Analysis of Supplier Development Strategies
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ABSTRACT OF THE THESIS
Any activity undertaken by a buying firm to improve supplier performance, supplier capabilities, or both and to meet the buying firm's short and/or long term supply needs can be termed as supplier development activity.
A study by the Harvard Business School concluded that a primary reason for declining US competitiveness is that US companies invest less than foreign rivals in intangible investments such as supplier development. Half of the companies fail in this supplier development effort if executed. As supplier development help in increasing competitiveness and is not successful every time if implemented, it is essential to examine supplier development and factors which result towards the success of supplier development.
This paper will examine aspects associated with the success of supplier development strategies within different set of industry. This research will put forward a specific set of aspects are significant contributors to supplier development; also this paper will show that some factors of supplier development have significant influence on other factors of supplier development.
Data from the population of buyers and suppliers will be collected to test the extent of relationship between significant factors and success of supplier development process. Agreement was noted between dependencies of success of supplier development process on several factors. Recommendations to supply managers and purchasing manager will be provided regarding upper management involvement, enhanced communication with their suppliers, recognition of their suppliers and development of strategic processing instead of reactive processing will be offered.
This thesis is a report of ethnographic study of critical factors for supplier development strategies. The study was based primarily upon the survey with supplier development managers and professionals involved in this field. This first chapter of the thesis will discuss the context of the study, intention of the study, describe the importance and will present the overview of the methodology used.
Background of Study
A global economy is emerging and resources are concentrated on core business rather than the diversification which show the way towards outsourcing. Outsourcing is increased from $91 billion to $416 billion in 20 years (Tunstall, 2002), and it is expected to increase further. In 2009 the value of outsourcing deals in logistics area were projected to $ 80 billion (Hyatt, 2009) which shows the intensity of use of suppliers. Due to this voluminous use of suppliers buying companies have to rely on their suppliers to deliver defect free product in a timely and cost effective manner. To compete in their respective markets, buying firm must ensure that their supplier capability equals the expectations (Krause & Ellram, Success factors in supplier development, 1997). When a supplier is incapable of meeting the buying firm's need the buying firm has three alternatives: (1) Bring the outsourced item in house and produce it internally, (2) Resource with a more capable supplier, (3) Help improve the existing supplier's capabilities. All the three strategies can work. (Handfield, Krause, Scannel, & Monczka, 2000). Supplier development is defined as
Any effort of a buying firm with its supplier to increase the performance and capabilities of the supplier and meet the buying firms supply needs. (Krause & Ellram, Critical elements of supplier development, 1997)
When the suppliers are innovative and exclusively supplying a product then the supplier development option comes into the picture. When a company is using a supplier, it is necessary to have a good relationship with them. The Harvard research suggested that supplier development started very late in USA but it was started very long ago in the Japan. Toyota, Honda and Nissan implemented these supplier development activities in their plants a long back.
Although similar research has been done previously, the theme of research was same but this new research is capable to generate new knowledge , First the populations is different and for the variety of reasons they will be having different opinions and attitudes than the previous cohort . There might be a different type of interaction in between me and those to which will generate the new idea, the sample data is from different set of industry and places so the research context will be totally different from the previous researches. Even the subject might be same but the contextual issues are very different.
The Problem Statement
Supplier development requires both supplier and buyer to commit their maximum to get the maximum out of the program. Even though both the sides agree that the commitment is required it is not necessary that supplier development program in which they are involved will be successful. In early 90's companies start reducing the number of direct suppliers and began evolving from adversarial relationships to more cooperative ones with the remaining suppliers. (Hartley & Choi, 1996), Approximate one-third projects are failed due to supplier's underperformance. So the success in the supplier development is not a foregone conclusion. Supplier development is considered as a long term business strategy and there are various factors which affects this long term strategy. These factors not only affect the end result of supplier development process but also influence each other. This research tried to establish the critical success factors for supplier development and their inter-relationship with each other. Regression models approach helped to develop the interrelationship among critical success factors. Anyone especially supplier development manager and procurement professional can refer the model over the wide range of circumstances and structure. The main objective of the research paper is to create the model for critical success factors for supplier development strategies.
Large number of companies does the supplier development and they fail as well at surprising rate. Not all supplier development initiatives are successful - in fact, as many as 50% are not successful, due to poor implementation and follow-up. (Handfield R. , 2002) The failed efforts consume tremendous amount of resources over months or even years. As multiple studies have shown over half of the supplier initiatives fails. This failure takes a toll that is not only financial but also psychological. Failure demoralizes employees who have been labored diligently to complete their share of the work. As the supplier development success factors depends on both the parties so a dedicated study is required to find out what factors make the supplier development process a success.
In 2000, according to the study 53% of the companies claimed that they are involved in the supplier development program but it was found that only 20% of the companies are contributing for the financial support for the suppliers and only 14% of the companies are putting their employees in the suppliers place for the development purpose. Eleven percentages of the companies are giving the chance to the suppliers to come at the buyers place and learn. Only 11% of the companies are having the formal program for supplier development, others are doing it without any of the formal program. (Anonymous, 2000). It shows that even though companies are involved in supplier development program but not fully implementing in an appropriate way.
In General Motors, after implementation of supplier development program supplier productivity was improved 50%, lead time was reduced by 75%, and inventory reduction happened around 70% during their one week workshops. On one project alone, Honda of America's Best Practices (BP) team reduced a supplier's costs by more than $200,000 per year by changing the layout of a welding process. Furthermore layout change might increase the efficiency of supplier and ultimately give advantage to buying company. (Hartley & Choi, 1996). Also one of the purchasing pro for a power tool producer said that in three years of developing suppliers, his company has seen quality rejects fall from 38.4% down to 0.5% while supplier on-time delivery has risen from 76% to 97.5%. Likewise, another proponent of supplier development cites an average supplier quality metric of 98.5% and on-time supplier delivery at 97%. They claimed to have "improved quality, response time, prices and cycle time improvements," The VP for a major California-based computer maker talks about how assistance from his firm allowed one subassembly supplier to "ramp up to 50,000 pieces per month in only six weeks." (Anonymous, 2000).Although it took only 6 weeks to ramp up the production but usually supplier development is very time consuming and long process which consumes plenty of resources, so it is very much required to do it correct first time. To get the results mentioned above -$200,000 saving /year it is essential to learn what are the success contributors and failure contributors of supplier development.
Overview of Methodology
A structured survey questionnaire with five-point Likert scale was developed. Web and email were used to circulate and gather information regarding what group of supplier development professionals thinks about supplier development activities. Survey was divided in 6 small sections and every section was having 3 questions. Total of 20 questions were mailed to random sample of 300 supplier development professionals. The survey solicited about a single instance of supplier development performed by them. Survey was face validated and content validated with the help of thesis chair and committee. Of 300 surveys circulated 50 usable responses were obtained, which provides the perception of large group of supplier development manger regarding the nature of their supplier development project. The responding population represents a wide range of industry types. Also before e-mail survey set of interviews with supplier development managers was conducted. The interview was designed to validate the success factors collected after reviewing literature review and to help focus on reliable, important success factors which have extremely high control on supplier development success.
The research study was conducted at San Diego State University during the end of the fall semester-2009.
- This research was limited to supplier development manager who updated their resume on resume bank.
- This research was limited to professionals in North America continent to reduce cultural differences within the population used in the study.
- Multiple Regression model was used to prove the interdependency in between critical factors instead structural equation modeling.
- Survey instrument was developed with the help of existing instruments. This will allow us to compare new results with the old results.
- This research was limited to 3 questions per factor to keep instrument short.
This chapter will review the past researches that serves as the foundation for the thesis report presented. The research papers are basically associated with critical factors associated with success of supplier development. The research paper will present purpose and rationale for writing research paper on supplier development strategies. Following will be the review of literature on Strategic process, Upper management involvement, Supplier recognition, Effective and enhanced communication and commitment of suppliers. The chapter will conclude with a summary of literature. Examples of the key word used while finding the scholar research papers were supplier development, supplier relationship, supplier evaluation, supplier management, supply chain management and buyer-supplier relationship. Combinations of keywords were used to get different research papers. Search engine used during literature search were SDSU library search engine and Google scholar. (Ekholm & Pashei, 2009).
First document application of supplier development comes from Toyota in 1939. Toyota discussed the need of working together with suppliers to improve collective performance. Thereafter in 1963 Nissan implemented first supplier development project, Honda joined the club in 1973 (Monczka, Handfield, Glunipero, & Patterson, 2009). It is essential to understand the significance of each factor and the role it plays in supplier development process. Past researches can be categorized in (a) Theoretical, (b) Conceptual, (c) Empirical, (d) Conceptual and Empirical. Table 1 gives the brief of past literature which were identified. Previous to mid 1990's, the supplier development literature consisted mainly of theoretical studies covering cases of several companies and surveys and the purpose was to learn the barriers which comes in the way of supplier development. In 1990s the research moved towards establishing relationship in between various supplier development constructs where in 2000 the research moved towards influence of supplier development towards innovation and purchasing strategy (Easton, 2000).
In today's business increased trend of reliance on supplier is observed. Most of the buying firms need to pursue aggressive strategies in order to increase the future rate of capabilities improvement. (Monnczka, Trent, & Callahan, 1993) Having mentioned that supplier is becoming increasingly critical to the competitive success of US firms, there are several reasons behind that. First manufacturers are beginning to focus on their core competencies and areas of technical expertise. Second, developing effective supply base management strategies can help counter the competitive pressures brought about by intense worldwide competition. Third, Suppliers can support directly a firm's ability to innovate in the critical areas of product and process technology. Study showed 95% of business unit sample indicated supplier contributions were increasing throughout in terms of importance. There was a 232% increase in people from 1989-1990 who agreed with the statement that suppliers are extremely important to the achievement of competitive market strategies. More and more people started to outsource and started rely on suppliers. There was a growth of 15% of people from 1991-1992. Furthermore for each sample period, respondent projected and increasing dependency on suppliers for future product technology. More and more companies started to use supplier development process. Some of them are HP, Epson, Apple Computer, 3M, and BMW etc. Strong belief is supplier warrants improvement. If improvement does not occur firms across many industries may lose market share to competitors who are able to maximize supplier performance input. Sample was non random so the result can be generalized. Thus the trend is towards increasing reliance on supplier to help achieve competitive market strategies. This reliance on suppliers and improving their performance was initially documented from Toyota in 1939. Toyota discussed the need of working together with suppliers to improve collective performance. Thereafter in 1963 Nissan implemented first supplier development project, Honda joined the club in 1973 (Monczka, Handfield, Glunipero, & Patterson, 2009).
Supplier development was ubiquitous in Japan and Korea for number of years but less evident in US firms due to perceived lack of instant return on investment allied with setting up resources required to make it successful. Interestingly this practice was recognized early in the 1900 in the US automotive industry when Ford required improving supplier capacity (Krause, Handfield, & Tyler, The relationships between supplier development, commitment, social and capital accumulation and performance improvement, 2006). In 1970s other Japanese automakers implemented the system and made their own modification like Honda developed a program called BP (Best practices). Review of case studies by (Sako, 2004) allowed examining differences in between supplier development activity in Toyota, Nissan and Honda. In 1939, Toyota purchasing rules stated that- Toyota suppliers must be treated as a Toyota branches and Toyota must continue to do business with these suppliers without switching to others and also develop the suppliers if required. Toyota bifurcated supplier development activities into TPS (Toyota Production System) and TQC (Total Quality Control). TPS was having different existence from TQC which allowed suppliers to take advantage of continuous improvement. Hyundai also realized that their small suppliers cannot again and again recruit engineers thus they sent engineers from their own shops to improve suppliers productivity. Hyundai do not financially support their suppliers but offer personnel support (Handfield, Krause, Scannel, & Monczka, 2000). Nissan also implemented supplier development program which were significantly different from Toyota in the terms of number of point of contacts for suppliers, approach towards sharing the ideas and one to one training strategy during program. Honda and Nissan unified the TPS and TQC offering a single point of contact (Sako, 2004). The common features of the supplier development programs at Honda, Nissan and Toyota are multiple channels for supplier development to transfer both tacit and explicit knowledge. Tacit knowledge is more difficult to accumulate as it needs closer interactions especially face to face with suppliers and more time thus it is difficult to replicate tacit knowledge (Clarke, 2007). In contrast to these companies in Japan, the suppliers in US and Europe distrust the buyer's intention and also buyer's don't have identical level of authenticity as in Japan to act as trusted well wisher who can suggest their suppliers how they should invest their resources (Sako, 2004).
A recent study from Harvard school concluded that primary reason for declining USA competitiveness is that US companies invest less in supplier relations and development thus considering these points from Japan the supplier development was adopted in Eastern countries like UK and USA (Monnczka, Trent, & Callahan, 1993). Supplier development activities were transferred to USA as buying firms commissioned their own plants in USA due to government regulations. By 1996 General Motors had completed supplier development projects with over 2000 suppliers and claimed productivity improvements over 50%, lead time reduction of up to 75% and inventory reduction of 70% (Hartley & Choi, Supplier development: Customers as a catalyst of process change, 1996), (Clarke, 2007). By 2001 John Deere was involved in 426 different projects with 92 different supplier development engineer and delivering annual saving of $700,000 along with improvements in quality, cost and delivery. By 1994, Allied-Signal expected to save up to $300,000 from supplier development activities and also expected for increase in shares price (Monnczka, Trent, & Callahan, 1993). At Deere and Delphi, a $100,000 investment in supplier development yields at least three to ten times the original investment (Nelson, Moody, & Stegner, 2005). This illustrates that large firms adopted supplier development and it became strategic tool for them to improve quality, reduce cost and improve the delivery. The basic development process started with reduction in supplier base and then developing the remaining suppliers. Also it was adopted in service based companies from product based companies. But more focus was on the product based companies. Service based relies on the competitive pressure of market forces instigate supplier performance to a greater extent than product based firms and that then to use. In UK most companies rationalized or optimized their supple base to include fewer total suppliers. Western countries were not getting involved in direct supplier development; Japanese companies were successful because they were involved in direct supplier development. Toyota is purchasing product from the same supplier since 1937. GM adopted this strategic supplier development in Europe. Motorola and Ford also adopted similar kind of supplier development
Countries and large firms started to realize the benefits of supplier development, they recognized that supplier development must be worth if it's emerging everywhere in Japan. From the national perspective, benefits of supplier development were improvement in domestic suppliers, reduction in off shoring and increase in GDP (Krause & Ellram, 1997). From the corporate and large firm perspective, supplier development helped in improving quality, reliability and manufacturability of new design. Besides that supplier development also helped in knowledge sharing and improved collaboration. Furthermore responsiveness to customer needs and market dynamics also increased with supplier development (Krause & Ellram, 1997). The data gathered with 527 purchasing executives by (Krause D. R., Supplier development: Current practices and outcomes, 1997) revealed that supplier development attributed to timely delivery, completed orders, reduction in defects & scrap and reduced order cycle time. Research by (Blonska, Rozemeijer, & Wetzels) established that supplier development guide towards getting a preferential buyer status and supplier adaptability. Supplier adaptation is perceived as an attainment of a goal of supplier development aimed at supplier performance improvement (Blonska, Rozemeijer, & Wetzels). With help of two in depth case studies (Reed & Walsh, 2002) established that supplier development activities enhance technological capabilities in their suppliers. Also some of the firms expected technological improvement should follow from improved business processes. Supplier development also helped in developing mutual trust in between buyers and suppliers (Reed & Walsh, 2002). As mentioned earlier this increase in reliance was due to improvement in performance after implementing supplier development program. BMW strives to be 20% above industry average in quality performance. Management believed supplier development made it possible to attain that quality standard and increase in revenue (Rhodes, Warren, & Carter, 2006). Also in Honda dramatic improvement was seen in product quality since Honda began to develop suppliers in North America, In 1985 quality level was 7000 parts defective per million and In 1995 quality level was increased to 100 defective parts per million (Berlow, 1995). A team of purchasing professionals from Honda of America worked with 12 stamping suppliers to reduce cost by $4million in six months in 1995 with its supplier development efforts (Berlow, 1995).
In the context of supplier development, suppliers and buyers state that they want to practice more supplier development methods to enjoy its benefits but there are myriads of barriers that hinder the effective supplier development strategies. Research by (Lascelles & Dale, 1989) utilizing survey responses from UK based suppliers to 3 major customers in automotive industry illustrated that poor communication and feedback, unstructured quality improvement programs, credibility of buyers, misconception regarding purchasing power and supplier satisfaction are the foremost barriers in the supplier development programs. Also in an empirical study with 89 minority goods and service providers (Krause, Ragatz, & Hughley, Supplier development from the minority supplier's perspective, 1999) demonstrated that the main barriers towards minority owned supplier development are poor communication, non-profit situation and racial biases. Results also indicated that small minority owned suppliers were less positive about supplier development activities as compared to large minority owned suppliers (Novak, 2008). Survey by (Handfield, Krause, Scannel, & Monczka, 2000) on supplier development strategies with 84 companies established several other barriers apart from already mentioned that deter supplier development strategies. It includes Lack of supplier commitment, insufficient supplier resources, lack of trust, and poor alignment of organizational cultures, unsupportive upper management and insufficient inducement to suppliers. Research by (McDuffie & Helper, 1997) established that supplier development might fail if suppliers are not having a strong identification or if suppliers are not dependent on buyers. It will show the way to break down in learning relationship. Another major barrier towards supplier development program found from research by (Forker, Ruch, & Hershauer, 1999) is difference between perceptions of buyer and suppliers about supplier development practices. These differences in perception are due to disparity in understanding in preference, intention, and process of supplier development program (Forker, Ruch, & Hershauer, 1999). Supplier might agree initially for the proposal but later fail to implement due to difference in understanding. This problem can be cured with the help of clarification of issues.
Researchers came up with number of conceptual models for building solutions to overcome these barriers. A ten step generic process model was developed based on the examination of in-depth response to open ended survey questions. Such a model was a step towards strategic supplier development. It was ranging from identification of critical commodities for development to systematically instituting ongoing continuous improvement. The model also suggested proposition that firms competing in markets characterized by high rates of technological changes and high level of competition are more likely to be involved with this model (Krause, Handfield, & Scannell, An empirical investigation of supplier development: reactive and strategic processes, 1998). This model was slightly changed by proposition of seven steps generic model (Handfield, Krause, Scannel, & Monczka, 2000). Also it was found most organization deployed first three steps but was less successful in deploying later stages. Similar to previous model a process oriented four step generic supplier development model was proposed. This model was designed to help suppliers sustain and continue the change process and effectively build the capability for improvement within the organization (Hartley & Jones, Process oriented supplier development: Building the capability for change, 1997). This model also increases the supplier's capability to act on its own and the improvement effort will continue once the buying firm finishes its activities (Wagner S. M., 2006). Also supplier structure was developed on the basis of specific vendor development strategy. Conceptual link was generated in between generic business unit strategies based on framework proposed by Porter and generic supplier development strategies, in other words linkage between supplier development strategies and company strategies (Chakraborty & Philip, 1996). Execution of case study of five firms by (Dunn & Young, 2004) results in a process model that enables the buyers to pinpoint specific areas where improvement is required. Highlighting these small areas can impact on long term strategic supplier development initiatives.
A review of the conceptual model and context of supplier development resulted in the identification of several elements that appear to be critical to the success of the supplier development program. These comprise of effective and enhanced communication, supplier commitment, top management involvement, strategic processing and "long term commitment and supplier recognition/rewards" (Krause & Ellram, 1997).
What is supplier development, why is the supplier development critical, what made this required to study and how the factors might affect the supplier development?
"Big things happen when you do little things right" (Don, 2000). In this case if small generic steps for supplier development are deployed correctly then it can contribute towards success in supplier development. (Handfield, Krause, Scannel, & Monczka, 2000) Developed seven step generic process map for set up supplier development activities. These are recognized as (a) "Identify critical commodities" (b) " Identify critical supplies (c) "Form a cross functional team" (d) " Meet with supplier top management" (e) " Identify key project" (f) " Define details of agreement" and (g) "Monitor status and monitor strategies". A discussion of each as follows.
Identify critical commodities and suppliers
Upper management involvement is vital to assess the relative importance of commodities and services procured by business unit. A corporate level executive committee analyzes the 'purchasing portfolio' developed during strategic process. This analysis is extension of company strategic planning (Handfield, Krause, Scannel, & Monczka, 2000). As a result critical commodities are identified and warranted for supplier development activities. Steps adopted here are mainly observed in strategic approach supplier development where in reactive approach respondents skip this step in supplier development process (Krause, Handfield, & Scannell, An empirical investigation of supplier development: reactive and strategic processes, 1998).
Choosing which supplier to develop is a critical task again because supplier development involves resources such as money and time, thus the decision should be strategic not reactive (Gordon, 2008). (Handfield, Krause, Scannel, & Monczka, 2000). Many situations exist which are not mutually exclusive but warrant supplier development. To decide which situation needs supplier development is calculated judgment. Companies have formal supplier measurement system with help of which they assess supplier's performance. If any gap is found in measured and expected results, these suppliers are identified for development process where in reactive approach respondent skip this step in supplier development activities (Krause, Handfield, & Scannell, An empirical investigation of supplier development: reactive and strategic processes, 1998). Also buying firm carefully evaluates supplier's quality, volume, delivery cost performance, launch readiness and potential kaizen opportunities to identify a prospective supplier development program (Novak, 2008).
Hence, Strategic processing and upper management involvement have significant influence on the outcome of this first step of supplier development-identifying critical commodities and suppliers. These two will be among the variable of interest in the research thesis.
Form a cross functional team
Each firm must develop their suppliers according to their requirement. For example, some firms need managerial assistance and some need technical assistance. Thus it is essential to evaluate each supplier individually to create a plan that benefits both supplier and buyer (Daghfous, Campa, & Hamde, 2008). As a result to face this complex challenge of developing dissimilar suppliers, innovative ideas are required to break down knowledge barrier between buyers and suppliers and to facilitate a transition of knowledge transfer from buyers to suppliers, a cross functional team is necessary to form (Blindenbacj-Driessen, 2009). Before approaching suppliers and ask for enhanced performance, it is also important to build up cross functional consensus and build up their own house before expecting commitment from suppliers (Monczka, Handfield, Glunipero, & Patterson, 2009). In particular commitment of buyers and strategic approach is essential for buildup of cross functional consensus. Also a buyer must establish its supply chain strategies and roles of procurement so that the business objectives are clear. Hence, Commitment and strategic process have significant influence on the outcome on creation of cross functional team. Therefore, these two will be among the variable of interest in the research thesis.
Meet with supplier top management
Upper management involvement again prevails but this time it is of supplier's side. Cross functional team must meet upper management of supplier side and establishes strategic alignment which helps to align the technology of supplier and buyers. Measuring the capability of supplier's side for example how much they will be able to implement the suggestions. Hence, upper management involvement has significant influence on the outcome of this step of supplier development-meeting with supplier top management.
Define details of agreement
After identifying project, the parties need to agree on the specific metrics for monitoring its success. Prior to setting up supplier development program and investing in supplier development activities, establish goals it want to achieve and how to achieve these goals (Wagner & Krause, 2009). The metrics may include percent of cost saving to be shared or percent of quality improvement to be achieved pr percent of delivery etc. The agreement also must specify milestones and deadlines for improvement as well as the role of each party-who is responsible for the project success and how and when to deploy the allocated resources. Upon reaching an agreement the project should begins. Perkins was trying to convince the supplier to consider one of the Kaizen but they were not considering it because another company's recent kaizen failed to yield significant improvement. So agreement should be defined before supplier development program get started. The agreement should also specify the role of each party who is responsible for success of the project. (Krause, Handfield, & Scannell, An empirical investigation of supplier development: reactive and strategic processes, 1998) Hence, effective and written communication has significant influence on the outcome of this step of supplier development-defining details of agreement. For example Hyundai motor company uses financial incentives to motivate suppliers. They pay class 1 suppliers in cash, class 2 are paid net 30 days , class 3 are paid net 60 days and class 4 suppliers are paid net 60 days and receive no new business. So suppliers know how Hyundai evaluate suppliers thus they take steps to ensure high performance (Rhodes, Warren, & Carter, 2006).
Monitor status and modify strategies
To ensure continued success, management must actively monitor progress and revise the strategies if business warrants (Wisner, Tan, & Leong, 2009). Communication is the key of success in this step as exchange of information is required to drive the project towards success. Unremitting communication is required with supplier community via supplier councils as suppliers are part of supplier council that provides feedback on buyer's performance (Krause, Handfield, & Scannell, An empirical investigation of supplier development: reactive and strategic processes, 1998). Co Priorities changes after attaining certain milestone so it is essential to change the strategies.
This chapter consists primarily of literature that is significant to the issues related to supplier development. In addition to the literature on supplier development, strategic outsourcing, off shoring, purchasing, material management, and reverse marketing literature were also reviewed. Particularly, the chapter established to answer the questions like the reason behind increase in reliance on suppliers and it also provides good reason for supplier development activities by firms. Chapter also talks about the emergence of supplier development in Japanese companies and how the benefits were spread out and countries in west and large firms included supplier development as their strategic approach. Along with benefits of supplier development, heap of barriers come with that. To overcome those barriers several conceptual models by (Krause, Handfield, & Scannell, An empirical investigation of supplier development: reactive and strategic processes, 1998), (Modi & Mabert, 2009), (Handfield, Krause, Scannel, & Monczka, 2000) were developed and are discussed in this chapter. The conceptual framework relates with strategic approach, effective communication, supplier commitment, long term contracts/rewards and upper management involvement. In this chapter the supplier development was defined as: "Any type of action taken by the customer to improve one or more of the supplier's process. This can include material flow, manufacturing, and quality control process. These changes can include the implementation of or improvement in production planning, capacity planning, material requirement planning, just in time inventory systems, shop floor control procedures and material handling" (Easton, 2000). The rationale for discussing critical factors is clearly discussed in the chapter. Each step is discussed in brief and critical factors associated with steps were also elucidated.
The research on supplier development has come to the front only since 1980's. Literature discovered that strategic process, upper management involvement, effective communication, long term contract/rewards and supplier commitment are important factors for successful supplier development results. Thus this chapter included an examination of the critical factors and their interrelationship in supplier development.
To conclude, after study of several literature related to supplier development it is established that the supplier development is a crucial element of supply chain management and research indicated reduction in lead time by 75% and inventory reduction of 70% (Hartley & Choi, 1996) on using supplier development programs. Due to this reason supplier development activities got a strong justification based on improved organizational results. Research determined that critical factors such as strategic process, supplier commitment, effective communication, supplier recognition and upper management involvement are important for success of supplier development. These critical factors have significant correlation with success of every supplier development step suggested by (Handfield, Krause, Scannel, & Monczka, 2000) in the present research. It will be useful to study the factors associated with success of supplier development program to improve supply chain. The research provides insight into the following question: Is there any significant correlation in between the critical factors and success of supplier development program. The definition of success for this report is any improvement in supplier performance in the field of quality, delivery, cost or technology which improves the ability of the buying firm to compete in the market. (Novak, 2008)
Next Chapter will present a hypothesis model that is developed mainly from an integration of the bodies of literature discussed in the chapter and interview with several supplier developments professional. In addition the hypothesis to be tested is presented and discussed (Easton, 2000).
This chapter will discuss the goal of this thesis and hypothesis development procedures. The main aim of the thesis was to study the data in order to verify several hypotheses related to supplier development success factors. Hypotheses were based on literature reviews and interviews of supplier development managers.
Six supplier development professionals were interviewed. Interviews were conducted to learn about critical factors leading to success for supplier development projects. The list of professionals interviewed is provided in the Table 1: Interviewees for hypothesis development. Interviewees were selected with utmost care that had at least experience of 3 years in supplier development programs and managed at least three supplier development programs. Interviewees were having a strong knowledge of supplier development programs. Also they had diverse experience with different supplier firm.
Interview questions were to the point and were concerned with what critical factors supplier development professional can relate with success of supplier development programs. These interviews took place on the phone. Similar set of critical factors for success were obtained after interviewing. Interviewees were asked regarding the supplier development projects they carried out followed by asking their opinion for the most significant contributors to supplier development program success or failure (Tamir, 2008). These questions were open questions and interviewees responded meticulously and carefully. A list of several factor were obtained which according to Interviewees were main contributors for supplier development.
Some of the buying firms are more content than others with the results of their supplier development programs. Generally every buying firm focuses on several factors while implementing supplier development program, which guide to success in some cases and failure in some. Again supplier development is not a simple task; the purpose is to transform suppliers so that continuous improvement becomes integral part of their competencies (Handfield, Krause, Scannel, & Monczka, 2000).This section of chapter reviews the factors which plays an important role in transformation during supplier development efforts. The main factors which were found to be of extreme importance to supplier development are: Strategic processing, Upper management involvement, Long term commitment/Rewards, Supplier commitment and Effective communication. The literature review validated all the success factors stated by interviewees.
Strategic process emphasizes strong supplier development efforts to improve alignment in the suppliers (Handfield, Krause, Scannel, & Monczka, 2000). Firms approaching strategic supplier development focus on classifying critical commodities with the intent to create a world class supply base. In contrast firms taking reactive approach are motivated by supplier non-performance including defects, delays or poor services. (Krause, Handfield, & Scannell, An empirical investigation of supplier development: reactive and strategic processes, 1998). Scope of strategic process focuses on whole supply base where in reactive approach focus is on eliminating specific supplier deficiencies. Also strategic processing encourages development of suppliers by closer collaboration between both the parties and upper management involvement. Development of whole supply chain is impossible without strategic approach (Monnczka, Trent, & Callahan, 1993). Thus with the support of interview and literature review following hypotheses were proposed:
- Strategic processing plays a positive role in success of supplier development.
- Strategic processing plays a positive role in upper management involvement.
- Strategic processing plays a positive role in supplier recognition in form of long term contracts.
Many interviewed managers stated that managers of suppliers were not willing to accept help in form of supplier development. The reason behind that is suppliers do not see the value addition with the development program (Handfield, Krause, Scannel, & Monczka, 2000). The reason for this perception is lack of communication which can be overcome by upper management involvement. Upper management is mainly responsible within company to remain competitive in the marketplace (Krause & Ellram, Critical elements of supplier development, 1997). Upper management initiates effective communication within suppliers and buyers followed by successful supplier development program. Thus the following hypotheses were proposed:
- Upper management involvement plays a positive role in enhancing communication
- Upper management involvement plays a positive role success of supplier development process.
In any chain network especially supply chain network commitment of buyer depends on suppliers commitment (Anderson & Weitz, 1992).Thus lack of commitment from the supplier side leads to failure of supplier development programs (Lascelles & Dale, 1989) . Here in this study the supplier commitment is defined as the degree with which the supplier is obligated to continue the supplier development program. In early meeting with supplier top managers, a buyer team must clearly delineate potential rewards for the supplier organization otherwise suppliers won't be fully committed to the effort (Handfield, Krause, Scannel, & Monczka, 2000).
Due to lack of commitment buyers frequently switched suppliers. Other buyers consider that the use of long-term contracts of three to five years effectively demonstrates commitment. While long-term contracts may be evidence of a long-term perspective, but commitment cannot be sustained without undertaking genuine risks. Supplier development involves risk for both the buying firm and the supplier, in that both must be willing to invest resources and time in dedicated assets for pay-offs that may only occur over a relatively long time period (Krause & Ellram, Critical elements of supplier development, 1997). Therefore following hypotheses are proposed:
- Supplier recognition plays a positive role in commitment of suppliers.
- Supplier recognition in form of long term contracts plays a positive role in success of supplier development.
- Commitment of suppliers plays a positive role in success of supplier development process.
Poor communication is principal barrier in effective supplier-buyer relationship (Lascelles & Dale, 1989) (Krause & Ellram, Critical elements of supplier development, 1997). Communication formality established between buying firm and supplier positively influences the supplier development process (Prahinski & Benton, 2004) and poor communication can defeat the supplier development process (Krause & Ellram, Success factors in supplier development, 1997). Thus, the following hypothesis is proposed:
- Enhanced communication plays a positive role in success of supplier development process.
With help of the interviews with respondents, findings from the precedent literature study explained in the previous chapter and in this chapter can be recapitulated in the model illustrated in Figure 1. This model is summarized to explain how critical factors affect the outcome of supplier development project.
This chapter will discuss the research methodology used in this study. In order to prove the hypothesis defined in earlier chapter, it was decided to obtain the universal understanding of success factors of supplier development and the survey seemed to be most appropriate research method. In the survey the focus was on following aspects: Strategic process, supplier commitment, upper management involvement, communication, long term commitment/rewards and success of supplier development program. Once the quantitative data was collected, statistical tests were performed to test the hypothesis and check the correlation between different factors. Following sections will describe research approach to gather data, survey design, population sampling, survey instrument and instrument's reliability and validity.
The survey design consist of following steps: literature survey for previous similar kind of research, constructing instrument, validate the instrument, pilot testing the instrument and document the instrument. For customer satisfaction kind of survey it is suggested to have only 10-20 questions (Janes, 1999) . It will be short and will not make the customer feel that their feedback is not important. The survey is not sponsored by any company and it is a kind of cold call survey on a specific topic so we should not make it longer than 10 minutes. If we will force the respondent to give the answers of long survey, it might be possible to get inaccurate or insightful answers. If the topic of survey is of very much importance to respondents then only they will be willing to spend a lot of time in taking survey (Kitchenham & Pfleeger, 2002). Many of the respondents felt that 10 minutes is the maximum time they can spend on the survey. Minimum time is 4 minutes. So a survey was created which can be finished in 6-10 minutes. (Nilsson & Soderstorm, 2005). With the long surveys usually the people get the insignificant results although yield is required but tradeoff in between them is unacceptable. Most of them dislike answering long questionnaire (Kitchenham & Pfleeger, 2002). Research consists of following sections: selection of research method, population and sampling, questionnaire selection, data collection, data capturing and data statistical analysis.
For the most part of the thesis two methods of data collection were used, Interview and literature survey. A brief interview was conducted to develop the list of critical success factors followed by an in-depth literature review to corroborate a set of propositions and critical factors related to success of supplier development. Several interviews with selected company's professionals helped in identifying factors leading to development of survey instrument (Krause, Handfield, & Scannell, An empirical investigation of supplier development: reactive and strategic processes, 1998). Having decided the critical factors, survey instruments having critical factors used in existing empirical studies were referred to prepare questionnaire. Most of the existing surveys were sent via mail and the response rates vary greatly for them. Total of eight articles were found which were related to the study and having empirical study content. Although various instruments were used in various studies but the objective, hypothesis, sample size and methodology used were different from this study. So it was concluded that it is beneficial to use a new survey instrument
The questionnaire was developed with the help of existing research instruments as a way to achieve the content validity and reliability. To further aid in the development of instrument manuals, articles, books and existing thesis on marketing research were referred.
The survey tool consists of 19 questions, every question correspond to one of the five success factors and success itself for supplier development program. To analyze every critical factor three questions are designated and one question was for ISO certification, to get an idea if there is any loop hole in certifications system for supplier. To keep survey small and to get higher response rate, fewer questions were kept in survey.
Survey instrument comprises qualitative questions including 5 point Likert scales to give respondents an option to be more expressive. Respondents were instructed in the starting of questionnaire to mark the most suitable answer. The score ranges from 1-5 as follows (Nyengane, 2007):
- Strongly Disagree
- Strongly Agree
The survey tool measures six factors. Each factor is mapped to three questions. The survey tool is available in Appendix B. The question dealing with our variable of interest-success of supplier development program are kept in the starting to keep salient questions in the start. This was done to make the survey logical to the respondent. Respondent can see the intent of coming questions with the existing question. Questions were formulated in a way that respondents can answer them easily and accurately. Response format was standardized so that respondents know their choice of answers and need not to waste time in reading choices question by question. It will help to reduce the time respondent will take while answering the questionnaire. Response format was strongly agree, agree, neutral, disagree or strongly disagree. There were no open questions in survey to avoid misinterpretation or confusing answers, all the questions were closed and as the questions were on ordinal scale, Neutral option was kept in the questionnaire
Reliability and Validity
Reliability is statistical measure of how reproducible the survey instrument data are (Litwin, 1995). Reliability is determined by three different forms: test-retest, alternate forms, and internal consistency. Test-retest needs a lot of time to check the reliability, alternate forms were not given priority because of technical nature of survey thus on recommendation of thesis committee, internal consistency method was selected to check the reliability of instrument. Internal consistency was measured by determining Cronbach's alpha. It is a statistic that reflects the homogeneity of scale (Litwin, 1995). Cronbach's alpha was preferred over split half reliability coefficient because split half requires one test to be treated as two tests. The resulting coefficient is the correlation between two subsets may differ depending on how the initial test is divided (Ekholm & Pashei, 2009). Ideally the value of Cronbach's alpha above 0.50 will be accepted if the number of questions is less (Tamir, 2008).
Validity refers to the degree to which a survey instrument actually measures what it purports to measure. There are four types of validity: Content, face, criterion and construct. This questionnaire has proved the face and content validity at the initial phase of survey instrument design. Face validity refers whether survey asks all the needed questions and does it use appropriate language to do so (Fink, 2003). To take on this face validity, thesis committee and supplier development professionals were consulted during and after preparation of questionnaire. They agreed on the appropriateness of language for all the questions in the survey. Content validation refers to the extent to which a question appropriately assesses the characteristics it is intended to measure (Fink, 2003). To take on this content validity, pilot study was performed. In the exercise, questions and critical factors which we are trying to measure were given to panel of professionals. The panel was asked to map each survey question to one of the factors measured. The purpose was to make sure that the questions are understood in a way well-matched with the survey design. A regular mapping of question to the wrong factor would have pointed out the problem with the question content or wording (Tamir, 2008). During pilot study, small wording modification suggestions were collected. Minor language alteration was made after pilot study. With help of this exercise content validation was verified and we agreed on representativeness of the items in survey. The intent of this validation was to discern the flaw, correct it and to adapt it to suit the purpose of report.
In cover letter of survey instrument ethical consideration of confidentiality and privacy were addressed. To encourage their candid response a guarantee was provided to respondents that their name will not be referred in the research report until they will state to do so. A particular effort was made at all the times to respect their privacy. (Nyengane, 2007)
Population and Sampling Procedures
Population is group of people which is focus of research and sample is people who are selected to be in a study. To increase reliability the survey was targeted mainly to supplier development professional, procurement professional, buyer and quality professional that have personally witnessed or participated in supplier development programs. All respondents in the survey were hand-picked so sample can be categorized as subjective population. Out of several sampling methods including simple random sampling, stratified random sampling, systematic and cluster based sampling; simple random sampling procedure was followed. Random sampling procedure gets tedious when sampling from an unusually large target population but in this study the population is small. The sample had an experience of at least three years in supplier development activities in U.S.
Web survey was used due to the fact it can gather several thousand responses within a day or two. Also there was practically no cost involved once the set up was completed. Along with the survey instrument, a cover letter (attached in appendix A), giving a short introduction of the research was sent to all the respondents. A sample of 305 professional was targeted from a population of approximately 500 professional. A total of 105 questionnaire were completed and returned resulting a response rate of 34%
This chapter will discuss the context and the purpose of the study. The introduction will start with some basics of supplier development followed by the brief about types of supplier development, how supplier development is executed and barriers in the road of supplier development activities.
Scale Analysis and Purification
This chapter will discuss the context and the purpose of the study. The introduction will start with some basics of supplier development followed by the brief about types of supplier development, how supplier development is executed and barriers in the road of supplier development activities.
Overview of Research
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