CHAPTER 3- CREATING & MANAGING

SUPPLIER RELATIONSHIPS

Principles of Supply Chain Management:

A Balanced Approach

Prepared by Daniel A. Glaser-Segura, PhD

 Learning Objectives

You should be able to:

– Discuss the current state & future challenges of SCM.
– Explain why Supply Chains are becoming more global.
– Describe how firms are expanding their SCM efforts to second-
& third-tier members of their supply chains.
– Discuss why & how supply chains are making greater efforts to
become more environmental responsible.
– Explain how supply chains are becoming faster.
– Explain why firms are outsourcing some or all SCM processes.
– Describe some of the ways supply chains are reducing total
costs.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
2
 Learning Objectives

You should be able to:

• Explain the importance of supplier partnerships and strategic
alliances
• Understand factors for developing successful partnerships
• Develop a supplier evaluation & certification program
• Explain the importance of a supplier awards program
• Understand the capabilities of supplier relationship management
technology
• Explain the benefits of using SRM software to manage suppliers

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
3
 Chapter Three Outline
• Developing Successful • Performance Metrics
Partnerships • Continuous improvement
• Building Trust
• Supplier Evaluation &
• Shared Vision & Objectives
Certification
• Personal Relationships
• The Weighted-Criteria
• Mutual Benefits & Needs
Evaluation System
• Commitment & Top
• ISO 9000 & ISO 14000
Management Support
• Change Management • Supplier Development
• Information Sharing & Lines of • Supplier Awards
communication • Supplier Relationship
• Capabilities Management Software

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
4
 Introduction
“Supply, sourcing, and purchasing professionals in
companies nationwide believe strongly that more and
stronger supplier partnerships are critical to achieving
competitive corporate performance”
Purchasing Magazine
Supplier partnerships 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”
Institute for Supply Management

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
5
 Developing Successful Partnerships

Reasons given for failure of alliances:

• Overly optimistic
• Poor communications
• Lack of shared benefits
• Slow payback results
• Lack of financial commitment
• Misunderstood operating principles
• Cultural mismatches
• Lack of alliance experience.

Survey of CEOS- The Conference Board

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
6
 Keys to Successful Partnerships

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, and, in short, go to the extra mile.
 
Shared Vision and Objectives
• Both partners must share the same vision and have objectives that
are not only clear but mutually agreeable. The focus must move
beyond tactical issues and toward a more strategic path to
corporate success.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
7
 Keys to Successful Partnerships- Cont.

Personal Relationships
• It is people who communicate and make things happen.
 
Mutual Benefits and Needs
• Partnership should result in a win-win situation, which can only be
achieved if both companies have compatible needs. An alliance is
much like a marriage, and if only one party is happy, then the
marriage is not likely to last.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
8
 Keys to Successful Partnerships- Cont.

Commitment and Top Management Support

• Commitment must start at the highest management level.
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.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
9
 Keys to Successful Partnerships- Cont.

Information Sharing & Lines of Communication

• Both formal and informal lines of communication should be set up to
facilitate free flow of information. With high trust, information
systems serve more effectively. Confidentiality of sensitive financial,
product, and process information must be maintained.

 Capabilities
• Key suppliers must have the right technology and capabilities to
meet cost, quality, and delivery requirements. In addition, suppliers
must respond quickly to changing customer requirements.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
10
 Keys to Successful Partnerships- Cont.

You can’t improve what you can’t

measure.
• Measures related to quality, cost, delivery, &
flexibility are used to evaluate suppliers.
• Metrics should be:1) understandable, 2) easy to
measure, and 3) focused on real value-added
results
• A multi-criteria approach is best to measure
performance.  
• Total cost of ownership (TCO), made up of all
costs associated w/acquisition, use, &
maintenance of a good or service

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
11
 Keys to Successful Partnerships- Cont.

Examples of Performance Metrics

• Cost/Price- Competitive price & availability of cost breakdowns
• Quality- Zero defects, Fit for use, ISO 9000
• Delivery- Fast, Reliable/on time
• Responsiveness & Flexibility- Responsiveness to customers & to
changing situations
• Environment- Environmentally responsible, ISO 14000
• Technology- Superior product/service design
• Business Metrics- Reputation, information sharing
• Total Cost of Ownership

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
12
 Keys to Successful Partnerships- Cont.

Continuous Improvement
• The process of evaluating suppliers based on a set of mutually
agreed-upon performance measures provides opportunities for
continuous improvement making a series of small improvements
over time results in the elimination of waste in a system.
• Buyers and suppliers must be willing to continuously improve their
capabilities in meeting customer requirements of cost, quality,
delivery, and technology.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
13
 Supplier Evaluation and Certification

• A process to identify best and most reliable suppliers.

• Sourcing decisions are made based on facts and not merely on
perception.
• Providing frequent feedback on supplier performance can help avoid
surprises and 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.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
14
 Supplier Evaluation and
Certification- Cont.
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 certified or successfully passing a recent, on-site
quality system evaluation
• Mutually agreed-upon set of clearly specified quality performance
measures
• Fully documented process and quality system with cost controls and
continuous improvement capabilities
• Supplier’s processes stable and in control
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
15
 Supplier Evaluation and
Certification- Cont.
The Weighted-Criteria Evaluation System
1. Select the key dimensions of performance mutually acceptable to
both customer and supplier.
2. Monitor and collect performance data.
3. Assign weights to each of the dimensions.
4. Evaluate performance measures between 0 and 100.
5. Multiply dimension rating by weight and sum overall score.
6. Classify vendors based on their overall score: Unacceptable,
Conditional, Certified, & Preferred
7. Audit and perform ongoing certification review.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
16
 Supplier Evaluation and
Certification- Cont.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
17
 Supplier Evaluation and
Certification- Cont.
ISO 9000
• Developed by International Organization for Standardization (ISO)- series
of management & quality standards in design, development, production,
installation, and service.
• U.S. companies wanting to sell in the global market seek ISO 9000
certification.
 
ISO 14000
• A family of standards for environmental management.
• The benefits include reduced energy consumption, environmental liability,
waste and pollution, and improved community goodwill.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
18
 Supplier Development

Supplier development refers to buyer’s

activities undertakes to improve a supplier’s
performance and/or capabilities based on the
following approach:
1. Identify critical products and services
2. Identify critical suppliers
3. Form a cross-functional team
4. Meet with top management of supplier
5. Identify key projects
6. Define details of Agreement
7. Monitor status and modify strategies

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
19
 Supplier Awards

Companies should recognize and celebrate the

achievements of their best suppliers.

Award winners exemplify true partnerships

continuous improvement, organizational
commitment, and excellence.

Award-winning suppliers serve as role models for

other suppliers.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
20
 Supplier Relationship Management
Software
Supplier relationship management (SRM) software
improves profits and reduces costs.
SRM refers to “extended procurement processes such as sourcing
analytics (e.g., spend analysis), sourcing execution, procurement
execution payment and settlement, and-closing the feedback loop-
supplier scorecarding and performance monitoring.”

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
21
 Supplier Relationship Management
Software- Cont.
Five key points of an SRM system:
• Automation
• Integration spans multiple departments, processes, and software
applications.
• Visibility of information and process flows
• Collaboration through information sharing
• Optimization of processes and decision making

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
22