Emerging concepts of Lean Supply Management

Write two study reports to further explore the two of the following three SCM areas: Explore the emerging concepts of Lean Supply Management based on what can be referenced in concurrent literatures; discuss the critical imperatives of efficiency and effectiveness that the lean approach can bring about. Propose a general approach with adequate level of details for an organization to and sustain lean supply management. initiate, develop

Elucidate the critical importance of supplier relationship management for the supply chain competitiveness; by finding and referencing to a number of professional literatures critically review some relationship management frameworks, models and approaches; discuss how a business might decide on the most appropriate relationship portfolio and management approach.

Explore the definition and concept of supply chain performance and explain how that is related or contributing to business excellence; explore what constituent components of supply chain performance measures and further distinguish it from business performance measures; discuss how those measures may be used constructively to transform the business strategy and improve operations and customer services.

SECTION 1

INTRODUCTION

This paper looks at lean supply management and a brief discussion on how it came about, its effectiveness and efficiency, and a general approach to its initiation, development and sustenance in an organization.

LEAN: MEANING

According to Plenert, (2007), Mainstream management consulting firm defined lean as a “systematic approach that focuses the entire enterprise on continuously improving quality, cost delivery and safety by seeking to eliminate waste, create flow and increase the velocity of the system’s ability to meet customers demand”. Abbott et al., (2004) also defined lean as “systematic approach to identifying and eliminating waste (non-value-added activities) through a continuous improvement by ¬‚owing the product at the pull of the customer in pursuit of perfection”.

The common words from the above definitions are; systematic, waste, flow, customer, improve. What this implies is that lean is mainly focussed on delivering a qualitative product to a customer at the least expensive price, and at the right time and this can be achieved by the continuous flow improvement and waste elimination along the whole chain of activities needed to deliver the product.

Abbott et al., (2004) further mentioned that the American Product and Inventory Control Socitey (APICS) sees lean not as a system as mentioned above but as a philosophy used in reducing all the inputs needed in an organization to achieve a result while Dough Howard of the Lean Enterprise Institute sees lean as a set of tool box where one can take any tool in making better whatever needs to be made better in an organization.

Whichever way lean is seen, whether as a philosophy, systematic approach, a philosophy or a set of tool box or a combination of the three , what is key is that it should be applied in such a way that will lead to the maximisation of the results it tends to achieve.

LEAN PRODUCTION: A BRIEF HISTORY

The term lean which has its roots in manufacturing was coined in 1988 by a researcher, John Krafcik at the International Motor Vehicle Programme (IMVP), Massachusetts Institute of Technology (MIT), USA (Womack, et. al., 2007). However, two books; The machine that changed the world and Lean Thinking by James Womack and Daniel Jones made the term very popular. (Dennis, 2002).

Around the 1900s, craft production was the order of the day, to have a car, one would need to visit a craft specialist who would then make the car according to the clients specification. The craft production system was characterised by the low production, and high cost. (Dennis, 2002).

According to Daniel Jones although the term lean just became popular in the 1990’s its principle can be traced back to Henry Ford’s mass production assembly line at Highland Park (Taylor & Brunt, 2001). Womack, et. al.,( 2007) further reiterated this point that by inventing the “moving assembly line” in 1913 and justaposing it with his earlier 1908 technique of ‘continous ineterchangeability of parts”,Henry Ford was able to increase astronomically the number of cars produced with the same number of people and equipment when compared with his earlier mass production model of 1908 which climaxed with Ford T model .

Womack, et. al., (2007) attribute the lean production system, which according to Wilson, (2010) can also be interchanged with the Toyota Production System , to a Japanese engineer, Ohno, who visited the Ford production system in Detroit in the late 1940s and noticed that a lot of the whole system was filled with waste which he referred to as muda. After carefully understudying the Detroit factory and experimenting with the presses he bought from them, when he got back to Japan, by late 1950s he was able to reduce the time needed to change a die from one day to three minutes in Toyota car factory where he worked as an engineer.

Ohno identified the different muda ( see fig 1) as seven and he listed them to be waste due to excessive inventory, waste due to waiting, waste due to transportion, wastes due to overproduction, waste due to defect, waste due to movement and waste due to excessive processing . (Wilson, 2010)

TRANSPORTING

DEFECT

EXCESSIVE

INVENTORY

WAITING

Waste (Muda)

NWASTE (MUDA) Value Adding Product or Service

OVERPRODUCTION

INAPPROPRIATE PROCESSING

UNNECESSARY MOTION

Figure 1: The Seven Wastes: Source (WMG, 2010)`

Womack, et. al., (2007) further stated that Ohno introduced measures which were totally different from the Ford’s mass production system. Ohno believed in getting it right at the very first time, thereby eliminating the need for rework .His philosophy was also hinged on what he referred to as Kaban or Just in time which tends to eliminate the need for inventory as materials were delivered in small amounts as needed in the factory. Ohno also developed multiskilled workers and gave them the power to stop production in the entire assembly line should any defect be noticed while working. The wokers would then to solve gather and try the problem by asking the “5 whys” which Wilson, (2010) referred to as the “Therefore” technique.

Fern, (2002) stated that with the application of the lean principles, Toyota was able to develop a system called “mass cutomisation” as coined by Joseph Pine in 1993 because they were able to manufacture cars which met different customers needs at a price cheaper than that of mass production.

LEAN SUPPLY MANAGEMENT

MEANING AND EMERGING CONCEPT

Lean supply as defined by Abbott et al., (2004) is a set of organisations directly linked by the upstream and downstream, flows of products, services and information that collaboratively work to reduce cost and watse by effectively and efficiently pulling what is needed to meet the individual customer.

Basically, lean supply looks at leanness not just in an individual organisation, but the application of lean across a chain of organisations which are interconnected to one another and also tend to have one common goal in mind which is satisfying the customer.

According to Phelps et al., (2003) while the method of lean manufacturing tends to look at bringing value to the customer by eliminating waste in the internal production process, lean supply management tends to look at ways of bringing value to the customer by the “optimisation of the whole supply chain” ,

WMG, (2010) lists some attributes of a lean supply system summarised below as :

Having a tier based supply structure where a strong relationship is developed with a small tier one supplier usually a few.

Supplier being chosen not just on the traditional lowest bidder case but on how well they have done overtime.

Making sure the suppliers are involved at an early stage when introducing a new product which will necessitate the buyer to share some design and proprietary information with the supplier

Materials being delivered just as needed in small but regular quantity ( JIT)

Using a competitive price the customer is willing to pay less profit (Target costing) rather than the traditional supplier cost plus profit approach.

HIGH OUTSOURCING

SMALL SUPPLY BASE

LEAN PRODUCER

1 LEAN PRODUCER

1ST TIER

(200)

1ST TIER SUPPLIER

2ND TIER

(30)

2ND TIER SUPPLIER

Figure 2: Lean Supply Structure: Adapted from (WMG, 2010)

The figure 2 above shows how lean supply is structured as opposed to the traditional mass supply structure shown in figure 3 below.

LOW OUTSOURCING

LARGE SUPPLY BASE

MASS PRODUCER

MASS

PRODUCER

SUPPLIER

(8000)

SUPPLIER

Figure 3: Mass Supply Structure: Source (WMG, 2010)

Lamming, (1996) further reiterated the relationship between the supplier and buyer in lean supply management that for there to be leanness in the supply chain, the buyer and supplier must see their selves as being in the “same boat” and having a “mutual destiny.” This can be achieved through cost transparency and collaborative efforts. He further stressed that the buyer must be willing to share information on cost and deisgn process, he must also be willing to carry out mutual assesment as opposed to the traditional vendor assesment method where the buyer asseses the supplier. Finally, the buyer must be willing to share blame with the supplier when someting goes wrong which is opposed to the traditional thinking where the buyer is seen as the “lord” and tends to blame the supplier should any problem arise.

EFFECTIVENESS AND EFFICIENCY OF LEAN SUPPLY

Macbeth in 1994, Axelsson and Wynstra in 2002, considered effectiveness as the improvement in value of a commodity or service i.e. quality perspective, while efficiency is a reduction in cycle time and price. (Senja and Westerlund, 2009).

Basically, in determining how effective and efficient the lean supply management is, one has to measure its impact on the price, cycle time and quality of materials produced overtime in a firm that has adopted that approach. For example, Plenert (2007) stated that after the introduction of lean supply in a particular aircraft manufacturing company, the aircraft gear box production cost reduced by $17.5 million annually. Also, in the same firm, the aircraft rebuild time reduced to 51 days from the pre lean time of 132 days leading to a 90 percent reduction in overtime.

Also Womack, et. al., (2007) stated that a survey carried out by the IMVP in 1987 showed 135 defects per 100 cars in General Motors Framingham assembly as opposed to 45 in Toyota ( a lean producer) Takaoka assembly.

However, Cox and Chicksand, (2005) also argued that lean suply has its limitations as academic scholars (such as ,Fisher, 1997; Christopher and Towill in 2002 and Lee in 2002) all of the agile school believe that lean supply is mainly useful when there is high volume, predictable demand with supply certainty and for functional product. What this implies is that lean can not be applied to products say in the fashion industry that have demand which is highly volatile. The table 1 shows the basic differences between lean and agile product profile.

Distinguishing Attributes

Lean Supply

Agile Supply

Typical Products

Functional Product

Innovation

Market place demand

Predictable

Volatile

Product Variety

Low

High

Product Life Cycle

Long

Short

Customer drivers

Cost

Available

Proft Margin

Low

High

Dominant Cost

Physical Cost

Marketability costs

Stock Out Penalties

Long-term contractual

Immediate and volatile

Purchasing Policy

Buy materials

Assign capacity

Information enrichment

Highly desirable

Obligatory

Forecasting Mechanism

Algorithmic

Consultative

Table 1: Lean and agile product profile: Source (Cox and Chicksand, 2005)

INITIATION, DEVELOPMENT AND SUSTAINANCE OF LEAN SUPPLY MANAGEMENT

INITIATION

According to Bernstein, (2006) before lean can into be initiated the supply chain, production execution accuracy has to be in the range of 80-85 percent and inventory accuracy has to be above 95 percent. Also, a good supplier evaluation and performance monitoring system has to be in place.

Plenert (2007) also stated that since implementation of lean could be disruptive, there has to be a very cogent reason for its implementation. The reason could be as a result of an organisation’s unfavourable stance among her competitors.

Plenert (2007) and Phelps et al., (2003) identified the necessary steps for lean supply initiation:

Top management coming together and reaching an agreement on the need to implement lean.

Engagement of an experienced lean facilitator who discusses with top management and defines in specific terms what the objectives (e.g. 20percent reduction in lead time, 100 percent quality achievement and 100 percent on-time delivery) of the lean supply implementation programme are.

The management with the facilitator then decide which target assembly and supply chain the implementation would start from. This has to be done because lean implementation could be disruptive and as such should be done in phases.

A core team comprising a manager in the target assembly, first tier suppliers and sub tier suppliers and lean facilitator is formed. The first tier suppliers are chosen based on Pareto’s rule, their perceived ability to meet the lean target goals and their willingness to adopt the lean initiative.

The facilitator then trains other core team members (if they don’t know) about lean and how the implementation would be carried out. The facilitator is just there as a guide, the other core team members will be the drivers of the lean development process. The facilitator could introduce tools like Change Acceleration Process (CAP) in order to make them buy fully into the idea of lean implementation as change could be difficult.

DEVELOPMENT

Plenert (2007) and Phelps et al., (2003) identified the following as the three major steps in developing lean supply as:

Assessment of the current state: The core team members then asses the current supply chain in order to determine the non value adding processes. This can be achieved using “macro” value stream mapping (which is a link of the individual value stream map in each level in the supply chain) (Womack and Jones, 2005) technique to access the materials flow across the supply chain levels i.e. assembly line, first tier and sub tier suppliers. Spaghetti mapping will be used for people movement; while systems flow chatting will be used for mapping the flow of information across the supply chain. Once the entire loop holes and non value activities across the supply chain have been identified and documented, the next phase would involve the mapping of the future state.

Developing a future state map: This map describes how the supply chain will look in the future in order to meet the set objectives and goals. It involves the development of the macro future state value stream map (Macro-FSVSM) for the supply chain. This can be done by firstly drafting a future state map (usually 18-24 months focus) for each level of the supply chain. Then with the macro current state value stream map, individual draft future state map for each level of supply chain identified and the performance objectives in place, a draft macro future state map can then be developed. The draft future state map is then presented in the form of a Macro-FSVSM) with a time line chart also in place so that progress would be measured during implementation.

Implementation: Once the core team has an idea of how the supply chain will look in the future, the next phase would be implementing the change. This would be done by the forming of project teams with project leaders in place across the supply chain. They would be taught what to do and how to go about it. There would be a time line in place and the future state Macro-FSVSM would serve as a guide. From time to time, the core team members would meet to see if set objectives are being met.

SUSTAINMENT

In order to sustain the gains from lean, the core team members would remain excluding the facilitator who could be consulted from time to time. There would be the need for lean champions in various departments who would meet the core team members from time to time to see new areas of possible improvement. Management also has to review from time to time the performance of the organisation and see if they meet the set goals. Also, continuous improvement (kaizen) workshops could be introduced in the organisation and participants would cut across employees of the assembly line, first tier suppliers and sub tier suppliers.

CONCLUSION

The value which lean supply brings into the supply chain competitiveness cannot be overemphasised. However, as discussed in the body of the paper, lean supply management style does not fit all types of organisations. There has to be a cogent reason for its implementation. As reiterated by Abbott et al., (2004), more often than not, the lean supply management style is usually used alongside another quality management tool, e.g. six -sigma. So in today’s organisations, we hear people talk about lean-sigma. Therefore, there should be a paradigm shift towards lean six-sigma.

SECTION 2

INTRODUCTION

This paper looks at the competiveness which supplier relationship management brings to the supply chain, various frameworks, models and approaches for supplier relationship management and how a firm can choose the most “appropriate” relationship management approach in order to gain competitive advantage.

IMPORTANCE OF SUPPLIER RELATIONSHIP MANAGEMENT FOR SUPPLY CHAIN COMPETITIVENESS

Buyer- supplier relationship management can be described as the management of the outcome which arises as a result of the interaction that is built overtime between buyer and supplier for value creation and beneficial achievements to the parties involved. (Cite this from pawlaks article)

According to Mudambi and Helper, (1998) there has been recognition in recent years that there is a sustainable competitive advantage (financial and strategic) gained when the relationship between firms and their suppliers are improved overtime.

Dyer and Sigh, (1998) further reiterated this point that gaining competitive advantage in modern market is not just a function of how well a firm provides competitive range of products, but has a lot to do with how well it manages her suppliers.

Cusumano and Akira,( 1991) using the car industry as an example stated that a typical car has over 15000 parts and very few of these parts are produced within, as such there is a need to determine the appropriate supplier relationship management approach in order to gain competitive advantage both in price and quality.

From the above, it can be seen that the need for supplier relationship management cannot be overemphasized; especially in today’s world where there is a lot of outsourcing and globalization.

RELATIONSHIP FRAMEWORKS, MODELS AND APPROACHES

RELATIONSHIP MANAGEMENT STYLES

Cox, et. al., (2004) described four basic buyer-supplier relationship management styles (see figure 4) as:

Adversarial arms- length relationship: Usually short term and the buyer relate with the supplier in an aggressive manner and uses exploitative approach in the didactic relationship.

Non adversarial arms- length relationship: Usually short term; however, the buyer uses the prevailing market price for bargaining in a non aggressive manner.

Adversarial collaboration relationship. The buyer tends to maximise the value gotten from the didactic relationship when he has dominant power, however, he is more open and shares operational information which will help the supplier in delivering a good product and service.

Non adversarial collaborative relationship. Usually long-term, win-win relationship type. The buyer maintains a very close relationship with the supplier. They both share the commercial value gotten from the relationship equally.

Adversarial

Collaborative

Relationship

Adversarial

Arm’s-Length

Relationship

Inequality

Relative share of

Value

Appropriation

Non- Adversarial

Collaborative

Relationship

Non- Adversarial

Arm’s-Length

Relationship

Equality

Collaborative

Arm’s Length

Way of Working

Figure 4: Relationship Portfolio Analysis: Source (Cox, 2004)

CRITICAL REVIEW OF CURRENT TREND IN RELATIONSHIP MANAGEMENT APPROACH

Over the last 15years, there has been a paradigm shift in the sourcing community concerning how buyers and sellers should relate (Cox, 2004). There are those scholars such as (Pawlak, 2009; Kraljic 1983, and Cox 1999) who argued that relationship styles should be treated differently in different circumstances and that it could be adversarial in some cases and collaborative in other cases depending on the prevailing conditions between buyers and sellers.

Cox, (2004,) argued that any relationship style could be appropriate and it is dependent on power regime analysis between buyers and sellers.

Kraljic, (1983) in his seminal work argued that relationship between buyers and sellers should be based on product categorisation using supplier risk and impact on business profit as the basis. As such, he stated that the classification of materials which he listed as bottle neck, leverage, non-critical and strategic, should be the determinant for the appropriate relationship.

Pawlak, (2009) argued using the economics of relationship theory ( see fig 3)that collaborative relationship might not always be useful because it may be expensive to manage and in some situations the cost associated with managing such relationship could outweigh its benefit .

However, another school (such as, Carlisle and Parker, 1989; Sako, 1992; lamming, 1995,) who after the seminal work on lean supply by Womack et al. in 1990 based their arguments on the success of the Japanese car manufacturing firms stated that relationship between buyers and sellers in all cases should shift away from the adversarial nature to a more collaborative one where trust and mutuality is important.

But Cox, (2004) of the agile supply school argued that the collaborative approach as advocated by the lean supply school should not be a one purpose fit all style. He based his arguments on the fact that long term collaborative approach which the lean supply advocates proposed for all types of relationship might not be appropriate in a situation such as fashion and film making industries where demand is not stable, not continuous and volume is low .

Cox, (2004) also argued that while in theory, the lean supply relationship (high level of collaboration, evenness in power distribution) pattern assumes that there is equal level of dependence between the buyer and seller, but in reality, it contradicts the assumption completely as it is only applicable in a system where the buyer is dominant.

The author believes in the school that tries to use different relationship style in different occasions. While the long term collaborative relationship style sounds desirable in theory, it is not easy to implement in practise as trust is not easy to achieve. Though we might never get to such an ideal, however, it is worth considering.

Every business is in to maximise profit. What should buyers in long-term collaborative win-win relationship do if the suppliers become not competitive enough as per product quality and cost? Should they stick to such a supplier since they have the same mutual destiny and are in the same boat (Lamming, 1995)? The author believes that should a case like this arise, the buyer should look for an alternative supplier. In essence, while long term collaboration and partnership might be good in some cases, it is not always the best and should not be used in all cases as it might be uneconomical to do so.

In continuation of the discussions above, the next section critically looks at different frameworks/ models available for developing a buyer – supplier relationship strategy.

FIG 3 ECONOMIC OF RELATIONSHIP FROM PAWLAK

CRITICAL REVIEW OF RELATIONSHIP MANAGEMENT MODELS

CRITICAL REVIEW OF KRALJIC PORTFOLIO MATRIX MODEL

Kraljic, (1983) proposed a four step approach into purchasing portfolio management. The four steps he proposed are classification of the items into various categories (leverage, strategic, bottle neck and non-critical) using 2 x 2 matrices with the supplier risk and profit impact on the items taken into consideration.

Secondly, market analysis to determine the supplier and company strength should be carried out using various criteria some of which are supplier, capacity utilisation suppliers’ break-even, potential cost of no delivery or inadequacy in quality.etc.

Thirdly, strategic positioning of materials in the strategic items quadrant identified in the first step by analysing the balance of power between the supplier and buyer using 3 x3 matrix with buyers strength and supplier strength identified in two above taken into consideration. The possible outcomes are exploiting the supplier if the buyer is more dominant in the market, if the supplier has more power, then the buyer should diversify, backward integrate, or look for substitute item and lastly, a balanced approach when the power between buyer and seller is evenly spread.

Lastly, he proposed that an action plan which depends on the scenario chosen from step three be taken on various policy issues some of which are volume, price, contractual coverage, new suppliers, inventories, own production, substitution, value engineering and logistic in focus.

HIGH

PURCHASING IMPACT ON FINANCIAL RESULT

LEVERAGE

STRATEGIC

Partnership

Competitive bidding

BOTTLE NECK

NON – CRITICAL

System Contracting

Secure Supply Continuity

LOW

FIGURE 5: KRALJIC MATRIX: ADAPTED FROM (KRALJIC, 1983)

SUPPLY RISK

LOW

HIGH

Svahn and Westerlund, (2009) stated that although, Kraljic matrix is one of the most widely used purchasing tool, it is also widely criticised. Caniels and Gelderman, (2007) argued that the Kraljic matrix basically focussed mainly on the items in the strategic quadrant and did not analyse fully the other quadrants in the matrix, however, Olsen and Ellram, (1997) modified the matrix and focussed on the entire quadrants.

Furthermore, Caniel and Gelderman, (2007) argued that the approach taken by Kraljic did not consider elaborately the issue of power and dependence. Also (Homburg, 1995 as cited in Gelderman and van Weele, 2005) argued that there is no clear line between what a high supply risk is and what a low one is, and that suppliers’ perspective was not considered in the didactic relationship. Pawlak (2009) also argued that Kraljic did not propose any relationship style in his portfolio matrix.

Finally, (Dubois and Pederson, 2002 as cited in Gelderman and van Weele, 2005) argued that the two dimensional model is too simple as it does not consider a wide range of factors which could influence decision makers in choosing the most appropriate relationship style to adopt.

The next section critically looks at another frame work which fully elaborates the issue of power and dependency.

CRITICAL REVIEW OF THE POWER MATRIX MODEL

Caniel and Gelderman, (2007) described power as the comparison of the degree at which one party depends on the other in a relationship. So invariably, the party that depends less on the other has more power.

Cox (2004) proposed a three point approach to relationship management. The first being the identification of the sourcing approach which is based on the strategic source planning, the second being an understanding of the power regime between the buyers and suppliers and third is the selection of the appropriate relationship management based on outcomes in the first two steps.

Cox (2004) identified the sourcing options available as:

Supplier selection: This is a reactive approach to selecting first tier suppliers.

Supply chain sourcing: This is a reactive approach to selecting suppliers not just from the first tier suppliers, but across the supply chain

Supplier development: This is a proactive approach to selecting first tier suppliers

Supply chain management: This is a proactive approach to selecting suppliers across the supply chain and not just first tier suppliers.

The second approach is the understanding of the “operational practise and commercial exchange” between the buyers and suppliers, this he referred to as the power regime analysis. This can be done using the power matrix shown in figure 6.

Attributes to buyer power relative to supplier

INTERDEPENDENCE (=)

BUYER DOMINANCE (>)

Few buyer / few suppliers

Buyer has relatively high % of market share

Supplier is highly dependent on buyer

Switching cost for supplier is high

Switching cost for buyer is high

Supplier is attracted by buyers account

Supplier has unique offerings

Search cost for buyer is high

Supplier has relative advantage over buyer as per asymmetry information

Many suppliers/ few buyers

Buyer’s share of market is high

Supplier depends on the buyer for revenue and has little or no alternatives

Switching’ costs for supplier are high

Switching costs for buyer are low

Supplier is highly attracted by buyers account

Buyers get standardised products from supplier

Buyers search costs are low

HIGH

SUPPLIER DOMINANACE (<)

INTERDEPENDENCE (0)

Few suppliers/ lots of buyers

Buyer’s contribution to suppliers profit is low

Supplier does not rely on buyer for revenue and has different options

Switching cost for supplier is low

Switching cost for buyer is high

Suppliers offer products that are unique

Buyer has a very high search cost

Many suppliers / many buyers

Supplier’s dependence on buyer for supplies is low.

Supplier does not depend on buyer for revenue

Both buyers and suppliers switching costs are low

Supplier is not attracted by buyer’s account

Buyer has a low search cost

LOW

HIGH

LOW

Attributes to supplier power relative to buyer

Figure 6: The power matrix: The attribute of buyer and supplier power: Source (Cox, 2004)

When the sourcing option is selected and power and leverage circumstances are known, the appropriate relationship management model can then be chosen from the table 2.

Sourcing Approach

Power and leverage circumstances

Appropriate relationship management styles

Supplier selection

BUYER DOMINANCE (>)

Buyer adversarial arm’s length / supplier non adversarial arm’s length

INDEPENDENCE (0)

Buyer and supplier adversarial arm’s length

INTERDEPENDENCE(=)

Buyer and supplier non adversarial arms length

SUPPLIER DOMINANCE(<)

Buyer non adversarial arm’s length / supplier adversarial arm’s length

Supply- Chain

Sourcing

BUYER DOMINANCE (>)

Buyer adversarial arm’s length / supplier non adversarial arm’s length

INDEPENDENCE (0)

Buyer and supplier adversarial arm’s length

INTERDEPENDENCE(=)

Buyer and supplier non adversarial arm’s length

SUPPLIER DOMINANCE(<)

Buyer non adversarial arm’s length / supplier adversarial arm’s length

Supplier Development

BUYER DOMINANCE (>)

Buyer adversarial collaboration/ supplier non adversarial collaboration

INDEPENDENCE (0)

Not applicable

INTERDEPENDENCE(=)

Buyer and supplier non adversarial collaboration

SUPPLIER DOMINANCE(<)

Buyer non adversarial collaboration / supplier adversarial collaboration

Supply Chain

Management

BUYER DOMINANCE (>)

Buyer adversarial collaboration / supplier non adversarial collaboration

INDEPENDENCE (0)

Not applicable

INTERDEPENDENCE(=)

Buyer and supplier non adversarial collaboration

SUPPLIER DOMINANCE(<)

Buyer non adversarial collaboration / supplier adversarial collaboration

Table 2: Appropriateness in sourcing strategies power circumstances and relationship management

Source: (Cox, 2004)

Although the issue of power and dependency which was not properly identified in the Kraljic matrix has been dealt with elaborately here, there is still a fundamental problem with this frame work as it does not consider the action plan for individual product categories. (Pawlak, 2009)

The author believes that the power matrix does not identify the possibility of the balance of power between a buyer and supplier changing after a period of time. Economic and environment factors could skew this power balance from time to time. As such, there should be a constant review of the balance of power between a buyer and her supplier when using the power matrix model.

Furthermore, the author believes that since this approach is qualitative and not quantitative, the judgement of the users of this framework might be subjective.

It can be seen that the power model did not consider the product categories; therefore, it would be necessary to consider another framework which takes into consideration both power and product categorisation.

PAWLAK RELATIONSHIP MODEL APPROACH

Pawlak, (2009) developed a frame work shown in figure 7 which considered the effect of power in a relationship and in addition product categories as developed by Kraljic (1983). The matrix has a two dimensional approach, the availability of alternative sources and product contribution to future and current profit.

Medium close relationship

High

Availability of alternative sources of supply

Distant relationship

Medium close relationship

Close friendship

Medium close relationship

Distant relationship

Medium close relationship

Close friendship

High

Low

Purchased product contribution to current and future profit

Figure 7: Improved framework of relationship management Source: (Pawlak, 2009)

The different relationship management approach as shown in the frame work is explained using table 3.

Distant Relations

Medium close

Relationship

Close Friendship

Time horizon

Short or medium term

Medium term

Long term

Involvement

Low

Medium

High

Commitment

Low

Medium

High

Communication

Low

Medium or high

High

Sharing of information

Limited

Medium or limited

High

Trust

Medium importance

Medium Importance

High Importance

Investment

Minimal

Medium

Functionality or quality of relationship

Focus

Price Efficiency of purchasing

Functionality or

Price

Joint

Design

Separate

Separate or joint

Joint

Strategic planning

Separate

Separate or joint

Joint

Rewards

Not shared

Shared or not shared

Shared

Risks

Not shared

shared

Shared

Low importance

Medium Importance

High importance

TABLE 3: IMPROVED CHARACTERISTICS OF BUYER -SUPPLIER RELATIONSHIPS

SOURCE: (PAWLAK, 2009)

Pawlak (2009) stated that in order to determine the appropriate approach, the following steps needs to be taken:

The right quadrant should be adopted using the two dimensional variable as shown in figure 7.

Upon determination of the quadrant, the following questions should be asked

Is the product critical?

Does a single supplier?

Does the product development involve a lot of complexity and long duration?

Is there a possibility to influence a closer relationship when the product functionality is important to the organisation

Is there a possibility to influence a closer relationship when the product price is important to the organisation?

If the answers to all the questions above is no, then the first relationship management approach in the quadrant chosen in step one should be adopted, otherwise the second relationship.

Although the Pawlak’s model has been able to incorporate both power and categorisation of products into the framework, however, the Pawlak matrix did not define in clear terms the demarcation between high and low product contribution to both future and current profit. Also, the time line for current profit and that for future profit was not properly defined.

Furthermore, what contributes to current and future profit was not properly defined. Users of this frame work might have different bias as to what the components of the contributing factors to current and future profit are; two different users in a firm might come out with very different relationship management styles because different weights might be applied to each contributing factor. This makes the framework highly subjective since it is not quantitative in approach but qualitative.

Still talking about profit contribution, the Pawlak’s matrix did not envisage a scenario where profit contribution is very high in the present but low in the future. In such a case, since both the current and future states are to be considered, where should the buyer place this effect, on the high side or low side? This could make this framework ambiguous.

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