Industrial Relations

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Industrial Relations

• Veronica Fellman
• Arcada
• 27 November 2006

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Relationships with SuppliersDavid Ford Managing
Business Relationships, chapter 5

• Supplier Provider Vendor
• Suppliers role more important the costs for
  purchased goods and services represent the
  dominant part of the total costs of most
  companies, e.g. for the car makers Ford and
  Volvo, the purchased items are around 70 per cent
  of total costs.
• Outsourcing often means specialising and
  efficiency
• Companies rely on the suppliers to design
  products
• Interface between supplier companies
  customers
• JIT, TQM and other management administration
  requirements
• Reduction in suppliers, relationship challenging
• Individual suppliers important, supply
  relationship competitive edge
• Not buying the right products at the right time
  and the right price

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Relationships with Suppliers

• What can suppliers do for a company?
• Rationalisation to increase efficiency
• Development to improve effectiveness
• Rationalisation and the offering
• Identify the most appropriate solution to solve a
  problem
• Purchase/in-house solution
• Specification
• Logistics manufacturer of electronics reduced
  delivery times from 3-4 days to 24 hours, lower
  total costs despite higher transportation costs
• Rationalisation and fulfilment
• Increase reliability and efficiency of the
  fulfilment of suppliers offerings on a
  continuing basis
• Each business transaction within a relationship
  involves a number of administrative operations
  from preliminary inquiries, through checking of
  quality, quantity and timing to invoice payment
  and inventory control
• Example the costs of handling a single purchase
  order for uncomplicated items like maintenance
  supplies are at least 20, for more complex items
  about 75-150, about 1.5m invoices per year.
  Efficiency in high-volume purchasing requires
  routines. Purchases were consolidated from a few
  suppliers blanket orders, system contracting,
  purchasing cards.

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Relationships with Suppliers
Rationalisation through Supplier
Relationships Example Replacing a spot
competitive purchases of aluminium of varying
alloys, our Portland plant has firmly committed
to fixed purchases of precisely defined blocks
over a two-year period from two suppliers based
in the Los Angeles area. They have also
completely overhauled the transportation system
linking the Oregon plant with three key
California-based suppliers. The payoff for
Boeing The people who are doing the final
assembly of the 777 are now getting all the flap
supports they want, exactly when they want them,
and at a unit cost that is 30-35 lower than it
was just a year ago. Source Stunza in Ford, 2003
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Relationships with Suppliers

• The development role of purchasing
• Problem-solving ability of supplier
• Technological development of supplier, enhanced
  by a specialisation of companies in business
  networks and increasing technological intensity
  of their offerings
• Difficult for a company to maintain its own
  capability, companies rely on their suppliers
  developmental resources
• The internal RD resources should be co-ordinated
  with those of its suppliers as early as possible,
  as up to 80 of the total costs of a new product
  is determined in the design phase.
• Early supplier involvement can reduce lead times
• Example One of the suppliers suggested that
  high-speed machining could be greatly
  facilitated, even revolutionized, if the
  aluminium blocks were made in a new way that
  reduces residual stress the theory being that
  blocks forged the old way had greatly complicated
  the machining process. In effect the machine
  operators were being forced to whittle away at
  the sides of the block rather than sculpting it.
• Working closely with its suppliers, Boeing
  tested and confirmed the approach that the
  machine operators could carve straight into a new
  kind of block. It proved to be a key insight
  leading to a whole series of changes between the
  Portland plant and its suppliers.
• Source Stunza in Ford, 2003

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Economic Effects of Supplier Relationships

• Supplier relationships a very important asset of
  a company, value depends on usage
• The impact on a company of a particular supplier
  can be assessed from
• What the customer is looking for from the
  relationship
• The way that it is used by the company
• How it relates to the companys other
  relationships with suppliers and customers
• Relationship costs cost efficiency
• Direct procurement costs
• Each purchasing transaction cost of
  transportation, handling of goods, ordering
  processes direct transaction costs
• Example of Relationship Costs and Benefits
• Relationship costs Relationship benefits
• Direct procurement costs Cost benefits
• Direct transaction costs Revenue benefits
• Relationship handling costs
• Supply handling costs

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Relationship benefits

• The source of the offerings that the company
  needs
• Offerings may include elements of product,
  service, advice, logistics and adaptation and
  provide the facilities, equipment, components and
  operations that a company needs
• Lower operational costs when a supplier provides
  a service that substitutes for task previously
  carried out by the customer
• Lower production costs when a supplier modifies a
  component so that it fits more easily into the
  companys own product
• Reduced development expenses based on information
  from a supplier about the use of its offering in
  the customers application
• Improved material flow brought about by reduced
  inventories due to changes in delivery frequency
  and lot sizes
• Reduced administration costs through more
  integrated information systems
• The price policy of the company?

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Value of Supplier Relationships

• The value depends on
• The context
• Portfolio of other suppliers
• Time span
• Both-way learning
• Innovation potential, technological innovations
• Perceptions of the relationship

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Involvement in Supplier Relationships

• Supplier relationship policy is important
• High- and low-involvement relationships
• Low-involvement relationships
• Close co-operation with supplier earlier meant
  too much dependence, now
• Anderson and Narus see the following advantages
  in low-involvement
• Low relationship-handling costs
• Transaction uncertainty is reduced, e.g. delivery
  failure, product or service quality flaws,
  fluctuations in demand
• Flexibility with several suppliers, not locked
  in, e.g. technology innovations
• Encourage competition
• Approach to suppliers producers of identical
  inputs, competitive tendering, common for
  government buying and construction industry.
  Price orientation for single projects, neglects
  often effects of the indirect costs and potential
  benefits of a purchase (e.g. organisational
  learning). Adversarial approach, benefits also
  for all parts.
• Handled with limited co-ordination, adaptations
  and interaction, no product or service
  adaptations, minimising resource ties,
  standardised order processing imply weak activity
  links, sales and purchasing administration, few
  actor bonds.

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Example of a Low-involvement Relationship

• There was also a feeling that everybody in the
  industry was trying to steal our technology and
  ideas, which was true 20 years ago. Everything at
  IBM was a secret. In procurement we were the
  guardians of confidential information, the guard
  at the door who did not let suppliers know
  anything.
• You could not have effective collaboration with
  suppliers because IBM did not want suppliers to
  know what product their parts were going to be
  used in.
• You could not develop volumes very well because
  the volumes planned were a secret.
• You could not say which plant would build the
  product that the part was going to be used in.
  Parts would be shipped to central locations like
  Kansas City or St. Louis and then we shipped it
  from there so suppliers would not know what plant
  it was going to.
• Source Carbone in Ford, 2003

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High-involvement relationships

• Based on an alternative idea of purchasing
  efficiency, a different view of the role of
  suppliers and the nature of relationships.
• Increased reliability on the resources of outside
  suppliers, co-ordination between companys and
  suppliers activities
• Relationship investments, tight
  interdependencies, low switch frequency
• Improve the operations in the long term by using
  suppliers resources
• Attempts to reduce total costs of the
  relationship by adaptations
• Tight actor bonds, activity links and actor bonds
• Relationship benefits in reduced costs of
  operations, material flows and service.
• Might be costly because of substantial
  co-ordination, adaptations and interaction,
  increased relationship-handling costs

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Example of a High-involvement Relationship
John Shoemaker, Vice-President for Purchasing at
Sun Corporation, has witnessed how supply
management at Sun has evolved. When I first got
here, Sun had a highly tactical strategy with
suppliers. We did not work with them. We had
adversarial relationships with them. However,
Sun began forging long-term relationships with
suppliers and took a more strategic approach to
supply management. It signed long-term agreements
with suppliers who were travelling down the same
technology path as Sun. It developed an open
kimono approach to suppliers who became involved
earlier in Suns new product developments. Its
totally changed from the old days when you did
not want suppliers to know too much. Now it is
the opposite. They know as much of your business
as we do. That is how you maximize their
value-added. Source Carbone in Ford, 2003
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The Need for Variation in Relationship Involvement
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Level of involvement and sourcing policy
Single
Sourcing policy
2
4
Multiple
1
3
Low
High
Relationship involvement
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Outsourcing Costs what do you get?
Price Production costs Goods handling
costs Storage costs Capital costs Relationship
handling costs Procurement costs Administrative
costs Development costs
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Relationships with many suppliers

• Co-ordination
• Adaptation with suppliers
• Interaction
• A company needs to think about the connections
  between the suppliers
• The connections can be handled separately, but
  better to foster connections by
• Joint logistics assembling
• Common information systems how to make
  innovations
• E.g. activity links and resource bonds, as well
  as actor bonds
• Networking activity patterns and resource
  constellations
• Personal networks
• Suppliers and sub-suppliers, NB! Take the whole
  link into consideration!
• Projects including suppliers and sub-suppliers
• Multi-professionalism engineers, marketers,
  economists....

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Critical Issues in Managing Supplier Relationships

• Active handling of relationships
• Using each individual supplier in the most
  appropriate way
• Using the combined potential of all the suppliers
  in the network
• Monitoring relationships and modifying
  involvement
• level of involvement assessing costs and
  benefits, increase/decrease?
• Evaluations?
• Most firms appear to be pursuing supplier
  reductions without clear assessment of the costs
  and benefits involved
• Had been overpaying for services in the name of
  partnerships, the terms of benefits of which
  could not be identified, let alone quantified
• Corruption!
• Too many one-sided decisions?
• Two-way complacency
• Kodak Benefits from Joint Development
• Every time you have a team approach with a
  common objective, then you are highly focused.
  When you get a supplier, an engineer, and a
  purchasing person together, you can co-ordinate
  the interfaces of the applications of parts. You
  can review the cost parameters versus a target.
  If you have the suppliers in up-front, they
  understand where you are starting from and what
  the target is. By having then work as a team, by
  having all expectations set out with respect to
  quality, cost, timing for prototypes etc., it is
  just a much faster process.

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Critical Issues in Managing Supplier Relationships

• When the supplier performance is seen to be
  inadequate, the buying company has two options
  change supplier or improve the relationship.
  Traditionally, companies charged suppliers in
  these situations, nowadays more to enhance the
  suppliers performance.
• A matter of using existing relationships in order
  to find the best potential partner
• e.g. Harley Davidson we send resources to help
  them
• Kodaks Criteria for Evaluating Partnerships
• Amount of technical support
• Number of innovative ideas
• Suppliers ability to communicate effectively on
  important issues
• Flexibility shown by supplier
• Cycle time, responsiveness, and improvements
  shown
• Supplier identification with Kodak goals, are our
  goals common?
• Level of trust that exists in dealing with the
  supplier
• Strength of the relationship at each plant

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Critical Issues in Managing Supplier Relationships

• Customer intervention
• Need to remember that buyer-seller relations are
  two-sided customer-supplier interaction
  determines the performance what else?
• supplier development programmes
• Help customers
• Not too detailed direction of sppliers (Quinn)
• What result is desired preferred to how the
  result should be produced, e.g. environmental
  questions
• If the buyer specifies how to do the job in too
  much detail it will kill innovation and vitiate
  the suppliers real advantage.

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Critical Issues in Managing Supplier Relationships

• 3. Mobilisation and motivation of suppliers
• High-involvement relationships entail costs for
  buying as well as supplying companies -gt
  motivation also for suppliers to get involved in
  high-involvement relationships with buyers
• KODAKs incentives to suppliers in partnerships
• Suppliers have secured Kodaks long-term
  business, future investments and use of resources
  sharpen resource utilisation and focus on
  meeting the particular needs
• Understand the needs and directions of a supplier
• Reduce administrative burden
• Definite job description between Kodaks job and
  the suppliers
• International customer/supplier network among
  Kodaks facilities
• SUN
• While Sun works closely with suppliers,
  involving them in product development and
  bringing them in-house, it does not mean that the
  company is not demanding. In fact, Sun has a
  reputation for being tough with suppliers on
  cost, delivery, and quality.

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Volume of business

• High involvement is preferable in supplier
  relationships with a major volume of business for
  the buying company
• Low involvement in low-volume relationships
• But high involvement in relationships for low
  volumes of business is an appropriate approach
  when the supplier has particular skills and
  capabilities that are not widely available, or
  when their offerings can have a considerable
  impact on the buying companys own offerings.
  Great developmental potential, e.g. large
  pharmaceutical companies small innovative
  companies in biotechnology.
• Customer companies can handle only a limited
  number of high-involvement relationships because
  they are resource-intensive. Choose some and
  invest in them!
• Low involvement with major suppliers is
  appropriate when the direct costs of purchasing
  are the most significant ones and the potential
  gains from further involvement are limited.
  Standardised offerings and solutions are
  involved. Customer induces the supplier to make
  reciprocal efforts to develop a closer
  relationship.
• High involvement might not suit a big supplier
  because of the relatively small scale of the
  buyer, the perceived absence of benefits in e.g.
  technology development or efforts directed
  elsewhere. Nourishment industry.

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Supplier networks

• Considerable benefits can be given customers if
  the suppliers co-operate
• Number of suppliers and sourcing approach.
  Reductions because of
• System sourcing specialisation, systems
  suppliers, reductions in transaction costs and
  relationship handling costs, procurement costs
  and costs in the relationship with the first-tier
  supplier increases
• Consolidation of purchasing fewer suppliers for
  the items they buy. Motorola 109 -gt 3 for 95,
  Harley Davidson 50 of their supply base since
  1990, three suppliers
• High-involvement relationships switch to single
  sourcing. Historically, the main advantage of
  single sourcing was perceived to be increased
  bargaining power. However, over time the need to
  reduce the indirect costs of purchasing led to an
  emphasis on high-involvement relationships with
  suppliers. Because these are resource-demanding
  they led to pressures to reduce the companies
  supply base. Once this is done and buyer and
  supplier bagin to work more closely together, a
  number of opportunities to improve relationship
  performance might appear.
• Single-multiple sourcing the buying firm would
  by single sourcing lose the benefits of reduced
  transaction uncertainty, enhanced flexibility and
  stimulation of price competition. Not true!
  Transaction uncertainty, logistics systems,
  technology
• When procurement costs are less important than
  indirect costs, single sourcing might be a better
  way to deal with cost rationalisation.

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Task for next time

• Think about what kind of variations different
  businesses need in their supplier relationships.
• Your task for next time is to think of the
  different industries for the level of involvement
  and sourcing policy.