Developing Strategic Sourcing Partners Business Essay


The goal is to achieve cost savings by streamlining procurement activities through renegotiating, consolidating and automating contracts, while strengthening supplier relationships. Strategic sourcing transforms relationships with direct and indirect suppliers into strategic partnerships, creating productivity gains and operational efficiencies for the company. It is crucial to establish reliable and long-term relationships with suppliers to optimize the partnerships and to maintain a competitive advantage.

The objectives of today's Sourcing departments in forming Strategic partnership are:

Streamlining the strategic purchasing process for hard dollar savings and operational standardization

Collaborative approach to cost reduction within marketing, production and supply chain divisions with suppliers/ Partners

Creating global sourcing partnerships for low-cost country sourcing.

Gaining visibility of your suppliers and procurement processes 

Strategic Partnerships & Alliances

Strategic partnerships and alliances are a part of fundamental strategies to any organization. Strategic Partnerships can provide and improve upon opportunities to improve an organisation's business potential. Partnerships are fundamentally based on the co-operative relationships that exist between the people in the partner organisations, in particular, those boundary-spanning personnel who share goals, objectives and have common agreement on norms, work roles and the nature of social relationships. Partner organisations can use this co-operative relationship to help gain new competencies, share risks, extend their commercial "reach" and move quickly to take up new commercial opportunities. The term "strategic partnership" tends to be used for relationships between customers and suppliers, whilst the term "strategic alliances" tends to be used for relationships between suppliers of like or unlike products and services servicing the same market sector.

The need for Strategic Partners

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In today's competitive business environment, there is the need to be flexible, adaptive, with renewed emphasis on leadership focussing on a people-based approach. In this complex world, competition is no longer merely based on price but on numerous other critical factors such as quality, service, timing, relationships, long-term sustainability, specialist advice, etc. The best commercial arrangements must be able to account for this complexity. In fact, the business environment has changed so drastically that there is a need to change the way relationships between customers and suppliers are managed, both internally and externally. Organizations and agencies with common goals should also seek to build and improve relationships strategically to achieve more than can be achieved individually. Partnerships are essential for organisations to prosper in a future environment where institutions both public and private will be seeking the next quotient of effectiveness. Strategic Partnerships are central to the effectiveness of networked organisations. In fact, the way an organisation can extend its capability through loosely coupling internal and external units is a company's "collaborative advantage", which in turn will lead to its financial and strategic advantage. Strategic partnering and alliances are the mechanism by which the "new" organisations will sustain themselves, manage and grow.

Strategic partnering is a complex mix of human behaviour and organisation functioning. Human interactions in an organization consist of 2 parts:

Rational - consisting of strategies, processes, functions, procedures, systems and standards

Non Rational - consisting of relationships, cultures, information, beliefs, faith and trust.

Most normal views of organizations concentrate on the rational part only, as the non rational part remains ignored because it is unpredictable and uncontrollable. However, for an organization which does not understand and develop human interactions to be more trusting and effective towards externalities fails in creating alliances and partnerships. Strategic Partnerships - i.e. the coupling of autonomous units to work collaboratively for a common goal and shared objectives, can only be effective when the human systems are as well developed as the organisational systems.

A Strategic Partnership can be expected to:

Have a relatively long life term (but terms of tenure can be specified to short terms also)

Appropriate documentation pertaining to specifications, plans, procedures etc.

Legal contract should give way to moral agreement based on mutual trust

Partnership documents are positive in nature, signifying collaboration, knowledge sharing, improvement, pain/gain sharing mechanisms etc.

Have positive relationship between organization and supplier

General Factors to be considered for Developing Strategic Partners

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From the point of view of Parent companies or companies which are trying to create sustainable partnership models it makes sense for companies to think of these parameters

This is how a typical sourcing department has been making its decision, thinking unilaterally about its own profit and cost structure. There are three things that are wrong with this type of thinking -

Failure to think how a particular partner could affect the entire supply chain

Despite a partner meeting all the above criteria he could not be the best supplier out there

This is not a fixed sum or zero sum game. The intention is not to win over the partner but get the best partner possible with the best possible potential

The future of strategic Sourcing partnership will look at more parameters than the antiquated least cost model. Apart from looking at all the above parameters any modern company must ask the below question also for tapping the best possible consumer surplus.

Before getting into a Partnership the difference between a Strategic partner and Improper Reciprocity must be properly understood. In a strategic sourcing partnership both parties have mutual interests and mutual benefits coming out of this relationship. In an Improper reciprocity arrangement, one of the parties inevitably ends up gaining or learning more than the other party involved.

Critical Factors to Strategic Partnerships

Partnerships are critical to organizational strategy and growth, and each alliance is different in its terms and conditions and outcomes. However, as most of the elements remain similar, a number of critical factors can be identified with any partnership, as listed below:

Strategic Fit -in terms of purpose, mission, commitment and ownership exists between the parent organisations.

Readiness - to evaluate the potential partners on their ability to behave relationally, openly, honestly and to be able to build trustful partnerships. Mechanisms exist to be able to measure and test for readiness.

Business Plan - The new entity (partnership) will need to be effective right from the start. As part of the readiness step, a consolidated Business Plan needs to be agreed by the parties for the new entity.

Governance - the partnership needs to be governed closely from the very start. It includes an organizational chart, Leadership team composition and role, Roles and accountability, Resourcing, Conformance and audits to check and improve.

Review and Evaluation -A learning environment is required where skills (competence and relationship) are continuously developed to support ongoing innovation and partnership. The process must reliably track performance as well as relationships on a regular basis.

Relational Skills Development -Very few parent organisations possess a depth of relational skills that will be required in an effective alliance/partnership. Positive steps are required to identify the relational behaviours and skills necessary and to plan to develop them.

Performance - KPI's that are appropriate for the partnership and not the business should be chosen. The choice of KPII's must be done carefully and with full involvement of the alliance team.

Advantages of Strategic Partnerships

Can capitalize on the individual strengths of each participating organization.

Can provide further contacts or links to the supply chain which can be a critical success factor.

Improved supply chain performance leading to greater supply chain profitability.

Involvement or shared responsibility for development and execution can help reduce risks.

Limits liabilities and reduces risks of any project/operation.

Provides reduced cost opportunities and greater expertise base from participating organization.

Introduction of synergies can improve upon economies of scope and learning.

Disadvantages of Strategic Partnerships

Usually limited to scope or objective of the partnership.

Can become ineffective or negative due to lack of involvement of one partner towards the objective or goal.

Can end up consuming more capital and resources than estimated.

Requires significant time investment to develop an effective strategic partnership.

Can result in a loss of flexibility for the organization to take quick action in another area that could have of better interest rather than the area they are pursuing as a partnership.

Before entering into a strategic alliance or partnership, the following questions should be answered:

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Does it extend the association's reach by opening up and developing new markets?

Does it help members gain access to additional industry intelligence and knowledge of other markets?

Does it increase the association's revenue? Will it contribute to the bottom line?

Will it amplify the association's resources? Will it leverage or reuse an already existing resource?

Does this alliance have relevance for the association and its mission? Will it increase the value of the association within the industry or profession

Supplier Relationship Management

Supplier relationship management (SRM) is the systematic, enterprise-wide assessment of suppliers' assets and capabilities with respect to overall business strategy, determination of what activities to engage in with different suppliers, and planning and execution of all interactions with suppliers, in a coordinated fashion across the relationship life cycle, in order to maximize the value realized through those interactions. The focus of SRM is to develop two-way, mutually beneficial relationships with strategic supply partners to deliver greater levels of innovation and competitive advantage than could be achieved by operating independently or through a traditional, transactional purchasing arrangement.

SRM requires a consistency of approach and interactions that develops trust over time. It requires instilling new ways of collaborating with key suppliers and also to actively dismantle existing policies and practices that can be an obstacle and limit the potential value of supplier relations. It requires:

Redesign of the organizational structure - to include suppliers as a strategic function of the organization with special teams to facilitate and develop SRM activities across functions and business units.

Delegation of roles and responsibilities- to create point of contacts between supplier and the organization with proper authority to balance supplier and organizational requirements.

Governance - a clearly and jointly defined framework for governance of SRM systems. . Effective governance should comprise not only designation of senior executive sponsors at both customer and supplier and dedicated relationship managers, but also a face-off model connecting personnel in engineering, procurement, operations, quality and logistics with their supplier counterparts.

Supplier Engagement Model - Effective supplier relationship management requires an enterprise-wide analysis of what activities to engage in with each supplier. The common practice of implementing a "one size fits all" approach to managing suppliers can stretch resources and limit the potential value that can be derived from strategic supplier relationships. Supplier segmentation, in contrast, is about determining what kind of interactions to have with various suppliers, and how best to manage those interactions, not merely as a disconnected set of transactions, but in a coordinated manner across the enterprise.

Joint Activities - including supplier summits, executive meetings, Business Planning meetings and operational reviews from time to time.

Value Measurement -SRM delivers a competitive advantage by harnessing talent and ideas from key supply partners and translates this into product and service offerings for end customers. One tool for monitoring performance and identifying areas for improvement is the joint, two-way performance scorecard. A balanced scorecard includes a mixture of quantitative and qualitative measures, including how key participants perceive the quality of the relationship. Advanced organizations conduct 360 degree scorecards, where strategic suppliers are also surveyed for feedback on their performance, the results of which are built into the scorecard. A practice of leading organizations is to track specific SRM savings generated at an individual supplier level, and also at an aggregated SRM program level, through existing procurement benefits measurement systems. Part of the challenge in measuring the financial impact of SRM is that there are many ways SRM can contribute to financial performance. 

System Collaboration - Includes joint ventures into research and development, systematic information sharing, demand forecasting and process reengineering.

Technology and Systems - There are a myriad of technology solutions which are purported to enable SRM. These systems can be used to gather and track supplier performance data across sites, business units, and/or regions. The benefit is a more comprehensive and objective picture of supplier performance, which can be used to make better sourcing decisions, as well as identify and address systemic supplier performance problems. It is important to note that SRM software, while valuable, cannot be implemented in the absence of the other business structure and process changes that are recommended as part of implementing SRM as a strategy.

Beyond Strategic Partnerships

Any partnership relationship will obviously affect the company in both formal and informal channels. Though the contract would deem the relationship to be mutually beneficial, Most of the times it is not so black and white or cut down the middle. Many instances would involve one partner wasting precious resources to solve the problems of another partner without any perceived pay off. But this is what defines a true partnership from the sourcing context.

The old tagline of efficient partnerships used to be "Share Information" but this will no longer hold well in today's context, we are in an era of globalisation where it is simply not possible for any single partner to analyse and be responsible for all the important decisions in a particular supply chain.

Also academic research suggest Early on, collaboration can be a hard sell; therefore the focus should be on developing the initiative, getting people on board with the initiative and gaining some momentum. Get the technology involved too early, and focus shifts to the technology rather than the initiative. Once supplier collaboration has gained some momentum, technology can be a significant enabler of sharing large volumes of information. To that end, managing people is vitally important to building a collaborative customer-supplier relationship. It is imperative, therefore, to get the right people in the right positions. From an HR perspective the company not only needs to ask the question "Is this employee the right fit for my company?" but also "Is this employee the right fit for my partners company also?"

Future of Strategic Sourcing from the perspective of Partnerships

Common purpose - The organization and its suppliers work together to develop complementary strategies and objectives and agree to reach these objectives with a common approach and set of values. Implementation of Objective performance measures and value based compensation structures will be indicators of this happening.

Joint processes - The boundaries between partners in business processes, such as product design, development, requisitioning, delivery, invoicing will get more undistinguishable. Technology will enable it to be cheaper and more effective for partners to establish and execute joint decision making mechanisms in vital processes also.

Effective dialogues - The purchasing party and its suppliers encourage communication by creating opportunities, processes, and well-defined communication points - from strategic consultations on the creation of value to tactical contacts targeted at getting the job done right.

Multidimensional relationships- This extends not only in R&D but in several other segments and functions like Marketing, Sales and HR. For eg. If a sourcing partner of a particular company has a brilliant talent development system for procurement personnel in place, then another partner uses this system to train his own personnel.