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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 processesÂ
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
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
"Developing Strategic Suppliers" is one of the key aspects of successful supply chain stories. In the era of globalization, these alliances with suppliers help the organization develop a competitive edge with efficient and optimum utilization of resources.
However, a lot of factors need to be considered before venturing into a developing partnership with suppliers with a strategic outlook. The need arises because developing strategic partners yields the required results only if the there is strategic fit between both the organization -i.e. the supplier and the manufacturer. Also a proper cost benefit analysis needs to done before such an alliance is made. The results show that "soft" facts such as trust are important for alliance success, but not on their own sufficient. Also "hard" facts such as strategic compatibility and appropriate governance mechanisms have an important inï¬‚uence on alliance success. Careful strategic planning and good partnership preparation are essential for alliance success, but the full value of an alliance has to be developed as it evolves.
There are two main theories which are currently recognized as the main explanations for form existence and inter-firm collaborations. These two main theories are:
Transaction Cost Theory
Resource Based View
The Transaction Cost theory states that a firm should choose organizational mode that minimizes the sum of ï¬xed and continual transaction costs whereas the Resource Based View explains firms as a bundle of resources and alliances arise when a firm needs additional resources that cannot be purchased via market transaction and cannot be built internally with acceptable cost (risk) or within an acceptable amount of time.
Besides these in today's emerging markets, there are two prominent theories that are doing the rounds. One is Knowledge Based Theory which states that alliances are undertaken with premise of sharing and combining knowledge and hence creating value in the process. The other theory is Sociological Theory which state besides economic and strategic viewpoints; firms collaborate in order to derive sociological benefits for example in order to enhance legitimacy.
However, none of the theories clearly enlist the factors that would make a strategic partnership successful. One major reason for this is that there is specific definition of success in a strategic partnership; it varies from organization to organization-some quote longevity while others measure its contribution to improving the strategic position or competitiveness of the allied ï¬rms.
In general, with the recent development like JIT, a dynamic supplier relation is the key for supply chain's success. Hence, strategic sourcing decisions are in effect based on the following factors:
Design and Development Capabilities
Quality Management Practices
Cost Reduction Capabilities
A general model for the factors can be depicted as follows:
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.
Methodology for Developing Strategic Partners
After identifying the factors that need to be considered in developing a strategic methodology for selecting a particular supplier should be finalized. For this a scorecard can be developed to evaluate the suppliers that would generally cover all parameters that could be taken into account.
A typical scorecard is as follows:
However, developing a mere scorecard does not give a clear picture and usually leads to erroneous results. A better framework that can be adopted is as follows
The first step involves the identification of the suppliers followed by data collection; the next step is evaluation of efficiency scores and ranking of suppliers based on DEA model and lastly addressing the managerial decisions associated with the supplier evaluation.
As this framework uses accurate modes like DEA, it is always preferable to adopt such models rather than relying on basic human judgments while dealing with supplier selection and evaluation.
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:
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
Developing Strategic Partners- A Quality Perspective
With companies outsourcing their manufacturing to strategic partners across the globe, the supply chains have become very long. As the sourcing sites are vested in different and distant locations along the globe, it is very impaerative for these supply chains to be quality effective. Any issue in suppleir quality can result in stock outs. Since most of the manufcaturing firms have PPM levels and Corrective Actions as one of their KPI' s for perfrmance, it is very much required that they demand their suppleirs to maintain the same levels of quality standards.
The follwing paractices can be adopted by these companies to improve their own quality by improving their supplier's product and delivery quality.
Measuring and Tracking Cost of Poor Supplier Quality
The cost of poor supplier qaulity (COPQ) may add up to 10% of the company's revenue. The following should be taken into account to calculate the actual COPQ.
Scrap, rework, sorting and processing costs due to poor quality
MRB inventory and processing costs due to inspection failure
Line shutdown attributed to poor quality
Using equipment that is capacity constrained for rework due to poor quality, reducing the overall utilization of the production line
Freight costs due to expedited shipment to customers/downstream plants
Warranty expenses due to poor quality
Recall expenses due to poor quality of products shipped to customers
In a cost recoveruy system, the suppliers are charged back for providing poor quality of components. This is an efficient way of tarcking supplier quality and keeps accoutability check on the suppliers.
Supplier Audits are one of the best ways to ensure that supplier is following the processes and procedures that you agreed to during the selection processes. The supplier audit identifies non-conformances in manufacturing process, shipment process, engineering change process, invoicing process and quality process at the supplier. After the audit, the supplier and manufacturer jointly identify corrective actions which must be implemented by the supplier within an agreed-upon timeframe. A future audit ensures that these corrective actions have been successfully implemented.
Supplier Scorecards are one of the best techniques in using facts to rank the supplier's relative performance within the supply base and tracking improvement in supplier's quality over time. Scorecards also provide a data point into any future business negotiations. Following are the key operational metrics that leading manufacturers track in their supplier scorecard:
PPM of Supplier Components
# of Corrective Actions Last Quarter
Average Response and Resolution time for Corrective actions
# RMAs Processed per month
MRB Inventory Levels
# of Rework Hours due to Supplier Components
% of Actual COPQ Recovered from Suppliers
# of Customer Complaints on Product Quality
Relative ranking of supplier
Performance against benchmark
Engaging Suppliers in quality systemsÂ
ItÂ is critical for manufacturers to engage suppliers in all aspects of their quality management system, so that the supply-base is fully integrated into the QMS being rolled out. Key requirements include:
Supplier should be able to provide quality-related data to the manufacturer without having to deploy a mandated quality management system within their environment. This can be achieved by feeding information from supplier's quality system into manufacturer's quality system (for larger suppliers or ones sharing their production line with multiple customers) or getting the supplier to use a manufacturer's web-based quality management system (for smaller suppliers or ones with dedicated lines for a customer). A web-based quality management system dramatically reduces the cost of ownership for a supplier by providing the right information to a key customer without having to deploy software in-house.
Manufacturer should be able to get every relevant stakeholder within the supply base to use the quality system without having to train every casual user. Emerging capability includes a scenario where an application form is embedded within an email delivered by the system to the casual user at a supplier. When the user opens an email, they hit reply, enter the data in the embedded form and hit send. The data in the form is processed by the system as if it came from the screen. As a result the user does not need to learn to navigate the quality application, yet can participate in the quality system.
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.Â 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. Managing suppliers with a one size fits all approach can stretch resources and limit the potential value that could be derived from strategic supplier relationships. Supplier segmentation is about determining what sort 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 extracting value from key supply partners for improved end offerings for the consumer. One tool for monitoring performance is the two-way performance scorecard. A balanced scorecard includes a mix of quantitative and qualitative measurements. Advanced organizations conduct 360 degree scorecards, where feedback from suppliers is also taken to monitor performance. 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.Â
System Collaboration - Includes joint ventures into research and development, systematic information sharing, demand forecasting and process reengineering.
Technology and Systems - There are a multiple technology solutions to enable effective SRM. These systems can be used to gather and track supplier performance data. The benefit is a more complete picture of supplier performance, which can be utilized to make better sourcing decisions, as well as identify and address supplier performance issues. 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.