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With the increase in the pace of innovation and technology the number of choices for the customers has been increasing with the increase in the market. Thus for an organization to sustain this competition in the growing market they have to have good relationships with the suppliers and customers who are the main resources for their revenue's and turnovers.
In the past companies used to handle all of the operations themselves, later on outsourcing has been introduced and the company used to handle only the core business but now the scenario has been changed to such a way that the suppliers are the one who are handling most of the company's operations like R&D and strategic supplier management. (Example: ABB co. is the company which handles both paper machinery and cruise boat engines).
One of the main aspects to sustain is growing the supplier relationship because they are the ones who recognise the need of the goods and make them available to the customers (http://wiki.answers.com). So Supplier Relationship Management is important for any organization.
Supplier Relationship Management is defined as''Â An information system that automates sourcing, purchasing and the management of daily supplier relations. It provides modules for vendor identification and selection as well as direct procurement.'' (www.answers.com)
Suppliers are segmented traditionally as following:
Commodity: where SRM is of not much use as they provide one off good or service to the main industry
Performance Management: where they are not important strategically and they provide off the shelf services or short to midterm services. This is where the companies are concerned more about cost and service levels
Development: where the importance of SRM is from mid to high level services with some strategical value.
Partner: the importance of SRM is high as they undertake a part of the organisation and provide with high level of services. They work with strategy, shared values and benefits.
According to Laurence Moran, CPO of telecoms firm Cable & Wireless International, "No one individual or specific function owns the supplier relationship. It has to be a co-ordinated and controlled activity facilitated, guided and governed by procurement."
Why companies should have relations with the suppliers? According to Shankar Ganesan's frame work:
Mutual dependence: extent to which they can rely or trust each other, and
Dependence and Trust: This depends on seller/buyer satisfaction, uncertainty in the environment, reputations and specific investments.
The main advantages of procuring a SRM according to Alan Day, Managing director of State of Flux are:
Accuracy in model costs
Handling of risk management
Metrics use to bring success for both the organizations
Use of knowledge from both the organizations
Ready supply of goods and services
Designing and Planning of strategies
These may vary with depending on the sector where the SRM is being used, it will be different for IT, Financial, Marketing, Production, etc.
Ninian Wilson, Director of group procurement of Royal Mail in Uk says that is not always better to procure because "Procurement professionals need to take responsibility for assuring supplier performance throughout the lifecycle. How can they do this if they don't own the relationship?"
Issues the firm faces while managing relationship with suppliers:
Let's consider the VOLKSWAGEN group which is very active at keeping the relations with the suppliers. "Partnership is a key element of our long-term strategy. In these turbulent times, the Volkswagen Group Award recognizes successful cooperation" (BNET 2005).
Volkswagen is the fifth largest automaker in the world(2005). It is based in Wolfsburg, Germany, it is Europe's largest and world's leading manufacturers.
It has a vision for 2015, "Together - Best in Class in Customer Value and Cost". The main objective of this vision is to maximize the long term relationship with the customer about the quality, costs and innovation.
In order to achieve this vision they are going to combine their innovation with that of the suppliers. In the intense combination of suppliers into the core processes the firm has faced problems on some of the issues like costs, quality and innovation. So in order to overcome this they have come up with a platform presented by Garcia Sanz 2007.
So they have been divided into 3 parts namely the costs forum, quality forum and the innovation forum. As a result the production been increased and also the production hall issues have been reduced to half (Automobil-Produktion 2007).
Regarding the relations with the suppliers, the VW group covers the governance modes. The strength of the original equipment manufacturer depends on how complex the component is and also depends on the market structure.
The VW group has distinguished three models of supplier management ( Garcia Sanz 2007):
Central control: This made the supplier model to be more transparent and to gain effective control. Thus the VW group gains the control in order to add supplier collaboration.
Modularization: The supplier has to reduce the time to market processes.
Strategic partnership: This is very selective because it involves the OEM and suppliers. So supplier has to take care of development.
Why does the company need to trust the suppliers is, in order to reduce the cost, improve the quality, innovate, and also to get ready supply of materials for the long term. In the same way why the suppliers need to trust the company is to reduce the costs, reputation, follow up projects, innovation and quality.
The suppliers need to be evaluated every time in order to have a check on their performance on the quality of work. So the company has made a balanced score card in which the reviews will be stated every time. If any of the supplier's performance is not well then the site will be blocked by the whole of VW group. So in order to gain reputation the suppliers will work harder without making any mistakes and also the company needs to train the executives with the changing technology so that they won't make any mistakes which will otherwise be of a greater loss to the company.
Dr. Martin Hofmann, VW's Group Executive Director for Purchasing Process and Information Management says that, "We need knowledgeable employees who can focus their energies on high-value activities and driving new efficiencies, spending as little time as possible seeking and wading through information."
Firstly they have faced a lot of problems to achieve their vision because the company is very globalised as a result the user interfaces, languages, time zones, architectures where totally localised which made the employees and the suppliers to take much time searching for retrieving, analyzing, validating and moving information.
The company needed to make its employees more productive because of the problems with the supplier-facing processes. In order to make it up with the changing supplier environment the company had to mix up its processes and information. So as a solution the company made a workplace which is effective for the employees in such a way that the processes have been streamlined for them and also to the suppliers.
Potential drawbacks of supplier relationship management:
The buyers need to make sure that they select the right companies because it more important than supplier relationship with the industry. "Purchasing needs to know a great deal more about supplier capabilities than it did when everything depended on a bid/buy relationship," confirmed Purchasing's Ernest L. Anderson.
Supplier relations have to be made very carefully before handling the whole supply system. Because you can't take risks at just letting them change the whole system according to their wish because sometimes traditional processes have to be followed in order to maintain the customer relationship and to gain loyalty. Medium businesses and thriving business can be able to handle those kinds of situations than those of almost closing or company which is in losses. Start up companies also need to study more about their suppliers than studying more about their costs. Depending on the category of the product the search has to be changes because let's consider a design engineer, he concentrates mostly on the designs where as the production or purchases professionals mainly depend on reducing the costs. The main and general objectives include quality improvement, cost reduction, innovative strength, handling of goods, paperwork reduction, etc. In order to reach these objective the strengths and weaknesses have to be studied a lot before taking any further step.
''Poor supplier performance is not the only risk a purchaser faces'' in situations where it has linked with a bad supplier, noted The Economist. Also one main risk that may happen because of supplier relationships is that they may leak the trade secrets to the competitors or may use it for themselves in establishing a new company. By completely letting them involve in the operations it may lead the organization to hollow itself.
This may happen mostly in the fast moving or innovative companies.
One of the main issues that the Volkswagen company has faced is they trying to expertise their employees and also that of the suppliers to get used to different technologies and innovations and also some other environmental issues when they were changing their company base from China to the USA. In order to achieve the vision 2015 they faced the problem of making their employees capable of handling the work, be productive and stay ahead in the competition. This was all because of the increase in complexity of supplier facing processes. So in order to overcome this issue they have come up with ''An On Demand Workplace that includes an enterprise wide portal for employees and suppliers whose sensing, analytic and workflow capabilities have radically streamlined the way employees access and act on information.''(Garcia Sanz 2007)
In order to achieve their vision they have bought changes in their core processes because of this they had lot of issues like the changes in the commodity prices, environmental issues and also the volume of automobile purchases have been increased and also the suppliers had withdrawn. Even at this situation they were able to handle things with their long term competitiveness and process efficiency. This was possible because of the way how the suppliers and employees gained knowledge from the expertise. "Knowledge management has become one of the most critical success factors in the auto industry," says Hofmann
So in order to grow or handle or make up a new relationship with the suppliers, these are some of the ways of evaluating:
On time service
Ways of communications
Capable of producing goods when needed