Supplier relationship management and supply chain performance

The supply chain is examined in the context of supplier relationship management and how supply chain performance can contribute to business success. The supplier relationship management (SRM) process at strategic level provides the structure for how relationships with suppliers will be developed and managed. To achieve the marketing, manufacturing and sourcing strategies are reviewed, in order to identify supplier segments that are significant to the organisation’s success both now and in the future. The supplier network is a key part of business success since it will impact: the quality of products, product availability, time to market for new products, and access to critical technology. By reviewing these strategies, management identifies the supplier types with whom the firm needs to develop long-term relationships. Then there follows the identification criteria for the segmentation of suppliers. Segmentation criteria include profitability; growth and stability; the criticality of the service level necessary; the sophistication and compatibility of the supplier’s processes; the supplier’s technology capability and its compatibility; the volume purchased from the supplier; the capacity available from the supplier; the culture of innovation at the supplier; and, the supplier’s anticipated quality levels. The final stage is to provide guidelines for the product and service agreement. This involves examination of the quality and cost implications, and the necessary measures to be used in monitoring the agreement (Lambert 2008).

Monitoring

After a contract with a supplier has been agreed, SRM involves monitoring, and a supplier relationship manager may be required to ensure this is carried out continuously, to ensure that it is meeting stated objectives, or if required, to make modifications to the agreement if it is not working as planned or due to changes in the market. The monitoring is based on predetermined and agreed-upon criteria such as quality, delivery performance, and ongoing cost improvement. It is also important to have a process in place to manage any disputes which may occur with suppliers.

One tool to monitor the supplier performance is the supplier scorecard. Scorecards typically include price, quality, and delivery reliability categories which may have been used earlier in the selection and choice process prior to the supplier being selected. There may be a category such as responsiveness of the supplier when a problem arises. The scorecards are used in regularly scheduled meetings with suppliers, so that deficiencies can be noted, discussed, and corrective action taken (Monczka et al 2008).

Speed

Speed is the essence of the business strategies of many of today’s top companies. Speed means the difference between customer satisfaction and potential loss of sales, between meeting marketplace demand and being left with unproductive assets, between success and failure. Speed has drawbacks in that it means that companies must constantly be vigilant to ensure their businesses follow a mix of agility, visibility, intelligence, and technology to survive in a marketplace which is increasing uncertain, ongoing shortening of business cycles, and increasing complexity of supply chains. The deployment of electronic or e-supply chain management and having an effective e-business strategy can meet the need for speed. Companies who have succeeded spectacularly with their E-business initiatives include Dell Computers, Wal-Mart, eBay and Cisco Systems. They have achieved success by having their management teams design an effective corporate strategy and then integrate an E-business model that supports that strategy (Ross 2003).

Models

A successful model in supplier relationship management is creation of an institutionalised partnership. As described by Lambert (2008), this will stabilise a partnership which will survive the transfer or departure of a key manager in the role. It will also recognise the importance of having a champion who will promote the partnership concept throughout the organisation. The success of the family restaurant chain Wendy’s in the USA is attributed in large part to the aggressive leadership of a partner agent, the vice-president of Wendy’s supply chain management.

Partnerships

Frazelle (2001) notes that supplier partnerships are the ultimate expression of supplier integration, with the implications of profit and loss sharing resulting from changes in the material, information, or cash flows between the two organisations. An example is the program initiated between major grocery retailers and Proctor and Gamble. Proctor and Gamble customers were given product discounts from implementing standards for receiving dock operations, allowing Proctor and Gamble trucks and carriers to unload faster, benefiting both partners and helping their relationships.

Customisation

For companies with large numbers of suppliers, the relationships take on a degree of complexity, and there may be individual key suppliers with limited computing facilities. This can be partially overcome by the use of the Internet. As described by Harrison et al 2005) low entry and exit costs make the Internet and web-based applications affordable at any stage of the buyer-supplier relationship. Web interfaces can easily be customised and channels of communication can be set up for individual suppliers helping to foster the relationship. From the point of view of both partners, if circumstances or markets change, the links can be rapidly discontinued and set up with alternate partners.

Best practice

The director of global technology supplier management at McDonald’s, the worldwide restaurant chain, believes that a successful SRM strategy requires dedicated supplier managers, effective processes to create standards of best practice, and tools to track and evaluate the results. Suppliers require to be segmented, to be measured and managed based on these measurements. McDonald’s best practices to manage its supplier relationships fall into four categories. First are performance measures, relating to a supplier’s efficiency in delivery and service. Second is contract administration, which ensures an agreement of followed and contains checks for any changes or variations, always being alive to the prospect of additional business. The third element is financial management administration, which confirms that invoices are correct and the buyer is paying for the agreed-upon services under the contract. Fourth, good communication keeps both parties in close contact to maintain a healthy relationship and to ensure that the purchaser’s end users also are benefitting from the supplier contracts (Wisner et al 2008).

Approaches

According to Frazelle (2001) the supplier network acts as an extension of the enterprise. The approach to supplier relationships needs to be as enthusiastically developed as customer relationships. The links with suppliers, whether face-to-face, by telephone or via the Internet need to reflect the same values of reliability, predictability and value added as serve customers. One way of facilitating this is an SRM program with annual conferences where logistics trends in all organisations are shared, proposed business projects that will impact the supplier community are presented, and agreements are reached for future logistics standards and capabilities.

Another approach is the introduction of supplier accreditation programs. Buttle (2004) describes this as a program under which certified or preferred supplier status is granted to suppliers that meet certain quality standards, and failure to be accredited means that a company is not considered among those shortlisted to supply. One common approach to supplier accreditation is to use international standards such as ISO 9000, a family of generic quality management standards in which quality is defined as ‘all those features of a product (or service) which are required by the customer’.

Evolutionary model

A five level evolutionary model of supplier relationship was developed based on a survey conducted by Computer Sciences Corporation (CSC) and Supply Chain Management Review in 2003. The results of this survey indicated that a business moves through five levels as it progresses to the most advanced stage. In level one the company focuses on functional and process improvement internally around the best ways of executing the supply chain process. In level two the company begins to recognise the savings being generate and strives for corporate wide excellence in supply chain processing. Companywide assets are evaluated with the objective of outsourcing portions of those assets to third-party providers who are more adept at handling these supply chain activities. Purchasing and procurement moves towards strategic roles, and logistics starts focusing on the effectiveness of the delivery system. Demand management becomes important as forecast accuracy can play a major role in planning and manufacturing. At level three, sourcing invites key suppliers to participate on collaborative designs and find solutions which match supply and demand. E-warehouse management and transportation management systems are introduced that enhance communication and provide visibility of items for supply chain partners. Marketing and sales enter the supply chain, by empowering key customers to self-configure products and services often through an interactive online portal. Business allies are working together to discover savings through mutually beneficial initiatives that reduce cycle time, achieve faster time to market and provide for effective use of assets. At level four supplier and customer collaboration blossoms as the business moves forward with its position in one or more networks. In this advanced environment, the company begins working in earnest with a select group of upstream and downstream partners. The objective is to establish a position of dominance in an industry for a particular network with the aid of the key end to-end constituents. New metrics appear such as on-time delivery, fill rates and returns in the customer satisfaction scores. With electronic information sharing, network members can readily identify opportunities to improve performance. On the supply side SRM is emphasised and the company and key suppliers work together to focus on important buy categories and attempt to find hidden value that may have otherwise been ignored. Crucial to level four in the model is the application of e-commerce, e-business and communication techniques to enable end-to-end visibility across the value chain network. At level five, the most advanced stage is characterised by communication connectivity across the total supply chain network. This is the world of full network collaboration and the use of technology to gain positions of market dominance. Only a few organisations in any given industry have reached this level.

Hindrances

Pointer (2004), argues that in spite of the Internet environment in which all forms of information can be shared rapidly, supply chain companies will be protective of their databases and only share what they think is necessary while they gather all they can to improve their performance. Newer thinking says that attitude prevents a company from getting to the hidden values and savings that could come from a more open, sharing relationship.

International

According to Zentes (2006) the differences between a buyer company and supplier in the international context mean that establishing an international supplier relations management (ISRM) system demands greater management capability than for national SRM and those international supplier relationships usually carry greater administrative costs. In cultural background terms, language differences can result in miscommunication, and a technology gap or differing technical standards are incompatible and hampers the information flows between companies.

Communication

Sollish and Semanik (2007), relate that productive supplier relationships do not just happen, they demand effort and perseverance. Processes that enable and improve relations with suppliers come in multiple ways. Fair and consistent treatment and the use of regular meetings are one, resulting in better co-operation and avoiding disputes. Regular meetings and reviews gives the opportunity for exchange of technology and business development plans. Periodic supplier surveys can help identify problem areas and provide information of how suppliers view the buying company from a customer perspective. Improvement teams are beneficial to improve working supplier relationships and with multifunctional teams working on operations improvements the company is able to maximise the talent within their supply base. Reciprocal visits breed a common bond and familiarise a company to become familiar with how the supplier’s operation works, so their strengths and limitations can be better understood. Improving communication of all types is particularly useful if they are two-way. Preparing suppliers to respond rapidly to trends or knowing which product lines are moving rapidly or those intended to be discontinued is valuable information for the supplier’s organisation. Use of a web site with information about the company and its procurement team is useful as is a supplier section where information of special interest to suppliers is posted, like invitations to bid. Focus groups are a useful method of eliciting supplier feedback. Newsletters can be used to address the supply community specifically to help them understand better developments inside the purchasing organisation.

Common vision

As described by Ross (2004) in today’s fast paced environment, while low cost and high quality are critical, the relationship that exists between buyer and seller that determines the real value-added component of procurement. The closer the demands and capabilities of customer and supplier are synchronised, the more total costs decline, and more agile suppliers become to meet complex demands, and the faster inventory moves through the channel pipeline. In addition, the more integrated the supply chain, the more partners can truly fashion collaborative relationships where their specific strengths can be used for mutual benefit to generate a common competitive vision.

Discussion

Deciding the most appropriate collection of components to supplier relationship is dependent on a number of aspects, which may evolve over time to full partnership. Good two-way communication, a dedicated partnering focus, careful monitoring, focus on mutual improvement and a common vision are vital, as are fair treatment and responsiveness on both sides.

Conclusions

The creation and maintenance of good supplier relationships is critical for competitiveness in the supply chain. There are numerous models and approaches which can foster this relationship, and the correct selection of approach is dependent upon the size, technical capability and cultural background of the supplier. In all cases information flows and good communication processes are appropriate, as is careful selection, measurement and progressive reengineering of the supply chain in a mode of mutual interest.

Supply chain performance

Definition

As described by Turban et al (2006), a supply chain includes the organisations and processes that create and deliver products, information, and services to the customers. The term supply chain comes from the concept of how the partnering organisations are linked together.

It follows therefore that for supply chain performance to contribute to business excellence, the performance of the entire chain depends on good relationship management between the partners.

Technology

A component of the supply chain in information and the technology to facilitate communication is vital to supply chain management since managing relationships with customers, suppliers and intermediaries is based on the flow of information and the transactions between these parties.

Michael Porter’s value chain considers key activities that an organisation can perform or manage with the intention of adding value for the customer as products and services move from conception to delivery (Porter 1980). Electronic communications within the total supply chain can be used to enhance value chain activities such as procurement through the primary value chain activities such as inbound logistics, manufacturing, marketing and delivery, support and after sales. Internet technologies in the supply chain can reduce production times and costs by increasing the flow of information as a way to integrate different value-chain activities (Chaffey 2002).

Information flows

Many, if not most, of the supply chain problems that occur are the result of poor, inaccurate or untimely information flows. To be used constructively in business the supply chain’s information systems must be professionally managed. According to Handfield et al (2002), in today’s competitive business climate, information and information technology are one of the keys to success, perhaps even survival of any supply chain management initiative.

Metrics

Turban et al (2006) relates that speed, cost, quality and customer service are the metrics which supply chains are measured. Consequently companies must define the measurements for each of these four metrics together with the target levels to be achieved. The targets levels should be attractive to the business partners. Stretch targets nay be useful, but hard to achieve measures may deter the concept of partnership.

Internet

High-performance supply chains have a positive effect on business operations or when not well managed have a negative impact. This is illustrated by McKeown (2003), who relates that in the fourth quarter of 2000, Nike had significantly reduced earnings because of problems with its supply chain system that caused it to produce too many unpopular shoes and not enough of the types in demand. In terms of the supply chain contributing to business success, Internet-based supply chain software systems make it possible to have constant and complete knowledge of a firm’s products from supplier to final customer. These systems provide this knowledge by displaying real time sales data, warehouse inventory, production plans and shipment schedules for everyone and every company in the supply chain. McKeown also states that the Internet can be used only for communication, not for actual shipment of goods. This view has been overtaken since by developments like those of the software industry which routinely advertises, conducts transactions and trades its product by making it available for download using the Internet.

Time compression

According to (Pearlson and Saunders (2004) time itself can give a business competitive advantage over its rivals. Dell Computers has developed a model of supply chain performance all the way from its individual suppliers through to an interactive capability with its customers. This enables a customer desiring a specific configuration of computer to receive that exact system within as little as five days, due to the time compression of all aspects of its supply chain performance. It has to be said, however, that Dell’s success is due in no small way to its clever sales and advertising strategy, allowing for both direct purchase by the consumer and via retail channels.

RFID tags

Wal-Mart is utilising RFID tags attached on pallets from suppliers which they ship to the company. The RFID tag includes an antenna and a chip that contains an electronic product code (EPC). The EPC holds a lot more information than barcodes, and unlike bar codes, which need line of sight contact to be read, RFID tags are passive tracking devices, signalling their presence when they are within yards of a special scanner. RFID tags were expensive, but recently prices have dropped dramatically. The tagging of suppliers goods can have an immediate value in that RFID tags enable items to be read in batches, without line of sight or human intervention, which can reduce checkout times, inventory control and loss prevention costs. The short-term value that RFID can add along the supply chain is through asset tracking and management, product recall and product-origin tracing. In the long term, collaborative use of RFID along the entire supply chain can help manage inventory efficiently with product fulfilment systems being demand-driven linking consumer behaviour back to inventory planning and logistics.

Measures

Supplier companies which measure themselves and are happy to have their performance measured are more likely to be constructive in performing business operations. According to Whittington and Dalaney (2007), performance measures can be financial or nonfinancial, and can include traditional performance measures found in financial statement and cost accounting systems, as well as performance measures on customer performance, supplier performance, environmental performance and others. A variety of performance measurement systems and frameworks are used in organisations. In the 1990’s two performance measurement systems which emerged were the balanced scorecard and value-based management. Financial measures gauge performance, profitability, or costs and are expressed as financial amounts, ratios, or other forms. Nonfinancial performance measures are expressed in nonmonetary terms and include measures of customer satisfaction, customer retention, on-time delivery, quality, employee satisfaction and others.

Characteristics

Suppliers which measure their own performance in such a manner as to be understood by their employees are likely to be good business partners in supply. Good performance measures have several distinguishing characteristics: They are directly related to objectives and strategies. They are understandable. They are meaningful. They vary between locations and customer segments. They change over time. They provide feedback (Gattorna et al 2003). Supply chains are becoming increasingly complex in terms of their configuration and operations and their purpose. Performance measures need to reflect these complexities in order to be realistic, but must be simple enough to be understood. Performance measures vary between locations and customer segments and this characteristic is particularly important in large organisations that have multiple products and services, categories, markets, customer segments and locations. Performance measures will also change over time as an organisation changes its operating strategies in accordance with successes and failures of past strategies, new technologies and operational advances, new product and markets, changing customer requirements and behaviours and changing corporate objectives.

Acceleration of movement

Suppliers who focus on accelerating of the flow of goods up the supply chain improves efficiency because inventory does not dwell in the chain as long, which brings down the cost of holding that inventory. At the same time, increasing the speed of inventory transition enhances flexibility because it reduces the time required to change the contents of the pipeline in response to changing demand. Faster transportation accelerates movement. If a company is sending goods overseas by ship and have the option of using airfreight, a net benefit may be realised, dependent upon the cost. A more effective way to increase velocity is to improve the way the chain handles goods that are not moving. A study of how inventory moves across the chain, with an examination of each place it stops, with a view to finding ways of getting it moving again requires supply chain re-engineering, applying the techniques of just in time, and related processes. The elimination of activities that don’t add value are those which don’t change the product in a way that increases its utility to the customer, usually by changing either its form or its location to bring it closer to the needs of the customer(Taylor 2004).

Tracking movement

Tracking the movement of products through the supply chain is complex, but technology can greatly ease this problem. Successful supply and distribution companies like Eddie Stobart have tracking systems which tell them where the items they are holding or moving are at any time. Supply-chain visibility systems, and event management software can remove the drudgery from this effort and automatically produce alerts for any slowdowns in the chain, identification technologies such as barcodes and RF tags can go even further by automating the entire process (Taylor 2004).

Cash flow

Suppliers who focus on retaining a viable cash flow are better equipped to help their purchasers. Accelerating the demand and cash flow along with supply means that the faster demand moves up the supply chain, the more quickly upstream suppliers can respond to changes in demand, and accelerating the flow of cash reduces the total cost of debt across the chain, further improving efficiency without impairing flexibility. Cisco systems use instant payment in its supply chain to help suppliers offset the cost of rapid delivery (Taylor 2004).

Risk pooling

Pooling the risk of failure to supply by spreading the requirements among others avoids disruption to the supply network. Risk pooling reduces inventory requirements by combining the management of inventories that would otherwise be controlled separately so that variability in demand can be managed with less safety stock. Multisourcing pools the risk. In situations where each facility can receive goods from two or more upstream facilities, then the inventories of those facilities automatically form a risk pool that reduces the need for safety stock. Transhipment can also achieve risk pooling by having the facilities at a given point of the chain exchange inventory among themselves. This technique of more expensive than multisourcing, but is sometimes the only option. In retail, this is often the case as there are no downstream facilities to receive merged shipments. Direct shipment is where one or more of the links in the supply chain is bypassed with goods being shipped directly from the central warehouse to a retail outlet, skipping the regional warehouse. This avoids the cost of moving through a staging facility, including time and costs of unloading, storing, retrieving and reloading merchandise. Designing for supply by taking manufacturing requirements into account during the design process, companies have simplified production. Design for supply also includes packaging, and a particular example is ready-to-assemble furniture such a desks and shelves, which requires the final assembly to be performed by the customer (Taylor 2004).

Human aspects

According to Trent (2007) many organisations have transitioned from traditional purchasing to a strategic supply model and as a result have had have had a major turnover of personnel. The knowledge and skill set required to succeed in supply management is very different from the knowledge and skill set required for success in a transactional purchasing environment. Having the right people with the appropriate skills dealing with supplier relationships is critical for the attainment of supply chain competitiveness.

Adaptive networks

Integration of all supply chain and other support systems and processes both within a company and across trading partners is needed for full supply chain visibility and flexibility. This can be accomplished by the creation of an adaptive supply chain network. These integrated, flexible networks of companies, technology tools, and processes focus on customers and their changing requirements. An effective adaptive supply chain network is characterised by is its ability to respond to changes in real time, allowing the network to prevent or minimise supply chain problems. When adaptive supply chain networks are established, companies will move from forecast-driven to demand-driven supply chains Coyle, et al 2009). 214

Future

In future pervasive automation, involving RFID, wireless communication, adaptive supply chain networks that do not require human intervention will support supply chain innovation, avoiding supply chain disruption and fundamentally alter the way items are produced, warehouse, and distributed. Managing product flows across the supply chain will also become much easier as item-level traceability and exception management will be facilitated by RFID sensors, and automated machine-to-machine communications will speed information flows (Coyle at al 2009).

Transformation

The case of Apple Computer personifies many of the components of supply chain performance improvement that contributed to business improvement. Apple Computer which was in difficulties in 1997, made a great comeback through a steady stream of impressive new and innovative products such as the iPod, iPod Nano, and iPhone. Apple pursued an array of purchasing and supply chain activities to manage product demand, inventory investments, channel distribution, and supply chain relationships. The company reduces its product line by almost half, forecasts sales weekly instead of monthly with daily adjustments to production, and relied on suppliers to manage inventory for standard parts and components. Apple also formed a partnership with a supplier to build components close to an Apple facility with just-in-time delivery, created a direct ship distribution network through the Web, and simplified its finished good distribution channel. Because of these activities, Apple now rivals Dell Computer in terms of supply chain performance. (Monzka et al 2008).

Conclusions

The measurement of supply chain performance and its contribution to business excellence is characterised by complexity. Overall business performance itself and the transformation of business strategy depend on flexibility and speed of change within the supply chain especially in a business environment which is itself facing uncertainty. The most successful improvements in business performance come from an examination of a whole range of components in the supply chain, and their subsequent optimisation, rather than individual stages. In today’s business environment, a common them for improvement is speed and flexibility of the supply chain. Successful examples come from total reengineering of the traditional supply chain tied to close business partnerships.