Chapter 1Dynamics of relationships

Relationships and the relationship spectrum

Basic features of relationships:

• Long-term
• Future focus
• Links and ties between the parties
• Commitment

Relationship drivers are key values that build relationships e.g. trust, transparency, reciprocity etc.

Relationships can be viewed on a continuum from close commitment to more distant. A close relationship is not necessarily always best; it is important to prioritise certain relationships.

Internal and external relationships

The inter-business external supply chain refers to other organisations in the supply chain including raw materials, manufacturers etc.

• Parts of the inter-business supply chain could be vertically integrated within the same company

The internal supply chain refers to the flow of information, resources etc within an organisation. The make vs buy decision is a decision between internal and external.

Procurement function might become an internal consultancy when procurement activities are done by part-time purchasers, or there are complicated multi-functional purchases.

Internal relationships would have the following characteristics:

• Basis of agreement: no legal contract but some sort of agreement, that could give rise to misunderstanding
• Costs: maybe not a direct fee but costs accounted in some way
• Personal relationships and internal politics may exist

There are 3 types of stakeholders in an organisation:

• Internal: within an organisation
• External: no direct dealing with the organisation but have an interest in its activities
• Connected: direct legal or commercial dealing with the organisation

An organisation might be organised in a functional organisation structure, e.g. procurement, finance, marketing etc. This allows for cost-effective scaling, but can cause barriers between functions.

• Cross-functional teams may exist to bring individuals across different functions.
• There might be cross-organisational teams that extend to representatives from suppliers / customers

Relationship spectrum

The spectrum is a model describing different levels of closeness, ranging from adversarial to 'co-destiny'.

From a procurement perspective, relationships can range from spot buying to partnerships, according to regularity and structure of trading.

A competitive relationship is likely to result in a win-lose, and is characterised by distrust, little recognition of mutual interests.

• These relationships are transactional, and the buyer might use multiple suppliers to induce competition

A relational approach creates shared benefits, and potentially a win-win situation. Long-term relationships could be developed with a small range of suppliers.

A relationship lifecycle ranges from:

• Birth starts with selecting suitable suppliers. Decline is when relationships have achieved their aims and lead to termination

Relationship portfolio analysis

Relationship purchasing is an approach that establishes strong relationships with suppliers, deriving added value for both.

Value measures the worth of something and can be measured in two ways: cost of production and price that consumers are willing to pay.

• Added value is the margin on the cost that the customer is willing to pay due to the service provided by the company.

Portfolio analysis and segmentation: categorising firm's suppliers according to importance, volume, risks etc.

• There are different types of risks: supply risk, supplier risk, environmental, demand etc.
• Risk = probability x impact
  • Probability as %, and impact as a number from 1 to 10

A risk assessment grid might be used, measuring likelihood of occurrence against impact on the organisation.

A supply positioning model is a tool to establish what kind of supply relationships should be developed.

• Pareto principle: 80% of spend is with 20% of the suppliers.
  • This means that procurement function should focus on the critical few suppliers, and maintain the rest
• The Kraljic matrix, mapping financial risk against complexity, is also a useful model

A supplier preferencing model is a tool for the supplier to establish its preference to deal with a buyer.

This is useful to consider for SRM, because it shows that a buyer needs to maintain its attractiveness to the supplier in order to get the best deals / attention.

If a supplier positioning model and supplier preferencing model match (i.e. both buyer and supplier view each other as strategic, or routine), then things are straightforward. If there's a mismatch, an SRM action plan might be required so that the buyer reduces its exposure to risk of breakdown.

• SRM action plan needs to consider the current state relationship, organisation strategy and state of supply market.

The competitive environment

The supply environment can be seen as a group of enlarging circles. On the inside is the procurement function, then the organisation, then the micro environment and lastly the macro environment.

• Procurement influences the internal environment by ensuring the flow of items into the organisation
• Procurement influences the micro environment by managing supplier behaviour and enhancing the organisation's competitive advantage

The macro environment is outside of procurement's control.

The external environment has three influences on an organisation:

1. Threats (from legislation, competition etc) and opportunities (technology, consumer demand etc)
2. Source of resources needed by the organisation
3. Contains stakeholders who may influence organisational activities

The five basic market structures are:

• Perfect competition
• Monopoly
• Imperfect competition: lots of suppliers with differentiated products
• Oligopoly: type of imperfect competition where there are a low number of large suppliers
• Duopoly

Porter's 5 Forces

• Competitive rivalry within the industry / market (this is the main one)
• Suppliers' bargaining power
• Buyers' bargaining power
• Threat from potential new entrants
• Threat from substitute products

The potential weaknesses of the 5 Forces model are that it focuses on profitability, only considers 5 factors and is designed at the strategic business unit level rather than whole organisation.

Competitive sourcing procedures, such as competitive tendering, e-auctions etc are the best guarantee of quality and price because they promote equal competition.

• There might be a political need to increase competition in a supply market, especially for the public sector, by encouraging new entrants, collaborative sourcing and global sourcing
• But competitive sourcing may not work if it deters new innovative suppliers who can't compete on scale, or prevents long-term partnerships from forming

Competitive advantage

• This could be through low cost or differentiation of products

Porter's strategies for competitive advantage

Cost leadership: important form of advantage in price-sensitive markets.

Differentiation: key form of advantage when a company is faced by a strong low-cost competitor.

Competencies: activities by which an organisation deploys resources effectively. Two types of competency:

• Threshold: basic capabilities that need to support the organisation
• Core: distinctive, value-creating skills

Value-adding supply chain relationships

According to Porter's value chain, each organisation has primary value and secondary value activities:

• Primary value activities: bringing resources into the organisation, transforming them, and moving finished products to consumers
• Secondary value activities: supporting the primary activities

Primary value activities have 5 areas:

Secondary value activities include HR, Technology and Procurement. Procurement supports primary value activities by fulfilling the 5 Rights, providing information to marketing and sales, managing outsourcing of logistics etc.

Activities within the value system are interdependent, forming linkages.

Activities that add cost without adding value are waste activities.

Added value: Organisations can add value by enticing customers to pay more (with additional features), or reducing costs. Procurement can add value by cutting costs or increasing operational efficiency.

• One way for procurement to add value is by reducing inventory size while ensuring that there is enough stock to meet service provision levels. Just in time (JIT) could be used.

Pricing management: managing input costs by ensuring that the organisation gets optimum prices for routine and leverage item procurements. This will involve price analysis, cost analysis and price leverage.

Quality

Quality control: systems for detection and correction of defects e.g. inspections.

Quality assurance: systems for prevention of defects (more proactive).

Quality management system (QMS): coordinated activities to continually improve quality. Total Quality Management (TQM) is an approach to quality that is applied across a company's entire supply chain.

Supply chain management (SCM)

SRM and SCM are different:

• Supplier Relationship Management (SRM): mainly focused on relationship between buyer and immediate suppliers.
• Supply Chain Management (SCM): looks at all interactions / linkages between all organisations in the supply chain.

Lean thinking: a three-pronged approach focused on quality, waste elimination and employee involvement.

• It's predicated on using less of everything
• Key principles include specifying what creates value, identifying all steps in the value stream, focus only on these steps and continually remove layers of waste

Agile supply: focused on using a responsive supply network to exploit profitable opportunities. While Lean focuses on removing surplus flesh and bulk, Agile is quick in movement.

• One view is that Lean is most relevant when cost and quality are paramount, whereas Agile is important when service levels and innovation are key.
• Agile is ready to accept stock as long as it makes sense to hold stock. For example, there might be late customisation of stock to suit customer orders.

Chapter 2Processes and procedures

Processes in sourcing

For important items, organisations might categorise certain suppliers as:

• Approved: supplier satisfies basic criteria
• Preferred: supplier has good track record and user depts are allowed to order from them without further checking

For critical inputs, a more rigorous procurement process may need to be followed before invitation to tender.

Value for Money: this is a function of cost and quality. It involves satisfying the 3Es: Economy, effectiveness and efficiency.

Types of tendering:

• Open tendering: tender is open to any potential bidder
• Single-stage selective tendering: potential suppliers are pre-qualified and 3-10 suppliers are invited to submit tender.
• Restricted/two-stage open tender: partly pre-qualified as advertisement of the tender is restricted to certain technical journals, websites etc. The prospective suppliers are invited to compete.

Selective tendering is often used when the buyer has a choice.

A weighted-factor tendering system might be used to balance price and non-price criteria, and systematically score them. This involves developing selection criteria (factors) and weights for them.

Post-tender negotiation (PTN) might be used with the first-choice supplier, if flagged in the ITT, to potentially improve the supplier's offer in dialogue.

Compulsory competitive bidding might be a feature of public sector procurements in order to ensure fairness and equality of supplier access.

Functional organisations

Organisations are often grouped into functions e.g. finance, procurement etc. For some purchases, procurement may form part of a cross-organisational team (COT) to collaborate.

• A matrix structure is one way of formalising cross-organisational working. It is dual authority (i.e. employees receive direction from functional and COT managers)

Practical stakeholder management

Contribution per unit of output: this is the selling price of a unit minus the variable cost of producing it. This must be enough to both cover the business's fixed costs and make a profit.

• Modelling contribution will allow procurement to understand where the supplier's breakeven point is.

In a long-term relationship, there might be transparent sharing of information in two ways:

• Open book costing: supplier shows its costs to the buyer, to prove that they are providing a reasonable price
• Cost transparency: both the buyer and supplier share their costs. This is more mutually beneficial and collaborative

Key principles for cost models:

• Understand the drivers of costs
• Be specific and simple
• Calculate TCO rather than just upfront price

Price elasticity of demand (PED): this is the degree to which demand is sensitive to a change in price. I.e. demand is elastic if it is more sensitive to a change in price.

It is calculated by:

• If PED is elastic, supplier revenue rises as price falls. If PED is inelastic, revenue falls if price falls

Early supplier involvement (ESI): this is a way of leveraging supplier expertise and know-how earlier in the procurement process, for example when building specifications. There are 4 types of ESI:

• No involvement: supplier only provides feedback and price for buyer's design
• White box: informal consultation
• Grey box: joint development activity
• Black box: supplier-driven development of the product

ESI should have a confidentiality clause since commercially sensitive information will be shared between the buyer and supplier. If it is particularly sensitive, an NDA should be appended as a schedule.

Use of KPIs: KPIs drive behaviours and change based on incentives. They can be based on cost, quality, time etc.

• For simple contracts, they could just be quantitative measures of numerical data e.g. target cost.
• Qualitative measures require more work: e.g. survey responses, communication etc
• If the buyer-supplier relationship is stronger, KPIs could be expanded from product-level to the relationship-level e.g. establishing shared goals, and measuring achievement of these

Purchaser-supplier satisfaction model (search this up for diagram)

• Axes measure purchaser's satisfaction and supplier's satisfaction
• There are 4 quadrants. In the bottom left, both parties are dissatisfied, and in the top right, both parties are satisfied
• In bottom right and top left, one party is satisfied and the other dissatisfied
• A 45 degree line from bottom left to top right is the line of stability. Moving along this line indicates equal movement for both parties. Staying on this line creates less pressure for change as both parties are equally satisfied

Risk management and continuity of supply

For bottleneck and strategic items under the Kraljic matrix, continuity of supply is important. Actions that procurement staff need to take include reviewing critical supply contracts for liability clauses and developing business continuity plans (BCPs).

• BCPs will set out alternative actions to be taken, other sources of supply etc

Risk management is how an organisation addresses risks to their activities and mitigates them. Risks to supply continuity can be identified through risk analysis exercises, monitoring risk events, engaging industry stakeholders etc.

A risk register would be maintained, outlining identified risks to supply continuity, risk owners and mitigation actions.

A popular risk management strategy is the 4 Ts:

Terminating relationships

Relationships could be terminated for intrinsic reasons (a change in circumstances within the relationship) or extrinsic reasons (reasons from the external macro or micro environment).

A relationship may first decline, and then be followed by terminal breakdown when continuing the relationship is no longer tenable or beneficial.

• If the relationship is moving towards termination, it would make sense to move from a partnership to a more arms-length relationship, as this withdraws valuable resources from an unprofitable relationship
• One could even move to an adversarial relationship to squeeze the last bit of profit out of the relationship
• Moving down the relationship spectrum is a responsible way of easing away from the relationship in a more manageable way for both parties

An exit strategy may need to be developed, with procurement staff understanding when the contract should be terminated, period of notice etc.

A fixed delivery contract expires upon the completion of the subject matter e.g. delivery of the goods. Payment is made and contract is finished.

A term contract expires on a set date. It is good practice to notify the supplier of the upcoming expiry and what the buyer will be doing next upon expiry.

• Contracts with no set end date will usually contain terms under which it can be terminated, and break clauses with notice periods
• Very few contracts have automatic renewal clauses (evergreen contracts)

A relationship could be terminated amicably or in a hostile manner.

• Amicable termination: terminated in line with existing contract, or under the terms of a new contract
• Hostile termination: e.g. a breach of contract or poor performance resulting in termination.

A contract could be terminated for:

• Poor performance of contractual obligations
• A party being liquidated or going bankrupt
• One party exercising the break clause in the contract

Legal advice is nearly always used when a contract is being terminated.

Alternative dispute resolution (ADR)

ADR is a quasi-legal way of resolving conflicts. There are many types of this:

• Consultation: causes of conflict are discussed, and the supplier gives their input upon the problem arising, or before it arises
• Conciliation: conflict discussions are facilitated by an impartial third party. The conciliator makes constructive suggestions only
• Negotiation: both parties discuss issues in a structured way and seek constructive compromise
• Mediation: this may follow conciliation if a voluntary settlement isn't reached. An independent person is appointed as a mediator who will make a formal proposal / recommendation as a settlement to the dispute, but this is not binding
• Arbitration: this may follow unsuccessful mediation. Most contracts have an arbitration clause. An independent person provides a judgement that is binding on both parties
• Litigation: legal action over a dispute that is resolved in the courts. Legal fees are costly and may take a long time to resolve. The conflict details are also public, unlike the other ADR mechanisms which are in closed proceedings

Litigation is seen as last resort, and it's common in contracts to stipulate that disputes first go to arbitration.

• Arbitration is the most commonly used form of ADR for international contracts because parties are in different legal jurisdictions. Avenues such as the ICC court of arbitration or UNCITRAL arbitration code may be used
• Arbitration and litigation tend to lead to win-lose solutions and are costly
• ADR methods such as conciliation and mediation are increasingly popular for the above reasons

Intellectual property rights (IPR)

There are different types of IPR:

• Patents: if an invention works, the inventor can register a patent to prevent others from using it for a set period of time, without permission
• Trademarks: a sign which is represented graphically and distinguishes a product from another. Trademarks can be registered
• Designs: design owners have design rights. These don't have to be registered to be protected from others copying them
• Copyright: the right of an author to prevent others from copying their work. This doesn't have to be registered: it is automatic
• Confidential information: a party may have a right to prevent another party from releasing its confidential information that it holds.

When a contract ends, IPR reverts back to its original state. However, jointly created IPR is more complicated, and should have been covered in contract terms.

• A confidentiality clause is generally included. An NDA is appended as a schedule if stricter confidentiality is needed
• The most important aspect of security following a termination is online security
• Personal data that is processed by one party on behalf of another is covered by GDPR in the EU and the Data Protection Act 2018 in the UK
  • This requires the data controller and data processor to have a contract between them covering their GDPR responsibilities
  • There are principles covering storage limitation (data should be kept only as long as necessary), processed with confidentiality and security, and have clear accountability for how it is processed

Employees and continuity of supply

Termination may affect employment contracts of staff if an outsourced service involved staff moving from the buyer to the supplier. The UK's TUPE Regulations preserve employees' rights when a service provision change occurs.

• When employees are transferred to a new employer, they move under the same T&Cs
• The old employer has a duty to provide employee information to the new employer before the transfer occurs. This is called employee liability information

If a contract is terminated and supply is still required, the buyer needs to take steps to ensure continuity of supply. A COT might be set up, new suppliers may be engaged etc.

Supplier base rationalisation may involve fewer multi-source agreements, and more single-source agreements with closer buyer-supplier relationships. This, however, creates a reliance on particular suppliers.

Particular themes in an exit strategy include:

• Parallel running: supplies by both outgoing and incoming suppliers may occur in parallel for a transition period. This should be supported by all parties
• Quality / timeliness of supplies: the quality provided by the outgoing supplier should continue to meet the KPIs. The same goes for the incoming supplier
• Data should be shared from the outgoing supplier to the other parties
• Outgoing supplier's personnel: the old supplier's personnel should be maintained to meet the demand during transition. Service quality shouldn't deteriorate when the contract is due to end

Chapter 3Partnering

• It makes sense to form partnerships when spend is high, the supply market is complex, there is lots of innovation required etc
• The downside is reliance on the supplier

There are different types of partnering:

• Limited involvement: there is a coordination of objectives and operations in one area, and it's relatively short-term
• Extended scope: arrangement covers multiple functions over the longer term. Might be integrated IT systems
• Operational integration: High level of operations and strategy integration. Focus on continuous improvement and innovation for mutual benefit

Communication is important in providing feedback in partnerships. Messages can be provided verbally or non-verbally. The communicator should adjust the message until they are confident that it has landed.

Supplier base optimisation is about finding the right number of suppliers for an organisation.

• Broadening the supplier base could be a viable strategy to tackle supply risk. There are more potential suppliers
• Partnering involves narrowing the supplier base, concentrating supply. This can lead to supply chain tiering, where there are a fewer number of direct suppliers that an organisation interacts with

5 stages in partnering implementation:

Partnership arrangements usually have a defined period, often 5 years, with options to review and extend. Some organisations may want evergreen contracts, with no end date.

There are a number of reasons why partnering relationships may fail e.g. loss of trust, cultural differences etc. Trust could be rebuilt through taking actions to rebuild, such as holding meetings, setting new objectives etc.