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Modern concept of an organizations supply chain is pictured as starting from our suppliers and their suppliers, and their suppliers, through our own organization, and to our customer's (and their customers, and their customers) Thus KYERICO's supply chain starts from its suppliers in India, China and Germany, through KYERICO and to its many well-known retailers in its customers base. And it is within this supply chain that has recorded the following ethical issues.
Workers of Felico supplies are subjected to unhealthy conditions.
Employment of underage staff.
Low wages being paid to workers of a supplier - Felico supplies.
Punishment of staff of some suppliers for their inability to complete orders on time.
Procurement of eye drops without local purchase orders by KYERICO.
KYERICO senior managers accepting gifts and favours from suppliers.
Discrepancies between the automated stock figures and physical stock quantities.
Pilfering by some members of staff of KYERICO.
Discrimination in pay structures by KYERICO management against female employees.
PLAN TO ADDRESS ETHICAL ISSUES IN KYERICO'S SUPPLY CHAIN
Ethics is concerned with the moral principles and values that govern our beliefs, actions and desires (Lysons). Ethical behaviour should be high on the agenda with supply chain management especially purchasing, buyers should be encouraged to operate to a principled standard. Ethics are also shaped more deliberately by public and professional bodies, in the form of agreed principles and guidelines that are designed to protect the public interest.
Ethical issues may affect business such as KYERICO at three levels namely the macro level, the corporate level and the individual level.
At the wider macro level, there are issues that concerns the role of business and capitalism in society. The debate about globalization, the exploitation of labour, the impact of industrialization on the environment and so on. AT KYERICO as part of the audit of suppliers by the new procurement manager, revealed the following at one of its suppliers by name Felico Supplies.
Harsh and inhumane treatment is allowed-staffs are punished if they do not complete an order on time.
Child labour is being used by Felico Supplies-under-age staffs are being employed.
Living wages not paid-wages are very low.
Working conditions are unsafe and unhygienic-workers at Felico supplies are subjected to unhealthy conditions.
To address the ethical issues raised at this level, the procurement manager and the three buyers of KYERICO should subscribe to the tenets of ethical sourcing. Ethical sourcing will establish KYERICO's responsibility for labour and human rights in the supply chain. In today's global market it is not enough to look only at the basic purchasing criteria such as price, quality and delivery. Buyers at KYERICO must take responsibility for sourcing decisions by acting in an ethical manner towards stakeholders within the supply chain.
Additionally, ethical issues at the macro level within the supply chain can be addressed by the Ethical Trading Initiative. This is an alliance of companies, non-governmental organisations and trade union organisation committed to working together to identify and promote good practice in the implementation of codes of labour practice.
At the corporate level, these are the issues which face an individual organization as it formulates strategies and policies about how it interact with its various stakeholders. Some of these issues will be covered by legislative and regulatory requirement, and organisation may have a compliance based approach to ethics which strives merely to uphold these minimal requirements. The sphere generally referred to as Corporate Social Responsibility covers policies which the organisation adopts for the well-being of stakeholders, taking a more proactive 'integrity based approach'. Corporate Social Responsibility includes key issues of sustainability, human rights, labour and community relations, and supplier and customer relations beyond legal obligations. An organisation's Corporate Social Responsibility may include Ethical trading, business relationships and development : consumer protection; the upholding of principles of good corporate governance, improvement of working (and social) conditions for employees, suppliers and subcontractors, upholding ethical employment practices (such as equal opportunities and employment protection)
In the case study under consideration, the following are Corporate Social Responsibility issues that needs to be addressed by Felico supplies.
HUMAN RIGHTS - Kyerico should devise a code of conduct for its suppliers. The code of conduct should have robust statements relating to human right issues (child labour, staffs punished if they do not complete orders in time) and should be enforced regularly.
EQUAL OPPORTUNITIES - Kyerico's purchasing department can ensure that equal opportunities is an issue included in and monitored in the Code of Conduct that suppliers need to comply with.
At the individual level, there are the issues which face individuals as they act and interact within the organisation and supply chain: whether to accept gifts or hospitality which might be perceived as an attempt to influence supplier selection. These issues are often addressed by a Professional Code of Ethics. The audit of the internal procurement function of Kyerico reveals unethical practices in the following areas.
HOSPITALITY AND GIFTS - A GERMAN based supplier Alexco is gaining 40% of the total orders although its costs are higher than the other similar suppliers. This GERMAN supplier's offers of Hospitality to a number of KYERICO senior managers appears very suspicious. Even though offers of hospitality are among common courtesies of business dealings, the problem for buyers is to decide when these practice among the senior managers of KYERICO amount to an attempt to induce a favourable sourcing decision. The new procurement management should conduct further investigations into these hospitality offers- whether the German company's share of 40% of orders is as a result of the hospitality offers being enjoyed by the senior managers. Is there an explicit link between the offers and the award of business to the GERMAN supplier? A major difficulty in answering this puzzle may be the difference in perceptions between the managers of KYERICO and the German supplier. To the German supplier, these offers of hospitality may be merely a token of appreciation, of a kind that his organisation virtually expects to bestow on most or all customers. To the senior managers, the offers may become a material inducement to favour the German supplier. Thus on business dealings, the difference in perception may also be a cultural issue.
Ethical issues are increasingly a concern to major companies and this is reflected in the number of firms which now publish detailed procedural guides in this area. Therefore to address the ethical issues raised in the supply chain of KYERICO, the plan below will be developed.
POLICIES AND RULES.
The procurement manager buyers and senior managers should subscribe to the tenets of ethical sourcing and ethical trading. These are meant to address ethical issues relating to labour and human rights.
The organisation KYERICO should ensure that Corporate Social Responsibility issues are made part of company policy. Corporate Social Responsibility will address ethical issues in the supply chain of KYERICO.
Workers wherever they are in the world have rights as enshrined in the UN Charter of human rights. As an organisation we must ensure that our employees and the employees of our suppliers have these rights.
No organisation should be involved in supply situations that infringe on human rights of others.
Equality considerations include equal pay, and the treatment of people in a way which is fair is to everyone. The organisation must ensure that its policies and the policies of its suppliers reflects these issues.
Equality is a fundamental right, we should not seek to discriminate.
As a purchasing department or an organisation our responsibility is to the surrounding in which our organisations operates and the impact of our requirement, produced in terms of our portfolio by suppliers on surroundings in which they operate. Hence we are interest in their waste disposal processes etc.
In the manufacture of products, this issue emphasises the use of materials which are either reusable themselves or made from resources which are produced from materials that are recycled or regenerated frequently.
The ethical policies to be developed should be communicated effectively to both the internal and external stakeholders. Therefore KYERICO procurement manager should also include a communication plan that will inform the various stakeholders of the new ethical policies. A formal communication channel within KYERICO may take any of the following.
Instruction from the Board/Management of KYERICO that will include briefings, rules and policies.
Horizontal or lateral in the form of interdepartmental meetings.
Between KYERICO and suppliers - this takes place at the top management levels, since changes in ethical policy is an information for strategic and policy planning and decision making. This will be formal face to face meeting between senior managers of KYERICO and suppliers.
The purchasing function effective communication of ethical rules and policies to both internal and external relationships can add value to the organisation. Improved levels of communication between stakeholders can lead to more direct value adding processes within the supply chain. These are to ensure that staffs of KYERICO and staff of our suppliers have access to the ethical policies and to faster responsible and ethical behaviour
1b) RULES FOR ETHICAL BEHAVIOUR
Ethics in supply chain management has two aspects: ethical behaviour and ethical sourcing. Buyers are, arguably, more exposed to ethical temptations than most professionals. They control large sums of organisational funds. Their decisions typically benefit some suppliers over others-creating an incentive to try and influence those decisions. Within purchasing there is a high priority placed on ethical behaviour and therefore KYERICO needs to create a set of rules as a preventive measure against future occurrence.
A general commitment to a set of rules, evidenced in writing and supported by appropriate training together with a management committed to ethical ideals, provides an organisational background in which ethical behaviour can flourish.
Senior Managers and buyers of KYERICO must declare any personal interest that may impinge on their activities.
Senior Managers and buyers of KYERICO must respect confidentiality of information.
Except for small-value items, business gifts should not be accepted.
Senior Managers and buyers of KYERICO should avoid any arrangement that might prevent fair competition.
Buyers of KYERICO should be rotated to avoid any particular buyer becoming familiar with any supplier as this will prevent unethical practices taking place.
KYERICO should encourage employees or managers to report ethical breaches without fear of reprisal.
All managers or employees should register all offers of gifts and hospitality to ensure transparency in supply chain management.
KYERICO should have a policy on tendering transparency.
KYERICO should promote the use of recycled materials by suppliers.
Since purchasing is the interface between KYERICO and the outside world (suppliers), the awareness of ethical issues is important in purchasing. An ethical sourcing policy places a clear obligation on both an organisation and the purchasing department to ensure compliance. This obligation will often be accompanied by the development of "Codes of Conduct" which will be placed on the next tier suppliers. These suppliers, in turn, place similar obligations on their suppliers.
KYERICO should put in place these rules for suppliers to follow.
AGREEMENT WITH KYERICO'S CLEAN PROCUREMENT POLICY.
Our suppliers must agree with our 'fair' and ethics-based principle' and implement fair business.
COMPLIANCE WITH FAIR TRADE.
Our suppliers must ensure full compliance with laws, regulations, and social ethics under KYERICO Purchase Agreement with our units.
FAIR TRANSACTION ON AN EQUAL BASIS.
When procuring goods and services, we should conduct fair and appropriate transactions with suppliers according to specified policies and procedures while maintaining the belief that there shall be 'no private interest' in the procurement process.
SAFEGUARDING OF HUMAN RIGHTS AND HEALTH AND SAFETY OF LABOUR.
Our suppliers must not use any illegal, forced or child labour force. They must also fully comply with the laws and regulations in each country where they conduct business operation with regard to employment conditions and occupational health and safety standards, including remuneration and working conditions.
SELECTION OF SUPPLIERS
When procuring goods and services, we assess and select our suppliers by providing fair competition opportunities according to the following procurement standards.
HOTLINE FOR SUPPLIERS Put in place a hotline number for suppliers to report any wrong doing in confidence
IMPOSITION OF SOCIAL STANDARDS. Impose social standards, Example labour rights, health and safety) and environmental standards on suppliers.
The management of kYERICO should put in place a set of rules for ethical behaviour that will help KYERICO and its suppliers prevent the issues identified in the case study. These rules must cover areas such as human rights, equal opportunities, employment of under-age staff, pilfering by staff, low staff wages and so on.
FOGG MIKE, (2006), MANAGING PURCHASING AND SUPPY RELATIONSHIPS,
1ST EDITION, CHARTERED INSTITUTE OF PURCHASING AND SUPPLY.
CHARTERED INSTITUTE OF PURCHASING AND SUPPLY, (2010), IMPROVING SUPPLY CHAIN PERFORMANCE, 3RD EDITION, PROFEX PUBLISHING LIMITED.
CHARTERED INSTITUTE OF PURCHASING AND SUPPLY,(2010), RISK MANAGEMENT AND SUPPLY CHAIN VULNERABILITY, 3RD EDITION, PROFEX PUBLISHING LIMITED.
ETHICS, (ONLINE), AVAILABLE AT www.cips.org, 27th January 2013.
In business, new product development (NPD) is the complete process of bringing a new product to market. A product is a set of benefits offered for exchange and can be tangible or intangible (like a service). Product development may involve modification of an existing product or its presentation, or formulation of an entirely new product that satisfies a newly defined customer want or market niche. It is also the creation of products with new or different characteristics that offer new or additional benefits to the customer. To improve the companies existing portfolio, procurement function of KYERICO should come up with ideas as to how to work with both the internal and external stakeholders.
KYERICO sales turnover for its eye preparations has seen a gradual decline over the last two years. This is as a result of KYERICO's inability to collaborate and coordinate with both external stakeholders such as manufacturers, external marketing organisations suppliers and internal stakeholders such as finance, marketing, sales, packing and warehousing.
EXTERNAL RELATIONSHIPS (STAKEHOLDERS)
There is a general trend for procurement function in a company to develop relationship and partnership interfaces with external relationships stakeholders.
Evaluation and Suppliers Selection.
A supplier is defined as the person or organisation that provides a product or service to another business. Finding a reliable and competitively priced supplier is vital to the success of the business of KYERICO. Suppliers are invaluable partners in KYERICO's efforts to continually better serve customers with high quality eye drops, mainly by helping us to develop products that meet our customer's expectation. KYERICO should be committed to creating the functions and values customers demand by establishing relationships of mutual trust with suppliers through the strengthening of external relationships.
The procurement manager of KYERICO should ensure that the company evaluates and select the best suppliers in a fair manner by adopting the following criteria.
Assurance of required product quality and safety.
Fulfilment of on-time delivery.
Advanced technology and development capability.
Respecting human rights and health and safety of labour.
The above criteria will ensure the KYERICO's portfolio remain price competitive in the light of the growing number of competitors in the market, the quality of supplied eye drops is up to date with market trends and new technology is incorporated in the product packaging of the eye drops.
Implementation Information Gathering and Purchasing During the Development Phase.
The buyers of KYERICO should serve as a liaison between KYERICO and its suppliers to collect information on market trends in materials and products as well as new technology such as laser and processes. The procurement function is responsible for collecting information and sharing it with the relevant function of KYERICO. The procurement function must collaborate with suppliers in new product planning, design, R&D operations to take proactive actions. Procurement should help make new eye preparation (branch) that are more competitive through active involvement from product development to after sales issues such as networking, exhibitions.
Ensuring Product Quality and Safety.
In line with KYERICO's quality assurance policy, procurement will clarify the quality level of existing products and standards being demanded in the eye drops market, and new products must fulfil in the development phase and request suppliers to secure and maintain the required quality. Our buyers will also ask each supplier to develop their own autonomous quality assurance systems by ensuring high quality in manufacturing Processes.
Respecting Human Rights and Health and Safety Labour.
KYERICO will conduct its procurement activities while respecting the human rights of individual employees of our company and our suppliers and thus provide a safe and healthy working environment. The procurement manager will ensure that all our suppliers strictly respect the human rights of all employees and that health and safety issues at the workplaces of all suppliers are adhered to. This will be done by making these issues part of the evaluation criteria.
KYERICO will conduct procurement activities with integrity, we will ensure that our suppliers comply with laws, regulations and social ethics in each nation and region and promote fair and open competition. The acceptance of gifts and hospitality offers from some suppliers will be stopped.
Achieving Optimum Procurement by Shortening Lead-Time.
The procurement function will strive to shorten lead-times for procurement, new product development to flexibly respond to changes in market needs by closely collaborating with other external stakeholders.
(2) EXTERNAL CUSTOMER.
These organisations are not part of the buyer's organisation. These are the clinics and hospitals that purchase eye drops from KYERICO. It seems the external customers are now considering alternative brands of eye drops from our competitors because they are offering better quality products. Purchasing can establish quality assurance procedures with suppliers to increase the quality of eye drops.
INTERNAL RELATIONSHIPS (STAKEHOLDERS)
The objective of a procurement function should move beyond its primary role of obtaining goods and services in response to internal needs of other functions. The role of the procurement function within KYERICO starts by looking of the following objectives.
SUPPORT OPERATION REQUIREMENTS.
This requires purchasing to:
Understand business requirements.
Buy products and services at the right price, from the right source, at the right specification that meets users' needs, in the right quantity, for delivery at the right time, to the right internal customer.
Internal stakeholders of the procurement function of KYERICO include:
Finance, Marketing, Sales, Packing and Warehousing.
MANAGE THE PROCUREMENT PROCESS AND THE SUPPLY BASE EFFICIENTLY AND EFFECTIVELY.
To manage the procurement process and supply base efficiently and effectively procurement must follow the following key steps:
Identify opportunities where the procurement team adds true value:
Evaluation and selection of suppliers.
All purchases should go through the approved procurement processes.
Other functional inputs are part of this process.
Sales personnel should not be allowed to enter contractual agreements without procurements involvement.
Managing the supply base -
Current suppliers are competitive.
Identification of new potential suppliers and develop relationship.
Manage its internal operations efficiently and effectively including.
Managing of procurement staff.
Developing and maintain of policies and processes.
Defining procurement strategy and structure.
Developing plans and measures.
Providing procurement leadership to the organisation.
Providing professional training and growth opportunities for employees.
DEVELOPMENT STRONG RELATIONSHIPS WITH OTHER FUNCTIONAL GROUPS.
Procurement staff/buyers will collaborate with internal customers such as marketing, finance etc. to achieve greater understanding of requirements.
RELATIONSHIP WITH FINANCE.
Procurement can contribute to product development by collaborating with finance executives to reduce the costs of product development. This will be done by finding opportunities to reduce costs in the product development cycle.
The role of finance within the purchasing process, is setting and reporting on budgets and financial appraisal of suppliers and projects such as product development. Product development can be done through the setting up of cross functional teams involving the Finance Department of KYERICO.
Finance is also involved in cash management and the use of their expertise will help KYERICO to know whether the funding will be available in the new product development. Finance also have expertise in investment appraisal for the new product development.
RELATIONSHIP WITH MARKETING.
Procurement and marketing can work together by allowing the marketing professionals to do their job of promoting KYERICO's existing portfolio. Procurement will do so by increasing the resources available to marketing, so marketing can consider attending conferences and network events linked to well-known manufacturers. Procurement can also collaborate with marketing to gain early insight into new product ideas. Also in forecast and demand planning requirements of new eye drops developments.
Procurement should also collaborate in effective marketing requirements such as differentiation, innovation.
Marketer's role in new product development will be in areas such as competitor assessment, product life cycles, market development, and product development. Their inclusion in a cross functional team or consultation by the purchasing team will yield value addition to the new product being developed. This will aid KYERICO to develop new quality products that will be acceptable to customers and end users thus improving the sales turn over. Marketers will also fashion out how the new products will be promoted. Media, public relations and promotion.
Logistics and warehousing teams handle a variety and volume of products. Communication from the procurement department of KYERICO and store manager about the New Product development will solicit their views of the storage conditions of the new product. The logistics team must also communicate with the purchasing team to make it aware of any difficulties with receipts or issues with packaging or handling items delivered by suppliers. Also involving them or consulting them with respect to new products, the team will get their perspectives on the storage conditions of both the product and new packaging materials to be used. They will be of help in the drafting of the requirements specification of new products. Involving Pharmacists as part of teams will use their technical knowledge in the design medicines to help in the formulation of new products. They have the technical knowledge to advise the procurement department on the specification of the new products.
The product function of KYERICO can contribute to new product development if the procurement manager and his or her team manage its relationship with stakeholders well. The procurement function should collaborate and coordinate with both external stakeholders and internal stakeholders. This will require developing relationship with finance, marketing, sales, packing and warehousing, suppliers and customers to create the added value that KYERICO need.
FOGG MIKE, (2006), MANAGING PURCHASING AND SUPPY RELATIONSHIPS,
1ST EDITION, CHARTERED INSTITUTE OF PURCHASING AND SUPPLY.
THOMPSON IAN, (2006), PURCHASING CONTEXT, 1ST EDITION,
CHARTERED INSTITUTE OF PURCHASING AND SUPPLY.
STAKEHOLDER RELATIONSHIPS, (ONLINE), AVAILABLE AT www.cips.org,
28th JANUARY 2013.
Procurement can be called sustainable when an organisation uses its buying power to signal preferences to the market by its choice of goods and services which meet sustainable development criteria. This power is widely recognised in a number of local and national authorities both in developed and developing countries where the application of sustainable procurement is becoming increasingly common and where a wealth of implementation tool exists. Sustainable procurement is not about ''burdening' the market with extra requirement; rather it's a well-defined strategy that gradually phases in sustainable requirement in bids, supports measures, promotes dialogue and open communication between suppliers and buyers.
There is no single definition of sustainable procurement but, in its simplest terms, it is the ability to purchase products and equipment, usually on a scale, without compromising resources for future generations. (www.governmenttechnology.co.uk)
There are many approaches to supplier relationship management within purchase and supply contracts in the context of sustainable procurement policy. Examples of supplier relationships are Preferred Suppliers, Public Private Partnerships and Long Term Suppliers Relationships.
PUBLIC PRIVATE PARTNERSHIPS (PPP's).
Are made between public and private sector organisation. It is the involvement of private enterprise (in the form of management expertise and/or monetary contributions) in a government projects aimed at public benefit. It is a business relationship between a private sector company and a government agency for the purpose of completing a project that will serve the public.
Public-private partnerships can be used to finance, build and operate projects such as public, transportation networks, parks and convention centres. Financing a project through a PPP can allow a project to be completed sooner or make it a possibility in the first place. PPP's often use private sector investments to finance a public project when sufficient public funding is not available.
Example of Public Private Partnerships.
Private Finance Initiative (PFI) - often used for capital and infrastructure construction projects, using private sector finance and with long term contracts, typically, up to 25 or 30 years.
Strategic service delivery partnerships.
Joint venture companies.
Arrangement where private sector skills are used to sell public sector services and assets into markets.
BENEFITS OF PUBLIC PRIVATE PARTNERSHIPS
COST SAVINGS AND INNOVATION
In the relationship or partnership, the private sector brings a commercial edge and is more experienced in going after the money and finding cost savings. The private sector tends to more innovative and prepared to try new ways of working, and will invest even in these cash-constrained times. On the other hand, the public sector brings experience at dealing with a range of consumers and service needs.
SHARING OF FINANCIAL RISK AND BEST PRACTICE.
To be successful, partnerships need to have a shared vision and you need high-level engagement from both sides. This engagement most of the time includes the investment of financial resources from both the public and private partners. Should this partnership prove unsuccessful in some cases, the risk of this loss is shared by the partners.
ACQUISITION OF PRIVATE SECTOR INVESTMENT.
This partnership arrangement facilitates the transfer of private transfer of resources into community projects. The public sector is under an enormous strain financially. A true partnership seek out ways of putting something back into the community being served in a way that gains support.
HIGHER PRODUCTIVITY Alleviation of capacity constraint and bottlenecks in the economy through higher productivity of labour and capital resources in the delivery of projects.
HIGHER PRODUCTIVITY Creation of added value through synergies between public authorities and private sector companies, in particular through the integration and cross transfer of public and private sector skills, knowledge and expertise.
A practical example of a PPP is DHL's partnership with the Ministry of Justice's National Offend or Management Service (NOMS) does more than just offering an efficient service - it helps prisoners gain the skills they need to put the past behind them. At present 550 prisoners work in the NOMS scheme, picking and packing orders for the peers. It's a perfect mix of efficiency (service levels have been improved by over 99%) cost cutting (saving £2m in labour costs) and social responsibility, offering offenders the chance to improve their skills, gain national qualifications and give something back.
COSTLY AND INEFFECTIVE.
In spite of the above advantages, public-private partnerships are too costly or ineffective. There is the tendency for tax payers to pay higher costs because the private sector usually sell their services at higher costs than the government.
INEQUALITIES IN STAFF PAY AND CONDITIONS.
Remuneration levels and conditions of service differ in the private sector. In the private sector, staff enjoy better salaries and conditions of service as compared to that of the public sector. These inequalities can affect the morale of the staff of the public sector leading to low output. Thus affecting the output and objectives of this partnership.
As with any contract between a public entity a private form, both partners are seeking to gain from the relationship. The public authority is looking to maximize the socio economic profitability of public sector investment. The private sector operator is looking to maximise financial profits.
The role of the PPP's in sustainable procurement is evolving and there are a number of areas where companies can contribute, make an impact and at the same time gain valuable market and operational insight for their own operations.
LONG TERM SUPPLIER RELATIONSHIPS.
Long term supplier relationships are generally the result of a strategic purchasing approach. They involve elements of risk and opportunity sharing and close co-operation. Benefits could include alignment of buyer/supplier strategies, sharing of innovation, and better continuity of supply improvement in shareholder value.
INNOVATION IN PRODUCTS AND PROCESSES.
Sustainable procurement brings about 'sustainability-driven innovation'. This is sometimes used for the creation of products, services, processes and new markets, driven by economic, social and environmental sustainability issues. Increasing demands for sustainable products spurs suppliers on to develop innovative new products and processes. Long term supplier relationships have led the way in sustainable procurement creating the way for the successful market adoption of innovative products and services.
ENSURING CONTINUITY OF SUPPLY.
Continuity of supply means that an organisation can obtain materials and supplies it requires without interruption. Ensuring continuity of supply is clearly one of the major task of a purchasing function. Adopting a sustainable procurement policy ensures that not only supplies can be obtained at a sensible price but that supplies are environmentally-friendly and ethically sourced.
PROMOTES CONTINOUS IMPROVEMENT.
Continuous improvement means setting goals and standards to be met and when these have been achieved, increased in such a way as makes them reasonable and achievable.
Sustainable Procurement- like quality management and other process improvement techniques-involves the ongoing and continual examination and improvement of existing process: 'getting it more right, next time.
Risk could include supplier complacency and financial overdependence by either party.
The first potential risk that customers need to be aware of is that tying up with specific suppliers, may force them to specialize in a specific niche in the market.
This will result in the supplier being complacent. The long term relationship with the supplier usually means the supplier become their main priority, and the supplier will focus on meeting their business needs.
Another risk that a supplier may have to deal with when entering into a long term relationship is related to selling price. In long term relationships, the customer will usually expect that the supplier will annually develop their techniques, figuring out ways to lower their selling price. This expectation puts immense pressure on the supplier to innovate and make the company more efficient. Their inability to lower costs will possibly result in the firm choosing an alternative supplier, leaving the supplier without a business. These risks, although significant, do not mean that long term relationship are never the right solution for a supplier, and in fact, entry into long term relationships has the potential to help suppliers in many ways. Long term relationships with companies can be often be beneficial for suppliers, but it is essential they consider the risks before agreeing to a long-term relationships.
Preferred supplier relationships are often the result of pre-qualification against a specific set of sourcing criteria. The supplier has a track record of satisfactory performance and user departments are allowed to order from them without further checking. Suppliers may hold a particular specialism or standard. Adopting a sustainable procurement policy when dealing with preferred suppliers will result in the following benefits:
Preferred suppliers deliver the best overall value to the customer based on the price, delivery capabilities quality, past performance, training, financial stability, ease of ordering and so on.
EASE OF ORDERING
It is easier to order from preferred suppliers, especially those with catalogues and this relationship also reduces transaction costs. Example total costs of acquisition.
REDUCED RISK DUE TO IMPROVED CONTRACT ADMINISTRATION.
Service levels are higher because these preferred suppliers have a stronger commitment to the customer. Thus the purchaser monitors the performance of Preferred Suppliers to ensure they comply with the signed contract agreement. The buyer has considered leverage and is able to hold these suppliers more accountable in ensuring that products and services meet the expectations of user department and units. And if the expectation of the user department are not met, the buyer can assist in resolving the disputes.
IMPROVED PRODUCTIVITY AND EFFICIENCY.
User department are not required to call for other bids when choosing to utilize a preferred suppliers as this activity has already been performed by the procurement department; terms and conditions also already established. This allows the user departments to better focus on their core functions/responsibilities.
Using preferred suppliers helps the buyer to consolidate purchasing power and leverage volume. Consolidation of usage drives up to volume, providing incentive for vendors to offer the best possible price. All the savings realized by the procurement department benefits everyone.
Risks can include missing out on innovations from non-preferred suppliers or supplier/buyer unresponsiveness to change.
Dependence on a preferred supplier increases vulnerability to supplier failure or supplier disruption (example strike, disaster). This will lead to reputational damage by association.
Complacent performance by a preferred by a preferred supplier will lead erosion of quality of supplies.