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Best Practice Tips On Building Supplier Partnerships
 

IOMA

From the July 2001 edition of Managing Logistics

Logistics managers that excel in supply chain management do so by maintaining strong supplier partnerships. Working closely with suppliers can help you to leverage the supplier's competencies and achieve even higher economic, productivity and operational efficiencies.

Companies that have defined and altered their partner relationships are now among those consid-ered world class. Best Practices in Supply Chain Partnership and Certification, published by Best Practices, LLC (Chapel Hill, N.C.; 919-403- 0251), offers eight tips for managing supplier rela-tionships and explains how some of today's lead-ing companies are putting them to use

  1. Require suppliers to develop and imple-ment internal quality programs. Florida Power & Light asks vendors to focus internally on quality improvement, detailing plans for deployment problem solving and proactive strategies.
  2. Require suppliers to meet cost require-ments. AlliedSignal asked its supplier base to re-duce their prices by 10% to 15%, reduce lead times by 30, and continue to meet quality stan-dards. Suppliers who did so were awarded long-term contracts.
  3. Measure internal customer satisfaction with suppliers to ensure end-user quality. GTE uses its Supplier Quality Program to determine if the sup-plier offers the best product or service that its ex-pertise can provide, if the supplier is reliable and consistent, if documentation is accurate, and if the supplier is responsive and timely in addressing problems.
  4. Conduct performance reviews to monitor supplier performance. GTE develops criteria for each supplier's product or service, based on value, delivery, documentation, and customer ser-vice. Each score is measured on a scale of one to ten (ten being excellent). A minimum score of eight is required to become a supplier. If a sup-plier receives a score below eight, GTE will out-line measures for improvement. Within 30 days, the supplier must submit a detailed action plan that reflects the improvements. If the supplier does not attempt to reach the minimum levels, it is dropped from GTE's supply chain.
  5. Define key measures to manage the sup-plier performance process. AT&T UCS measures its suppliers according to mutually agreed-upon service standards. Regular meetings are held with key suppliers to discuss plans, review results, and address issues important to the success of the part-nerships.
  6. Employ classification designations to regu-late the frequency of performance reviews. Xeroxreviews its largest suppliers ($20 million and more) quarterly, midsized suppliers ($1 to $5 mil-lion) every six months, and small suppliers (under $1 million) annually. Standards for quality and lead times are reviewed at these times.
  7. Employ a self-renewing supplier evalua-tion process to foster continuous improvement. General Motors has suppliers rate themselves in terms of quality, cost, delivery, technology, and management.
  8. Develop a structured process to manage re-lationships with top suppliers. Corning Telecom-munications Products Division has a tight struc-ture for developing relationships with Level I sup-pliers. Suppliers are rated on their strengths and weaknesses in performance, quality, technology, and price. The process has reduced the level of defective product received from Level I suppliers by a factor of five.

Another leading organization, Hoffman-La Roche Inc., has put together a four-phased vendor certification program for establishing partnerships with suppliers of raw materials and components to attain quality improvement. In phase I, vendors are chosen for certification and are evaluated on their commitment to quality. During phase II, the vendor is assessed and qual-ity improvement programs are implemented. Phase III requires the vendor to fulfill all certifica-tion criteria, and if the vendor meets all the re-quirements of phases I to III, certification is achieved.

7 Supplier Relationships

To get started, you first have to define the type of supplier relationship you want. James A. Eckert, assistant professor of marketing and supply chain management at Northeastern University (Boston; 617-373-5307), defines seven types of relationships between suppliers and customers by level of trust, frequency of interaction, and commitment to the relationship (see cover graphic). They are:

  1. Non-strategic transactions. These can be one-time or multiple transactions. The predominant characteristics include limited trust of the other party, limited communication, limited dependence on the other party, limited capability of the other organization, limited volume conducted between the organizations, and very little investment in the other party.
  2. Administered relationship. Like non-strate-gic transactions, these include one-time or multiple transactions, but with a stronger emphasis on man-aging the relationship through less formalized strate-gies. Trust is generally low, but communication high. These relationships have a high percentage of transactions over multiple products and services, which increases the level of dependence.
  3. Contractual relationship. Contractual terms are popular in supplier-customer relationships and reduce the need for direct communication between boundaries. Interactive skills are critical, and manag-ers must be aware of the contractual obligations to appropriately address key issues.
  4. Specialty contract relationship. These exist for narrowly designed products or services that are exchanged between suppliers and custom-ers. Success here requires strong personal relation-ships and a significant amount of trust. Such a rela-tionship might exist between a manufacturer and a logistics services provider.
  5. Partnership. An example here might be a supplier of critical components to a manufactured product delivered on a weekly basis. Trust and commitment must be high, but interaction is low. Partnerships require both parties to invest heavily in the relationship to prove their commitment.
  6. Joint venture. This is generally associated with some form of investment by the parties in the relationship to accommodate mutual benefits. For instance, two manufacturers with complementary technologies might form a joint venture to produce a completely new product. Since the parties are tied by financial obligations, managers should be aware of their respective internal responsibilities.
  7. Strategic alliance. Significant trust is re-quired to achieve levels of communication and increased investment. An example might be a sup-plier who provides a dedicated engineer to work with a customer's new product development team. Eckert says that managers must develop negotiation and relationship management strategies for each type of relationship and adapt their approaches to the unique characteristics of each relationship. This is done by analyzing where the relationship cur-rently stands and where they would like it to go, where the other party considers the relationship to stand and where they would like it to go, and what action they can take to increase trust, interaction, and communication.

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