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CHAPTER 1

INTRODUCTION

1.1 SUPPLY CHAIN MANAGEMENT

Supply Chain Management (SCM) has received an increased amount of interest both

from academicians and practitioners. The success stories of Apple, Dell, McDonalds,

Wal-Mart and Zara have relied much upon the responsive supply chains. The best in

class organizations have become benchmark because of the stratagems they are

adopting especially to manage the supply chain.

According to Christopher (1998), a supply chain consists of multiple firms, both

upstream (i.e., supply) and downstream (i.e., distribution) thus having a network of

organizations that are involved, through upstream and downstream linkages, in the

different processes and activities that produce value in the form of products and

services delivered to the ultimate consumer. The first step in understanding a supply

chain network is to place one of the network organizations into its proper zone

(Walker, 2005). Lambert et al. (1998) defined supply chain as an integration of key

business processes from end user through original suppliers that provides products,

service, and information that add value for customers and other stakeholders.

Keith Oliver coined the term „supply chain management‟ in 1982. SCM is a central

and important area for academic research due to its impact on firms competing in

today‟s global economy and it has become a significant strategic tool for firms

endeavoring to improve quality, customer service and competitive success for

sustainability. To be successful and viable in global scenario supply chain

management is the requisite in managing the operations of all partners involved.

Companies that acknowledge supply chain as a strategic asset achieve 70 percent

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higher performance (Global Supply Chain Survey, 2013). According to Quinn (1997)

SCM deals with management of all of those activities associated with moving goods

from the raw-materials stage through to the end user which includes sourcing and

procurement, production scheduling, order processing, inventory management,

transportation, warehousing, and customer service and also embodies the information

systems required to monitor all of those activities. Simchi-Levy (2000) defines SCM

as a set of approaches utilized to efficiently integrate suppliers, manufactures,

warehouses, and stores, so that merchandise is produced and distributed at the right

quantities, to the right locations, and at the right time, in order to minimize system

wide costs while satisfying service level requirements. The holistic concept of supply

chain takes into consideration all the processes and functions from beginning to end.

This concept contradicts the single unit focus for profitability by integrating all the

units to be a „supply chain‟.

Mentzer et al. (2001) have cited the existence of different supply chain flows like

products, services, information, financial resources, demands and forecasts from

supplier‟s supplier to customer‟s customer (Figure 1.1). There is a close connection

between the design and management of supply chain flows. A supply chain is a

sequence of processes and flows (Figure 1.2) that take place within and between

different stages and combine to fill a customer need.

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Figure 1.1: Supply Chain Flows

Source: Mentzer et al. (2001)

To be cost efficient is the top priority for business leaders across all industry sectors

(KPMG, 2011). As organizations with mature procurement functions enjoy lower cost

growth, greater business flexibility, increased market certainty and as a result

significant competitive advantage over their peers, so many executives are looking to

procurement to engage the business in strategic conversations about how the supply

chain can be optimized to deliver the greatest returns (KPMG, 2012). To manage the

resources optimally from the supplier to customer, many approaches are used. New

opportunities are created, new ways of cutting cost are identified and new ideas for

product development are hitched with the involvement of players in supply chain. To

simplify the roles to be played by the supply chain members the cycle view discloses

the responsibilities of these players.

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Figure 1.2: Cycle View of Supply Chain

Source: Chopra (2010)

The roles and responsibilities specified in cycle view facilitate the work of all

members according to the strategy espoused in supply chain. According to Fisher

(1997), supply chain strategy should align with demand and supply characteristics of

the product distributed through that supply chain. He proposed the efficient

orientation in case of functional products and responsive orientation in case of

innovative products. The efficient supply chains utilize the lowest possible cost and

responsive supply chains take the lowest possible time with variety offerings. For

both efficiency and responsiveness, the coordination among the members of supply

chain like supplier, manufacturer and retailer is required so as to meet the overall

objective of supply chain. Responsive and effective supply chains as introduced by

Fisher (1997) are demonstrated in Table 1.1.

A distinction between physically efficient and market-responsive supply chains can

also be made with reference to lean and agile supply chains. Naylor et al. (1999) have

defined:

• Leanness (Figure 1.3) means developing a value stream to eliminate all waste,

including time, and to ensure a level schedule.

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• Agility (Figure 1.4) means using market knowledge and a virtual corporation

to exploit profitable opportunities in a volatile marketplace.

• Leagile (Figure 1.5) is the combination of the lean and agile paradigms within

a total supply chain strategy by positioning the decoupling point so as to best suit the

need for responding to a volatile demand downstream yet providing level scheduling

upstream from the marketplace.

Table 1.1: Efficient and Responsive Supply Chain

Efficient Supply Chain Responsive Supply Chain

Primary purpose Supply predictable demand

efficiently for the lowest possible

cost

Responding quickly to unpredictable

demand in order to minimize stock-

outs, forced markdowns and obsolete

inventory

Manufacturing focus Maintain high average utilization

rate

Deploy excess buffer capacity

Inventory strategy Generate high turnovers and

minimize inventory throughout the

chain

Deploy significant buffer stocks of

parts or finished goods

Lead-time focus Shortened lead-time as long as it

doesn‟t increase cost

Invest aggressively in ways to reduce

lead-time

Approach to choosing

suppliers

Select primary for cost and quality Select primarily for speed, flexibility

and quality

Product-design strategy Maximize performance and

minimize cost

Use modular design in order to

postpone product differentiation for

as long as possible

Source: Fisher (1997)

Many programs, processes and tools like Electronic Data Interchange (EDI), Efficient

Consumer Response (ECR), Vendor Managed Inventory (VMI) and Collaborative

Planning, Forecasting and Replenishment (CPFR) are available now-a-days to meet

the specific goal of supply chain. These new transformational approaches are based

on forging integration across the supply chain to achieve the supply chain objective.

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Figure 1.3: Lean Supply

Many programs, processes and tools like Electronic Data Interchange (EDI), Efficient

Consumer Response (ECR), Vendor Managed Inventory (VMI) and Collaborative

Planning, Forecasting and Replenishment (CPFR) are available now-a-days to meet

the specific goal of supply chain. These new transformational approaches are based

on forging integration across the supply chain to achieve the supply chain objective.

EDI enhances the efficiency and reliability in the system as it is used as a

communication tool with suppliers for ordering and order processing, payment and

delivery arrangements. Information sharing via technology catalyzes the cooperation

level. The strategic concepts like ECR and VMI focus on entire supply chain and help

in reducing the total cycle time. Further, to control, simplify and automate the buying

process, many organizations are adopting e-procurement for efficient inventory

control, reduction in purchasing overheads, removal of intermediary costs and to

improve manufacturing cycles. This is possible with the use of e-commerce in e-

Material

Supply Satisfied

Customer

Material

Supply

Satisfied

Customer

Material

Supply

Satisfied

Customer

Lean Processes

Agile Processes

Agile

Processes Lean

Processes

Decoupling

Point

Figure 1.5: Leagile Supply

Source: Mason-Jones et al. (2000)

Figure 1.4: Agile Supply

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procurement for real time information and quick linkage with parties. To enhance the

linkage among all the partners of supply chain Voluntary Inter-industry Commerce

Solutions (VICS) has developed a CPFR model. Over 300 companies (VICS, 2004)

have implemented this model and showed in-stock percentage improvements of 2-8

percent for products in stores and inventory reductions of 10-40 percent across the

supply chain.

Figure 1.6: Supply Chain Network Zones

Source: Walker (2005)

To apply the supply chain strategies and techniques available at the right point

understanding the network zones (Figure 1.6) becomes essential. Transforming raw

material into components by the organizations is done at upstream level. The quality

of raw material provided by the supplier goes in long run in providing the quality

finished product to customers for meeting their demand. Therefore, the raw material

provider or the supplier plays an imperative role in deciding about the functionality of

the final product. The responsibility falls on the supplier to deliver the order on time

with minimal defects. Only transactional way of exchange between buyer and supplier

cannot yield quality results, for improved performance the focus on developing

relationship orientation with supplier so as to yield good future returns becomes

mandatory.

Raw

Materials

Upstream

Value-Added

Transformation

Midstream Value-Added Manufacturer

Downstream Value-Added

Fulfillment

Customers

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1.2 BUYER-SUPPLIER RELATIONSHIP

An effective supply chain is made up of a series of partnerships and partners are

required to build and maintain long term relationships because the trend has been

observed (Balakrishan, 2004) towards the conscious examination and rationalization

of supplier networks and the development of collaborative or partnership relationships

between buyers and suppliers. The efficacious execution of supply chain management

philosophy becomes promising by crafting cooperative relationships with the players

of upstream network zone which expedites responsiveness via operational

performance and better efficiency via cost saving.

Historically, supply chain relationships have been used either on power or on trust. In

power based relationships, the stronger party usually exploits the weaker one. In the

short run, the stronger party is able to benefit at the expense of weaker one but since

this is not sustainable, in the long run either the relationship breaks down or the

overall chain performance starts deteriorating. Supply chain relationships are typically

long term and require considerable strategic coordination for sustainability. The

World Business Council for Sustainable Development (WBCSD, 2008) defines

sustainable development as forms of progress that meet the needs of the present

without compromising the ability of future generations to meet their needs. The

WBCSD calls for an organization development framework that supports a

collaborative approach to sustainable development, uniting individuals, organizations,

ideas and assets to benefit. Therefore, every organization has to foresee collaboration

among all the parties/players of supply chain for viable growth of all involved.

Sourcing from other firms can generate relatively more uncertainties in upstream

network zone. These risks and uncertainties are reduced when there is more of

collaboration between buyer and supplier instead of use of power. It is prudent to go

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for a few trustworthy suppliers instead of weak large number of suppliers. Focusing

on integration between buyer and supplier processes also tends to reduce waste and

delays. Although ideally supply chain management emphasizes total integration of all

the business entities within the supply chain, but a practical approach is to consider

only the strategic suppliers and customers because most supply chains are too

complex to achieve full integration of all the supply chain members.

The use of partnership instead of power is also encouraged by Shah (2009).

According to him, the initiative for a new supply chain is usually started by the focal

firm which provides leadership to the entire value chain. How these initiatives impact

the cost aspect is depicted in Table 1.2.

Table 1.2: Cost Impact of Supply Chain Initiative

Type of

Initiative

Supplier Costs Customer Costs Supply Chain Costs Action/Initiative enabler

I. ↓ ↓ ↓ Supply Chain Partnership

II. ↑ ↓ ↓ Power equations

III. ↑ ↓ ↑ Power equations

IV. ↑ ↑ ↑ Power equations and

gaming by two parties

Source: Shah (2009)

Relationships designed strategically, managed with collaboration and further

redesigned with the environmental changes tend to sustain longer.

Companies such as Honda, John Deere, and Praxair (Chenoweth et al., 2012) are

increasingly making full supplier cost disclosure a condition for consideration as a

potential supplier to plan supplier management initiatives. Suppliers‟ perspective is

also taken while preparing the balanced scorecard of the organization. A balanced

scorecard for supply chains consists of a financial perspective, a process perspective

and cooperation quality and cooperation intensity perspectives (Stadler and Kilger,

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2004). Bhagwat and Sharma (2007) have taken into consideration the partnership

evaluation parameters in a supply chain given by Gunasekaran et al. (2004) while

devising a balanced scorecard approach for measuring the performance of supply

chain. While taking supplier‟s perspective, the inbound logistics cost as a percentage

of sales, average payment period to the creditors, and the suppliers‟ performance in

terms of reduction in variance in time and quality are the most important Key

Performance Indicators (KPIs) in the manufacturing sector (Anand et al., 2005).

Therefore, the concentration on managing the relationship with supplier has gained

prominence as now-a-days the suppliers are also engaging in value enhancing

collective efforts to enhance the responsiveness and efficiency of the supply chain.

1.3 BUYER-SUPLLIER RELATIONSHIP MANAGEMENT

Relationship with suppliers is a critical component of managing the Supply Chain.

Global Supply Chain Forum identified supplier relationship management as one of the

eight core supply chain processes. The leading organizations along with basics are

using differentiating processes like supply planning with key suppliers and effective

supplier management to reduce complexity and volatility risks. For sustainable supply

chain, collaboration with suppliers and managing key suppliers professionally, are

required. For effective management of these relationships, Spekman et al. (1999) have

defined ten principles which are as follows:

• Integrate suppliers into the Supply Chain

• Share information

• Develop trust

• Organize effectively to achieve alignment

• Use commodity teams

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• Look globally for advantage – global sourcing

• Focus on total costs

• Rationalize the supply base

• Let the suppliers manage it

• Leverage technology

The focus of procurement has shifted from encouraging competition among many

suppliers in order to drive down process to long term relationships with fewer

suppliers and deeper investments in relationships. Buyer-Supplier Relationship (BSR)

management is one of the most important parts of supply chain management.

Effective relationship management and improving qualitative and quantitative levels

of suppliers could be a competitive advantage of every company (Cusumano and

Takeishi, 1991). The Association for Operations Management (APICS) has defined

this relationship management as follows:

Supplier Relationship Management (SRM) is a comprehensive approach to managing

how an enterprise interacts with the organizations that supply its goods and services.

The goal of SRM is to streamline the processes between an enterprise and its

suppliers. SRM often is associated with automating procure-to-pay business

processes, evaluating supplier performance, exchanging information with suppliers,

and supplier certification.‟

Stadler and Kilger (2004) say that Supplier Relationship Management encompasses

strategic sourcing, collaborative design and manufacturing, and collaborative e-

procurement both for direct and indirect goods. It enables to create and sustain

sourcing strategies across areas of design and strategic sourcing responsibilities.

It takes time to build strategic relationships; to manage them involves the contribution

of many elements and the organizations have realized the importance of focusing on

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this issue because of the competitiveness it may generate for the efficiency and

responsiveness of the whole supply chain. The concept of managing relationship with

the supplier became notable gradually.

1.4 EVOLUTION OF BUYER-SUPPLIER RELATIONSHIP MANAGEMENT

Globalization, environmental dynamism, technological changes and increasing

customer needs have pressurized the firms to remain competitive. These factors have

also changed the scenario of sourcing patterns of the firms. Earlier, purchasing was

not a specialized function and could be performed by anyone in the company. The

realization of its importance, as it is responsible for 50-90 percent of cost of goods

sold, has made purchasing function widely recognized. Purchasing function

contributes to the strategic success by confronting with the above mentioned factors.

The modern purchasing function is different from traditional in terms of planning and

implementation involving strategic members of supply chain. The risks and

uncertainties diminish by the negation of opportunistic behavior. The supplier chosen

with caution is likely to be trustworthy to the buyer. The strategic shift of purchasing

function, from transaction oriented traditional approach to strategic oriented modern

approach, has established the need of relationship management.

Rogers (2006) in his study has depicted (Figure 1.7) the change in the form of

evolution of BSR from spot purchasing arm‟s length which had short term focus and

transaction orientation to strategic partnership alliance which has long term focus and

relationship orientation. In practice, many business relationships are long term.

Harmonious and mutually successful long-term supplier relationships have been

observed in many industries and documented by researchers in strategy and

management. In these supplier relationships, both the buyer and supplier are

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concerned about how their current strategic behavior affects their future interactions,

and value long-term cooperation over one-shot business transactions. In fact, some

buyers strongly prefer to deal with suppliers on a long-term basis as observed in case

of Honda Company (Handfield and Nichols, 2002) which emphasizes the

development of trust with its suppliers. Initially, Honda was not allowed to produce

cars and also few existing automotive suppliers were willing to provide parts to the

company. Those few suppliers who convinced to supply are now having close ties

with the company and today Honda is the largest exporter of cars in the U.S. and also

eighty percent of items are single sourced with one set of dies by the company.

The first truly long term inter organizational relationships evolved in Japan during the

post-World War II years, when the organizations in Japan recognized a new type of

integration scheme known as the keiretsu which encompasses informal but strict

cooperation among members (Prescutti, 1992). As the organizations cannot rely only

on their competence and potential but the capabilities of suppliers are also need to be

utilized by establishing linkages and relationships with them. Relationship with

suppliers is a critical component of managing the supply chain. Supply chain

relationships are typically long term and require considerable strategic coordination.

Cooperation between supplier and focal organization arises directly from both trust

and commitment.

The relationship cannot be formed with all the suppliers. Like in case of Whirlpool

Corporation (Handfield and Nichols, 2002) when it faced intense competition in early

1980s, it realized the need to achieve competitive advantage from sourcing strategy.

The corporation identified Inland Steel as the key supplier and gradually reduced the

number of suppliers for steel from eleven to four in 1994 and sourced 80 percent of

steel requirements from Inland Steel which further changed the traditional BSR to

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strategic relationship between the two companies. When the buyer and supplier are

willing to collaborate then it strengthens the association and gives it the form of

relationship. Commitment through investment and support in each other‟s venture

establishes closer relationship.

Value Generation

Strategic

Partnership

Alliance

Concentration of Buying Power

Consolidation of Buying Power

High Value

Dynamic Relationship Management

Joint Benchmarking & KPI Management

Balanced Scorecard Reporting

Preferred

Supplier Concentration of Buying Power

Consolidation of Buying Power

Medium Long Term Focus

Contract & Relationship Setup &

Management

Occasional RFQ

Dual Supply

Strategy Short-Medium Term Focus

Consolidation of Buying Power

Low-Medium Value

Standard Terms & Conditions with

Modifications

Regular Tenders

Spot

Purchasing

Arm’s Length

Short Term Focus

Every Transaction is Stand Alone

Low Value

Standard Terms & Conditions

Figure 1.7 Supplier Relationship Evolution

Source: Rogers (2006)

The business environment with lots of changes in competition, government

regulations, environment concern, and technology and customer demands leads the

organizations to focus on strategic relationships with the suppliers. The organizations

try their best to fully utilize their as well as suppliers‟ potential to be successful in

their ventures. With this approach the partners of supply chain concentrate on the

associations in between them in the form of a relationship for future sustenance. For

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the successful collaborations the suppliers have to be chosen strategically and also

invested in for the development of not only the supplier but also the dyadic

relationship between the buyer and the supplier. In the mid-1990s, Deere & Company

(Stegner et al., 2002) used the assessment criteria from the Malcolm Baldrige Quality

Award to evaluate areas of the business with special emphasis on supply

management. They wanted to reduce costs especially the supply base costs so as to

compete globally. The engineers from the supplier development group were sent to

train supplier personnel for optimum resource utilization and production efficiency.

The significant savings were realized by the suppliers as their production capacity

increased, lead times decreased and overall business performance enriched. A

stronger supplier base was created by this initiative of Supplier Development (DEV)

which also reduced the cost and amplified the performance of Deere & Company.

Ultimately the competitiveness of whole supply chain improved because of one step

put forwarded by the focal company.

Strategically managing the suppliers for sustenance and profitability requires

teamwork. The organizations can restructure and redevelop with their suppliers. As

observed in case of Harley Davidson (Kamath, 2008) which became almost bankrupt

in early 1980s, then it focused on restructuring the supply chain with main focus on

supplier involvement. Since 1990, it has reduced its supplier base to half and also

relationship with three thousand MRO suppliers has been concentrated to three

suppliers for eighty to ninety percent of the procurement. Now it keeps supplier

delegates on rotational basis in its supplier involvement program. This strategy has

helped the company in: regaining its market share, reducing inventory period from

fifteen days to six and half days, increasing output of bikes by seventeen and half

percent every year.

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Effective relationship with suppliers provides organizations the next-generational

competitive advantage as happened in case of Honda, Harley Davidson, Whirlpool

Corporation and Deere & Company moving the relationship orientation from

transaction basis to close strategic basis. Relationship with suppliers is also important

as it reduces the redundancy and competitive pressure with the aid of synergy of two

players of supply chain: Buyer and Supplier. The strategic differentiation emerges and

a core competency improves when the suppliers are trusted as partners. Krause et al.

(2007) also believed in generating supernormal profit by investing in relation specific

assets for which inter organizational relationship need to be grown between the buyer

and supplier as a source of competitive advantage and value recognition.

1.5 SIGNIFICANCE OF BUYER-SUPPLIER RELATIONSHIP

The relationship which firms establish with their suppliers may take the form of

different models, from a competitive model to a partnership model. Today, a

cooperative relationship is becoming widespread as it leads to greater supplier

involvement in the development of new products. Many auto companies like Ford,

Harley Davidson and Mahindra & Mahindra have been able to design the automobiles

according to the market need with collaboration of their suppliers. The buyer and the

supplier innovate together. This collaboration becomes more fervent when the buyer

starts investing for supplier development. There is ample anecdotal evidence in

corporate practice and academic research that supplier development efforts to improve

supplier performance and/or supplier capabilities can help to meet supply needs and

generate favorable results for the buying firm (Krause et al., 2000). The instance of

Deere & Company is the outcome of such efforts only.

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A cooperative relationship leads the buyer and supplier to consider each other as

strategic partners and work towards a common goal. This results in participating

parties‟ readiness to invest resources, to achieve goals conjointly, to share information

and to solve problems together in order to achieve improved performance and

competitive advantage. Harley Davidson‟s one third market share confirms this

characteristic of BSR.

The relational view of supply chain says that investments are made by buyers in the

development of suppliers in order to accrue tangible benefits such as reduced cost,

greater quality and flexibility and more reliable delivery. Buyers, especially in

manufacturing industries have the priorities of cost, quality, delivery time, reliability

and flexibility as the benefits from relational aspect. To accrue these tangible benefits

such as reduced cost, greater quality and flexibility and more reliable delivery buyers

invest in suppliers (Dyer and Singh, 1998).

Manufacturers pursue lower costs of their supplied inputs so as to lower their total

costs of final assembly and to provide a competitive price on their final products to

customers. Reductions in rework, scrap and downtimes also benefit both the parties in

relationship. Many companies like Dell have success in reducing supply chain costs

by getting delivery speed and reliable delivery from its suppliers and also reduction in

amount of buffer inventory to be held by the buyer. The auto sector of Mahindra &

Mahindra (M&M) has increased outsourcing (Kulkarni, 2004) to seventy eight

percent of vehicle parts and focuses more on critical components like engines and

marketing. It has been possible because of their mantra „let us work together towards

mutual prosperity‟. The supplier technical assistance has helped M&M in co-

designing the vehicles also. Thus, the manufacturing flexibility and response to

unpredictable environment improves when suppliers are able to meet changes in

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quantity requirements, delivery of products at short notices and running smaller

productions at frequent intervals.

Nelson et al. (2001) depicted (Figure 1.8) the long term savings to the organizations in

context of Producer Price Index (PPI) from 1992-98 in case of select U.S. auto

companies. The best in class companies (the Japanese transplants in U.S.A.) had

approximately $600 million more savings as compared to good U.S. companies

because of their close relationship with suppliers.

Figure 1.8: SRM can lead to Large Long-Term Savings

Source: Nelson et al. (2001)

If the relationship developed between buyer and supplier is beneficial and results in

distinguished operational performance compared to competitors, then the outcome is

the competitive advantage and larger market share as appeared in case of Lantiq, the

second largest fabless semiconductor company in Europe. United Microelectronics

Corporation (UMC), a leading global semiconductor foundry, received the best

supplier award from Lantiq. UMC has been considered as valuable partner for

Lantiq‟s fabless strategy and is producing a large portion of their wafer demand with

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high-tech expertise and mature processes to secure the basis for flawless products

(www.umc.com).

For cost efficiency, better performance, fast response to market demands and

changing environmental subtleties, a profound focus on the essentials of BSR and

their influence on various dimensions need to be dealt with.

1.6 CHAPTERS STRUCTURE

With this background, the present study has been undertaken to study the relationship

between the buyer and the key input supplier. With the purpose to conduct a feasible

study to explore and analyze the different dimensions of BSR, this research has been

undertaken. The primary survey has been conducted for the purchasing officials of

different manufacturing and service organizations. The study is organized in the

following way. The first chapter makes an introduction to the topic followed by

second chapter which reconnoiters the previous studies in the field. The third chapter

sets out the objectives of the study and discusses the research methodology. The

fourth chapter discusses the type of relationship of the buyer with the supplier. The

factors explored in the study have been discussed in the fifth chapter. The sixth

chapter discusses the criteria used in supplier selection and evaluation. The seventh

chapter proposes a comprehensive model of BSR. Lastly, the eighth chapter

summarizes the findings of the study and discusses its theoretical and policy

implications for maintaining relationship with supplier. This chapter also discusses

the future directions of research emanating from the study.