Module 3.

8
Topic
Choosing the right Supply Chain relationship
Objectives
1. To be able to understand the relationship in the Supply Chain
2. To be able to identify number of approaches seek to segment suppliers into
categories
3. To be able to describe the purchase portfolio matrix
4. To be able to identify the characteristics of non critical items
5. To be able to address which relationship is appropriate in different circumstances
Concepts
Organizations around the world usually engaged with logistics and supply chain. There
are many types of supply chain relationships that could be adopted and will be use for the
efficiency and effectiveness of their supply relationship. Companies tend to deal with a
large number of suppliers, even after the supply base has been rationalized. Treating
them all in the same way fails to recognize that some have different needs to others.
Essential Questions
1. What types of supply relationships can be adopted?
2. How can each type of relationship be tailored to different types of product?
3. What are the approaches in supplier’s segmentation?
4. What are included in the purchase portfolio matrix!
5. What is the formula in getting the company index?
Introduction
There are many possible types of relationship in the supply chain. A development of
Sako’s view mentioned in the introduction is that the different options can be viewed in
the form of a continuum. This can range from arm’s length, where the relationship is
conducted through the marketplace with price as its foundation, to vertical integration,
where the relationship is cemented through ownership. Vertical integration can extend for
one or more tiers and its direction may be upstream, downstream or both. Each of these
relationship styles has motivating factors that drive development, and which govern the
operating environment. The duration, breadth, strength and closeness of the relationship
vary from case to case and over time.
Lesson Proper
A continuum of relationship options is shown in the figure below.

A focal firm may not have the same type of relationship with all of its customers and
suppliers. The firm may adopt a range of styles: choosing which type of relationship to
adopt in a given supply chain situation is an important strategic issue. For example,
grocery retailers often adopt an arm’s length style for ‘own brand’ goods like kitchen
paper, and use on-line auctions (Smart and Harrison, 2003) to obtain lowest price
solutions. Elsewhere, they may use a strategic alliance to develop petrol forecourts, such
as the Esso–Tesco Express alliance.
Companies tend to deal with a large number of suppliers, even after the supply base has
been rationalized. Treating them all in the same way fails to recognized that some have
different needs to others. Differentiating the role of suppliers and applying appropriate
practices towards them allows a focal firm to target purchasing and supply chain
management resources to better effect. A popular view is that Japanese companies
consider all of their tier 1 suppliers as partners. This is not really true: for example,
Japanese automotive manufacturers do not regard all of their suppliers as equal. In fact
among the typical 100–200 tier 1 suppliers to an OEM only about a dozen will enjoy
partnership status. Typically, these elite few tend to be large organizations.

A number of approaches seek to segment suppliers into categories. The purchase

portfolio matrix is based on the notion that a customer will seek to maximize purchasing
power when it can. This approach assumes that the key factors that affect the relationship
are the strength of the buying company in the buyer–supplier relationship, and the number
of suppliers able and willing to supply a product in the short term.
Strategic items
Strategic items are those for which the buyer has strength but there are few available
suppliers. In this situation, purchasing should use its strength carefully to draw suppliers
into a relationship that ensures supply in the long term.

Bottleneck items
Where the buyer has little power and there are few alternatives then these items are
termed bottlenecks. The aim of purchasing in this situation is to reduce dependence on
these items through diversification to find additional suppliers, seek substitute products
and work with design teams to ensure that the bottleneck items are avoided in new
products where possible.
Non-critical items
With a good choice of suppliers, possibly through following a strategy of using
standardized parts, the traditional buying mechanism of competitive tendering is most
valid for non-critical items.
Such items are the ones with the following characteristics:
● not jointly developed;
● unbranded;
● do not affect performance and safety in particular;
● have required low investment in specific tools and equipment.

Leverage items
Where there are a large number of available suppliers and the buyer has high spending
power then the buyer will be able to exercise this power to reduce prices and to push for
preferential treatment. Naturally, care should be taken not to antagonize suppliers just in
case these favorable market conditions change. This approach is heavily weighted
towards the buyer’s viewpoint. It is also a little unfashionable because it uses the term
‘power’ in supplier relationships, and assumes that traditional market-based negotiations
will be used for some product groups. However, it applies to many firms today, and
reflects the tough approach taken by purchasing teams of some of their customers.
Accepting that these sorts of conditions are likely to prevail, it is clear that suppliers need
to work on their relative strategic importance to a focal firm in order to strengthen their
position in a supply relationship.
Activity
Write true if the statement is correct and false if not.
_____ 1. A focal firm may have the same type of relationship with all of its customers
and suppliers.
_____ 2. Differentiating the role of suppliers and applying appropriate practices towards
them does not allow a focal firm to target purchasing and supply chain
management resources to better effect.
_____ 3. Bottleneck items are those for which the buyer has strength but there are few
available suppliers.
_____ 4. Strategic items are those where the buyer has little power and there are few
alternatives then these items.
_____ 5. The purchase portfolio matrix is based on the notion that a customer will not
seek to maximize purchasing power when it can.
References
Logistics Management and Strategy Competing Through the Supply Chain