

strengthens supplier
relationships.

7. Logistics:

- Supply management assists in 8. Accounts Payable:

sourcing and pricing logistics
services. - Delayed payments can harm
supplier relationships and
- Logistics costs are a increase costs.
significant part of the budget.
 - Suppliers may increase prices
because they know payment
to them will be delayed.

9. Lawyers: 10.Non-manufacturing
organizations:
- Lawyers ensure proper
contract management with
suppliers.

Chapter 3 – Buyer – Supplier Relationship

The Three Core Supply Chain Relationship Links

1. Transactional Arm’s Length Relationships: Basic, short-term, and often

adversarial.

2. Collaborative Relationships (Partnerships): Closer, more integrated, and

cooperative.

3. Strategic Alliances: Highly integrated, long-term, and based on mutual trust

and shared goals.

1. Transactional Arm’s Length Relationships: Basic, Short-term or one-time

purchases.

 Characteristics:

- Low switching costs (easy to change suppliers).

- Focus on low price.
- Adversarial rather than cooperative.
- Power is often with the larger organization.
- Once off buys, when the exchange between buyer and seller ends, the
relationship ends
- Products involved in these relationships are referred to as routine or non-
critical products
- These relationships are often adversarial rather than cooperative

 Examples: Buying office supplies from a vendor.

2. Collaborative Relationships (Partnerships): Long-term, highly integrated

partnerships.

- Characteristics:

- Mutual trust, openness, shared risks, and rewards.

- Focus on long-term benefits.
- Organisations work together towards common goals and share investments in areas
such as product development, inventory control, and non-core process outsourcing
- Information sharing through tools like Electronic Data Interchange (EDI).

By close co-operation with suppliers they can :

- Improved product design.

 - Faster time to market.
- More efficient processes.

Example: The supplier helps the buyer manage inventory levels to reduce costs.

3. Strategic Alliances

Characteristics:

- High level of operational them together) to pursue specific

integration. market opportunities
- Joint planning, shared technologies, - High interdependence and mutual
and process integration. investment.
- Reserved for those suppliers or - Mutal trust is needed as It can help
customers who are critical to an parties have access to each others
organizations long term success. strategic plans in the areas of the
- When supply chain partners achieve interface
the greatest degree of - Relevant cost information and
collaboration, they form strategic forecasts are shared.
alliances - which neither of the two parties
- whereby two or more organisations dominates the other
agree to pool their resources (group

Benefits:

- Risk and reward sharing.

- Reduced coordination and transaction costs.
- Rapid response to market needs.

Characteristics of buyer-supplier:
Positioning Buyer-Supplier Relationships (Kraljic’s Portfolio Analysis)

The Portfolio Matrix:

The matrix helps organizations decide how to manage suppliers based on supply
risk and value to the firm.

Quadrant Characteristics Strategy

Strategic / High value, high risk (few Build partnerships for

Critical suppliers). collaboration and innovation.

Low value, high risk (few

Use multiple suppliers or find
Bottleneck suppliers, monopolistic
substitutes to avoid delays.
market).

Consolidate purchases with a few

High value, low risk (many
Leverage suppliers for discounts. Use
suppliers, standard goods).
competitive bidding

Low value, low risk (many Use electronic catalogues, EDI, or

Routine/
suppliers, low impact on Vendor Managed Inventory (VMI)
Noncritical
performance). to reduce costs.

The Role of Power and Trust in Buyer-Supplier Relationships:

Power Dynamics
  Captive Buyer: The buyer is Trust
dependent on the supplier
(supplier has power).  Essential in: Strategic and
Collaborative relationships.
 Captive Supplier: The supplier
is dependent on the buyer (buyer  Less important in:
has power). Transactional relationships.

Summary of Power and Trust in Each Quadrant

Quadran Buyer Supplier Trust

t Power Power Essential?

Strategi
Balanced Balanced Yes
c

Bottlene
Low High No
ck

Leverag
High Low No
Defining Stakeholders: Mapping Stakeholders

 Stakeholders: Individuals or  Identify key stakeholders.

groups with an interest in the
organization’s procurement or  Understand their influence and
supply chain activities. interest in the supply chain.

 Examples: Suppliers, customers,  Develop strategies to engage and

employees, shareholders, and manage them effectively.
government agencies.

Chapter 4 – Supplier Selection

1. Supplier Analysis

 Purpose: Identify potential suppliers.

Key Considerations: Sources of Information:

- Number of possible suppliers. - Supplier websites.

- Number of buyers in the market. - Supplier catalogs.
- Nature of competition. - Trade registers, directories, and
journals.
- Phone directories.
- Company personnel.
- Trade shows.
- The Internet.
- Networking

2. Supplier Evaluation and Selection

When to Evaluate:

o For low-cost items, less time is o For important purchases, detailed

needed. evaluation is required.

Steps for Evaluation:

1. Surveys: Gather information about 4. Evaluation Conference: Meet with

the supplier. the supplier to discuss the purchase.
2. Financial Condition Analysis: 5. Plant Visits: Inspect the supplier’s
Check the supplier’s financial facilities.
stability. 6. Capability Analysis: Assess quality,
3. Third-Party Evaluators: capacity, management, labor skills,
Independent firms analyze the service, flexibility, lead times, and IT
supplier. systems.

3. Weighted-Point Model for Supplier Evaluation

Steps:

1. Select Evaluation Categories: E.g., quality systems, delivery capability, price.

2. Assign Weights: Give higher weights to more important categories.
3. Rate Suppliers: Rate each supplier on a scale (e.g., 1 = very poor, 5 = excellent).
4. Multiply Weight by Rating: For each category, multiply the weight by the
supplier’s rating.
- Add Totals: Sum the scores for each supplier.
- Select the Best Supplier: The supplier with the highest total score is the best
choice.
- Make sure weighted score equals to 100
4. Competitive Bidding vs. Negotiations:

1. Competitive Bidding: is a process where multiple suppliers or vendors submit their

offers (bids) to win a contract or supply goods/services to a buyer.

When to Use: Process:

- Price is a key factor. - The buyer issues a Request for

- Specifications are clear. Proposal (RFP) or Request for
- Many suppliers are available. Quotation (RFQ).
- The relationship with the buyer is - These are documents that describe
not close. the purchase requirements as
- Level of spend is high enough specifically as possible
- Suppliers submit bids.
- The buyer evaluates the bids and
selects the best offer.

2. Negotiations: Is a bargaining process involving a buyer and seller seeking to reach

mutual agreement

When to Use: - Buyer and seller negotiate to reach

a mutual agreement on price,
- Price is not the only important service, specifications, Technical
factor. and quality requirements , and
- Costs are uncertain. payment terms.
- Changes in specifications or
contract terms are expected.
- Special tooling or setup costs are
significant.

Process:

Chapter 5- Bargaining and negotiation

What is Bargaining?

Bargaining happens when the terms of a sales transaction or business deal are settled. It
involves an agreement between two parties on the cost of goods or services. For
example, if a seller agrees to offer a 10% discount on a product as long as the buyer
orders at least 12 units, that's a bargain.

Key Points:  Bargaining is an alternative to

fixed pricing.
 Bargaining is a type of
negotiation where buyers and What Can You Bargain?
sellers debate the price and
details of a transaction.  Price

 If both parties agree on terms,  Wages

the transaction happens.  Working conditions

 Volumes

Types of Bargaining

There are two main types of bargaining:

1. Distributive Bargaining 2. Integrative Bargaining

 Definition: A competitive  Definition: A collaborative

negotiation where parties are in negotiation where parties work
conflict over a fixed amount of together to find a "win-win"
resources. solution.

 Used as a negotiation strategy to  Outcome: By working together,

distribute fixed resources such as Both parties can increase total
money, resources, assets, etc benefits by focusing on mutual
between two parties. interests.

 Outcome: The more one party  Example: Two teenagers

gains, the less the other gets. discover one wants to eat the
orange, and the other wants the
 Example: Two teenagers splitting peel to bake a cake. They both
an orange in half because both get what they want without
want it. splitting the orange.
 Distributive is a win lose situation  Often happens between
manufactures and distributors

Which is Better?

 Integrative bargaining is generally better because it creates a win-win situation

for both parties.

Planning for Negotiations (Buyer's Perspective)

Buyer's Strengths:

 Number of sellers in the market What Buyers Must Analyze:

 Number of buyers in the market  Information submitted by the

seller
 Knowledge of the item or service
 Seller's strengths and
 Cost breakdown (if applicable) weaknesses
 Level of preparation  Power dynamics in the
negotiation

Preparing for Negotiations

1. Gather all relevant information.

2. Define what you want to achieve. And what strategies and tactics you would use

3. Understand the supplier's cost breakdown to determine a fair price.

4. The more data you have, the stronger your position.

Procedure for Negotiations

1. Choose a team and decide who will lead the negotiation.

2. Clearly outline what you want to achieve.

3. Preparation:

 Look at comparative bids.

 Perform a supplier visit.
 Look at supplier rating-evaluation records.
 Perform a value analysis.
 Look at contract terms.
 Industry price trends.
 New product ideas.
 Survey data
 Test reports.
 Prepare a proposal analysis (e.g. determine questions.)

4. Bargaining Strength

5. Develop the plan (i.e. the agenda, venue, time, min-max positions, is it a reorder or a
new supplier?)

6. Strategy: Know your objectives (e.g., process, specifications, etc.).

7. Tactics

 Start with easy issues to build momentum.

 Establish rules for the negotiation (e.g., recesses, interruptions).

8. Follow up after the negotiation to ensure agreements are implemented.