Jahan University
Vice Chancellor office
Economic faculty
Hr Department
:Subject name
TQM
Semester: 1st
Lecture: 8th
Prepare by: Committee year: 1402
SUPPLIERS’ PARTNERSHIP
DEFINITION & DESCRIPTION
SUPPLIER RELATIONS CONCEPTS DEFINED
As Purchasing’s role has evolved—from passive information transfer agent between requisitioner and supplier to facilitator of the supply chain—
the definitions applicable to the Purchasing function have evolved as well.
Purchasing. The tasks, activities, events, and processes required to facilitate the acquisition and delivery of a good or service required by an
end user.
Supplier Relations. The tasks, activities, events, and processes required to facilitate the ongoing interface between suppliers of goods and
services and the end users of those goods and services.
Supply Chain. The tasks, activities, events, processes, and interactions undertaken by all suppliers and all end users in the development,
procurement, production, delivery, and consumption of a specific good or service. The coordination, integration, and monitoring of this supply
chain is referred to as “supply-chain management.” The extended enterprise of the supply chain includes the end users, prime supplier or
distributor of a product or service, prime manufacturer, and the multiple tiers of suppliers providing goods and services to these prime
manufacturers and distributors, as Purchasing personnel find the scope of their job expanding. Purchasing is no longer expected simply to
acquire goods and services, but to engage in the proactive management of supplier relations, searching for opportunities to add value
throughout this supply chain. But what is value, and how can this value be articulated, identified, measured, and managed?
Definitions of Quality and Value. “Quality” may be defined as fitness for use. The fitness for use of an acquisition can only be assessed based
on a thorough understanding of the relevant customers and their needs. Value is the relative cost of acquiring quality. If two different supply
chains are able to produce a product with identical fitness for use, the chain which can achieve the required fitness for use at the lower total cost
of ownership is the one with the greater value. Therefore, the ability to provide a given level of quality at a reduced total cost of ownership [as a
result, for example, of an initiative to reduce the cost of poor quality (COPQ)] will always result in value generation.
Total Cost of Ownership. Sometimes referred to as life-cycle cost or total system cost, total cost of ownership is the sum of all costs associated
with the acquisition, installation, operations, maintenance, and retirement of a good or service.
DEVELOPMENT PROCESS OF SUPPLIERS’ RELATIONS
Nowadays, price has become a major factor in market. Customers tend to look for cheap goods and services and
companies tend to find lucrative customers. Their choices should match rather than to conflict. Therefore, companies
and customers should consider each other’s position and come up with a profitable partnership for both sides.
Typically, goods and services are either: (1) those which are used or consumed or become a part of the end product
(for example, raw materials and chemicals) or (2) those which support the production process itself or the personnel
involved (for example, plant machinery and equipment, computer equipment, travel services, and office supplies).
Following World War II, when growing demand for goods and services was satisfied by increasing plant capacity,
Operations was identified as the strategic component of an organization. Purchasing was relegated to a staff support
role. Purchasing’s mission was to ensure that suppliers provided an uninterrupted supply of required goods and
services, delivered on time and at the right price, where “right price” was usually interpreted as “lowest price.”
Personnel in Purchasing departments developed competencies in supplier negotiations, bid evaluation and analysis,
document administration, and market knowledge. Supplier negotiations were viewed as the major value-added
activity of the Purchasing department, and supplier relations developed during these negotiations.
In the late 1970s and early 1980s, companies in the United States were finally shocked into the realization that quality
was vital to long-term success. As Purchasing departments began to focus on supplier quality, the fourth of Deming’s
14 points, “End the practice of awarding business on the basis of price tag (alone)” (Deming 1986), became the
framework by which purchasers approached the acquisition of goods and services. Supplier relations evolved from
confrontation between adversaries to collaboration between partners trying to satisfy their common customer, the
end user of the finished product or service. Because of the demonstrated benefits of this evolution, this new approach
to supplier quality in the automobile industry set a pattern which began spreading throughout industry in the
developed world.
QUALITY INCORPORATED INTO TRADITIONAL PURCHASING
Purchasing as a Strategic Process. Consider the potential opportunity if time, resources, energy, and
management priorities focus on the processes by which these goods and services were scheduled,
designed, manufactured, and purchased, rather than simply focusing on the acquisition alone. Quality and
cost reduction opportunities can be identified, measured, and managed. Where two firms compete in
identical markets, the ability of one firm to identify, measure, and manage these opportunities faster than
another firm creates a clear competitive advantage. Therefore, purchasing, while traditionally thought of as
a utility, non-value-added function, is increasingly being recognized as a strategic function—an opportunity
for process management and improvement and a tool for achieving competitive advantage.
On average, manufacturers shell out 55 cents of each dollar of revenue on goods and services, from
material to mail. Shrinking that bill by 5 percent can add almost 3 percent to net profits. The same
arithmetic applies to service businesses. Cutting purchasing costs has surprisingly little to do with
browbeating suppliers. Purchasers at companies like AT&T and Chrysler aim to reduce the total cost—
not just the price—of each part or service
they buy. They form enduring partnerships with suppliers that let them chip away at key costs year after
year. Companies are also packaging once fragmented purchases of goods and services into company-
wide contracts for each.
SUPPLIERS’ RELATIONS
Purchasing personnel focus on process, abandoning the focus on transaction.
Within the end user’s firm, the purchasing function is elevated to a strategic level and its
transaction activities and responsibilities minimized or eliminated. A successful transition to
a strategic approach to purchasing requires everyone in an organization to embrace a new
belief system concerning purchasing. In the transition, senior management will find it
necessary to aggressively promote the new view, which might be summarized as follows:
Purchasing has become a key strategic process within our organization, requiring a staff of
highly skilled professionals committed to working with our end users and suppliers, in a
collaborative, problem-solving environment, facilitating quality and continuous
improvement. Shift to Strategic Purchasing. The differences between the traditional view of
purchasing and the strategic view are dramatic. They are summarized in Table. The
differences require some significant changes in culture and behavior. Total Cost of
Ownership. The most fundamental shift in the purchasing professional’s behavior is to base
purchase decisions on the total cost of ownership. Taking a total process approach (rather
than a transactional approach) to quantifying the total cost of ownership will result in the
identification of supplier, end-user, and joint costs which will need to be identified and
measured. Many of these costs will be reduced through joint problem solving. Table offers a
sample list of elements of Total Cost of Ownership.
Suppliers’ relations standpoint
Commercial view Traditional view Strategicall view
Supplier/buyer relationship Adversarial, competitive, distrusting Cooperative, partnership, based on trust
Length of relationship Short term Long term, indefinite
Criteria for quality Conformance to specifications Fitness for use
Quality assurance Inspection upon receipt No incoming inspection necessary
Communications with suppliers Infrequent, formal, focus on purchase Frequent, focus on the exchange
orders, contracts, legal issues
Inventory valuation An asset of plans, ideas, and problem solving
Supplier base Many suppliers, managed in aggregate Opportunities
Interface between suppliers and end users Discouraged A liability
Purchasing’s strategy Manage transactions, troubleshoot Few suppliers, carefully selected
Purchasing business plans Independent of end-user and managed
Geographic coverage of suppliers organization business plans Required
Focus of Purchasing decisions As required to facilitate leverage price Manage processes and relationships
Key for Purchasing’s success Ability to negotiate Ability to identify opportunities and
collaborate on them
Supply chain enhancement
The goal of a strategic purchasing function is to facilitate the performance of the supply chain. This process facilitation includes participation
of the end users and suppliers. Supply-chain optimization is the ongoing management and continuous measurable improvement in the
performance of this supply chain, generating value for all involved. The entire supply chain must be considered, including indirect suppliers,
manufacturers, distributors, and end users. Note that the key words in this definition are:
Ongoing: Supply-chain optimization is not an event, but an ongoing process
Measurable: The results of supply-chain optimization are tangible benefits
Improvement: The foundation of supply-chain optimization is continuous improvement
All: True supply-chain optimization requires participation of all parties involved to share in the benefits.
1. There is a shared specific focus on satisfying their common end consumer.
2. There is an alignment of vision.
3. There is a fundamental level of cooperation, commitment to performance, and trust.
4. There is open and effective communication.
5. Decisions are made by maximizing the use of the competencies and knowledge on both sides of the relationship.
6. All stakeholders are committed to generating long-term mutual benefits.
7. There is a common view of how success is measured.
8. Both sides are committed to continuous improvement and breakthrough advancements.
9. Whenever competitive pressures exist in the environment they are allowed to exist in the extended enterprise.
Organizing suppliers’ relations (internal)
The Sourcing Process. As previously stated, supplier relations are defined as those tasks, activities, events, and processes required to facilitate the ongoing interface between suppliers of
goods and services and the end users of those goods and services. It requires
Quality planning
Business planning and customer goal alignment
Market assessments and analysis
Customer identification
Customer needs assessments
Design specification determination and analysis
Forecasting of Purchasing activity
Consolidation of forecasted Purchasing activity
Supplier evaluations and selection
Establishment of supplier agreements
Communication of supplier agreements
Spot buying in response to emergency events
Shipment and logistics planning and optimization
Inventory control and optimization
Quality control
Accounts payable
Value analysis
Customer satisfaction assessments
Quality improvement
Function based & process based organizations
Function-Based Organizations. In a function-based organization, departments are established based on specialized
expertise. Responsibility and accountability for process and results are usually distributed piecemeal among departments.
It depicts the organization of a function-based manufacturing facility. A function-based organization typically develops and
nurtures talent, and fosters expertise and excellence within the functions themselves. Therefore, it offers several long-
term benefits. However, function-based organizations can result in a slow, bureaucratic decision-making apparatus, as
well as the creation of functional business plans and objectives which may be inconsistent with overall strategic business
unit plans and objectives. Many organizations are beginning to experiment with an alternative to the function-based
organization in response to today’s “make it happen fast” world. Increasingly, organizations are being rotated 90° into
processed-based organizations.
Process-Based Organizations. In a process-based organization, reporting responsibilities are associated with a process
and accountability is assigned to a process owner. In a process-based organization, each process is provided with the
functionally specialized resources necessary. This has the effect of eliminating the barriers associated with the traditional
function-based organization, making it easier to create cross-functional teams to manage the process on an ongoing
basis. Figure 21.7 depicts such an organization. In this example, four processes are depicted: Sourcing; Product
Development; Budgeting; and Recruiting. Process-based organizations are usually accountable to the business unit or
units which receive the benefits of the process under consideration. Therefore, process-based organizations are usually
associated with responsiveness, efficiency, and customer focus. However, over time, pure process-based organizations
run the risk of diluting and diminishing the skill level within the various functions. Furthermore, a lack of process
standardization can evolve, which can result in inefficiencies and organizational redundancies. Additionally, such
organizations frequently require a matrix reporting structure, which can result in some confusion if the various business
units have conflicting objectives.
Principles of organizing supplier relations
1. Recognize the Purchasing function as a strategic, highly value-added function within an organization, to be staffed by highly skilled
professionals.
2. Assign leadership within the Purchasing function to visionary, results-oriented individuals, who have both the full support of senior
corporate management.
3. Develop purchasing strategies in alignment with business unit strategies
4. Hold the business unit management accountable for the successful implementation of the sourcing strategies. The implementation of
purchasing strategies can result in a competitive advantage.
5. Hold the Purchasing management accountable for the performance and continuous improvement of the sourcing process. While the
business unit is held accountable for the results of the purchasing strategy, functional management should be held accountable for the
execution of the sourcing process.
6. Organize cross-functional teams to manage the acquisition of goods and services. It helps facilitate a customer-driven, fact-based
approach to the development and implementation of purchasing strategies which are consistent with overall business unit objectives.
7. Maintain an ongoing focus of the cross-functional team on the total supply chain performance, including the total cost of ownership, the
identification of opportunities for increased value, and identifying and achieving competitive advantage.
8. Develop, implement, and manage purchasing strategies by consolidating and segmenting procurement activities across strategic
business unit boundaries wherever feasible.
9. Maintain open, honest, and frequent communications with and between end users. This is critical for the ongoing successful identification
and implementation of purchasing strategies.
10. Base the development and implementation of purchasing strategies on collaboration and cooperation between business units, a
decision-making process based on facts, and a measurement system user and supplier
