This explains the linkage of vendor development and control as an integral factor of value on demand chain logistics. A comparison of the traditional purchasing function with vendor development is discussed. Describes the vendor structure framework and analyses the primary dimensions. Further discusses the vendor development strategies and it pros & cons and barriers to vendor development. It concludes with the impact on vendor development and control on the supply-demand chain with elaboration on understanding supplier costs and target costing.
In supply chain management Vendor development is the recent advancement. Various approaches are generated for the development of the suppliers so that the buyer can benefit by developing effective partnership with suppliers. Supplier partnering has been one of the areas of interest in purchasing management (Seetharaman et al, 2010).
Few years ago, concepts like simultaneous purchasing and network sourcing have been planned and effectiveness of mechanisms such as supplier association or Kyoryoku Kai, as they are called in Japan have been studied. At present the focus is on the value stream in logistics. There have been sudden changes in the corporate environment. Markets are undergoing rapid technical change and cost and consumer demands are varying widely (Chakraborthy & Philip, 1996). Purchasers analyse their vendor's performance that is deficient in certain aspects of quality and cost improvement, new technology adoption, financial health and delivery performance. Purchasers have become more reliant on the vendor to meet the rising competition. Vendor development strategies are a necessity for the success of any competitive strategy. It focuses on vendor improvement through training, innovation, improving capacity, delivery lead time and quality of products of their counterparts. Vendor development has an important attribute which is the tiered and networked relationships with the demand chain (Seetharaman et al, 2010).
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Carrying out a vendor development approach depends on the structure of an organisation, demand chain, personnel utilisation and financial considerations. Vendors should be chosen on the basis of process capability, meeting the requirements of the customers by quality workmanship, local licensing and competitive pricing. Vendor development process involves certain problems like lack of consultants and expertise in relation to meeting the requirements, lack of awareness, understanding the benefits, ability to meet the consumer demands and so on(Seetharaman et al,2010).
Authors Leenders et al (1994) discussed how the purchasing function evolved from the traditional procurement service image integrated into a supply chain through improving by the means of improving both internal interfaces and external interfaces. Fung (1999) presented the limitations to the traditional approach to the purchasing and suggested an interactive external exchange relationship involving inclusion of strategic procurement, supplier base management and lean-supply organization. However Fung had not specified the possible costs and issues of implementing a lean supply organisation which is capable of meeting the demand chain requirements (Seetharaman et al, 2010).Traditional procurement used fact-based approach to deal with the vendors and very few people in the organization worried about how the purchase of products was carried out and its quality.
Auer (2000) discussed that the payment for the vendor's development environment is usually an issue and surfaces in debate. Development environment costs include payment for the hardware, software, services required to create the software and connections for the network. But a vendor development environment set up and the payment should be done by the vendors. The author did not mention the components required for the development environment leaving the non-IT-based decision makers confused (Seetharaman et al, 2010).
VENDOR STRUCTURE FRAMEWORK
To make a sensible allocation of the resources to the vendor development tasks, a framework for analysing vendor structures is necessary. Need for such a framework is essential due to the increasing dependence on the vendors for the supply of parts and this allows the organization to gain a point of view and improving the effectiveness of the vendor development effort. The three primary dimensions under vendor structure are
Vendor structure scope
Vendor structure relationship
Vendor structure focus
Vendor structure scope(VSS)
It may be defined as the interdependence between the various units of the vendor structures existing within the boundary. This dimension involves following variables
Always on Time
Marked to Standard
As the geographic scope of its vendor increases the vendor structure scope of the business unit tends to increase. Geographic scope involves domestic, international and global where domestic geographic scope means all vendors are local, i.e. the firm does not do any outsourcing but it could purchase from a domestic supplier that produces parts containing foreign sourced materials. International geographic scope means that firms have their manufacturing units located in more than one country and it is not easy for the manufacturing unit to obtain the material it needs from the host country. There is lack of coordination and each unit follows its own procurement strategy. Global geographic scope implies there is integration & coordination of procurement requirement across the different manufacturing units (Chakraborthy & Philip, 1996).
As the vendor structure scope of the business unit tends to increase as the interdependence between the vendors increases. This involves pooled, serial and reciprocal interdependence. When there is no work flow between the vendors it represents a pooled interdependence." Serial interdependence represents a state where each vendor's inputs are the outputs of another vendor and each vendor's outputs go either to another vendor or to the buyer". When each vendor's inputs are received from other vendors it is called as the reciprocal interdependence (Chakraborthy & Philip, 1996).
Vendor structure relationship
Association between the various units of the vendor structure is defined as the vendor structure relationship. This involves the following variables
Relationship of the vendor structure of a business unit tends to increase as the degree of the task structure decreases. This involves unstructured, semi-structured and structured tasks. In a structured task environment the organization specifies the purpose of the vendor, role, responsibility and activity. In an unstructured task environment the organization specifies the purpose for the vendor and vendor activities are offered with little guidance (Chakraborthy & Philip, 1996).
It involves Long-term contract and Short-term contract. Contracts of length greater than or equal to the average model life cycle of the organization's product are long-term contracts. Contracts of length less than the average model life cycle which are usually for a year are short term contracts (Chakraborthy & Philip, 1996).
Vendor structure focus
Various units of the structure focused in terms of technology and customer base is defined as the vendor structure focus. It consists of the following variables
More the vendors are involved in the part development; the more they are focused on the vendor structure of the business unit. It involves proprietary, black box and controlled involvement. In case of a proprietary involvement vendors develop their own parts and show a greater interest in developing and technological improvement. In black box situation, vendors work on the parts based on functional specification and the change requirement are brought by the organization. Organization expects the vendor to come up with the required product. In case of a controlled situation parts are developed by the vendors on the basis of the detailed specifications. Organization handles the improvement and design and provides it to the vendor for producing the parts (Chakraborthy & Philip, 1996).
When there are less number of customers, higher is the focus of the vendor structure if the business unit. It involves single, multi and mass customer base. Vendors may lose focus in attempt to satisfy multiple customers and their conflicting demands which may lead to decline in their performance (Chakraborthy & Philip, 1996).
These concepts provide a hypothetical base to consider the interrelationship between the various crucial elements in vendor development like structure, technology, relationship, tasks etc
Vendor Development strategies and its pros and cons
Managers have pursued many collaborative initiatives for the performance improvement and supply chain integration such as the Vendor managed inventory (VMI) and Continuous Replenishment (CR) Programs. These programs are adopted by the efficient consumer response (ECR) which has been a medium for the progress of the collaborative initiatives (Barratt, 2003).
EFFICIENT CONSUMER RESPONSE (ECR)
This was initiated in 1992 by 14 trade association sponsor including the grocery manufacturers of America and food marketing institute and benefits could be achieved by excelling in four core strategies such as the efficient promotions, efficient replenishment, efficient store assortment and efficient product introductions.ECR movement issued a report which the proposed the need to "develop a trust based relationship between the supplier and the purchaser by sharing information". This would enable supply chain to become demand driven and produce products according to the customer requirements. Authors Kotzabet et al discussed ECR has developed consistently in both North America and Europe. Authors De Santa et al discussed that expectation had been that there would be a $30 billion of savings delivered by the ECR. However, authors Caltegirone et al suggested that inventory levels rose in the U.S and Brown et al discussed that the service has not improved. Effective consumer response makes the vendors realise the defects in the product and they develop it according to the customer requirements and most of the problems are shared. But this has limitations such as there are too many industries in different regions or countries and individual initiatives and asking them to exchange the information is complex (Barratt, 2003).
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VENDOR-MANGED INVENTORY (VMI) & CONTINUOUS REPLENISHMENT (CR)
VMI is a technique where the vendor alone is responsible for managing the purchaser's inventory policy including the replenishment process. This can work only if the partnership is based on trust with sharing of large number of information. This technique has been adopted by companies like Procter & Gamble and Walmart. Companies have predicted that if VMI is implemented the right way then this would lead to effective replenishment. Weakness of VMI is the gap invisibility of the whole supply chain and the point to sale (POS) data and the level of the backroom inventory data is ignored. Other weaknesses are that it does not allow the suppliers to see the stock and eliminate the unnecessary ones (Barratt, 2003).Benefits of VMI are vendors produce items according to the customer requirements, reduction in transportation costs, prevention of sub optimization etc. Continuous exchange of information between the vendor and customer leads to reduction of the bullwhip effect which is caused by the uncertain demands between supply chain partners (Claassen et al, 2008).
Vendor Evaluation is done on the basis of the performance and correct evaluation is essential as it helps the organization directly and indirectly to improve the quality of the product, reduce the cost and lead times for new product introduction. If the rating is good then it motivates the vendor to improve its performance .Vendor and supplier delivers products of good quality and safely within the delivery schedule. Depending on the feedback received from the customers their performance is evaluated (Pal & Kumar, 2008).
Vendor development programme
Suitable vendors are selected for the development programme. This deals with holding presentations to outline the vendor duties, new approaches, how the vendor's performance will be assessed and evaluated. For example: The ford motor company showed a video "ford cares about quality" to assist with the task. Survey is carried out at the vendor's factory to assess the vendor's capability as a business partner. Problem solving activities is also a part of the program. This program aims at building up an effective business relationship (Lascelles & Dale, 1990).
Internet is highly essential for vendor development .This speeds up the communication between the vendor and the customer and it improves the service quality, increases flexibility in terms of delivery and response time. It has its benefits such as the ability to respond to the customer through e-mails, pick-ups and deliveries can be decided and scheduled, direct communication is possible between the vendors and customers regarding any supply issues or change in configuration in the product, both vendors and purchasers can track the equipment location, vendors can receive orders from International customers etc (Rahman, 2004).
A poorly designed contract is an obstacle for vendor development as it affects the vendor customer relationship. To maintain a working relationship (customer) company's goal and objectives should be clear and a tight contract reduces the risk of failure for both vendor and the customer. At the same time the contracts can be risky in the long run due to the complexities of the involvement of multiple legal bodies, inconsistent motivational factors, and time, contracts are not foolproof can affect the vendor-customer relationship. Outsourcing contract should have a description of the vendor performance and the expectation regarding the quality and service levels. This encourages the vendors to perform even better and work according to the customer requirements and up to the appropriate predetermined standards. Rewarding the vendor company also motivates the vendors to perform better (Platz & Tamponi, 2007).
Outsourcing contracts should create communication infrastructure which creates channel of communications, direction of communications, list of methods of communication etc. Company would prefer those vendor companies who provide warranty for the products produced. Warranty is an assurance that the product delivered will be of certain quality. Outsourcing contract should provide the terms of warranty (Platz & Tamponi, 2007).
According to authors Carter et al the critical aspect of successful vendor supplier relationship is effective communication. Readiness of the buying firm to share information, proprietary information and the strategies would help increase the vendor's performance as they would have the knowledge about the customer requirements. (Krause & Ellram, 1997).
Vendor involvement in product development
New product development (NPD) has become the crucial point for profitability and sustained growth. Vendors are involved in the product development because they have a team of design and technology expertise. The NPD process is often implemented through the creation of a development team which involves the customers and vendors and this facilitates better and a more consistent communication and enhances the product according to the customer requirements. Developing a "committed " environment will enable the suppliers to be more creative and risk acceptant. Impact of vendor involvement depends on maintaining the buyer-supplier relationship to ensure a proper level of integration and performance (Birou & Fawcett , 1994).
Barriers to vendor development
Poor communication and feedback
Misguided vendor improvement objectives
Lack of customer credibility'
(Lascelles & Dale, 1990)
Impact of vendor development and control on the supply-demand chain
The supply demand chain alliances have a major impact on the member firms on the basis of capability and profitability and it affects the Income statement, Balance sheet and cost of capital. Supply demand chain organization focus on the establishment of supply chain partnerships, coordination of activities in all the departments and improved value for end customers. In 1995, to look after the integrated decision making and incorporated physical materials handling, Xerox created a position as "customer supply assurance manager" (Seetharaman et al, 2010). Responsibilities of the customer supply assurance manager are assurance of product availability, satisfying the customer demand, introducing or terminating sales promotion and interfacing with all points of supply chain on a daily basis (Hewitt, 2001).It provides significant opportunities for the competent members of the alliance to reduce expenses, generate better return on invested capital and improve cash flow due to higher customer satisfaction. In supply demand chain partnership, member firms share the expenses of the installation of the computers or other technologies and upgrade the outdated practices etc." Each organization affects the other's profitability in supplier-alliance relationship and the target cost for an item is its selling price less the desired profit. Target costing is a technique where the organization determines the price the market will bear; the remaining amount is the cost for which the firm can afford to make" (Seetharaman et al, 2010).
Traditional approach is being replaced by control through relationship management strategies in supply demand chain management. A conceptual synthesis framework that links vendor structure to demand chain management is introduced for an effective vendor development approach. E-learning and upgrading of skills is crucial for the vendors to perform according to customer requirements. Collaborative planning offers many benefits in terms of increasing the sales through greater product availability.
Internet has transformed the industry by creating easier means of communication and has brought many modifications to improve profitability of the supply chain. Vendor development has become an essential part of quality improvement strategy aimed at improving the business.