International Supply Chain Management - Partnership Sourcing

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International Supply Chain Management - Partnership Sourcing

  1. 1. International Supply Chain Management Partnership SourcingWord Count: 2302Module Code: 7BSP1011Module Leader: David Wright Prepared By: Mustafa Mert Dikmen Student Number: 10252709 Page 1
  2. 2. Table of Contents1.0 - Introduction ..................................................................................................... 32.0 - Drivers of Partnership Sourcing ................................................................... 33.0 - Aim of Partnership Sourcing ......................................................................... 44.0 - Drivers of Success ........................................................................................... 5 4.1 Strategic Colloboration: Commitment and Loyalty......................................... 5 4.2 Trust ................................................................................................................. 5 4.3 Communication ................................................................................................ 6 4.4 Culture Compatibility....................................................................................... 65.0 - Benefits of Partnership Sourcing................................................................... 6 5.1 Benefits for Purchasers .................................................................................... 7 5.1.1 Secured Supply ........................................................................................ 7 5.1.2 Faster Product and Service Development ............................................... 7 5.1.3 Delivery on Time ..................................................................................... 7 5.1.4 Reduction of Supply Base ....................................................................... 7 5.1.5 Improved Quality .................................................................................... 8 5.2 Benefits for Suppliers ....................................................................................... 86.0 - Risks and Limitations of Partnership Sourcing........................................... 87.0 - Conclusion........................................................................................................ 98.0 - References and Bibliography ....................................................................... 10 Page 2
  3. 3. 1. IntroductionCompetition amongst suppliers is rapidly increasing due to the threat of trade regulations, excessivedevelopment of technologies and globalisation. Promoting strategic partnerships with suppliers hasbeen the strategy of organisations in response to the threat of undesired costs arising from the highlycompetitive business environment (Ellram, 1991). According to DTI (1992), “partnership sourcing”, anew name of alliances of organisations with suppliers can be defined as “a commitment by bothcustomer and suppliers, regardless of size, to a long term relationship based on clear mutually agreedobjectives to strive for world class capability and competitiveness” “Adversarial competition” and “partnership sourcing” are two forms of purchasing strategiesthat organisations use. Among these two, partnership sourcing is considered to be more beneficial thanthe other since it creates a relationship based on trust between two sides (Macbeth and Ferguson,1994). There again, single sourcing was considered as a dangerous strategy because it gave thesupplier the occasion to take advantage of the potential opportunities (Newman, 1988). Interestinglyenough, the term “adversarial competition” was being referred to as short-term, competitive supplyaround 20 years ago, when now it is purposely enunciated as adversarial. On some occasions, the relationship between the supplier and the buyer is best described as“dependency” rather than partnership. For this reason, Van Weele (1995) states these partnershiprelationships as to be misleading. This clearly necessitates the need of some specific conditions forpartnership sourcing such as a clear definition of mutual responsibilities and specific, measurablemilestones for improved performance (Parker and Hartley, 1997). If not critically evaluated,partnership sourcing can be damaging. This paper aims to evaluate the term “partnership sourcing”, exploring its advantages anddisadvantages. Long term strategic and operational implications of the term will also be examinedwith the intention to draw a conclusion if partnership sourcing is truly beneficial to all partiesconcerned. 2. Drivers of Partnership SourcingThe availability of low-cost manufacturers located in Eastern Asia and the increased legislationsespecially regarding the environmental concerns necessitated an improvement of co-ordinationthroughout the supply chain. The need of co-operation is what stimulated the need of partnershipsourcing in this respect. The competition arising from the availability of cheap manufacturers has led Page 3
  4. 4. organisations to focus on their core businesses to maintain their place in the market and remaincompetitive. Organisations try to identify the aspects which are strategic in their procurement activitiesby using a variety of positioning techniques to anticipate the potential impacts of a probable supplyfailure. These types of procurements generally lead to partnership sourcing. Professor Andrew Cox(1995) has defined strategic procurement as “the development of an external sourcing and supplystrategy which link the total business plan of an organisation so as to maintain a sustainable positionfor that organisation in the total value chain”. According to Brown et al. (1994) partnership sourcing is strongly associated with qualityinitiatives. When organisations understood that “total quality management” was not a competitiveadvantage but a definite requirement, they tried to find new ways of maintaining their qualitymanagement approach. Partnership sourcing offers organisations the opportunity to compel thesuppliers to take quality initiatives. Hence, it is accepted that quality initiatives is one of the maindrivers of partnership sourcing. 3. Aims of Partnership SourcingTraditional procurement methods which include aggressive bidding and negotiation have often causedlack of trust, poor quality, bad service and stiff prices. Lewis (1995) asserted that if each part of thesupply chain sees itself as an investor these consequences will not appear. He further indicates thatworking co-operatively with the supplier helps an organisation to maximize their benefits and arguesthat the co-operation between the purchaser and the supplier “unleash a capacity for innovation that faroutweighs the short term cost savings offered by arm’s length competitive bidding”. Therefore the aimof partnership sourcing is to achieve greater benefits through good supplier and buyer relationships. According to Sadler (2003), partnership sourcing is an element of competitive strategy of anorganisation and is developed and implemented with the intention to provide benefits. The aim of asuccessful partnership is reducing stock times, shortening lead times, achieving a greater flexibility,improving the cash flow and lowering the administrative costs. In addition this approach aims toimprove the quality of the information and its flow which leads to successful long-term planning,innovation and technological development. However, partnerships won’t work unless the limitationsare possible problems are not diagnosed and managed the way it should be. Page 4
  5. 5. 4. Drivers of SuccessThere is a variety of partnership dynamics which should be present to be able to consider thecollaboration of the supplier and the buyer successful. Both parties should make further considerationsto proceed with the partnering decision if most of the characteristics identified below are not present.4.1 Strategic Collaboration: Commitment and LoyaltyThe sense of mutual interdependence between the buyer and the supplier brings about a long termrelationship between two parties concerned. However, in order to achieve high buyer commitment andsupplier loyalty, both parties have to perceive that there is a soaring level of strategic fit between them.Therefore for the buying party the initial phase of undertaking a partnering relationship should be theanalysis of the value of the supplier considering its long-term purchasing needs. However, by formingclose partnerships with suppliers, purchasers have realized that the development of the suppliers tomeet its demands is expensive and time consuming. This is a reassuring factor for the supplier asexpenditure is considered to be a necessity of true partnership and brings about trust. Trust is seen tobe more difficult to build if the buyer and the supplier have a record of adversarial negotiations.4.2 TrustThe suppliers and the purchasers have to work closely to reduce cost and improve quality. Asuccessful partnership relationship arises from a substantial amount of trust. Cry (1999) states that inany kind of alliance between two organisations building trust is a necessity for success. When there isa level of trust between the purchaser and the supplier, both parties believe that the other is committedto mutual success. Successes of the purchaser and the supplier are often interdependent. A trustful purchaser willcater its needs using the same supplier and a trustful supplier will use its resources fully to be able tosatisfy the purchaser’s needs. Both parties will win if they can obtain the degree of collaboration andtrust. Buttler (1999) asserts that the level of complexity of the negotiations between the supplier andthe buyer decreases when both parties trust each other. This allows organisations to get rid of theconcerns regarding each other’s behaviours and to communicate more important matters rather thanlosing time on discussing small details. Thus, negotiations consume less time and resources withmutual trust. Page 5
  6. 6. 4.3 CommunicationSuppliers appreciate it when the purchasing organisations use collaborative communication (indirectinfluence strategy, formality and feedback) to communicate and perceive this as a mechanism toenhance their relationships. The suppliers expect commitment, loyalty and long life from theirrelationships with the purchasing organisations. According to Prahinski and Benton (2004), thepurchasing organisations can influence the supplier’s commitment through improved communicationand relationship development. They further indicate that this development comprises of improvingcooperation, problem solving, and reflecting commitment, loyalty and aspiration to proceed with thepartnership for a significant amount of time. When the necessary measures of partnership sourcing is taken and fully implemented, thequality and reliability of the data exchanged between two parties is significantly improved. The mostimportant aspect of this relationship will be the improvement of communications. The purchaser andthe supplier will be able talk through the problems they have and try to resolve any kind of problemswith pure and mutual intent.4.4 Culture CompatibilityFor the partnership of the purchaser and the supplier organisation to be successful, their culture has tobe adaptable with one another. This is important to corroborate the cooperative relationship of theorganisations. Behaviours such as adversarial purchasing have to dispelled to serve the cause ofstrengthening the organisational relationship. The similarity of size, working environments between two parties will simplify the partnershiprelationship. In addition it is possible that good relationships between the management of theseorganisations will increase the chance of success of partnership sourcing. 5. Benefits of Partnership SourcingThe main benefit of partnership sourcing is the fall in total cost. Frequently encountered advantages ofpartnership sourcing are reduction of handling, accounts activities, buying and dispatching activities,and examination necessities. In addition to these, increase in stock return and scope for increasingsales can be identified as common benefits of partnership sourcing (Lock, 1998). Page 6
  7. 7. 5.1 Benefits for Purchasers5.1.1 Secured SupplySuccessful partnership sourcing provides the buying organisation with a variety of benefits and asecured supply chain is one of them. Through to help of partnership with the supplier, the purchasingorganisation enjoys improved “product safety”, “inventory management”, “supply chain visibility”,“product handling”, “process and speed”, “problem identification time” (Blanchard, 2006).5.1.2 Faster Product and Service DevelopmentAnother benefit arising from successful partnerships with suppliers is the faster development ofproduct and service. Shared benefits due to mutual dependency with the supplier lead to improvedcommunication with the supplier. Subsequently, it results in benefits such as faster engineeringchanges, reduced assembly time, improved productivity, improved responsiveness and faster productdevelopment.5.1.3 Delivery on TimePartnership sourcing usually increases the efficiency of JIT (Just in time) purchasing. According toFenneteau (1990), an organisation chooses to partner up with the supplier to encourage the supplier todeliver better performance than it would otherwise deliver. The supplier can give better service if thereis a partnership relationship between them because the supplier will perceive the needs of thepurchaser, such as the expectations regarding deliveries and services or the type of demand, better.5.1.4 Reduction of Supply BaseWith the reduction of the supply base organisations neutralize the wastage of resources arising fromadversarial relationships with suppliers. According to Brown et al, there is little to lose frompartnering up with suppliers since the competitive tendering approach usually leads to potentialsuppliers conniving so as to fix the price. However, partnerships yield benefits for companies bymeans of increased commitment of suppliers to improve their products and services. Reducing thesupply base for organisations allow them to spend more time with suppliers, thus allows them to buildclose relationships. This permits the purchasing organisation to influence the degree of quality andcost. Taken as a whole, reduction of the supply base helps the company to improve its products andreduce its costs. Page 7
  8. 8. 5.1.5 Improved qualityImprovement of the quality of products and services is a common result of partnership sourcingrelationships. However, the improved quality of products/services can be originating from differentapproaches. The buyer firm may have insisted that the quality should be improved or anotherpossibility is that the purchaser company may have made the supplier firm to understand theimportance of quality. Both ways partnership sourcing provides the purchasers with the benefit ofimproved quality.5.2 Benefits for SuppliersUnquestionably the suppliers benefit from partnership sourcing as well, like the purchasersorganisations. This partnership provides the suppliers with an improved long term managementcapability; improved technological capability via long term relationships, learning and bettercommunication; marketing improvement and with an improved cash flow and financial stability. 6. Risks and Limitations of Partnership SourcingPartnership sourcing may not always work as there are many reasons for failure when implementing orafter the implementation phase of the activity. The necessary commitment and involvement from thepurchaser and supplier to successfully partner up are not often accomplished from the beginning. Evenwhen everything seems to be in order regarding the implementation process of partnership, there is apossibility that one partner or some third party organisation can stop the progress of partnershipsourcing. Partnership is not a one way relationship. Both the purchaser and the supplier has to contributecompletely if not equally, to maintain a steady relationship. If one of the partners try to attain arelationship with another organisation, for instance for the sake of accessing new technologies, thepartnership relationship will not turn out to be successful. A partnership in which only one of theorganisations contributes is not likely to succeed. Good partnerships take time to develop. During the process of development there are sometypes of behaviours both parties would want to avoid such as impatience, arrogance, complacency andover-dependency. Page 8
  9. 9. The following have been identified as common causes of failure in partnership sourcing (Lock,1998): Lack of commitment Lack of resources and planning Poor communication Unrealistic and arbitrary targets Targets which cannot be measured Behavioural changes or conflicts in the key personnel within two parties However, perhaps the most common cause of concern is that the volume of business the supplieris reaching does not reflect the intended expectations. Yet, this is supposed to be something thatshould be agreed on through collaborative communication. 7. ConclusionThis paper has evaluated the term “partnership sourcing” and uncovered some of its principals interms of the advantages and limitations to be considered by both buyers and suppliers. The aims,drivers, advantages and failure risks have been evaluated thoroughly by taking into account all theaspects of partnership sourcing that both of the organisations can encounter to come to a conclusion ifthe practice of partnership is beneficial to the parties concerned.It is here concluded that if the organisations measure the risk of success and failure by analysing bothoneself and the other party, there are no real impediments for success. By avoiding and overcomingadversarial behaviours such as impatience, arrogance, complacency and over-dependency, bothorganisations are likely to take advantage of the benefits presented by partnership sourcing. Page 9
  10. 10. 8. References and BibliographyBlanchard, D. (2006), IndustryWeek [online], Available from:http://www.industryweek.com/articles/the_benefits_of_a_secure_supply_chain_13103.aspx[Accessed: 26 April 2011].Brown, A., Boyett, I., Robinson, P. (1994). The Dynamics of Partnership Sourcing. Leadership andOrganisational Development Journal, 15: 7, 15-18.Cox, A. (1995), “Strategic procurement management in the public and private sectors: the relativebenefits of competitive and collaborative approaches” In: Lamming, R. and Cox, A. (eds) StrategicProcurement Management in the 1990s: Concepts and Cases, Earlsgate Press, Boston 5-22Cry, D. (1999), High Tech, High Impact: Creating Canada’s Competitive Advantage throughTechnology Alliances, Academy of Management Executive, 13:2.DTI (1993), Partnership Sourcing, Department of Trade and Industry, London.Fenneteau, H. (1990), “Mise en concurrence de fournisseurs ou partenariat?” Revue internationale,PME 3:2, 167-191Ellram, L.M. (1991), “A Managerial Guideline for the Development and Implementation ofPurchasing Partnerships”, International Journal of Purchasing and Materials Supply Management,August, pp. 2-8.Lock, D. (1998), The Gower Handbook of Management, 4th. ed. England: Gower Publishing Limited.Lewis, J. (1995), The Connected Corporation, New York: Free Press.Macbeth, D., Ferguson, N. (1994), Partnership Sourcing: an Integrated Supply Chain Approach.Pitman, London.Newman, R. (1988), Single source qualification. Journal of Purchasing and Materials Management,Summer, 10-17. Page 10
  11. 11. Parker, D., Hartley, K. (1997), The Economics of Partnership Sourcing Versus AdversarialCompetition: A Critique, The European Journal of Purchasing & Supply Management, 3:2, 115-125Prahinski, C., Benton, W. (2004), Supplier evaluations: communication strategies to improve supplierperformance, Journal of Operations Management, 22: 39-62.Sadler, P. (2003), Strategic Management, 2nd. ed., London: Kogan Page Limited.Van Weele, A. J. (1995) Myths and Truths in Purchasing and Supply “Some Provocative Ideas forThought” IPSERA 4th International Conference, 11-12 April, University of Birmingham. Page 11

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