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This report highlights the implications for organizations that are attempting to develop collaborative relationships with their suppliers. Hawkins (2010) states that the world is changing at much faster rate, than, probably, we could have ever visualized. Globalization has become a fact of life and IT has bridged the market place. The networked economy is creating alternative business models based on complementary alliances. Although supply chain is giving its way to the concept of 'value chain' but one factor has remained constant. Building a good supplier relationship with the rising cost of capital and economic challenges, we need to move towards 'partnership sourcing' both in public and private sector.
Partnering arrangement is becoming global phenomenon these days and Charted Institute of Purchasing and Supply (CIPS) defined it as " An approach with an attitude, or management ethos, (towards selected suppliers) of openness, effective communication, close collaboration and co-operation, trust, honesty, transparency, sharing and mutual benefit" (CIPS, 2011). Partnership Sourcing Limited (PSL) states that this relationship actually starts with one to one relationship between customer and supplier. Previously these were contract-based relationships that were limited to the self interest only. But now the paradigm has shifted to a more collaborative working environment where each another understand the needs of others and thus utilizes the joint knowledge and capabilities of both organizations to create new and added value relation (PSL, 2011a).
There are developments made to bring improved collaborations and partnerships. The major development is the introduction of world's first standard in business relationship management, BS 11000. This provides guideline for partners how to use methodology, gaining competitive advantage through collaborations and ultimately make sure the value added results for the customers (Foster, 2011).
In the content of purchasing and supply the focus should be only on where collaboration can add real value. However collaboration arrangement can also result into cost reduction, resource optimization, improved performance, expanded capability, joint product development and streamlined management. Focusing and concentrating on the core competencies what each party have in a complementary business process, many aspects of supply and delivery network can be optimized both in domestic and international markets (Supply Management Guide, 2010).
Source: (PSL, 2011a)
Case study of Telemetry Research
Telemetry Research is a New Zealand based high-tech Company that takes products developed from physiological research to the market. The company was built on intensive research in the field of inductive power transfer and in monitoring physiological signals such as blood pressure. Now it has grown to full service company providing sales, marketing and manufacturing in addition to ongoing research and development (Electrical Technology, 2011). There were problems in the management of supply chains because there were numerous suppliers. As multinational companies it had to deal with different time zones, multiple currencies, language and cultural problems.
Its production manager Wayne was spending 40 percent of its time on purchasing and office administrator was not able to concentrate on administration work and telemetry research was thinking of hiring another person for the job but the issue was whether the person would have same negotiating and purchasing skills .As the demand for the products was increasing so it had to consider the ways to streamlining its internal processes to match high demand so company decided to form a collaboration arrangement to create value for customers.
Teletech is an importer and distributor of electronic parts, and wire solutions which is involved in manufacturing and import of wire harnesses and low-pressure molding products. These two joined to form a new brand, Fero, in order to offer its manufacturing customers an integrated approach to electronic and wire technology (Electrical Technology, 2011).
Fero took over the sourcing, pricing, purchasing, reporting, warehousing of telemetry research's stock. Now its stock items have grown from 400 to 900. This has happened because they have changed existing spreadsheets with a secure and tailored inventory management system. It is operated with material requirement planning (MRP) software to help manage stock levels and plan the purchasing process. It has also resulted in the reduction of Waynes input in purchasing to 10% and now he can concentrate other operational matters (Electrical Technology, 2011). As a result that Telemetry Research is enjoying the many benefits of the collaboration purchasing model and taking the next consideration will be looking to further optimize the supply chains. The introduction of advanced inventory control system has enabled it to achieve economies of scale and focus on its core competencies as well.
Nonetheless collaboration in any form is not an easy option. It requires major investment and resources because there are long term relationships involved which can be better negotiated with capital capacity. This process involves different phases and can change continuously within an organization. So it requires lean and agile setup to respond quickly to these changes. Strong executive sponsorship coupled with clear business objective is needed to form a good partnership relation. As majority of the decisions regarding price squeezing or blocking comes from top and everyone across the organization can appreciate the potential for a value chain approach. Most difficult part of creating a collaborative approach comes with the negotiation process. The implication of how negotiation is conducted can be far reaching and will set the tone for the future relationships. Sometimes managers have only experienced the win-win approach, but if these relations not managed effectively will turn into certain disadvantages (Supply Chain Guide, 2010a).
ALSTOM and Steelscraft
ALSTOM Power UK Ltd manufactures high efficiency gas turbines and sells them internationally. Steelcraft is a manufacturer of precision components for aerospace, nuclear and power engineering. It is a key supplier of ALSTOM. The initial relationship was strictly limited to that of customer and supplier. Although a regular supplier, Steelcraft had to compete for each contract through competitive tendering. But in 1999 they form a partnership relation. It achieved economies of scale as steel craft abruptly reduced 15 percent in the price of components and in turn Steel craft received a five year contract and financial assistance (PSL, 2011b). But there were also problems in execution of this partnership as Steel craft had to take over existing employees and equipment within the ALSTOM facility in Lincoln. This raised questions among employees about losing their rights and job security. Steelcraft directors were also concerned about the element of risk involvement in accepting a 15 percent reduction in prices. This major cut in the cost would affect the company's profits. ALSTOM director held meetings with the employees and their trade union representatives. But the problem was soon resolved as the demand and orders was increasing and they require an additional labor to match this demand.
While the recruitment and training process was taking place, purposeful and urgent discussions were taking place within East Midlands Development Agency (EMDA) and local authorities on the property front. ALTOM proposed the development of a Technology Park, which could be used by a number of key suppliers to ALSTOM. A consortium was established, which included Lincolnshire County Council, North Kesteven District Council and EMDA. Agreement was eventually reached on the development of a three hectare Technology Park, approximately three miles from ALSTOM's facility in Lincoln. This will house a purpose built facility for Steelcraft (PSL, 2011b). And now partnership has resulted in a very good customer supplier relationship. There were certain cost and employment issues but with the development of process they build confidence in each other and thus not only form a good relationship but also achieved their objectives.
Partnership sourcing has resulted in the decrease of number of suppliers from which an organization typically procures materials, components and services. And in some event of collaboration there is only one supplier for the sole supply of an item. There are reported cases available where major supply chains disruptions have been caused by a failure at a single source (PSL, 2011c). The development of collaborative arrangement evaluates through different phases. So it is not really logical to rely only on single supplier because if some disruption happens, the whole supply chain is disrupted. That's why today challenging business environment requires supply chains having lean practices with an agile response. So responsiveness and resilience must be the twin goals of supply chain design and management.
The pace of change has been increased and the nature of developments within and among organizations is changing. The revolution in electronic businesses has changed customer supplier relations. Introduction of faster ways of communication like internet and mobile phones has made companies to think about the alliances with the companies that have these modern tools. The focus on branding and people rather than goods and capital has made organization to keep the focus only on their own core competencies (PSL, 2011c).
The business models of late 1990s was based upon the search for greater levels of efficiency in supply chains. There were opportunities for industries to get cost savings by focusing on inventory reduction. But this model was good with stable market conditions. Now the market has become very uncertain and unstable. Certain commodity prices and political implication changes the cost of complete supply chain (PSL, 2011c).Recent turmoil in Egypt resulted in disturbance of complete supply chain of oil because majority of the supply of oil passes through Suez Canal. The operation of canal was closed temporarily closed due to political instability. The disruption in this supply chain resulted sharp increase in oil prices and whole world has to absorb its adverse effects.
The globalization of supply chain has although resulted in cost reductions. Because in offshore sourcing and collaborative arrangements internationally utilize cheap labor opportunities which result in cost reduction. But it has also exposed supply chains to the risks of extended lead times, greater buffer shocks and potential higher level of obsolescence, particularly in short life cycle markets. The increased cross border mergers and acquisitions have also consolidated the supplier base in the global world (PSL, 2011d).
Do relationships matter in supply chains?
Collaborative relationships and partnerships have become very popular these days, with the public sector and government leading the charge. However, changing the nature of a relationship from simple contracting to integrated operations raises expectations and thus increases the chances of disappointment and irritation (PSL, 2011e). As we move towards the need for a more agile and interdependent business models the glimpse of risk should be high on the profile of considerations. Alliances are a valuable option but they rely on the parties having common objectives and a culture of sharing responsibility.
Despite a personal commitment to partnership and its potential value, it must also be appreciated that not every relationship is a partnership. Relationships are a factor in every business context and that understanding the nature, depth, value and long term implications of that relationship are crucial to delivering best value. Yet in the majority of cases the training programmes that are available remain focused on command and control concepts that fail to recognise the changing more fluid face of the business outlook (PSL, 2011e).
Whether customer, supplier, alliance partner, or in the context of internal divisions, relationships are a critical part of operating efficiency. Whilst we should not detract from the discipline of effective processes and good governance, if we are to exploit innovation then a proactive approach to relationships, rather than the traditional head in the sand position, are important. If the traditionalist would for a few moments look back on their successes I would suggest they would find good relationships at the core (PSL, 2011e). The transition from a mere relationship to a collaborative arrangement consists of different phases. It can affect the operational role of supplies function due to any kind of problems in the relationship between partners but it will result in a good strategic alliance in the long run adding value to supply chains.
Decentralization, complexity and alternative more variable trading approaches the vista of CSR and sustainability are becoming as serious concerns for business leaders, particularly where this may reflect back on reputation. Sustainability though not simply in the sense of environmental and ethical trading but more basically in terms of continued wealth generation and supply security. Relationships are very important and facilitate success, companies make contracts but people make business. In fact we contract for risk and failure; the more dependence we place on electronics to bridge the divide the less we cultivate the relationships that make things happen. The following chart perhaps reflects these views and has provided lively discussion when presenting the importance of relationships, particularly in the context of partnership sourcing.
Source: (PSL, 2011e)
The value of relationship has become very important. In some events the relationship is more important than the contract and failure to establish the interface can even stop a good deal being done. It is also important to recognize that contracting approaches and negotiation styles can enhance or damage the downstream performance (PSL, 2011e). Thus before forming an alliance partners are really careful about the nature of customer supplier relationships. There are questions regarding creating values for the supply chains and businesses as well. Because selecting a weaker partner may deteriorate the functions of supply chains and ultimately major stakeholder has to suffer due to this bad decisions.
Establishing sound relationships focused on business aims and drivers are common sense but sadly as we become more systemized it's not so common. The initial question was 'Do relationships matter in supply chains' it is certain that they do but each organization needs to understand how these fit with the business strategy and ethos of their operations in supply chains. Technology can facilitate communication and speed transactions but it is only part of the equation and failing to recognize the so-called soft issues may completely negate the effectiveness of the process (PSL, 2011e).
On the whole, partnership sourcing is becoming a major force to integrate the optimum resources in the world to get maximum benefits for the businesses. Focus is tending to shift from price to cost and from supply chain to value chain. On the other hand, there are difficulties in forming long-term relationships as the process of integration takes time to build confidence among customers and suppliers. Furthermore future implementations of the strategy can be impacted as building good customer and supplier relationships with raising cost of capital and economic challenges would find partnership sourcing at the core.