Michèle Routley manages the Business Process Support section of the Manufacturing Support Group at TWI and co-ordinates an advanced design centre to support one of TWI's Member companies. She started at TWI in 2001 in the Microtechnology Group focusing on reliability and life extension. She also had responsibility for the EPPIC Faraday Partnership marketing, training and seminars work packages. Prior to TWI, Michèle researched germanium implantation as a method of fabrication for SiGe Heterojunction Bipolar Transistors in the silicon processing cleanrooms of the University of Southampton.
In this, the second in a series of three articles on supply chains, Michèle Routley reviews different types of relationships within supply chains and the various advantages and disadvantages.
What different types of buyer-supplier relationship are there and what are their main characteristics?
Within the ever-increasing complexity of total product systems there are a number of factors interacting at different levels. While there are some autonomous organisations that keep suppliers and buyers at arm's length, the majority of organisations are involved in various levels of relationships with several others.
There are three primary types of dyadic (two-party) buyer-supplier relationships, other than autonomous firms:
- serial dependence: this is where the output of company A goes into production of company B.
The relationship is characterised by a typical 'transaction cost model', that is, one which is based on short-term financial benefit for the buyer, who is the dominant actor in the relationship. There is contractual trust as the buyer is managing the supplier and trusting them to perform contractual duties. The relationship is relatively easy to change and as such could be subject to churn, with little advantage for suppliers to invest. It is traditionally how subcontracting has been carried out - at arm's length.
- reciprocal dependence: where company A and company B affect the behaviour of each other.
This is a stage further where there is collaboration between buyer and supplier, and the level of trust has increased to competence trust, whereby the buyer believes that the supplier is fully competent for what is being requested. Often when supplier numbers are reduced, buyers will move from subcontracting to more collaborative relationships, increasing in goodwill and trust. There is a greater level of dependency between each organisation than in serial dependence, and this may often involve 'preferred supplier' status, with second tier suppliers having responsibility for those further down the chain. The relationship tends to be longer term and less subject to churn.
- mutual dependence: where companies A and B have interlinked behaviour.
This is a full collaborative venture, where there is systemic management of the supply chain and is typically seen in joint ventures. In this situation there is a blurring of organisational boundaries and there is likely to be management of the interaction and operational activities by a cross-functional and cross-organisational team. It is likely in this case that the organisations involved will have relational contracting and envisage a shared destiny, and systems in place may include 'open books' and electronically shared information. The focus is no longer purely on financial maximisation, but on a range of joint benefits and competitive advantages.
What are the potential advantages and disadvantages of collaborative, supply chain partnerships from the point of view of:
- buyers in the downstream areas of a supply chain?
- suppliers located towards the upstream area of a supply chain?
There are many relationships within a particular supply chain and each organisation may have several types of buyer-supplier relationship, and these are likely to change over time. With the complexity of products increasing, there is a trend towards partnerships. Increasing integration across the supply chain leads to efficient customer response, with subsequent advantages for both downstream buyers (including end-customers) and upstream suppliers. Buyers maintain their core competencies, but increase their flexibility and suppliers gain knowledge and security of demand. Table 1 summarises key advantages and disadvantages for buyers involved in collaborative partnerships and Table 2 gives examples for suppliers involved in the upstream area of a supply chain.
Table 1: Advantages and disadvantages of collaborative, supply chain partnerships from the point of view of buyers in the downstream areas of a supply chain, with suggested optimisation strategies
| Advantage | Strategy to maximise |
| Long-term commitment - guaranteed supply | Code of conduct |
| Aligned objectives | Communication/shared ownership |
| Shared risk (technological, financial) | Chose partner who has proved reliable Supplier appraisal |
| Shared cost | Effective planning |
| More feasible to gear supply to demand - reducing waste | Information exchange and communication |
| Frees up internal resources | Effective handover/delegation/training
Focus on own development areas |
| Problem solving | Increase interaction to allow and stimulate creativity |
| Access to niche technology/capability/knowledge | Choose partner carefully |
| Access to new markets/extension of scope | Clear, aligned objectives |
| Disadvantage | Strategy to minimise |
| Challenging | Planning, preparation and communication
Regular meetings
Effective team working |
| Consumes considerable resource | Use of ICTs for efficiency |
| Organisational differences (culture, size, management, procedures) | Use of a link-pin
Secondments |
| Lose in-house expertise | Maintain peripheral input |
| Buyer becomes dependent on supplier with no strategy for delivery failure | Knowledge of alternatives and multi-sourcing - sometimes globally |
| Possible quality issues | Use standards and inspection.
Cascade approach for quality procedures. |
| Can be difficult to have enough trust | Management of relationships and interactions |
Table 2: Advantages and disadvantages of collaborative, supply chain partnerships from the point of view of suppliers located towards the upstream areas of a supply chain, with suggested optimisation strategies
| Advantage | Strategy to maximise |
| Guaranteed demand - peaks and troughs smoothed | Sole supply contract |
| Learning | Openness, information management, training from lead firms |
| Financial leverage | Chose partner who has proved reliable and has shared vision |
| Visibility of market/co-ordinated approach to NPD | Meetings, joint development of specialist products |
| Access to new markets/supply network | Use major multiples for distribution |
| Development | Ensure adding value to the chain and aligned to overall business strategy |
| Disadvantage | Strategy to minimise |
| Greater dependency | Negotiate a sole supplier relationship or extend product range to other buyers |
| Greater vulnerability due to dependency on one customer | Expand into other markets |
| Cultural conflict | Conduct a cultural audit before entering into a new relationship |
| Risk (Technological) | Ensure in niche market with high entry barriers, and high standard of support service |
| Risk (Financial) | Negotiate a percentage revenue return |
It should be noted that not all collaborations are beneficial for all participants. If the collaboration is instigated by large-scale buyer power then it is likely to result in a relationship characterised by low-trust, suspicions and tensions with the suppliers involved.
What alternatives exist to forming partnerships in product systems?
To support individual organisations or dyadic relations, there have been many cases of strategic alliances or networks being formed. These can take many forms, and have different operational structures and formality. In general they are a group of organisations with common objectives, whether this is driven by product, reaction to legislation (such as automotive alliances formed due to the ELV Directive) or in response to changes in the market (such as aerospace alliances). They can be formed by similar sized firms or be part of integration along a typical supply chain, such as has been seen in automotive, aerospace and textile industries or in certain regional clusters.
The benefits these networks offer to their members tend to be:
- More power
- Extended capability
- Potential for cross-fertilisation of ideas
- Access to new markets
- Administrative or business support
Overall these associations are positive, however they can have difficulties in communicating across the network, it can be difficult to maintain a common objective if the vision of members is not properly aligned, and they may disband once their original purpose has been fulfilled.
In contrast to this idea of altruistic collaboration, a final inter-organisational relationship is the traditional, adversarial supply chain relationship. This was mentioned at the start and is characterised by an autonomous organisation with no commitments to others. It is a short-term, price-driven relationship that is subject to high levels of churn and consequently does not really allow a relationship to form. Typically this would be subject to market governance rather than the hybrid forms for the relationships previously described, and increasingly it will include outsourcing and international relocation. It works best for commodity products, and although price-driven, this advantage needs to be carefully considered against total ownership costs, whereby the disadvantages of high collateral costs, poor quality, high search costs and high transportation costs are balanced against the cheaper price.
Suppliers in this situation are less likely to invest in equipment or their workforce and the arrangement is likely to come up against lobbyist or consumer protests. Of course it is not always the buyer who is dominant in this relationship, a supplier could be autonomous and pick 'preferred customers' should they be large enough or have a key niche market technology.
For effective operation, individual organisational improvement is not enough, relationships, and indeed the whole product system needs to be optimised. It is important to ensure that the correct relationships are formed, appropriate to the industry, the situation and the product - and each of these may change, causing a change in the relationships. The perfect supply chain does not exist as it is a dynamic concept in a dynamic situation, however as Tables 1 and 2 showed, there are ways of improving relationships within any total product system.
Why may companies that wish to improve their supply chain performance need to develop new types of measurement ( ie new metrics) to establish their progress?
Metrics are used to indicate performance quantitatively with respect to defined targets, and these can be used:
- as a baseline (pre-determined for a particular system)
- to benchmark against world-class, or a competitor
- to monitor the progress of a programme of change
- to predict the impact of introducing a change
- to evaluate relationships within a supply chain in terms of delivery, quality and flexibility
- to stimulate ideas for areas that require improvement, such as in Kaizen events
Traditionally, the emphasis for metrics has been financially based and introspective, however the drive to integrate supply chains, and changing competitive conditions has led to a requirement for new metrics. Examples of traditional metrics include measures of operating efficiency based on long runs and high percentages of machine usage. Continued use of measurements geared to production systems and market conditions of the past may thus contribute to poor decision making. Indeed the move to lean manufacturing has sometimes led to traditional metrics being misleading, as conventional costing ignores the important differences between products and services, and there has been a significant increase in services and aftermarket support within product offers. Information now needs to be provided both upstream and downstream. Metrics can help to define what is acceptable, say in terms of quality, helping to align different players' perceptions.
In conditions where supply chain flows need to be demand driven, providing fast, flexible responses to changes in demand, or to handle high variation in product types; different measures are required to avoid bad decision making, and to gear decisions and actions to actual market or customer needs. Examples of such metrics include: on-time delivery, defective parts per million, total cost of acquisition, total cost of ownership and innovation metrics such as patents awarded.
Generalising, approaches now tend to be:
- focused on value - driven from the customer perspective, and 'demand pull' rather than 'supplier push'.
- more holistic - since supply chains compete rather than companies. The holistic concept extends both across the supply chain and into the product lifecycle, with aftermarket and end-of-life becoming increasingly important. Regulation (including the End-of-Life Vehicle Directive and Waste Electrical and Electronic Equipment Directive) now requires certain new recycling metrics.
Metrics should provide useful information for strategic analysis. The design of the measurement system to be used must align with the chosen production strategy. This leads to a bespoke approach, rather than a prescribed list of 'optimal' metrics, which will vary according to industry sector, place in the supply chain, and over time. Therefore metrics should be regularly reviewed, not only quantitatively, but also with a view to their relevance, however traditional metrics do not necessarily lose their relevance just because they are 'old'.
The final article in this series of three will look at the rôle of smaller enterprises within total product systems.
