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1 CIPS. Level 4. QUICK START GUIDE. Managing Purchasing and Supply Relationships First edition for new syllabus May 2006. Published by Profex Publishing Limited 7 North Road Maidenhead Berkshire SL6 1PE. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of Profex Publishing Limited. Profex Publishing Limited, 2006. ii CHAPTER 1. Relationships in Context 1 Internal and external relationships This study module is concerned with the commercial relationships that exist between buyers and suppliers. The relationships that we will be studying are usually entered into for the purpose of making a profit. However, it is worth noting that some of the organisations with which buyers are concerned are not dominated by a profit motive.

2 For example, this is true of charities and government departments. As buyers, we are mostly interested in relationships with suppliers. A supplier is usually an external organisation providing us with quality goods or services for use in our business, in return for a consideration that will boost its own profits. However, purchasing also deals with internal customers and suppliers. The concept of the internal customer is that within an organisation, internally-delivered goods and services, as well as externally-obtained goods and services, should meet the requirements and expectations of the internal customer. To do this, the needs of the internal customer have to be identified. Effective purchasing will therefore make use of cross-functional teams (CFTs), with representatives of the internal customers included within the team.

3 2 The relationship spectrum A relationship with a supplier can be either competitive or collaborative. In a competitive relationship , the buying organisation seeks to obtain the best price possible from the supplier, for the required quality and delivery standards. The buyer tries to squeeze the supplier's profit margins. A competitive approach can be seen as a win-lose situation, where any gains for the buyer are at the expense of the supplier. Competitive relationships are associated with transactional purchasing. Features of transactional purchasing are as follows. Competitive bidding for contracts. Many competing suppliers. Typically, standard products. Wide supply markets. No benefit from or need for a high degree of trust between buyer and supplier. No supplier power. The cost of switching from one supplier to another is low.

4 In a transactional relationship there is a simple exchange between supplier and buyer. The supplier provides goods or services; the buyer provides money in payment. This differs from a collaborative relationship in which the benefits of doing business together arise from ideas of sharing as well as exchanging. 1. Managing Purchasing and Supply Relationships In a collaborative approach, the buyer organisation seeks to develop a long-term relationship with the supplier. The strategic view is that the buyer organisation and the supplier share common interests, and both can benefit from seeking ways of adding value in the supply chain. There is a win-win situation, where buyer, supplier and end-customer can all benefit. The supplier will participate with the buyer in looking for improvements and innovations, secure in the knowledge that any benefits that are achieved will be shared In practice, buyers will choose to adopt a competitive approach with some suppliers and a collaborative approach with others.

5 These are the two ends of a relationship spectrum that can be illustrated as follows. We elaborate on this in the Course Book. The relationship spectrum Competitive Collaborative Strategic alliance Closer tactical Single sourced Transactional Arm s length Outsourcing Partnership Adversarial Co-destiny 3 Transactional relationships There are situations where the trouble and expense of developing a long-term collaborative relationship is simply not justified. If the product has little or no strategic importance to the buyer then a simple transactional model is appropriate. This might apply, for example, to purchases of office stationery. Another case where the transactional model is appropriate is that of items which are purchased only rarely. Developing a collaborative relationship involves continuous interaction with the supplier, and this is not justified when purchases are rare.

6 Of course, just because a transactional model is adopted does not mean that the buyer should relax his efforts to maximise the benefits to his employer. The buyer will still wish to manage the relationship in the most efficient way. To do so, he can make use of modern developments that help to keep down costs and streamline processing. For example, small- value orders may best be handled by use of corporate purchasing cards. Savings may also be available by electronic purchasing. 4 Collaborative relationships It was recognised in the 1980s that developing a customer-supplier relationship could generate enormous mutual benefits for both the customer and the supplier. However, the successful development of customer-supplier relationships was all too often hindered by the win-lose attitude towards the purchasing transaction.

7 Either the customer won' with a low price or the supplier won' with a high price. The DTI and the CBI therefore launched a Partnership Sourcing initiative in September 1990. The aim of the initiative was to encourage businesses to recognise the potential benefits from adopting a philosophy of win-win, where both parties in the relationship stand to gain from working together. 2. Chapter 1: Relationships in Context Partnership sourcing is defined as a commitment by customers/suppliers, regardless of size, to a long-term relationship based on clear mutually agreed objectives to strive for world class capability and effectiveness'. The CBI and DTI list the principal characteristics of partnership sourcing as: top level management commitment involvement by all the relevant disciplines/functions customer and supplier working together a spirit of openness and trust between customer and supplier clear joint objectives a long-term relationship taking a proactive approach to improvement and developing the partnership, not a reactive approach to dealing with problems after they have happened a total quality management philosophy flexibility.

8 A buyer organisation might decide to form a long-term relationship with a supplier, possibly by setting up a joint venture or partnership. A joint venture might be a jointly-owned company, in which the buyer and the supplier each have an equity stake. A co-destiny relationship is even closer: the two organisations recognise that their interests are so closely linked that their futures depend on each other. If one succeeds, so will the other. 5 Relationships and organisational success Effective procurement, based on appropriate commercial relationships with carefully chosen suppliers, can be an important factor in overall organisational success. In particular, it can help an organisation to achieve lean supply. As Saunders expresses it: The main goal of being lean is to obtain the same output from half the resources used by older methods half the number of workers, half the number of design engineers, and half the level of inventory, for example'.

9 Implications of this new approach were that high-volume production of standard models was no longer enough to satisfy ever more demanding customers, and that higher levels of quality and shorter time to market in new product development were achievable targets. Lean supply is based on the concept of eliminating waste. Waste is any activity that uses resources but adds no value. Examples of waste are excessive inventories, rectifying defective output, unnecessary procedures, which are time-wasting, and so on. Lean supply is associated with the principles of just in time manufacturing and purchasing. JIT is also known as lean operations'. 3. CHAPTER 2. Managing Relationships between Purchasers and Suppliers 1 The supply positioning model A supply positioning model is a tool for determining what kind of supply relationships we should seek in relation to the various items we purchase for our organisation.

10 The aim is to distinguish between the criticality of the different items purchased and to use this information in establishing suitable relations with the organisations that supply us. The model relevant to your syllabus maps the different items purchased onto a two- dimensional grid. For each item we determine the level of risk we run in using that item (measured along the vertical axis of the grid) and the cost of the item (measured along the horizontal axis of the grid). The basic idea is that for items that are critical in terms of their risk, or in terms of the amount of spend, we must adopt a type of relationship that secures supply. By identifying items that are critical we ensure that management time and effort is directed most effectively. For items with high supply risk and high cost (strategic critical items) it is vital to ensure security of supply at a good price, and this suggests a need for long-term collaborative relationships with a very small number of suppliers.