Understanding Supplier Relationship Management in SCM | AIMS UK

Academy for International Modern Studies (AIMS), UK. www.aims.education
Supply Chain Lecture
Academy for International Modern Studies (AIMS), UK

• Supplier Relationship Management
is infact a type of relationship
management, which affects all
areas of the supply chain and has a
dramatic impact on supply chain
performance.
Supply Chain Relationships and
Supplier Relationship Management

• One of the most fundamental
yet more challenging
requirements for supply chain
integration is changing the
nature of traditional
relationships between suppliers
and customers in the supply
chain.
Changing the Nature

• In many cases, the information
systems, technology, inventory,
and transportation management
systems required for the supply
chain management (SCM) effort
are available and ready to be
implemented, but the initiatives
fail due to poor communication of
expectations and the resulting
behaviors.
Communication

• Relationship Management is defined
as the strategy employed by an
organization in which a continuous
level of engagement is maintained
between the organization and its
audience.
• Relationship management can be
between a business and its customers
(customer relationship management)
and between a business and other
businesses (business relationship
management).
Relationship Management

• Managers often assume that the
personal relationships important
to the supply chain will fall into
place; however, managing
supply chain relationships
among organizations can be the
most difficult part of the SCM
initiative.
Personal Relationship in
Supply Chain Relationship

• Single most important ingredient
for successful SCM may be trusting
supply chain relationships among
partners in the supply chain, where
each party has confidence in the
other members’ capabilities and
actions.
• Trust building is characterized as an
ongoing process that must be
continually managed.
Trust

"Supply chain management is one of the most emotional experiences I've
ever witnessed. There have been so many mythologies that have developed
over the years, people blaming other people for their problems based on
some incident that may or may not have occurred sometime in the past.
Once you get everyone together into the same room, you begin to realize
the number of false perceptions that exist. People are still very reluctant to
let someone else make decisions within their area".
Materials Management VP,
Fortune 500 Manufacturer
According to a Materials Management

• In the early stages of supply chain
development, organizations often
eliminate suppliers or customers that
are unsuitable, because they lack the
capabilities to serve the organization,
they are not well aligned with the
company, or they are simply not
interested in developing a more
collaborative relationship.
Supplier Relationship Management
A Perspective

• Then, organizations may
concentrate on supply chain
members who are willing to
contribute the time and effort
required to create a strong
supplier relationship
management.
• Firms may consider developing a
strategy with this supplier to share
confidential information, invest
assets in joint projects, and pursue
significant joint improvements.
Supplier Relationship Management - a Perspective Cont….

• Many firms lack the
guidelines to develop,
implement, and maintain
supply chain alliances in
creating new value
systems; companies must
rethink how they view
their customers and
suppliers.
Lack the Guidelines to Develop
Supply Chain Alliances

• Companies must concentrate
not just on maximizing their own
profits, but on maximizing the
success of all organizations in
the supply chain.
• Strategic priorities must consider
other key alliance partners that
contribute value for the end
customer.
Maximizing the Success

• Instead of encouraging
companies to hold their
information close, trust-building
processes promote the sharing
of all forms of information
possible that will allow supply
chain members to make better,
aligned decisions.
Trust Building Processes

• Whereas traditional
accounting, measurement,
and reward systems tend to
focus on individual
organizations, a unified set
of supply chain performance
metrics should be utilized as
well.
Unified Set of Supply Chain

Strategic alliances can occur in any number of different markets and with different
combinations of suppliers and customers. A typical supplier-customer alliance involves a single
supplier and a single customer.
Strategic Alliances

• A good example is the
supply chain relationships
between Proctor & Gamble
and Wal-Mart, which have
worked together to
establish long-term
electronic data interchange
(EDI) linkages, shared
forecasts, and pricing
agreements.
Supply Chain Relationships Example

• Alliances also can develop between
two horizontal suppliers in an
industry, such as the supply chain
relationships between Dell and
Microsoft—organizations that
collaborate to ensure that the
technology road map for Dell
computers (in terms of memory,
speed, etc.) will be aligned with
Microsoft’s software requirements.
Horizontal Suppliers

• Vertical supplier - supplier
alliance may involve multiple
parties, such as trucking
companies that must work
with rail-roads and ocean
freighters to ensure proper
timing of deliveries for multi-
modal transshipment.
Vertical Supplier

• Creating and managing a
strategic alliance means
committing a dedicated team
of people to answering these
questions, and working
through all of the details
involved in managing the
supplier relationship
management.
Creating and Managing Strategic Alliance

• There is no “magic bullet” to ensure
that alliances will always work However,
it is reasonable to assume that, like a
marriage, the more you work at it, the
more successful it is likely to be!
Will Alliances Always Work?

• Many firms have directed
significant attention toward
working more closely with
supply chain partners,
including not only
customers and suppliers but
also various types of
logistics suppliers.
Supplier Relationship Management in General

• Considering that one of the fundamental objectives of effective supply chain management is
to achieve coordination and integration among participating organizations, the development
of more meaningful “relationships” through the supply chain has become a high priority.
Coordination and Integration

• Supply chain relationships in
general, with an emphasis on
the types of relationships, the
processes for developing and
implementing successful supply
chain relationships, and the
need for firms to collaborate to
achieve supply chain objectives.
Emphasis On Types of Relationships

• Third-party logistics (3PL) industry
in general and how firms in this
industry create value for their
commercial clients. The 3PL
industry has grown significantly
over recent years and is recognized
as a valuable type of supplier of
logistics services.
Third-Party Logistics (3PL) Industry

As suggested by the late Robert V. Delaney in his 11th Annual State of Logistics
Report, supply chain relationships are what will carry the logistics industry into
the future.
In commenting on the current rise of interest in e-commerce and the
development of electronic markets and exchanges, he states,
“We recognize and appreciate the power of the new
technology and the power it will deliver, but, in the frantic
search for space, it is still about supply chain
relationships.”
SCR According to Robert V. Delaney

• This message not only captures
the importance of developing
logistics relationships but also
suggests that the ability to form
relationships is a prerequisite to
future success.
Relationships is a Prerequisite
To Future Success

Also, the essence of this priority is captured in a quote from noted
management guru Rosabeth Moss Kanter2 who stated that,
“being a good partner has become a key corporate asset; in
the global economy, a well-developed ability to create and
sustain fruitful collaborations gives companies a
significant leg up.”
According to “Rosabeth Moss Kanter2”

Types of
Logistics Relationships
Vertical Relationships
Horizontal Relationships
Logistics Relationship
Types of Relationships:

• It refers to the
traditional linkages
between firms in supply
chain such as retailers,
distributors,
manufacturers, and
parts and materials
suppliers.
Vertical Relationships

• These firms relate to one another in the
ways that buyers and sellers do in all
industries, and significant attention is
directed toward making sure that these
relationships help to achieve individual
firm and supply chain objectives.
• Logistics service providers are involved
on a day-to-day basis as they serve their
customers in this traditional, vertical
form of relationship.
Vertical Relationships Cont….

• The second type of logistics relationship
is horizontal in nature and includes those
business agreements between firms that
have “parallel” or cooperating positions
in the logistics process.
• To be precise, a horizontal relationship
may be thought of as a service agreement
between two or more independent
logistics provider firms based on trust,
cooperation, shared risk and investments,
and following mutually agreeable goals.
Horizontal Relationships

• Each firm is expected to contribute to
the specific logistics services in which it
specializes, and each exercises control
of those tasks while striving to integrate
its services with those of the other
logistics providers.
• An example of this may be a
transportation firm that finds itself
working along with a contract
warehousing firm to satisfy the needs of
the same customer.
Horizontal Relationships Cont….

• Cooperation between a third-party
logistics provider and a firm in the
software or information technology
business would be an example of this
type of relationship.
• These parties have parallel or equal
relationships in the logistics process
and likely need to work together in
appropriate and useful ways to see that
the customer’s logistics objectives are
met.
Horizontal Relationships Cont….

• The range of supply chain relationships
types extends from that of a vendor to
that of a strategic alliance.
• In the context of the more traditional -
vertical’ context, a vendor is
represented simply by a seller or
provider of a product or service, such
that there is little or no integration or
collaboration with the buyer or
purchaser.
Intensity of Involvement

• Relationship with a vendor is
“transactional,” and parties to a
vendor relationship are said to
be at “arm’s length” (i.e. at a
significant distance).
• Analogy of such a relationship
to that experienced by one who
uses a “vending” machine is not
inappropriate.
Intensity of Involvement Cont…

• This form of relationship suggests a
relatively low or non-existent level of
involvement between the parties,
there are certain types of transactions
for which this option is desirable.
• One-time or even multiple purchases
of standard products and/or services,
for example, may suggest that an
“arm’s length” supply chain
relationships would be appropriate.

• Alternatively, the supplier relationship
management suggested by a strategic
alliance is one in which two or more
business organizations cooperate and
willingly modify their business
objectives and practices to help achieve
long-term goals and objectives.
• The strategic alliance by definition is
more strategic in nature and is highly
relational in terms of the firms
involved.

• This form of supplier relationship
management typically benefits the
involved parties by reducing uncertainty
and improving communication,
increasing loyalty and establishing a
common vision, and helping to enhance
global performance.
• Alternatively, the challenges with this
form of relationship include the fact
that it implies heavy resource
commitments by the participating
organizations, significant opportunity
costs, and high switching costs.

• Leaning more toward the strategic alliance end of the
scale, a partnership represents a customized business
relationship that produces results for all parties that is
more acceptable than would be achieved individually.
• Partnerships are frequently described as being
“collaborative”.

• Note that the range of alternatives are
limited to those that do not represent the
ownership of one firm by another (i.e.
vertical integration) or the formation of a
joint venture, which is a unique legal entity
to reflect the combined operations of two
or more parties.
• Each represents an alternative that may
imply even greater involvement than the
partnership or strategic alliance.
• Considering that they represent alternative
legal forms of ownership, however, they are
not discussed in detail at this time.

Supply Chain
Relationships may
differ in numerous
ways.
A partial list of
these differences
follows:
Duration
Obligations
Expectations
Interaction/Communication
Cooperation
Planning
Goals
Performance analysis
Benefits and burdens

• Most companies feel that there is
significant room for improvement in
terms of the relationships they have
developed with their supply chain
partners.
• The content of this chapter should
help to understand some key ways in
which firms may improve and
enhance the quality of relationships
they experience with other members
of their supply chains.

• Let us assume that the model is
being applied from the
perspective of a manufacturing
firm, as it considers the
possibility of forming a supplier
relationship management with a
supplier of logistics services (e.g.,
transport firm, warehouseman,
etc.).
Model for Developing and Implementing
Successful Supply Chain Relationships

• This first stage involves the process by
which the manufacturer becomes fully
aware of its logistics and supply chain needs
and the overall strategies that will guide its
opera-lions.
• Essentially, this is what is involved in the
conduct of a logistics audit, which is
discussed in details
supply chain management certification
online, that includes,
diploma in supply chain management.
Step # 1: Expanding Efficiencies

• The audit provides a perspective
on the firm’s logistics and supply
chain activities, as well as
developing a wide range of
useful information that will be
helpful as the opportunity to
form a supply chain relationships
are contemplated.
Expanding Efficiencies Cont…

• Overall business goals and objectives, including those from a
corporate, divisional, or logistics perspective.
• Needs assessment to include requirements of customers,
suppliers, and key logistics providers.
• Identification and analysis of strategic environmental factors
and industry trends.
• Profile of current logistics network and the firm’s positioning in
respective supply chains.
• Benchmark, or target, values for logistics costs and key
performance measurements.
• Identification of “gaps” between current and desired measures
of logistics performance (qualitative and quantitative).
The types of
information
that may
become
available as a
result of the
audit include
the following:

• Given the significance of
most logistics and supply
chain relationship decisions,
and the potential complexity
of the overall process, any
time taken at the outset to
gain an understanding of
one’s needs is well spent.

• Depending on the type of supplier
relationship management being considered
by the manufacturing firm under
consideration, this step may take on a
slightly different decision context.
• When the decision relates to using an
external provider of logistics services (e.g.,
trucking firm, express logistics provider,
third-party logistics provider), the first
question is whether or not the provider’s
services will be needed.
Step # 2: Decision to Form Relationship

• A suggested approach to making this
decision is to make a careful
assessment of the areas in which the
manufacturing firm appears to have
core competency.
• For a firm to have core competency in
any given area, it is necessary to have
expertise, strategic fit, and ability to
invest.
• The absence of any one or more of
these may suggest that the services of
an external provider are appropriate.
Decision to Form Relationship Cont…

• If the relationship decision involves a
channel partner, such as a supplier or
customer, the focus is not so much on
whether or not to have a relationship
but on what type of relationship will
work best.
• In either case, the question as to what
type of relationship is most appropriate
is one that is very important to answer.

• Lambert, Ernmelhainz, and Gardner have
conducted significant research into the
topic of how to determine whether a
partnership is warranted and, if so, what
kind of partnership should be considered.
• Their partnership model incorporates the
identification of “drivers” and
“facilitators” of a relationship; it indicates
that for a relationship to have a high
likelihood of success, the right drivers
and facilitators should be present.

• Drivers are defined as “compelling reasons
to partner.” For a supplier relationship
management to be successful, the theory
of the model is that all parties “must
believe that they will receive significant
benefits in one or more areas and that
these benefits would not be possible
without a partnership”.
• Drivers are strategic factors that may result
in a competitive advantage and may help
to determine the appropriate type of
business relationship.

Although other factors may
certainly be considered, the
primary drivers include the
following:
 Asset/Cost efficiency.
 Customer service.
 Marketing advantage.
 Profit stability/Growth.

• Facilitators are defined as “supportive
corporate environmental factors that
enhance partnership growth and
development.”
• As such, they are the factors that, if
present, can help to ensure the success of
the supplier relationship management.
• Included among the main types of
facilitators are the following:
 Corporate compatibility.
 Management philosophy and techniques.
 Mutuality of commitment to relationship
formation.
 Symmetry on key factors such as relative size,
financial strength, and so on.

• Number of additional factors
have been identified as keys to
successful relationships.
• Included are factors such as
exclusivity, shared competitors,
physical proximity, and prior
history of working with a partner
or the partner, and a shared high-
value end user.

• Lambert and his colleagues suggest a
method for measuring and weighting the
drivers and facilitators that we have
discussed.
• They discussed a methodology by which
the apparent levels of drivers and
facilitators may suggest the most
appropriate type of relationship to
consider.
Step # 3: Evaluate Alternatives

• If neither the drivers nor the
facilitators seem to be present, then
the recommendation would be for
the relationship to be more
transactional, or “arm’s length” in
nature.
• Alternatively, when all parties to the
relationship share common drivers,
and when the facilitating factors
seem to be present, then a more
structured, formal supplier
relationship management may be
justified.
Evaluate Alternatives Cont…

• In addition to utilization of the
partnership formation process, it is
important to conduct a thorough
assessment of the manufacturing
company’s needs and priorities in
comparison with the capabilities of
each potential partner.
• This task should be supported with
not only the availability of critical
measurements and so on, but also
the results of personal interviews
and discussions with the most likely
potential partners.

• Although logistics executives and
managers usually have significant
involvement in the decision to form
logistics and supply chain
relationships, it is frequently
advantageous to involve other
corporate managers in the overall
selection process.

• Representatives of marketing, finance,
manufacturing, human resources, and
information systems, for example,
frequently have valuable perspectives to
contribute to the discussion and analysis.
• Thus, it is important to ensure a broad
representation and involvement of people
throughout the company in the
partnership formation and partner
selection decisions.

• While this stage is of critical
concern to the customer, the
selection of a logistics or
supply chain partner should
be made only following very
close consideration of the
credentials of the most likely
candidates.
Step # 4: Select Partners

• It is highly advisable to interact with and get to
know the final candidates on a professionally
intimate basis.
• As was indicated in the discussion of Step#3, a
number of executives will likely play key roles in
the srm supplier relationship management
formation process.
• It is important to achieve consensus on the final
selection decision to create a significant degree
of “buy-in” and agreement among those
involved.
Select Partners Cont…

• Due to the strategic
significance of the decision to
form the logistics or supply
chain relationships, it is
essential to ensure that
everyone has a consistent
understanding of the decision
that has been made and a
consistent expectation of
what to expect from the firm
that has been selected.
Select Partners Cont…

• The structure of the relationship
refers to the activities, processes,
and priorities that will be used to
build and sustain the
relationship.
• As suggested by Lambert and his
colleagues, components “make
the relationship operational and
help managers create the
benefits of partnering.”
Step # 5: Structure Operating Model

5 Components of the operating model may include the
following:
Planning
Joint operating controls
Communication
Risk/Reward sharing
Trust and commitment
Contract style
Scope of the relationship
Financial investment
Structure Operating Model Cont…

• Once the decision to form a supplier
relationship management has been
made and the structural elements of
the relationship identified, it is
important to recognize that the most
challenging step in the relationship
process has just begun.
• Depending on the complexity of the
new relationship, the overall
implementation process may be
relatively short, or it may be extended
over a longer period of time.
Step # 6: Implementation and Continuous Improvement

• If the situation involves
significant change to and
restructuring of the
manufacturing firm’s logistics
or supply chain network, for
example, full implementation
may take longer to accomplish.
• In a situation where the
degree of change is more
modest, the time needed for
successful implementation
may be abbreviated.
Implementation and Continuous Improvement Cont…

• Finally, the future success of the supplier
relationship management will be a direct
function of the ability of the involved
organizations to achieve both continuous
and breakthrough improvement.
• A number of steps should be considered
in the continuous improvement process.
• In addition, efforts should be directed to
creating the breakthrough, or “paradigm-
shifting,” type of improvement that is
essential to enhance the functioning of
the relationship and the market
positioning of the organizations involved.
Implementation and Continuous Improvement Cont…

• Whether the supplier relationship
management may or may not be with a
provider of logistics services, today’s
supply chain relationships are most
effective when collaboration occurs
among the participants who are involved.
• Collaboration may be thought of as a
“business practice that encourages
individual organizations to share
information and resources for the benefit
of all.”
Need for Collaborative Supplier
Relationship Management

• According to Dr. Michael Hammer,
collaboration allows companies to
leverage each other on an operational
basis so that together they perform
better than they did separately.”
• He continues by suggesting that
collaboration becomes a reality when
the power of the Internet facilitates the
ability of supply chain participants to
read - transact with each other and to
access each other’s information.
Need for Collaborative Supplier Relationship Management Cont…

• While this approach creates a synergistic
business environment in which the sum of
parts is greater than the whole, it is not
one that comes naturally to most
organized particularly those offering
similar or competing products or services.
• For example, consider that consumer
products manufacturers sometimes go to
great lengths to make sure that their
products are not transported from plants
to customers’ distribution centers with
products of competing firms.

• While this part is = have a certain logic,
a willingness of the involved parties to
collaborate and share resources can
create significant logistical efficiencies.
• Also, it makes sense, considering -
entailers routinely commingle
competing products as they are
transported from distribution centers to
retail stores.
• When organizations refuse to
collaborate, real losses may easily
outweigh perceived gains.

• The contemporary topic of importance
is “collaboration.” Most simply,
collaboration occurs when companies
work together for mutual benefit.
• Since it is difficult to imagine very many
logistics or supply chain improvements
that involve only one firm, the need for
effective supply chain relationships is
obvious.
• Collaboration goes well beyond vague
expressions of partnership and aligned
interests.

• It means that companies
leverage each other on an
operational basis so that
together they perform better
than they did separately.
• It creates a synergistic business
environment in which the sum
of the parts is greater than the
whole.

It is a business practice
that requires the
following:
Parties involved dynamically share and interchange
information.
Benefits experienced by parties to exceed individual benefits.
All parties to modify their business practices.
All parties to conduct business in a new and visibly different
way.
All parties to provide a mechanism and process for
collaboration to occur.

To develop your skill in International logistics, we
recommend you following logistics and supply chain
management programs:
Certified Supply & Logistics Professional (CSLP)
Certified Supply Chain Expert (CSCE)
Master Diploma in Supply Chain (MDSC)
For registration and details
www.aims.education
AIMS

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