1. A Transformation in Relationships
• The transformation from reactive and
mechanical purchasing to proactive
procurement and on to WCSM parallels a
similar transformation in relationships
between buyers and suppliers
• Prior to the 1980s most purchasing
relationships were reactive
• Interaction between vendor and
purchasing resulted in outcomes where
one’s gain would be the other’s loss
5-1 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Problems with the Term Partner
• During the late 1980’s and early 1990’s,
“partnerships” became popular
» Implications of the term “partner” were not
well understood
» Legal problems and concerns inevitably arose
• While the term “partnership” is still
relatively common, we avoid use of the
term preferring the terms “collaborative
relationship” and “strategic alliance.”
5-2 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

3. Three Types of Buyer Supplier Relationships
• Transactional
• Collaborative
• Alliance
5-3 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

4. Continuum of Buyer-Seller Relationships
Figure 5-1
Activity/Attribute Transactional Collaborative Alliance
Communication High pot. for problems Systematic approach
Competitive Adv. Low High
Connectedness Independence Interdependence
Continuous Impr. Little A focus
Contributions to NPD Few Many – ESI
Difficulty of Exit Low Difficult – high impact
Duration Short Long
Expediting Reactive Proactive
Focus Price Total cost
Level of Integration Little or none High or total
5-4 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

5. Continuum of Buyer-Seller Relationships
Figure 5-1 Continued
Activity/Attribute Transactional Collaborative Alliance
Number of Suppliers Many One or few
Open Books No Yes
Quality Incoming inspection Design quality in system
Relations Inward looking Concern w/well being
Resources Few – low skill level Professional
Service Minimal Greatly improved
Shared Forecasts No Yes
Supply Disruptions Possible Unlikely
Technology Inflows No Yes
Type of Interaction Tactical Strategic synergy
5-5 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

6. Transactional Relationships Characteristics
• An absence of concern
• One of a series of independent deals
• Costs, data and forecasts are not shared
• Price is the focus of the relationship
• A minimum of purchasing time and energy
is required to establish prices
• Transactional purchases lend themselves
to e-procurement
5-6 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

7. Advantages of Transactional Relationships
• Relatively less purchasing time and effort
are required to establish price
• Lower skill levels of procurement
personnel are required
5-7 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

8. Disadvantages of Transactional Relationships
• Potential for communication difficulties
• Expediting and monitoring of incoming quality
• Inflexible when flexibility may be required
• Tend to result in more delivery problems
• Quality will be only as good as required
• Suppliers provide the minimum service required
• Less effective performance by suppliers
• Customers are subject to more supply
disruptions
• Supplier is not motivated to invest time and
energy development of buyer’s products
5-8 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

9. Collaborative and Alliance Relationships
• "Collaboration is the new imperative,"
declares Michael Dell
• Collaborative and alliance relationships
tend to result in lower total costs and
improve performance of the supply chain
5-9 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

10. Three Success Factors
• Researchers Stanley and Pearson found
that the three most important factors in a
successful buyer-supplier relationship
are:
» (1) two-way communication,
» (2) the supplier's responsiveness to supply
management's needs, and
» (3) clear product specifications
5-10 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

11. Collaborative Relationships
• Typically used for the procurement of non-
commodity items and services
• A collaborative relationship frequently is
an appropriate first step on the road to a
strategic alliance
5-11 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

12. Collaborative Relationships
• Collaborative relationships tend to
foster….
» Longer term contracts
» Reduction of risk for suppliers
» Reducing total costs
» Improvement of processes
» Improvement of products
» Increased investment in R & D
» Increased investment in training
» Increased investment in equipment
» Better focus on customer needs
5-12 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

13. Supply Alliances
• The fundamental difference between
collaborative relationships and supply
alliances is the presence of institutional
trust in alliances
• The failure to develop and manage
institutional trust is the principle reason
that so many supply alliances fail
5-13 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

14. Benefits of Supply Alliances
• Lower total costs.
• Reduced time to market
• Improved quality
• Improved technology flow from suppliers
• Improved continuity of supply
5-14 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

15. Alliance Attributes
• Continuous improvement
• Interdependence and commitment.
• Atmosphere of cooperation
• Informal interpersonal connections
• Internal infrastructures to enhance
learning
• Openness in all areas of the relationship
• A living system
5-15 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

16. Alliance Attributes Continued
• A shared vision of the future
• Ethics take precedence over expediency
• Adaptable in the face of change
• Design of experiments and supplier
certification
• Win-Win negotiations
• Executive level commitment
5-16 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

17. Which Relationship is Appropriate?
• What are the “Strategic Elements of a Relationship?”
• Are there many relatively undifferentiated suppliers
providing what amounts to inter-changeable
commodities?
• Does the potential supplier possess economic power
which it is willing to employ over its customers?
• If there is recognition by both parties of the potential
benefits of an alliance, but adequate qualified human
resources are not available at one or both firms?
5-17 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

18. Situations Wherein Alliances may not be
Appropriate
• Stability
» Price Volatility
» Demand Volatility
» High Switching Likelihood with High Switching
Costs
• Capability
» No Partnership/Alliance-Capable Supplier for
the Item
» No Partnership/Alliance-Capable Supplier in
the Geographic Area
» Rapid Technological Change
» Mismatch of Clock Speed
5-18 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

19. Situations Wherein Alliances may not be
Appropriate
• Competition
» Non-Competitive Market
» Supplier Dependency Creation
» Neglected Areas
» Suppliers Seeking to Reduce Competition
• Benefits
» No leverage from Partnership
» No Hard Savings from Partnership
• Internal Buy-In
» No Internal Customer Buy-In
5-19 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

20. The Portfolio Approach
• Successful supply chain management
requires the effective and efficient
management of a portfolio of relationships
• Three environmental factors to consider:
» (1) the product exchanged and its technology,
» (2) the competitive conditions in the upstream
market, and
» (3) the capabilities of the suppliers available
5-20 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

21. Chapter 5
Appendix
INSTITUTIONAL
TRUST
5-21

22. Trust
• Trust is one of the key factors that
differentiates the three classes of
relationships.
• The simplest definition of trust is “being
confident that the other party will do what
it says it will do.”
• Some level of trust must be present in all
three types of relationships
• The level of trust increases with
collaborative relationships and becomes
an essential characteristic with strategic
alliances
5-22 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

23. Supply
Management in
Action
A SUPPLIER
ALLIANCE AT
QUAKER OATS
5-23

24. Merchant Supply Rejection
• Absence of lower cost alternative
merchant supply (freight cost hurdle).
• No known way to gain effective cost
understanding/cultural improvement with
arms length relationship (lack of both
parties’ commitment).
5-24 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

25. Self-manufacture Rejection
• Not a core competency.
• Supplier’s cost of capital was generally
lower than Quaker’s –best to use their
money.
5-25 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

26. In-house Plant Choice
• Best cost –no freight, direct feeding of
filling line eliminated palletizing, fresher
materials.
• Best opportunity to institutionalize
continuous improvement. Alliance
relationship comes from the open book
need to drive improvement. Quaker and
Graham (the selected supplier) agreed to
act as one company on each other’s
behalf.
5-26 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

27. Type of Contract:
• Evergreen from one fixed period to
another.
• Completely open book
• Cancelable for failure to perform.
5-27 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

28. 5-28 McGraw-Hill/Irwin ManagementSM, ISBN 0-07-229070-6, Copyright Copyright ©The McGraw-Hill Companies, Inc. All rights reserved.
World Class Supply © 2003 by 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

29. Chapter 5
BUYER-SUPPLIER
RELATIONSHIPS
5-29

30. Key Concepts
• A Transformation in Relationships
• Three Types of Buyer-Supplier
Relationships
» Transactional Relationships
» Collaborative and Alliance Relationships
» Collaborative Relationships
» Supply Alliances
» Which Relationship is Appropriate?
• The Supplier's Perspective
• Developing and Managing Collaborative
and Alliance Relationships
5-30 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

31. Key Concepts
• Situations Wherein Alliances may not be
Appropriate
• The Role of Power
• A Portfolio Approach
• New Skills and Attitudes Required
• E-Commerce and the “Right” Type of
Relationship
• Relationships of the Future
• Institutional Trust
5-31 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

32. Evolving to WCSM Through Alliances
• Systematically selected supply alliances…
• …built on institutional trust...
• …help organizations complete their
evolution to World Class Supply
ManagementSM.
5-32 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

33. Strategic Elements of a Relationship
• Is one supplier head and shoulders above the
rest in terms of the value it provides; including
price, innovation, ability to adapt to changing
situations, capacity to work with your team, task
joint risks, etc?
• Are some suppliers “strategic” to your business?
• Would your company benefit greatly if the
supplier were more “integrally connected” with
your company?
• Do your customers require high degrees of
flexibility and speed of responsiveness?
5-33 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

34. The Supplier’s Perspective
• Supplier’s want good customers
• Several issues affect their assessment,
among them are:
» Cash Flow
» Openness and Approachability
» Availability
» Professionalism
5-34 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

35. Questions to be Addressed Before
Proceeding
• Is there a danger that the supplier may act in an
opportunistic manner over time?
• Do electronic systems allow for optimum
communication and sharing of information?
• Is the potential strategic alliance able to stay
current in the industry?
• Are both the organizations willing to keep
attention focused on the joint customer?
• Are there other suppliers worth investigating
before committing to a strategic alliance?
• Has the supply manager been thoroughly
trained?
5-35 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

36. Questions to be Addressed Before Proceeding
• Is the organization proud to be aligned and
associated with the supplier?
• Is the organization comfortable with the level of
risk associated with reducing the supply base?
• Are both supplier and buyer aligned in what their
ultimate customer considers to be valuable?
• If there is substantial risk for the supplier to
develop new technologies, products, processes,
or service support?
• Are both supplier and buyer aligned in their
respective visions?
• Are there sufficient operational points of
interaction?
5-36 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

37. The Role of Power
• Power is a topic that makes people
uncomfortable
• Power is at the heart of all business
relationships
• Power plays a key role in two important
subclasses of buyer-supplier
relationships:
» Captive Buyer: buyer is held hostage by a
supplier free to switch to another customer
» Captive Supplier: makes investments in order
to secure a portion of the buyer's business,
with no assurance of sufficient business to
recoup the investment
5-37 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

38. New Skills and Attitudes Required
• Developing and managing collaborative
and alliance relationships require supply
professionals that possess the following
skills and attitudes:
» Recognize the benefits of collaboration
» Ability to identify, obtain and use data
» Able to work in chaos and uncertainty
» Agile, flexible, and highly adaptive
5-38 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

39. E-Commerce and the “Right” Type of
Relationship
• "How does B2B eCommerce affect our
selection of the 'right' type of
relationship?“
» Selection must be a function of the
requirement, not of the Internet!
» B2B eCommerce is an enabler
5-39 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

40. E-Commerce Traps to Avoid
• Trap #1: Guilding the pig
» Take an archaic, cumbersome procurement
process and “webbize” it
• Trap #2: The Magic pill
» Looking for the one solution that can be used
to solve every procurement situation
• Trap #3: Supplier equality
» Supplier relationships range from
transactional to alliances
5-40 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

41. Attributes of Institutional Trust
• Developed over time
• Internal trust is developed before external
trust
• Based on individual and institutional
integrity
• It is greater than individual trust.
• Trust and relationship are viewed as
investments
• Partners have access to other's strategic
plans
• Relevant costs and forecasts are shared
5-41 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

42. Attributes of Institutional Trust
• When key individuals leave, fingerprints
are left behind that hold the relationships
together
• Trust is visible
• Informal agreements are as good as
written
• Both parties are sensitive to the cultural
bridge
• Relationship is adaptable in the face of
change
• Both firms recognize the interdependency
5-42 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

43. Attributes of Institutional Trust
• Sharing information is a means of developing
trust
• Conflict in the relationship is openly addressed
• Rights, desires, and opinions are considered
• Firms have mutual goals
• A bank account of trust is created
• Recognizes trust has different cultural meanings
• Both CEO's make a personal investment
• Senior managers from both firms commit
• Ethical issues are freely brought up without fear
• An ombudsman is assigned at both firms
5-43 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

44. Actions to Develop and Manage Trust
• An inter-firm team is appointed
• Discussions conducted in an atmosphere of
respect
• Inter-firm team receives guidance and training in
the implementation of practices
• Listening, understanding, time, energy are
invested
• Senior leaders at both firms act as champions
• A communication system is developed
• Actions to develop and measure trust are created
• Risks and rewards are addressed openly
• Negotiation is used as a trust-building
opportunity
5-44 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

45. Actions to Develop and Manage Trust
• Both firms work together on technology plans
• Technical personnel from both firms visit the
other
• Contractual relations are designed to enhance
trust
• Contract relations focus on continuous
improvement
• Team and relationship skills are developed early
• Company leaders create a formal relationship
• A contracting philosophy and a legal
infrastructure are designed to the relationship
• Institutional trust is measured and managed
5-45 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

46. The Alliance Options
• Merchant supplies the total product.
• Self-manufacture with key raw material
suppliers.
• In-house plant operated by a supplier.
5-46 World Class Supply ManagementSM, ISBN 0-07-229070-6, Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.