Academic journal article International Journal of Purchasing and Materials Management

Supplier Partnerships: Influencing Factors and Strategic Benefits

Academic journal article International Journal of Purchasing and Materials Management

Supplier Partnerships: Influencing Factors and Strategic Benefits

Article excerpt

INTRODUCTION

Increasingly, North American firms are examining their purchasing function as part of an effort to improve plant operations. Three principal reasons have been cited for this increased awareness of purchasing's importance. First, purchased goods and services frequently account for 60 percent or more of the cost of manufacture.|1~ In situations of low profit margins and high purchased value, purchasing is a source of financial leverage.

Second, efforts at just-in-time production cannot be successful without acceptable purchased inputs of consistent quality.|2~ Reduced inventories force companies to strive for high reliability and input quality. Purchasing plays a central role in selecting the appropriate supplier and overseeing the management of supplier quality during the contract period.

Finally, careful study of the Japanese success in industrial competitiveness reveals that at least some portion of that success can be attributed to the form of the supplier relationship, not just the supplier choice.|3~ As a result, supplier selection and management of supplier relations has become a critical task for purchasing managers. This new form of supplier relationship frequently has been called a supplier partnership, or a strategic alliance.

This article summarizes theoretical developments in the area, develops a supplier partnering model, and empirically tests the model.

COMPETITIVE BIDDING VS. SUPPLIER PARTNERSHIPS

Traditionally, North American firms have used some form of bidding process for selecting suppliers. Under such a system, material specifications are explicitly defined in advance and a supplier is selected through competitive bidding, often on the basis of the lowest bid price. A variation of the low price selection criterion, the weighted factor approach, is also used to evaluate bidders. This approach encompasses a broader stream of selection criteria, including quality, delivery, and various service elements, which may override the price factor.|4~ A number of articles have focused on variations of the weighted factor approach that are used by firms in making the selection decision.|5~

The bidding process, however, is not an effective supplier selection process to use in the case of certain types of purchases. Some authors have suggested that competitive bidding should not be used when major issues other than price are important.|6~ Others have suggested that the philosophy underlying the competitive bidding approach to supplier selection can lead to a higher total cost in the long run.|7~ An emphasis on price at the expense of quality and uncertainty about follow-up contract awards, with subsequent shorter production runs, can lead to a supplier environment in which avoidance of investment in technology, R&D, and capital equipment, all requiring long-term stability for adequate financial return, is commonplace. Competitive bidding, therefore, in some cases may lead to low cost materials only in the short run, even when price is the primary selection criterion. Clearly, however, competitive bidding remains an important component of the supplier selection process for certain types of products, particularly for commodity type purchases.

On the other hand, in today's rapidly changing environment, interest has grown quickly in an alternative to the competitive bidding process--a supplier selection and relationship process called supplier partnering, or strategic alliance. This arrangement establishes and maintains an ongoing relationship between the two "partners." To work, it requires information sharing, joint problem-solving activities, and mutual dependency, dependency.|8~ In short, partnerships are strong inter-company dependency relationships with long-term planning horizons. In contrast, an annual bidding process can be considered as a short-term "hands-off" relationship that uses the continued possibility of contract nonrenewal as a bargaining tool. …

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