CPSM Blog

Developing and managing supplier relationships

Having segmented suppliers the next step is to manage supplier relationships.Important areas are managing confidential information between organizations and being clear about intellectual property issues.

This section mentions ten different points to promote good relations and trust including top management meetings, timely payment of invoices, equitable treatment of suppliers,supplier development, supplier surveys and periodic business reviews. An important survey question to ask, which is not very obvious is "how can we make your work easier and how can we help you reduce your costs".

A final and important point made is about Early Supplier Involvement (ESI) in new product development because 70-80% of costs occur in the design phase and its really very strategic to involve suppliers early on.

Supplier Base Rationalization

The Supplier Relationship Management task (1-F) is the last task of Foundations of Supply Management. In this task the supply manager must examine the supplier base for the purpose of segmenting suppliers. Truly the work of Dyer and colleagues has influenced supply management thinking in this domain. For eg. see Dyer ,Cho and Chu (1998).

The overarching theme of the section is that the supply manager must differentiate between strategic suppliers who contribute to the core mission or business of the buyer's organization and those who do not. By and large the 80-20 rule applies here and only a few suppliers, in a few categories are of major strategic importance and relationship management becomes very important, these include critical raw materials. Interestingly, according to Procurement Strategy Council Research 50-70% of suppliers do not qualify for becoming strategic alliance partners. Nevertheless, all these suppliers need to be handled on a collaborative basis because they do have major business implications for example specialized packaging,IT services etc. Finally there are 20% suppliers who are  needed but not critical and these include MRO  and stationery items. For each of these categories a different set of supply management skills from strategic to tactical  are required but overall, the first step is to categorize suppliers.

Choosing between negotiating and competitive bidding

This last task(1-E-3) within the Sourcing section deals among other things (like  buying strategies including spot buying , JIT and forecasting) the perennial sourcing question of when do you negotiate and when do you try getting competitive bids. Here is an overview:

You do competitive bids when there are a large number of suppliers,the purchased products are manufactured to the same industrial standards,adequate time is available for the bidding process,dollar value is high,when specifications are very clear to buyer and potential sellers,when fixed price contracts are involved - in contrast to cost reimbursable contracts,considerations of the modified Kraljic risk-value matrix,if your external customers have enough lead times for the purchased product and do not specify suppliers,high flexibility on quantity-variety-timing from supply manager perspective.

All reverse conditions to the above call for negotiations with either existing suppliers or competent suppliers you can immediately find.

One exclusion from all of this is small value frequent purchases that can be handled through P-Cards or  blanket contracts based on I guess some form of competitive bid.

Decision matrix,supplier diversity,business continuity and information security

I was rather impressed with the bridge exam portions of this task (1-E-2). For one it gets into decision matrix development after you receive bids. It also discusses how important it is to check out the business continuity plans of the supplier being distinct from disaster recovery plans. But the really fine point is that you need to ask specifically about the specific information security arrangements the supplier has in place. In particular, if an employee of the supplier leaves, what is the process of eliminating access to the IT network or the process of access revocation. Very interesting because this kind of employee attrition happens all the time with overseas suppliers......

Who do you source from?- Existing versus new suppliers

Analysis of the supply base can reveal important action possibilities including understanding the nature of the market in the particular category.

Existing versus new suppliers is a complex decision and includes no less than thirteen different considerations including urgency,long-term relationships,supply base optimization  and Internet based searches.

Several other sections speak in more detail to these considerations, central to the Foundations of supply management.

Supply chain safety policy and procedures

The supply manager is expected to not only implement and monitor safety in the supply chain but also promote and advocate safety.

Not only US safety laws like OSHA are important but other countries legislation must be complied with like European Union Restriction of Hazardous Substance Directive (RoHS) , the Waste Electrical and Electronic Equipment Directive (WEEE) and Registration.Evaluation and Authorization of Chemicals Directive (REACH).

Finally, homeland security must be considered when dealing with supply chain safety issues.

Environmental responsibility, CERCLA and an EMS

Environment responsibility from "cradle to grave" of materials purchased is the responsibility of the supply manager. The CERCLA ( pronounced Sir-kla and an acronym for Comprehensive Environmental Response,Compensation and Liability Act ) is the principal guiding legislation in this regard.

Supply managers need to explicitly consider any creation,transport,disposal of any toxic waste or by-product that may be produced across the supply chain. Proper records and an explicit addressing of issues are mandatory. Importantly, even when say suppliers are hired to dispose off toxic materials and these suppliers make mistakes, the supply manager's organization will be responsible and  liable for consequential damages under CERCLA although the disposal contractor was in default. An environmental management system (EMS) that operates under a systematic quality procedure like ISO 14000 and is therefore audit-able  and amenable to systematic improvement is very desirable.

Code of business conduct for supply management and external suppliers

Social Responsibility starts with a code of conduct for both supply management and and supplies. Guiding principles are based on the current ISM Principles and Standards of Ethical Supply Management  Conduct (Global) approved in 2005.

International issues are guided by the United Nations "The Ten Principles of the Global Compact."

The Foreign Corrupt Practices Act (FCPA) 1977 and revised 1988 prohibits offering a bribe to a foreign official or NGO for an order. In addition, hiring a relative of a foreign official with the intent of influencing decisions is illegal. Intriguingly, "grease payments" like $5 for moving your file forward because the test that there will be an order is not provable. At most things move faster (probably) because of "grease payments" but there is no guarantee of order. However for supply managers such actions might indicate an appearance of impropriety and therefore should be avoided.

Finally, the Sarbanes Oxley ACt (SOX)  in the US  involves not only adoption of codes of ethics but also evidence that employees have received explicit training on codes of ethics.

Cross-Border Transaction documentation

Cross border transactions require good documentation. These are guided by the UN Convention on Contracts for International Sale of Goods (CISG) and the International Commercial Terms (Incoterms ) used for contracting.

Additional points to consider are relating to the US Foreign Corrupt Practices Act. the International Ant-Bribery Act of 1998,Anti-boycott legislation and the Export Administration act. Security considerations encourage the use of RFID for verifying identity of goods.  Finally, professional brokers specialized in documentation  can assist with documentation and ensuring that all the transactions are thoroughly well documented.

International sources of materials and Services and 4PL

This section provides a mix of guidelines including researching and benchmarking global suppliers, interpersonal skills required, cultural awareness,financial issues including computing different exchange rate concepts like Nominal Official Exchange Rate (NOER), Real official exchange rate (ROER) etc.

The growing trend (1/3) of transactions being done by subsidiaries on behalf of holding company and then avoiding letter of credit and other international costs is an interesting development. Understanding tariff systems like Ad Valorem vs. Value Added Tax (VAT) is important as is the need to articulate a business case for international procurement.

Finally, the discussion on 3rd Party vs 4th Party logistics (4PL) or a lead logistics provider (LLP) does confuse matters!