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© 2022 University of South Africa
All rights reserved
Printed and published by the
University of South Africa
Muckleneuk, Pretoria
MNP3703/2023
Ms Word, Florida
10034072
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CONTENTS
Page
Lesson 0: Orientation to MNP3703
iv
Lesson 1: What is supplier relationship management?
1
Lesson 2: Forming buyer/supplier relationships
17
Lesson 3: Structuring buyer/supplier relationships
41
Lesson 4: Managing change
64
Lesson 5: Managing buyer/supplier contracts
78
Lesson 6: Managing supplier performance
101
Lesson 7: Negotiating with suppliers
124
Lesson 8: Terminating buyer/supplier relationships
149
Lesson 9: A generic supplier relationship management process
162
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LESSON 0: ORIENTATION TO THE MNP3703
WELCOME TO THE MODULE
Welcome
We hope you will enjoy this module, MNP3703 and wish you all the best. If you experience
any difficulties with the content of this module, do not hesitate to email your lecturer. We
hope you will find MNP3703 exciting, interesting and rewarding.
Siyakwemukela
Siyathemba ukuthi uzowuthakasela lo mojuli MNP3703 kanti sikufisela okuhle kuphela.
Uma ngabe kukhona ubunzima ohlangabezana nabo mayelana nokungaphakathi kwalo
mojuli, ungathandabuzi, kodwa thumela i-imeyili kuthisha wakho. Siyathemba lokhu ku
MNP3703 kuzokujabulisa futhi kuzoba yinzuzo kuwe.
O amogetšwe
Re holofela gore o tla ipshina ka motšule wo wa, MNP3703 gomme re go lakaletša
mahlogonolo. Ge e le gore o na le mathata afe goba afe ka ga diteng tša motšule wo, o
se ke wa dikadika go emeilela mofahloši wa gago. Re holofela gore o tla hwetša
MNP3703 e kgahliša ebile e go putsa.
Verwelkoming
Ons hoop dat u hierdie module, MNP3703, sal geniet en ons wens u alles van die beste
toe. Stuur gerus ʼn e-pos aan u dosent indien u enige probleme met die inhoud van hierdie
module ondervind. Ons vertrou dat u MNP3703 as interessant en lonend sal ervaar.
We trust that you will find this module interesting, meaningful and enriching. This module
is offered by the Department of Applied Management, which is part of the College of
Economic and Management Sciences at Unisa. The module carries a weighting of 12
credits and is offered as a semester module.
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WHY STUDY THIS MODULE?
Undergraduate degrees at the College of Economic and Management Sciences provide
graduates with a wide range of knowledge and skills that will equip them to work in the
business community. This module builds on the second-year module: Purchasing
Management (MNP2601). While MNP2601 serves as a basis for understanding
purchasing management in organisations as an upstream process towards suppliers,
MNP3703 will show you the importance of building relationships with suppliers and how
to manage these relationships. When considering your work environment, you will realise
the importance of having reliable relationships with suppliers and understand the
obstacles that may arise in building such relationships. You will also appreciate the effort
that your organisation may put into building, developing, evaluating and managing
supplier relationships.
PURPOSE OF THIS MODULE
Supplier Relationship Management has become increasingly popular, as buyer and
supplier networks have become more global and interdependent. Consequently,
companies are becoming more reliant on strategic suppliers for their overall growth and
success. Hence, the purpose of this module is to equip you with knowledge, skills,
attitudes and values to analyse the dynamics of supplier relationships and examine the
processes and procedures to foster positive relations with suppliers. Therefore, from a
buying perspective, organisations set objectives to leverage their supply base in order to
improve their competitive position, both locally and globally. The module is designed for
those who will have the responsibility of building, maintaining and managing relationships
with suppliers.
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MODULE OUTCOMES
On completion of this module, you should be able to:
•
Critically discuss the relevant key terms, concepts, models, principles and processes
and their applicability within the field of supplier relationship management.
•
Analyse supplier relationship models that guide the formation of a buyer/supplier
relationship.
•
Analyse the characteristics and functions of different types of buyer/supplier
relationships.
•
Identify and critically discuss the factors that influence change in supplier relationship
management.
•
Apply appropriate procedures and processes in supplier contract management.
•
Evaluate the impact of supplier performance on supplier relationship management.
•
Critically discuss the applicability of negotiations as a supplier relationship
management tool.
•
Discuss the key processes for terminating stakeholder relationships.
•
Evaluate a generic supplier relationship management process with the aid of a
diagram.
•
Solve problems for the management of supplier relationships.
STUDY MATERIALS
To successfully complete MNP3703, you will have to use the following study materials:
Lessons:
You need to work through nine lessons for MNP3703. The lessons are available on
myUnisa. The lessons include all online material for MNP3703.
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Tutorial Letters:
Tutorial Letter 101 will be available on the MNP3703 module site on registration. Tutorial
Letter 101 contains essential information, such as general information about Unisa and
important module-specific details.
Throughout the semester other tutorial letters may communicate important information,
such as assignment due dates. These tutorial letters will be available on the MNP3703
module site.
Definitions of key terms
There are several key terms that are used in all Purchasing and Supply Chain
Management modules at Unisa. A document has been drawn up that includes definitions
for these key terms, as well as further explanatory notes. The definitions are available on
myUnisa. The definitions also form part of Tutorial Letter 101.
FRAMEWORK OF THE MODULE
The following table presents a framework of the different topics with the allocated lessons
covered in MNP3703. There are five topics that will be studied in the nine lessons.
Topic 1
Introduction
Lesson 1:
What is supplier relationship management?
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Topic 2
Topic 3
Forming and structuring
buyer/supplier
relationships
Changing and improving
buyer/supplier
relationships
Lesson 4:
Lesson 2:
Managing change
Forming buyer/supplier
relationships
Lesson 5:
Managing buyer/supplier
contracts
Lesson 6:
Lesson 3:
Structuring buyer/supplier
relationships
Managing supplier
performance
Lesson 7:
Negotiating with suppliers
Topic 4
Topic 5
Ending buyer/supplier
relationships
Supplier relationship
management in action
Lesson 8:
Terminating buyer/supplier
relationships
Lesson 9:
A generic supplier
relationship management
process
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LEARNING APPROACH
MNP3703 follows a fully online teaching approach; thus, teaching takes place online, and
all the learning material is provided online. You will find several learning outcomes at the
beginning of each lesson. These learning outcomes are there to guide you through the
study material, informing you of the skills you should be able to demonstrate or what you
should know by the end of each lesson. They also indicate what skills or knowledge you
may be expected to demonstrate in the assessment process.
You will have to familiarise yourself with the information contained in Tutorial Letter 101
and the nine lessons to successfully complete this module. You will be required to apply
the knowledge you have mastered to different scenarios and case studies. You also need
to spend at least 120 hours on this module. This includes approximately 40 hours on
reading and studying the learning material and 80 hours on preparing for and completing
the compulsory assessments. It is very important that you accept responsibility for your
own learning by planning your work at your own pace.
Suggestions on how to approach your studies in this module:
•
Studying
In this module we promote continuous learning; and we urge you to make an effort to
study this guide conscientiously according to the guidelines and the sequence provided.
You will need an in-depth understanding of the content of these sections to complete the
activities and the assessments for this module. In order to gain an in-depth understanding
of the learning material, you must accept responsibility for your studies. You must also
realise that learning and understanding are not the same as memorising. In the
assessments, you will be expected to show that you understand and can apply
information, not just recall it.
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•
Reading
You may wish to read more widely than just the study guide. When reading information
in other sources, you should not simply accept it without question. You should question
the ideas and information that you come across. To test your understanding of the ideas
that you learn about in this module, you should try to apply them to real situations.
Importance of completing activities, assignments and self-assessment questions
For you to succeed in this module, you are advised to start studying early in the semester
and work on your official assessments at your soonest convenient time.
•
Activities
In each of the nine lessons, you will find activities that you have to complete. These
activities are based on the work done in a specific section. Make use of the activities on
myUnisa, including YouTube videos, articles, self-assessments and discussion forum
activities to improve your understanding and to prepare you for possible assessment
questions.
You will come across various types of activities in the nine lessons, for example:
-
reflecting on work covered
-
participating in discussions on the module site
-
doing self-evaluation
-
participating in peer-evaluation
•
Official assessments
As per Tutorial Letter 101, MNP3703 follows a continuous assessment study plan. This
means that you will have several compulsory assessments during the semester in which
your results will add up to your final mark. There is no summative assessment
(examination) for MNP3703. The combined weighted averages of your assessment
marks must be 50% or higher to pass the module. There are no further opportunities if
you do not pass the module. If you fail the module, you will have to re-register for the
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module in the following semester. The assessments, will take on different forms, including
quizzes and written assessments. Specific details about the assessments will be shared
in tutorial letters and on myUnisa.
The assessments for this module will be posted on the MNP3703 module site. Completing
the official assessments is crucial to help you achieve the learning outcomes and
eventually pass this module. The official assessment questions that will be posted on your
module site will also allow you to apply the theory to a case study or a practical situation
related to your own workplace.
VERY IMPORTANT WARNING
Copying information from another source without acknowledging it may be
considered plagiarism. Copying information from another student or person is
deemed to be unethical and a criminal offence. Examples of such offences include,
if a student copy work from another person such as an assignment/assessment
and submit identical work, or if a student buys an assignment or essay from a
ghost-writing service and act as if it were his or her own assignment; or someone
else does an assignment on the student’s behalf. Such cases will be reported
immediately to the Student Disciplinary Office for investigation and possible
further action. No correspondence will be entered into about the matter.
As a third-year student, you MUST:
•
Acknowledge sources that you have consulted in assessments and activities in
a list of references at the end of the assessment. The study guide is also
considered as a source.
AND
•
Acknowledge each source in-text where the source’s information was used.
•
Apply the Harvard style of referencing in acknowledging your sources.
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Unisa’s Copyright Infringement and Plagiarism Policy, as well as a guide to the
Harvard style of referencing are available on myUnisa. Please study these
documents carefully.
CONCLUSION
We trust this module will give you a glimpse into this exciting world of entities interacting
with one another. We wish you a fascinating and satisfying journey through the learning
material and trust that you will complete the module successfully. Following this
introductory Lesson 0, we will next look at an introduction of supplier relationship
management in Lesson 1.
Enjoy the journey!
Kind regards
YOUR MNP3703 TEACHING TEAM
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LESSON 1: WHAT IS SUPPLIER RELATIONSHIP MANAGEMENT?
INTRODUCTION
Lesson 1 introduces you to the concept of supplier relationship management. We explore
appropriate models (such as the supplier preferencing model and the supplier positioning
model) and key concepts. An understanding of supplier relationship management is
important because a long-term relationship between suppliers and the organisation
results in effective supply chains, which have a positive impact on costs and customer
service. This lesson will assist you in understanding exactly what supplier relationship
management is by discussing the concept as a step beyond purchasing and strategic
sourcing, which you have previously mastered in the module Purchasing Management
(MNP2601). This lesson lays the foundation for the module by explaining the nature and
management of supplier relationships with appropriate models as well as the
characteristics of different types of buyer–supplier relationships.
The overview of Lesson 1 is illustrated in Figure 1.1 below:
Understanding
supplier
relationship
management.
Types of
relationships
between buyers
and suppliers
Lesson 1
What is supplier
relationship
management?
Nature of supplier
relationship
management
Figure 1.1: Overview of Lesson 1
The importance
of supplier
relationship
management in
organisations.
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The focus of this lesson is therefore on achieving specific outcomes. You can use the
outcomes to guide you throughout the learning process and to monitor your progress.
Learning outcomes
After studying this lesson, you should be able to do the following:
•
•
•
•
•
Compile your own concise definitions of the concepts of supplier, buyer–supplier
relationship and supplier relationship management.
Critically discuss the importance of supplier relationship management in
organisations.
Apply the supplier preferencing model to a case study.
Apply the supply positioning model to a case study.
Distinguish between the three types of supplier relationship management in
organisations.
Key terms
•
•
•
•
•
•
purchasing management
strategic sourcing
supplier preferencing model
supply positioning model
buyer–supplier relationship
supplier relationship management
Recommended resources
Gadde, LE & Snehota, I. 2019. What does it take to make the most of supplier
relationships? Industrial Marketing Management 83:185–193. :
https://www.sciencedirect.com/science/article/pii/S0019850118308745 (accessed: 8
October 2021).
Hawkins, TG, Wittmann, CM & Beyerlein, MM. 2008. Antecedents and consequences of
opportunism in buyer–supplier relations: Research synthesis and new frontiers.
Industrial Marketing Management 37(8):895–909.
https://www.sciencedirect.com/science/article/pii/S0019850107000685 (accessed: 30
September 2021).
Nagel, DM, Giunipero, L, Jung, H, Salas, J & Hochstein, B. 2021. Purchaser
perceptions of early phase supplier relationships: The role of similarity and likeability.
Journal of Business Research 128:174–186. :
https://www.sciencedirect.com/science/article/pii/S0148296321000345 (accessed:
29 September 2021).
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Shiralkar, K, Bongale, A & Kumar, S. 2021. Issues with decision-making methods for
supplier segmentation in supplier relationship management: A literature review.
Materials Today: Proceedings. [Online]. :
https://www.sciencedirect.com/science/article/pii/S221478532105999X (accessed: 6
October 2021).
1.1.
UNDERSTANDING SUPPLIER RELATIONSHIP MANAGEMENT
What is supplier relationship management? There is no standard definition of supplier
relationship management. Hence, there is no agreement on a consistent definition.
However, there are some common elements in the available definitions.
Activity 1.1: Defining supplier relationship management
Search the internet for relevant articles on “what is supplier relationship management”.
Read a minimum of five definitions on supplier relationship management. Below are some
links that you may find useful to understand the definition.
https://www.cips.org/knowledge/procurement-topics-and-skills/supplier-relationshipmanagement/
https://www.tradegecko.com/blog/supply-chain-management/what-is-supplierrelationship-management
https://www.nigp.org/resource/global-bestpractices/Supplier%2520Relationship%2520Management%2520Best%2520Practice.pd
f?dl=true
In not more than 200 words, write your own understanding of what is supplier relationship
management.
As you study the different definitions, take note of the common concepts and terms used
in each definition. You will use the common terms and concepts to formulate your own
definition.
Read the posts of your fellow students and comment on at least two posts. Compare your
answers to those of your peers. See how your definition compares to those of your peers.
You may then consider modifying your own definition.
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Feedback on Activity 1.1
Did you consider any of the following points in your definition?
•
•
•
•
•
•
•
•
•
•
Process of identifying appropriate and most suitable suppliers
Building lasting relations based on trust between the buyer and supplier
Sharing information to reach a common goal in business success
Classifying each relationship according to the buyer’s needs and the supplier’s
capabilities
Evaluating the supplier’s performance for correction and improvement
Optimising benefits for all the parties involved
Strategy to reduce price and costs for all the parties involved
Increase in efficiency when supply requirements and possible solutions are clear
Method to prioritise the most important or urgent business matters
Process to discover new opportunities with new suppliers
In the next section, you will learn about the importance of supplier relationship
management
1.2. THE IMPORTANCE OF SUPPLIER RELATIONSHIP MANAGEMENT
Suppliers and relationships with them are the focus of purchasing management and
strategic sourcing. The modules Purchasing management (MNP2601), Supply chain
management (MNP2602) and Strategic sourcing (MNP3701) highlighted the fact that
purchasing management evolved from
•
•
an inward-directed operation with administrative characteristics to
strategic outward-directed sourcing operations.
This describes one unit of the supply chain management concept.
For the sake of comprehensiveness, a summary of the concepts of purchasing and
strategic sourcing are provided in Sections 1.2.1 and 1.2.2. Finally, the benefits resulting
from these two concepts highlight the importance of supplier relationship management in
Section 1.2.3.
1.2.1 Purchasing management
Purchasing was traditionally considered a transactional activity whereby the ability of a
supplier to deliver products and services on time and at the right price was monitored
(Engelbrecht, 2021).
Purchasing management deals with the process of obtaining goods and services to
satisfy the needs of an enterprise by using the following steps:
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(1)
(2)
(3)
(4)
(5)
identifying the need
finding and choosing the right supplier to fulfil the need
negotiating matters such as price, quality and quantity with the supplier
ensuring that the goods or services fulfilling the need are delivered according to the
agreed conditions
maintaining files and records to document the transaction
The process of purchasing management is illustrated in Figure 1.2 below:
Deciding on
what, when and
how much to
purchase
Finding and
choosing a
supplier
Negotiating
price, quality
and quantity
Ensuring goods
are received on
time according
to the specified
quantity and
quality
Maintaining
files and records
to document
the transaction
Figure 1.2: Process of purchasing management
In the past few decades, the purchasing function has been characterised by major
dynamic changes, because of certain developments in the management of organisations.
As a result, the role of the purchasing management function has transformed from an
administrative activity involving a simple transferral of goods to a managerial function with
a primary objective to ensure continual movement of materials, goods and services in
order to meet consumers’ needs consistently (Engelbrecht, 2021). A more strategic view
of purchasing management developed.
1.2.2 Strategic sourcing
Strategic sourcing is a complicated process that involves several related tasks. In the
literature, strategic sourcing is viewed from both a broad perspective and a narrow
perspective. In the broader sense, strategic sourcing involves top-level, long-term
decisions about high supply risk products or services (Lysons & Farrington, 2020). In the
narrow sense, strategic sourcing is a structured process that analyses an organisation’s
spending patterns with the aim of leveraging its purchasing power, reducing costs and
improving its overall performance.
Strategic sourcing can be regarded as a process whereby internal and external activities,
services and know-how are continuously balanced with the organisation’s long-term
strategy. This involves constantly evaluating the business processes and the product or
service requirements, and forming a reliable supplier base (Lysons & Farrington, 2020).
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1.2.3 The benefits of supplier relationship management
For many years, it has been clear that relationships with customers should be built and
maintained to grow a business. More recently, it was discovered that managing
relationships with suppliers are just as important. Most business dealings are dependent
on the availability of products and services and the efficiency with which these
relationships are built. Even if all strategies were achieved in the process of strategic
sourcing, efforts may be in vain if suppliers are not well managed.
Activity 1.2: Benefits of supplier relationship management
Watch the video on supplier relationship management. In a short paragraph of
approximately 200 words, argue any two opposing views (challenges versus benefits)
mentioned in the video.
The benefits of supplier relationship management in strategic
https://www.youtube.com/watch?v=DznMytfLQNE (duration 8:43 minutes)
sourcing:
Feedback on Activity 1.2
Have you considered the following points in your discussion?
•
•
•
Why is it important to focus on supplier relationship management?
What gave rise to supplier relationship management?
From the above questions answered, identify benefits and challenges and argue
two opposing views of supplier relationship management.
In the next section, you will learn about the nature of supplier relationships.
1.3. THE NATURE OF SUPPLIER RELATIONSHIPS
The Oxford English dictionary (2022) defines a relationship as the way in which two or
more things are connected. Relationships apply when individuals, organisations and
groups within and external to an enterprise interact. Relationships between suppliers and
buyers differ a great deal – they may range from low-value, transaction-based interactions
to partnerships that are of strategic and financial importance to the business.
It makes sense that the more strategic purchasing became, the more important suppliers
became. The attainment of the strategic potential of efficient and effective purchasing
requires a reorientation of the buyer’s view of suppliers and their resources once a
contract or an agreement has been reached. Forming close relationships with chosen
suppliers, and maintaining these throughout their involvement with the buyer, is an
enabler to gain access to the supplier’s resources (for example, their technological
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expertise). Buyers do not always dictate the direction of a relationship. The importance of
suppliers’ clients sometimes dictates the preference of the type of relationship, depending
on the position and power of a supplier.
1.3.1 The supplier’s influence on the relationship
The supplier preferencing model was originally introduced by Paul Steele and Brian
Court. The model demonstrates how suppliers see a buyer by considering two aspects:
(1)
the value of the business offered by the buyer in terms of the supplier turnover
levels, and
(2) the level of attractiveness that the buyer’s business has for the supplier
(Cordell & Thompson, 2019)
These two aspects form the axes of the model and divide the preferences into four
quadrants. Each of the quadrants implies a different view of the buyer on the part of
suppliers. The nuisance quadrant indicates that a supplier views the buyer’s current
business as nonessential, and that a buyer–supplier relationship is not worth developing.
This is because of the low value of business offered to the supplier, added to a low level
of attractiveness of the buyer. If the value of business offered increases, but the level of
attractiveness is still low, a supplier will tend to exploit the buyer–supplier relationship to
maximise their own gain. These two supplier views account for the least positive
quadrants in the supplier preferencing model (Cordell & Thompson, 2019).
Nevertheless, if the level of attractiveness of the buyer is high, the supplier will be willing
to develop the buyer–supplier relationship by increasing the level of current performance
in the hope of escalating business dealings with the buyer, thereby aiming to move a
buyer into the core quadrant of the supplier preferencing model – where the value of
business and the level of attractiveness of the buyer are both significant (Cordell &
Thompson, 2019).
Figure 1.3 demonstrates the supplier preferencing model.
High
Level of
Attractiveness
Low
Low
Develop
relationship
with buyer
Core
relationship
with buyer
Nuisance
relationship
with buyer
Exploit
relationship
with buyer
Value of business
Figure 1.3: Supplier preferencing model (Cordell & Thompson, 2019)
High
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Activity 1.3: Understanding a supplier’s preference of a relationship
Visit the following link and read the news article about Vehicle Energy Japan and their
relationship
with
Nissan:
https://global.nissannews.com/en/releases/release5078281d19ed36853371357c4a03e1fa-220907-01-e
Consider the supplier preferencing model while reading this article to form an opinion
about what type of relationship Vehicle Energy Japan will prefer to have with Nissan.
Debate with your fellow students the value of Nissan’s business as well as the level of
attractiveness that Nissan holds for Vehicle Energy Japan. Conclude which type of
relationship Vehicle Energy Japan will probably prefer.
Feedback on Activity 1.3
Did you consider
•
•
why Nissan's business will be highly attractive to Vehicle Energy Japan
why Vehicle Energy Japan will believe that the value of Nissan's business is high
in terms of their turnover levels
1.3.2 The buyer’s influence on the relationship
The buyer evaluates the amount they spend on purchases of products and services. In
other words, a buyer will do an analysis of the level of risk and complexity an item or
service holds for the organisation as opposed to the value spend allocated to the item or
service. According to the supply positioning model – also known as the strategic sourcing
matrix developed by Peter Kraljik (1983) – products or services are then classified as
routine, leverage, bottleneck and critical. If the buyer is in a position of power, this model
will be the determinant of the nature of the relationship. Figure 1.4 demonstrates this point
by means of an illustration of the supply positioning model.
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High Bottleneck
products or services
• Low expenditure
• Few alternate
products/services available
• Few qualified sources of
products/services available
• Unique specifications
Level of risk
and complexity
Critical
products or services
• High expenditure
• Strategic to profitability and
operations of the buyer
• Alternate products/services
not available
• Few qualified sources of
products/services available
• Complex specifications
Routine
Leverage
products or services
products or services
• Low expenditure
• High expenditure
• Many existing alternate
• Existing alternate
products/services available
products/services available
• Products/services readily
• Products/services readily
available from various
available
qualified sources
• Small individual
transactions
Low • Clear specifications
Low
Value spent
High
on an item
Figure 1.4: Supply positioning model (Kraljik, 1983).
You can now argue that the core quadrant of the supplier preferencing model is the ideal
situation for a buyer to be in from the supplier’s point of view, especially where critical
products are concerned – or is it? Is it not more beneficial for a supplier to position a buyer
in the exploit quadrant if they know that the purchase is a high spend requirement easily
substituted? Or the develop quadrant if a low value requirement will be repeated
numerous times and substitution is difficult? Or maybe in the nuisance quadrant if the
supplier knows that they are providing a low-value product in small amounts to the buyer?
You will be correct in all of the above instances.
You would have now realised why buyer–supplier relationships in practice are so difficult
and interesting to study. Let us continue our exploration by establishing exactly what
supplier relationship management is.
Page 10
Activity 1.4: Understanding a buyer’s position in a relationship
Do some further reading on automotive lithium-ion batteries and again read the news
article about Vehicle Energy Japan and their relationship with Nissan:
https://global.nissannews.com/en/releases/release5078281d19ed36853371357c4a03e1fa-220907-01-e
Discuss the applicability of the supply positioning model when you classify the automotive
lithium-ion batteries that Nissan buys from Vehicle Energy Japan as a type of product in
the model.
Feedback on Activity 1.4
Which product or service characteristics did you consider for each quadrant? Did you
think of the following key questions?
•
•
•
•
What are the costs involved in purchasing automotive lithium-ion batteries?
What alternative products are available in the market?
How many other suppliers of automotive lithium-ion batteries are available to Nissan
in the market?
What is the level of complexity involved in the specifications of automotive lithiumion batteries?
1.3.3 Linking the supplier preferencing model and the supply positioning model
A buyer must ensure that there is a clear link between the category of a specific product
or service and the preference of the buyer reserved by the direct suppliers of that
particular product or service (illustrated by Figure 1.5). As a result, a buyer’s comparison
of the supplier preferencing model and the supply positioning model will unfold as follows:
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High
Level of attractiveness
Low
Develop
Core
relationship
relationship
(especially with the
(especially with the suppliers
suppliers of bottleneck
of critical products or
products or services)
services)
Nuisance
Exploit
relationship
relationship
(especially with the
(especially with the suppliers
suppliers of routine products
of leverage products or
or services)
services)
Low
Value of business
High
Figure 1.5: Comparison of the supplier preferencing model and the supply positioning
model (Cordell & Thompson, 2019; Kraljik, 1983)
Clearly, a buyer wants the suppliers of their critical products or services to envision a core
buyer–supplier relationship between the two organisations. They would also value the
bottleneck products or services supplier’s inclination to develop the current buyer–
supplier relationship. Note that it is never preferable that a supplier views the buyer’s
business as nuisance or worth exploiting – not even when a low monetary value is
associated with an agreement.
The buyer would therefore have to endeavour to move the perceptions of especially their
more essential suppliers to either regard the buyer–supplier relationship as a core
relationship with the particular buyer or at least that the buyer–supplier relationship is
worth developing. How do they achieve this? They do this by not focusing merely on the
actual purchasing or strategic sourcing efforts of the organisation, but rather managing
all buyer–supplier relationships continuously throughout the span of the organisations’
involvement with each other.
Activity 1.5: Comparing the supplier preferencing model and the supply positioning
model
Revisit the news article about Vehicle Energy Japan and their relationship with Nissan:
https://global.nissannews.com/en/releases/release5078281d19ed36853371357c4a03e1fa-220907-01-e
When comparing the supplier preferencing model and the supply positioning model,
discuss what Nissan needs to consider when classifying the automotive lithium-ion
batteries that they are buying from Vehicle Energy Japan.
Page 12
Feedback on Activity 1.5
Now that you have suggested which relationship Vehicle Energy Japan would prefer with
Nissan in Activity 1.3, and identified the type of product automotive lithium-ion batteries
can be classified as in Activity 1.4, address the following:
•
•
•
Which type of relationship will be reasonable for Nissan to pursue with Vehicle
Energy Japan for purchases of automotive lithium-ion batteries?
Do you agree that it will be a good strategy for Vehicle Energy Japan to form the
relationship type that you identified in Activity 1.3?
Do you agree that the type of product you identified in Activity 1.4 should place the
focus on the relationship type that you identified in Activity 1.3?
In the next section, you will learn about the types of relationships between buyers and
suppliers.
1.4. TYPES OF RELATIONSHIPS BETWEEN BUYERS AND SUPPLIERS
A buyer–supplier relationship comprises any interaction between a buyer and a supplier,
either positive (good) or negative (bad). The most successful relationships are those
where buyers and suppliers develop trust and an understanding of their respective
requirements and interests, accompanied by a concern that both learn from and provide
assistance to each other. Where such conditions exist, the ultimate outcome should be
the creation of established and dependable buyer–supplier relationships. Such
relationships are the basis of networks and provide competitive advantages for both
parties.
A wide spectrum of relationships between buyers and suppliers can exist based on the
type of interaction between the buyer and the supplier. The spectrum stretches from
transactional relationships to alliance-type relationships. Figure 1.6 provides a summary
of the activities and attributes common to each.
Page 13
CONTINUUM OF BUYER–SUPPLIER RELATIONSHIPS
Communication
Competitive
advantage
Connectedness
Continuous
improvement
Contributions to new
product
development
Difficulty to exit
Duration
Expediting
Focus
Level of integration
Level of trust
Number of suppliers
Open books
Quality
TRANSACTIONAL COLLABORATIVE
ALLIANCE
RELATIONSHIPS
RELATIONSHIPS RELATIONSHIPS
Systematic approach to
High potential for problems
enhance communication
Low
Independence
High
Interdependence
Little
A focus on
Few
Many/Early supplier
involvement
Low
Short
Reactive
Price
Little or none
Low
Many
No
Incoming inspection
Relations
Inward looking
Resources
Service
Shared forecasts
Supply disruption
Technology inflow
Type of interaction
Few skills/Low-skill level
Minimal
No
Possible
No
Tactical
Difficult/High impact
Long
Proactive
Total cost
High or total
High
One or few
Yes
Design quality into system
Concern with each other’s
wellbeing
Professional
Greatly improved
Yes
Unlikely
Yes
Strategic synergy
Figure 1.6: Characteristics of the three principal classes – transactional, collaborative
and alliance buyer–supplier relationships (Horn, Badenhorst-Weiss, Cook, Heckroodt,
Strydom, 2015)
From this broad spectrum of buyer–supplier relationships, a buyer–supplier relationship
continuum is formed that includes more specific agreements between suppliers such as
spot purchases, regular trading, call-off contracts, fixed contracts, partnerships, strategic
alliances, joint ventures and internal provision (Putri, Suliantoro & Pujoromo, 2020).
Certain types of contracts are also associated with certain types of buyer–supplier
relationships. These are discussed in more detail in Lesson 3.
Page 14
Now consider this: If a buyer–supplier relationship is a managed one, who is doing the
managing and what does it entail? Will it be the buyer or the supplier? Traditionally,
suppliers did a better job of managing their customers (the buyers). Organisations
traditionally focused more on customers (the sales/marketing side of the organisation)
and therefore “customer relationship management” has been an important part of
marketing management. Organisations conventionally placed too little emphasis on the
management of the supplier side, and supplier relationships and supplier relationship
management only became important in the previous decade. Attention to the supply side
and suppliers only changed with the inception of the supply chain management approach.
The traditional price-based relationship with suppliers is changing – giving way to longterm relationships based on total cost, trust, flexibility, innovation, quality and constant
amendment. These relationships are assisting organisations to make a positive impact
on customer satisfaction, financial performance, innovation and organisational growth.
This requires a considerable amount of commitment by the buyer. It is worth the effort,
however, as an increasingly large percentage of the value of a product or service comes
from suppliers in today’s business world, prompting organisations to realise the
significance of sustaining strategic relationships with first-tier (and in some cases even
second-tier) suppliers by means of constructive management.
The gist of supplier relationship management will become clearer as we proceed with the
discussion on the implementation thereof.
Activity 1.6: Plotting interactions between organisations on the continuum of
buyer–supplier relationships
Consider the organisation that you work for, or any organisation of your choice, and
explore their relationships with various suppliers. Apply the interaction between your
organisation and a supplier for each of the three principal classes on the continuum of
buyer–supplier relationships by analysing the characteristics for each class.
Feedback on Activity 1.6
Were you able to evaluate specific characteristics of the interaction between your
organisation and relevant suppliers, and categorise the relationship into each of the
principal classes of buyer–supplier relationships?
SUMMARY
What an overwhelming start to this module on supplier relationships! We suggest that you
review Lesson 1 a couple of times to ensure that you are well versed in the fundamental
principles of managing buyer–supplier relationships before proceeding to Lesson 2. Do
you understand the premise of the complex world of supplier relationship management?
Page 15
You should, as we determined exactly what supplier relationship management is. We
started with a definition of suppliers, buyer–supplier relationships and supplier
relationship management, and discussed the concept as being a step beyond purchasing
and strategic sourcing. We explained the nature of supplier relationships from both the
buyers’ and the suppliers’ point of view. Lastly, we explained the types of relationships
between buyers and suppliers.
In Lesson 2, we look at how buyer–supplier relationships are formed.
SELF-REFLECTION
Think about what you have learned in this lesson and then answer the following questions:
•
•
•
•
•
Did you realise how complex relationships between buyers and suppliers can be?
What was your view of supplier relationship management before you started the
learning process?
Have any of your thoughts or beliefs about managing supplier relationships changed
– and if so, how?
Were you able to apply the theory in this lesson to real-life case studies?
Did you achieve the learning outcomes successfully or did you struggle? If you were
struggling or could not complete the lesson in the recommended time, which
strategies could you apply to improve your learning?
LIST OF REFERENCES
Cordell, A & Thompson, I. 2019. The procurement models handbook. 3rd edition. London:
Routledge. https://0-doi-org.oasis.unisa.ac.za/10.4324/9781351239509 (accessed: 31
August 2022).
Engelbrecht, W. 2021. Business management: Back to basics. Cape Town: Juta &
Company.
:
https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=2803367&site=eds
-live&scope=site (accessed: 29 August 2022).
Horn, G, Badenhorst-Weiss, H, Cook, J, Heckroodt, S & Strydom, J. 2015. Supply chain
management: A logistics approach. Cape Town: Oxford University Press Southern Africa.
https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=1104435&site=eds
-live&scope=site (accessed: 1 September 2022).
Kraljik, P. 1983. Purchasing must become supply management. Harvard Business
Review 61(4):109–118.
Page 16
Lysons, K & Farrington, B. 2020. Procurement and supply chain management. Harlow:
Pearson Education.
Nissan Motor Corporation. 2022. Nissan to acquire shares in Vehicle Energy Japan Inc.
[Online]. https://global.nissannews.com/en/releases/release5078281d19ed36853371357c4a03e1fa-220907-01-e (accessed: 31 August 2022).
Putri, SK, Suliantoro, H & Pujoromo, D. 2020. The 5th International Conference on
Industrial, Mechanical, Electrical and Chemical Engineering 2019 (ICIMECE), Solo, 17–
18 September 2019. AIP Conference Proceedings.
Simpson, J (ed). 2022. Oxford English dictionary. 3rd edition. Oxford: Oxford University
Press.
Page 17
LESSON 2: STRUCTURING BUYER–SUPPLIER RELATIONSHIPS
INTRODUCTION
In Lesson 1, we introduced supplier relationship management. In Lesson 2, we explain
how buyer–supplier relationships are formed during accumulating levels of interaction.
We also highlight the usefulness of supplier relationship models in the formation of
supplier relationships. In doing so, we explore models such as the Cox supplier
relationship model (Cox, 1996), the Bensaou supplier relationship model and the IMP
supplier relationship model that buyers may choose from to implement in their
organisations and its supply base. An understanding of the supplier relationship models
is important because it provides guidance in the formation of buyer–supplier relationships
from the perspectives of both theory and practice.
The overview of Lesson 2 is illustrated in Figure 2.1 below:
Establishing
buyer supplier
relationships.
The
importance of
supplier
relationship
models
Lesson 2:
The COX
Supplier
relationship
model
Structuring
buyer-supplier
relationships
The IMP
supplier
relationship
model
Figure 2.1: Schematic overview of Lesson 2
The Bensaou
supplier
relationship
model
Page 18
Learning outcomes
After studying this lesson, you should be able to do the following:
•
•
•
•
•
•
Apply relationship formation, according to the five different aggregation levels, to
relevant case studies.
Discuss the different stages of supplier integration.
Apply the Cox supplier relationship model in relation to the transaction cost theory
(TCT) and the resource-based theory (RBT) to relevant case studies.
Analyse the management profile for each contextual profile matrix in the Bensaou
supplier relationship model.
Apply the four elements of the IMP supplier interaction model to relevant case studies.
Critically discuss the importance of the supplier relationship models to purchasing,
sourcing and supply professionals.
Key terms
•
•
•
•
•
•
•
•
•
•
•
•
•
Cox model
transaction cost theory (TCT)
resource-based theory (RBT)
Bensaou model
captive buyer
strategic partnership
market exchange
captive supplier
IMP model
interaction process
interaction parties
interaction environment
atmosphere
Recommended resources
Cordell, A & Thompson, I. 2019. The procurement models handbook. 3rd edition.
London: Routledge. https://0-doi-org.oasis.unisa.ac.za/10.4324/9781351239509
(accessed: 31 August 2022).
Hu, S, Chen, P & Chen, X. 2021. Do personalized economic incentives work in
promoting shared mobility? Examining customer churn using a time-varying Cox model.
Transportation Research Part C: Emerging Technologies 128. [Online].
https://www.sciencedirect.com/science/article/pii/S0968090X21002382 (accessed: 10
January 2022).
Page 19
Liu, Y, Luo, Y, Huang, Y & Yang, Q. 2017. A diagnostic model of private control and
collective control in buyer–supplier relationships. Industrial Marketing Management
63:116–128.
https://www.sciencedirect.com/science/article/pii/S0019850116302954#bb0015
(accessed: 20 January 2022).
2.1 ESTABLISHING BUYER–SUPPLIER RELATIONSHIPS
If you refer back to Section 1.4 in Lesson 1, you will remember that a buyer–supplier
relationship constitutes any interaction between a buyer and a supplier, which can be
positive or negative. Depending on the reason for the buyer–supplier relationship, several
relevant processes (P) and outcomes (O) are involved in a relationship. Interaction takes
place at different levels between the buying and supplying organisations. These
interactions also differ in intensity and formality. Lysons and Farrington (2020) arrange
these interactions on five different aggregation levels: action, episodes, sequences,
relationships and partner base. This is illustrated in Figure 2.2. (You will see that the last
two levels are not indicated in Figure 2.2. They are actually a combination of the first three
aggregation levels.)
P and O
P and O
Sequence
Episode
Action
P and O
P and O
P and O
P and O
P and O
P and O
P and O
P and O
P and O
Figure 2.2: Processes (P) and outcomes (O) on different interaction levels (Holma,
Vesalainen, Soderman & Sammalmaa, 2020)
These are hierarchical levels, ranging from a single exchange to the portfolio of
relationships of one particular enterprise:
Page 20
•
•
•
•
•
Actions: Individual initiatives by the buyer (such as a telephone call or plant visit)
that may relate to products, information, money or social contacts.
Episodes: Groups of interrelated actions, such as a negotiation encompassing a
number of actions.
Sequences: Larger and more extensive entities of interactions. This level may be
defined in terms of a contract, product, campaign or project. A sequence in
enterprises can also be related to the presence of a significant human action in
either of the organisations. A sequence may then end when a particular person is
replaced by another in either organisation. Even if the relationship continues, the
quality of the relationship may change due to the influence of one single person.
The completion of a sequence constitutes a vulnerable period during which the
parties make important evaluations. The evaluation may cause a potential
termination of the relationship because a sequence represents a time-framed
commitment, which is defined by the particular sequence.
Relationships: These are comprised all the sequences, which in turn comprise all
related episodes and actions in one particular relationship between two
organisations.
Partner base: The relationship portfolio of a particular enterprise (that is, all the
relationships that a particular enterprise has at a particular time).
Long-term personal relationships usually form or develop by going through the same
stages. Thus, a meeting (action level) may develop into a friendship (episode level),
courtship (sequential level) and marriage (relationship level). Each level is normally of a
longer and more permanent duration than the preceding one. The model of supplier
integration shown in Figure 2.3 follows this pattern (Lysons & Farrington, 2020).
Page 21
Figure 2.3: Stages of supplier integration (Lysons & Farrington, 2020)
Activity 2.1: Applying the five aggregation levels of interaction
Visit the following link and read the article about First National Bank (FNB) that became
the principal partner for the Springbok women’s team: https://www.sarugby.co.za/newsfeatures/articles/2022/08/10/fnb-join-springbok-women-on-journey-to-greatness/
SA Rugby’s high-performance manager for women’s rugby states that they are delighted
to be partnering with FNB as a sponsor. Suggest scenarios that are relevant to the article
for the progress through each of the five aggregation levels.
Page 22
Feedback on Activity 2.1
To guide you, let us first consider a scenario that relates to “actions”.
•
•
•
Actions: SA Rugby may have used individual initiatives that relate to service,
information, money or social contacts, such as an email to FNB (information) or an
invitation to a rugby game of the Springbok women’s team (social contact). Which
scenarios can you suggest that will be relevant to progress through the aggregation
levels of episodes and sequences?
Relationships: A relationship comprises all the sequences (contracts), which in turn
comprise all related episodes (negotiations) and actions (social contacts) in one
particular relationship between two organisations. Therefore, the relationship
between the Springbok women’s team and FNB will comprise all the contracts (for
the Castle Lager Rugby Championship and the Rugby World Cup), all the
negotiations (about prices, the extent of the services and the terms of sharing
information) and all the social contacts (attending rugby games and so on).
Partner base: The relationship portfolio of a particular enterprise (that is, all the
relationships that a particular enterprise has at a particular time); in this case, the
Springbok women team’s relationships with its “strong and credible sponsors”.
Long-term personal relationships usually form or develop by going through the same
stages. Each stage is normally of a longer and more permanent duration than the
preceding one.
Do you now realise that relationships between buyers and suppliers form at different
levels during interactions? In Section 2.2, we continue our exploration of relationship
formation by examining supplier relationship models. A buyer has to choose a specific
supplier relationship model to implement within their organisation and its supply base.
This often dictates the structuring of the buyer–supplier relationship, and guides the
manner in which the buyer will employ the supplier contract and performance
management functions. There are several models of supplier relationships, of which the
following by Cox, Bensaou and the IMP Group are typical. We start off with the Cox
supplier relationship model.
Page 23
2.2 THE COX SUPPLIER RELATIONSHIP MODEL
The Cox supplier relationship model is illustrated in Figure 2.4 below:
Figure 2.4: Cox model (Lysons & Farrington, 2020)
The Cox supplier relationship model draws heavily on concepts associated with
transaction cost and resource-based theories of the organisation. In this section, we
explore these theories and relate them to the Cox supplier relationship model. We classify
contracts according to the Cox supplier relationship model.
2.2.1 The TCT
We often consider an organisation’s expenses to be the cost of products and the tax to
be paid on those products. But do we consider all the costs involved in trading before it
can be retailed? The TCT considers all costs and sets an organisation’s goal to minimise
the costs of providing a good or service if it was purchased in the marketplace in order to
minimise the costs within the organisation. Three key concepts included in the theory are
those of transactions, asymmetrical information distribution and asset specificity (Lysons
& Farrington, 2020).
Page 24
Transaction costs comprise:
•
•
•
search and bargain costs
bargaining and decision costs
policing and enforcement costs
Asymmetrical information distribution means that the parties to a transaction have uneven
access to relevant information. One consequence is that, within contractual relationships,
either party may engage in post-contractual opportunism if the chance of switching to
partnerships that are more advantageous arises.
Asset specificity is the relative lack of transferability of assets intended for use in a given
transaction to other uses. There are six main types of asset specificity:
(1)
(2)
(3)
(4)
(5)
(6)
sites
physical assets
human assets
brand names
dedicated assets
temporal
Activity 2.2: Significance of the TCT
Watch the video on TCT. Apply at least two examples for each of the concepts associated
with the TCT mentioned in the video.
Transaction cost theory and transaction cost sources: Introduction to organisations:
https://www.youtube.com/watch?v=xQcpomoGCI0 (duration 11:28 minutes)
Feedback on Activity 2.2
•
•
•
•
Were you able to apply relevant examples for each concept of the TCT?
What aspects of the transaction costs did you consider when applying examples to
the TCT?
Were you able to provide examples where buyers or suppliers had more or limited
information about applicable transactions?
How do your examples show that there may have been assets that could not be
transferred to other transactions, resulting in high risk and associated costs of
the assets?
Page 25
2.2.2 The RBT
Have you ever deliberated on the reasons why some organisations outperform their
competitors? The RBT has an internal focus and emphasises that each organisation is
characterised by its own unique collection of resources of core competences. The source
competitive advantage is the creation and exploitation of distinctive capabilities that are
difficult to build and maintain, codify and make into recipes, copy and emulate, and cannot
simply be bought off the shelf. Three basic types of distinctive capabilities are identified:
(1)
(2)
(3)
Corporate architecture: The capacity of the organisation to create and store
organisational knowledge and routines, promote more effective cooperation
between network members, achieve a transparent and easy flow of information,
and adapt rapidly; and flexibly.
Innovation: The capacity to lower costs, improve products or introduce new
products ahead of competitors. The successful exploitation of new ideas
incorporating new technologies, designs and best practice is difficult and
uncertain. Often, innovation can only be achieved by cooperating and
collaborating with partners.
Reputation: The capacity to instil confidence in an organisation’s credibility;
reliability; responsibility; trustworthiness; and, possibly, accountability.
Organisation only achieves a positive reputation over time; however, once
achieved, their ability to provide quality assurance may enable them to obtain a
premium price for products.
2.2.3 Cox’s supplier relationship model based on the TCT and the RBT
According to Lysons and Farrington (2020), Cox derives the following propositions from
the insights provided by the TCT and the RBT:
•
•
•
Arm’s length relationships are associated with low asset specificity and low
supplier competences that can easily be bought off the shelf, as there are many
potential suppliers.
Internal contracts (in-house provision) are associated with high asset specificity
and core competences. The more competences approximate to core
competences of high asset specificity, the greater the likelihood that external
relationships may lead to merger or acquisition; or, failing that, result in very
close, single-sourced negotiated contracts in which both parties have some clear
ownership rights in the goods and services produced.
Partnership relationships apply to assets of medium specificity and ascend in steps
according to the distance of the complementary competences that are provided by
external suppliers from the core competences of a particular organisation. The
nearer the complementary competences are to the core competences of the
Page 26
organisation, the more the organisation will have to consider vertical integration
through merger and acquisition. The further away from the core competences of the
organisation, the less there is a need for medium asset-specific skills to be vertically
integrated.
2.2.4 Cox’s classification of contractual relationships
The five steps of the ladder of contractual relationships shown in Figure 2.4 represent a
higher level of asset specificity and strategic importance to the organisation of the specific
goods and services. Each step also represents relative degrees of power between the
relationship’s participants and in the relative ownership of the goods and services
emanating from the relationships. Strategic supplier alliances are the final stage before
an organisation considers a complementary supplier to be so important that vertical
integration through merger and acquisition is undertaken.
•
•
•
•
Adversarial leverage: Until the mid-1980s, approaching the marketplace on an
adversarial basis was the norm. Buyers thus multisource; negotiate short-term
contracts; maintain secrecy regarding costs, sales and product design; and
make (or receive) no improvement suggestions to (or from) suppliers.
Preferred suppliers: These are providers of complementary goods and services
of medium asset specificity or strategic importance that have been placed by the
buyer on a restricted list of potential suppliers after a process of vendor rating
and accreditation.
Single sourcing: This is purchasing from a single supplier of medium asset
specificity complementary goods or services of relatively high strategic
importance. As Cox observes, the aim of single sourcing is to reduce transaction
costs and economise, but without the costs associated with vertical integration.
Network sourcing and partnerships: Network sourcing “is the idea that it is
possible to create a virtual company at all levels of the supply chain by
engineering multiple tiered partnerships at each stage, but without moving to
vertical integration”. With network sourcing:
o the prime contracting organisation acts as the driver for the reduction of
transaction costs within the whole supply and value chain
o cost reduction is achieved by a partnership between the prime contractor
and a first-tier supplier who controls an important medium asset for the
prime contractor and also forms similar partnerships with second-tier
suppliers
o each tiered level of the supply chain is effectively a joint venture in which
organisations at each stage will inform and educate their respective
partners by sharing best practice and “fit for purpose” techniques
o such network sourcing relationships will only be possible in mature
industries “where asset specificity has constantly been reduced and
multiple and serial subcontracting thereby facilitated. In such supply
Page 27
chain relationships issues of ownership, control and power become
increasingly difficult to allocate”.
• Strategic supplier alliances: Classically referred to as joint ventures, Cox (1996)
defines these as “negotiated single-sourced relationships with the supplier of a
complementary product or service”. Such relationships form a completely new and
independent legal entity, distinct from the organisations comprising the alliance. As
both parties have some degree of proprietorship (not necessarily 50/50) in the
outcome of the relationship, the basis of such relationships is power equivalence
and a high degree of complementarity.
Activity 2.3: Categorise organisational capabilities with the RBT
Download and read the following article about Villa Crop Protection and its business
dealings with African suppliers in the agribusiness sector.
Apply information from the case study to each of the unique capabilities that the RBT
identifies to show how Villa Crop Protection possesses these capabilities. Offer your view
and read your fellow students’ posts. Comment on at least two posts that differ from your
view.
Page 28
Feedback on Activity 2.3
•
•
•
Corporate architecture
o What is Villa Crop Protection’s capacity to provide suppliers with products in the
South African market?
o In what way does Villa Crop Protection structure itself for delivery to the supply
market?
o What do these questions conclude about Villa Crop Protection’s corporate
architecture?
Innovation
o Do you think that Villa Crop Protection was innovative in their approach to the
market?
o If so, what do you believe were innovative about their business?
o If not, what do you believe would have been innovative in this case study?
Reputation
o Consider the case study and search for reviews of Villa Crop Protection on the
internet. Deliberate on their reputation in the market.
When you consider the TCT and the RBT, do you now realise why it is important to
classify relationships to ensure that time and resources are invested in the appropriate
relationships? Were you able to understand how the Cox model assists in examining
these relationships? Let us then continue with our exploration of more supplier
relationship models by investigating the Bensaou supplier relationship model.
2.3 THE BENSAOU SUPPLIER RELATIONSHIP MODEL
Professor Ben Bensaou developed a supplier relationship model based on the supply
positioning model that you learned about in Lesson 1. According to Lysons and
Farrington (2020), the Bensaou model suggests a framework for managing a portfolio of
investments to enable senior managers to answer two questions:
Question 1: Which governance structure or relational design should an organisation
choose under different external contingencies? (This is a strategic decision
because it affects how an organisation defines its boundaries and core
activities.)
Question 2: What is the appropriate way to manage each different type of relationship?
(This is an organisational question.)
Bensaou suggests four buyer–supplier relationship profiles: market exchange, captive
buyer, captive supplier and strategic partnership.
Page 29
2.3.1 Characteristics of profiles in the Bensaou supplier relationship model
For each of the four profiles, Bensaou identifies distinguishing product, market and
supplier characteristics.
He also suggests that the four profiles can be arranged in a matrix to indicate whether
the buyer and the supplier’s tangible or intangible investments in the relationship are
high or low. Tangible investments, in this context, are buildings and tooling equipment.
Intangible investments are people, time and effort spent on learning buyer–supplier
business practices and procedures as well as information sharing. The Bensaou supplier
relationship model, as adapted, is shown in Figure 2.5.
Figure 2.5: Bensaou supplier relationship model (Lysons & Farrington, 2020)
Figure 2.6 shows how characteristics of products or services, the type of supplier and the
relevant market differ for each relationship profile.
Page 30
Figure 2.6: Characteristics of products, suppliers and markets for each profile (Lysons &
Farrington, 2020)
Page 31
2.3.2 Management variables for profiles in the Bensaou supplier relationship
model
Bensaou also identified three management variables for each profile:
(1)
(2)
(3)
information-sharing practices
characteristics of “boundary-spanner” jobs
the social climate within the relationship
The high performers of each profile use management practices that are required to match
the coordination, information and knowledge exchange between the organisation and its
supplier. Lysons and Farrington (2020) describe these practices under informationsharing mechanisms, boundary-spanner tasks, and the climate and process
characteristics in Figure 2.7.
Page 32
Figure 2.7: Management profile for each contextual profile (Lysons & Farrington, 2020)
Page 33
2.3.3 Bensaou’s observations in designing the model
Bensaou concluded the following:
• Many large manufacturing organisations are moving away from traditional vertical
integration to the external contracting of key activities.
• As interorganisation relationships increase, organisations cannot manage with one
design for relationships and so need to manage a portfolio of relationships.
• There are two kinds of successful relationships: high requirement–low capability and
low requirements–high capabilities. There are also two paths to failure: designed and
overdesigned relationships. Overdesign takes place when organisations invest in
building trust because of frequent visits and cross-company teams when the market
and product contexts call for simple, impersonal control and information exchange.
Such overdesign is both costly and risky, especially in terms of the intangible
investments in people, information or knowledge.
2.3.4 Building or redesigning relationships with the Bensaou model
Building or redesigning relationships according to the Bensaou model follows the
following three analytical steps:
Step 1: Strategic selection of relational types to match the external conditioning to the
product, the technology and the market
Step 2: Identification of an appropriate management profile for each type of relational
design
Step 3: Matching the design of the relationship, which could be over- or underdesigned,
to the desired management profile
Activity 2.4: Profiling buyer relationships with the Bensaou supplier relationship
model
Visit the following link and read the article about Woolworths’ plan to convert shopping
bags into shipping pallets: https://www.businessinsider.co.za/woolworths-recyclableshopping-bags-conversion-2021-9
•
•
Reflect on the Bensaou supplier relationship model while reading the article about
the relationship between Woolworths and the supplier that provides the service of
converting shopping bags into shipping pallets.
Debate with your fellow students about which profile in the Bensaou supplier
relationship model will best describe the relationship Woolworths has with this
supplier.
Page 34
•
Justify your thought process by discussing at least three aspects of the profile that
you believe are relevant to this service.
Feedback on Activity 2.4
Did you consider any of the following points?
•
•
•
Were you able to identify specific product or service characteristics that are relevant
to a particular relationship profile?
Which characteristics of the marketplace did you consider to be relevant to this
relationship profile?
There is not much information available in this article about the supplier, but what
do you propose will be relevant characteristics of the supplier in the relationship
profile that you have identified?
In the next section, we explore the IMP supplier relationship model.
2.4 THE IMP SUPPLIER INTERACTION MODEL
This model, as indicated by its title, was developed by Hakansson and the IMarketing and
Purchasing Group (IMP) that was formed in 1976 by researchers in European countries.
In the IMP model, the marketing and purchasing of industrial goods is seen as an
interaction process between two parties within a specific environment. The model
analyses industrial marketing and purchasing in terms of four basic elements, each of
which is subdivided (Hakansson & IMP Group, 1982). The four elements are the
interaction process, interacting parties, the interaction environment and the atmosphere.
2.4.1 The interaction process
The interaction process involves the analysis of two factors: episodes and relationships.
•
•
An episode (as stated earlier) is a group of interrelated actions involved in a process,
such as placing an order. In an industrial market, relationship episodes involve the
exchange of products or services, information, money and social attitudes or values
(such as mutual trust between buyers and suppliers). Episodes, especially social
exchange episodes, are critical to the establishment of long-term buyer–supplier
relationships.
Building relationships may involve adaptations to products, financial arrangements,
information routines or social relations on the part of either party. Exchanging
information or communication may also involve contact patterns between people
filling different roles or functions. Over a period of time, the exchange of products or
services, money, information and social relationships lead to clear expectations by
Page 35
both parties of the roles and relationships of their opposite numbers, which
eventually become institutionalised so that they go unquestioned by either party.
2.4.2 The interacting parties
The process of interorganisational interaction will be influenced by the characteristics of
both the organisations themselves and the people who represent them.
•
•
Organisational factors include the position of an undertaking in the market as
manufacturer, wholesaler or distributor; the products of the selling company; the
production and application of the two parties; and their respective relative expertise.
Individual factors are the people (such as the salesperson and buyer) or groups of
individuals (representatives of design, selling, transport and so on) involved in
interorganisational interactions. The exchange of information and relationships
leads to the creation of social bonds between the individuals concerned, which in
turn influence the decisions of each enterprise involved in the business relationship.
The varied personalities, experience, expertise and motivations of the individuals
representing each enterprise will result in various ways of dealing with episodes that
will, in turn, affect the development of long-term interorganisational relationships.
Individual experiences may also result in preconceptions about customers or
suppliers that affect attitudes on the part of those involved and others who know
about them. The experience gained in individual episodes aggregates to create a
total experience. The experience of a single episode (such as incivility or delayed
delivery on the part of the supplier or slow payment by a buyer) can radically change
attitudes that may then persist over a long period.
2.4.3 The interaction environment
Interorganisational interaction will be influenced by the environmental context with several
aspects.
•
•
•
The market structure depends on the concentration of buyers and suppliers, the
stability of the market, and whether it is viewed strictly national or explores
international opportunities.
The degree of dynamics within the market and relationship: Close relationships may
cause one party to anticipate the actions of the other party, which will increase
forecast possibilities. However, to rely on one or a few relationships may increase
opportunity costs when considering the development of other parties in the market.
Opportunities for internationalisation may motivate parties to develop international
relationships, but will require planning for sales subsidiaries, possible language
barriers and cultural differences in international trading.
Page 36
•
•
The position of the relationship in the supply chain should be considered.
Organisations form relationships from primary producer to the end user based on
their suppliers’ offerings or customers’ expectations, which in turn influence other
suppliers higher up or buyers’ relationships.
The wider social system is relevant to generalised attitudes and perceptions, for
example the reliability of another country or culture’s business operations. It is also
relevant to regulations (such as exchange rates and trade regulations) that may
previously have restricted a buyer or supplier’s business with another industry.
2.4.4 The atmosphere while interacting
The atmosphere of supplier relationships depends on the power that exists between
buyers and suppliers. It is influenced by relationship variables such as a position of power
or dependence, cooperation or conflict, closeness or distance, as well as the mutual
expectations of the respective parties.
•
•
•
•
The control dimension: The ability of either party to control the other, which derives
from the perception of the power exercised by the other party in the relationship.
The commitment dimension: The focus of the relationship will determine the
position of both parties – a desire to cooperate and improve or to develop through
conflict in either direction.
The distance dimension: Unlike with distant interaction, closer interaction between
buyers and suppliers will result in reduced costs or higher profits for one or both
organisations.
The expectation dimension: Unforeseen circumstances will be limited when both
parties communicate their expectations of the relationship clearly.
The IMP interaction model can be conceptualised as shown in Figure 2.7.
Page 37
Figure 2.7: IMP interaction model (Hakansson & IMP Group, 1982)
Activity 2.5: The IMP interaction model
Watch the video “Nomava Zanaso: 4 myths and misunderstandings about doing business
in
Africa”
that
addresses
possible
perceptions
of
other
countries:
https://www.youtube.com/watch?v=Axh07mJ9Ag4 (duration 1:54 minutes).
In not more than 200 words, share your view on perceptions and attitudes that
international buyers and suppliers may have about business relationships in Africa.
Think about the following:
•
•
Do you agree with the myths that Nomava Zanaso identify?
Can you think of other perceptions and attitudes that international buyers and
suppliers may have about business relationships in Africa?
Page 38
•
Read the responses of your fellow students. Have you thought of the arguments that
someone from another culture raised?
•
Comment on two posts of fellow students.
Feedback on Activity 2.5
This activity gives you an opportunity to voice your opinion, which is valued. We trust that
you have respected the comments made about your discussion. We also hope that you
have learned something from your fellow students.
Some questions that may have guided you in forming an opinion include:
•
•
•
•
Which general perceptions in the past were you able to identify?
How do the similarities or differences in African cultures influence relationships?
Is it worth forming relationships in Africa?
How does Africa’s history impact their relationships?
Do you now realise why supplier relationship models are so difficult in practice and
interesting to study? In the next section, we explore why we can consider them useful.
2.5
THE IMPORTANCE OF SUPPLIER RELATIONSHIP MODELS
An understanding of the supplier relationship models is important because it provides
guidance in the formation of buyer–supplier relationships from the perspectives of both
theory and practice. Interactions between buyers and suppliers take place at different
levels. Interactions start with individual actions, but may continue to build to form a
relationship. It is important to evaluate which relationships are worth pursuing when
considering investing resources. Investing resources in a relationship that is not lucrative
or results in exploitation will surely influence a business’ operations and economic worth.
This is where the different supplier relationships models present practical usefulness for
purchasing, sourcing and supply professionals. These models evaluate both sides’
resources, commitment to and circumstances in which a relationship will have to exist.
The models will assist in defining the terms for each interaction or relationship.
Activity 2.6: Importance of supplier relationship models
There are various other models of supplier relationships in addition to those described
above. To practising purchasing, sourcing and supply staff, models of supplier
relationships often appear academic and remote from the realities of day-to-day
purchasing. There are, however, several reasons for purchasing students and
practitioners to study such models.
Page 39
Motivate with at least two reasons why supplier relationship management models are
important to consider when forming relationships with suppliers.
Read the posts of your fellow students and comment on at least two posts. Compare your
answers to those of your peers. Reflect on reasons that you may not have considered
before this activity.
Feedback on Activity 2.6
•
•
•
•
•
Did you consider any of the following questions when forming your motivation?
What would be the main goal when studying these models?
What should all be considered when evaluating information in the model?
Can models be practical and relevant to all industries?
Do models become outdated?
SUMMARY
Supplier relationships are formed on a daily basis globally, but the terms are not always
defined. Lesson 2 was concerned with providing an understanding of the establishment
of buyer–supplier relationships from the perspectives of both theory and practice. Several
models have been designed to explain and suggest structures to these relationships. We
explained models such as the Cox, Bensaou and IMP supplier relationship models, and
highlighted their practical usefulness to purchasing, sourcing and supply professionals.
In Lesson 3, we look at how buyer–supplier relationships are structured.
SELF-REFLECTION
Think about what you have learned in this lesson and then answer the following questions:
•
•
•
Did you realise how beneficial academic supplier relationship models can be in
practice during the formation of relationships?
Have any of your thoughts or beliefs about investing time and resources in all
supplier relationships changed – and if so, how?
Were you able to apply the theory in this lesson to real-life case studies?
LIST OF REFERENCES
Cox, A. 1996. Relational competence and strategic procurement management: Towards
an entrepreneurial and contractual theory of the firm. European Journal of Purchasing &
Supply Management 2(1)57–70.
https://www.sciencedirect.com/science/article/pii/0969701295000194 (accessed: 26
January 2022).
Page 40
Hakansson, H & IMP Group. 1982. International marketing and purchasing of industrial
goods: An interaction approach. [Online].
https://www.impgroup.org/uploads/books/InternationalMarketing.pdf (accessed: 29
January 2022).
Holma, AM, Vesalainen, J, Soderman, A & Sammalmaa, J. 2020. Service specification
in pre-tender phase of public procurement – A triadic model of meaningful involvement.
Journal of Purchasing and Supply Management 26(1). [Online]
https://www.sciencedirect.com/science/article/pii/S1478409219303309#fig4 (accessed:
2 September 2022).
Lysons, K & Farrington, B. 2020. Procurement and supply chain management. 10th
edition. [Online]. https://0-ebookcentral-proquest-com.oasis.unisa.ac.za/lib/unisa1ebooks/detail.action?docID=6118332 (accessed: 24 January 2022).
Page 41
LESSON 3: STRUCTURING BUYER–SUPPLIER RELATIONSHIPS
INTRODUCTION
Although models might be useful to purchasing, sourcing and supply professionals (as
you learned in Lesson 2), the practical application may seem too complex. Lesson 3
simplifies matters. We evaluate the structure of a buyer–supplier relationship by focusing
on two aspects. First, the status between the buyer and the supplier should be
established. This can be done during the formation of new relationships and/or evaluation
of the buyer’s existing relationships with its suppliers by focusing on two aspects: the
complexity of the relationship and the level of trust between the buyer and the supplier.
Second, a distinction is made between the seven typical types of buyer–supplier
relationships and the contracts best suited for each relationship. It stands to reason that
the buyer will not establish the same type of relationship with all suppliers, because of the
diverse nature of goods and services it acquires. Therefore, the correct type of contract
or terms with the supplier is of the utmost importance to support the specific type of buyer–
supplier relationship dictated by circumstances and envisioned by the buyer.
The overview of Lesson 3 is illustrated in Figure 3.1 below:
Evaluating the
status of a buyer supplier
relationship
Stages of a
partnership as a
buyer--supplier
relationship.
Lesson 3
Structuring
buyer--supplier
relationships
Types of buyer-supplier contracts
Figure 3.1: Schematic overview of Lesson 3
The importance of
trust between
organisations in
buyer--supplier
relationships.
Page 42
Learning outcomes
After studying this lesson, you should be able to do the following:
•
•
•
•
Critically discuss the complexity of the association in buyer–supplier relationships.
Critically discuss the importance of trust between organisations in buyer–supplier
relationships.
Apply the seven different types of buyer–supplier contracts or terms on the buyer–
supplier relationship continuum to a relevant case study.
Analyse the four stages of a partnership as a buyer–supplier relationship.
Key terms
•
•
•
•
•
•
•
•
•
•
relationship spectrum
buyer–supplier trust
spot purchases
regular trading
call-off contracts
fixed contracts
partnerships
strategic alliances
joint ventures
internal provision
Recommended resources
Arvidsson, AP & Melander, L. 2020. The multiple levels of trust when selecting suppliers
– Insights from an automobile manufacturer. Industrial Marketing Management
87(1):138–149.
https://www.sciencedirect.com/science/article/pii/S0019850118308095?via%3Dihub
(accessed: 10 January 2022).
Johnsen, TE, Howard, M & Miemczyk, J. 2019. Purchasing and supply chain
management: A sustainability perspective. New York: Routledge.
https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=1923625&site=eds
-live&scope=site (accessed: 10 January 2022).
Lysons, K & Farrington, B. 2020. Procurement and supply chain management. 10th
edition. [Online] https://0-ebookcentral-proquest-com.oasis.unisa.ac.za/lib/unisa1ebooks/detail.action?docID=6118332 (accessed: 10 January 2022).
Page 43
3.1
EVALUATING THE STATUS OF A BUYER–SUPPLIER RELATIONSHIP
Often a buyer can anticipate the status of a relationship with a supplier from the initial
individual initiatives between the two organisations. In Lesson 1, you learned about the
spectrum that stretches from transactional relationships to alliance-type relationships.
Everyone has a starting point on this spectrum. Organisationally, every organisation has
a predetermined starting point as well. To establish the status of the relationship between
the buyer and the supplier, we can consider the complexity of the relationship and the
level of trust. We first discuss the complexity of buyer–supplier relationships.
3.1.1 The complexity of a buyer–supplier relationship
We have already established that the buyer purchases a large variety of goods and
services that vary considerably in price, volume and criticality. It is therefore clear that the
buyer will not establish the same complex relationship with all the suppliers. You learned
about the continuum of buyer–supplier relationships in Figure 1.6 of Lesson 1. In Figure
3.2, the complexity of buyer–supplier relationships displays the spectrum between a
distant and a close relationship.
Figure 3.2: Spectrum of association in buyer–supplier relationships (Crouch, Feasey,
Wayne, Funder, Roberto & Smith, 2019)
Page 44
Activity 3.1: Complex association in buyer–supplier relationships
In Lesson 2, you learned that buyer–supplier relationships are formed at different levels.
But how are these relationships structured? Watch the video on the range of buyer–
supplier relationships. Apply an example for each of the proximities and communication
aspects mentioned in the video.
05_01_P4 Range of buyer–supplier relationships:
https://www.youtube.com/watch?v=DI59jkLmUAI (duration 4:35 minutes)
In not more than 200 words, provide an example of buyer–supplier relationships at the
following levels: buy on the market, ongoing relationship, partnership and
collaboration/strategic alliance.
Further guidelines
•
•
Identify each level of relationship: buy on the market, ongoing relationship,
partnership and collaboration/strategic alliance.
Use a practical example of the proximity for each relationship other than what was
used in the video.
Feedback on Activity 3.1
•
•
•
•
Having reflected on the above characteristics, have you realised why it is crucial for
buyer–supplier relationships to be structured?
Did you consider the role of both parties in a structured relationship?
Why did you choose your practical example for the proximity of each relationship?
Did you consider possible communication problems for each relationship that may
have been caused by the lockdown during the Covid-19 pandemic?
During the evaluation of the relationship between the buyer and supplier, the level of trust
will be investigated. Trust will form an essential part of the position on the buyer–supplier
relationship continuum. Let us continue to look at what trust encompasses in buyer–
supplier relationships.
Page 45
3.2
THE IMPORTANCE OF TRUST IN BUYER–SUPPLIER RELATIONSHIPS
3.2.1
Buyer–supplier relationships and trust
Trust is a key aspect of forming alliances in buyer–supplier relationships. The formation
or maintenance of alliances is problematic in the absence of trust. The focus of trust
should rather be on expectations of whether the buyer will fulfil specific actions that are
important to the supplier, and vice versa (Arvidsson & Melander, 2020).
Trust is part and parcel of any buyer–supplier relationship. The higher the level of trust
between buyers and suppliers, the more comprehensive the nature of the buyer–supplier
relationship will be. The levels of trust on the relationship continuum are illustrated in
Figure 3.3 below.
Figure 3.3: The levels of trust on the continuum of buyer–supplier relationships (Johnsen,
Howard & Miemczyk, 2019; Moreira, Ferreira & Zimmerman, 2018)
Collaboration means working together jointly; and for collaboration to be effective, trust is
needed. A culture should be created that welcomes transparency because transparency
leads to trust (Moreira et al, 2018). It is a powerful strategy that needs to start internally
and then extend externally into those specific supply chain networks that have been
identified to benefit from such a relationship-driven approach. Incompatible attitudes,
values and beliefs about trust and collaboration between buyers and suppliers can lead
to ineffective relationships.
The buyer wants to get due performance from suppliers and still be considered fair and
trustworthy. The supplier wants to deliver beyond an adequate performance to ensure
Page 46
sustained business and a continuous revenue stream, earning the buyer’s trust. The
levels of trust on the relationship continuum are illustrated in Table 3.1 below.
Table 3.1: Levels of trust
Level 1
Contractual
Level 2
Competence
Explicit promises
Known standards
Contract is more
important
Standard performance
Mistakes bring
enforcement
Exchange data for
transactions
Time bound (as far as
the contract says)
Satisfactory
performance
Cooperate on
information for mutual
access
Level 3
Goodwill trust
Anything that is required to
foster the relationship
Contract is a “safe pair of
hands”
Success beyond expectation
Mistakes give shared learning
for advantage
Cognitive connections and joint
decision making
Open ended, ongoing and
leaving a legacy
Source: Johnsen et al (2019)
3.2.2
Building trust between buyers and suppliers
It is possible to move between the different levels of trust if the organisations employ
several principles to build trust. Let us take a closer look in Table 3.2 at a suggested
strategy to build trust between a buyer and a supplier.
Table 3.2: Strategy to build trust between a buyer and a supplier
Create a
vision
The vision should focus on building and maintaining a sustainable
relationship.
• Relevant targets should be set to achieve goals for the
relationship.
Set goals
• Performance criteria should be set for specific expectations
and activities.
• Continuously communicate the organisation’s values and
vision.
Communicate • Share the type of impact the relationship may hold for the
organisation.
• Reveal which aspects will be prioritised.
• Environmental management systems.
Develop
Page 47
Specify
Build
Validate
•
•
•
•
•
•
•
•
•
The organisation’s code of conduct.
Official ethical practice.
The buyer’s purchasing requirements.
The contractual obligations of the supplier.
A relationship that is based on trust.
Strive to build a partnership or alliance between the buyer and
supplier where advancement in the relationship is warranted.
Continuous training of relevant products, services or systems.
Continuously improve trust and performance in the relationship.
Form and authorise cross-functional teams.
Source: Johnsen et al (2019)
One of the key distinguishing characteristics of a high-performance supply chain
collaborative buyer–supplier relationship is the presence of trust at a strategic level
(strategic trust). With strategic trust, the parties have access to each other’s strategic
plans in the pertinent areas of the interface. Relevant cost information and forecasts are
shared. Risks and rewards are addressed openly. Some may believe that trust can only
exist between individuals. However, trust must also be institutionalised at the
intercompany level if organisations are to enjoy the full benefits of improved supply chain
relationships. Trust must be a part of the company culture and, therefore, become “the
way we do things around here”. The principles to reach this level of trust are encapsulated
in Table 3.3.
Table 3.3: Principles of trust
Principles
Accountability
Transparency
Ethical behaviour
Respect for the other
party’s interests
Respect for the rule of
law
Expectations
Both sides are answerable to the other party that may be
affected by its decisions and activities.
All the parties should reasonably disclose policies,
decisions and activities (including known and likely
impacts).
Ethical behaviour should be based on honesty, ethics and
integrity.
Each party should take into account the rights, claims and
interests of all the parties.
All the parties should comply with all the applicable laws
and regulations.
Page 48
Respect for international
norms of behaviour
Respect for human
rights
Each party should respect international norms of
behaviour while respecting the rule of law.
All the parties should respect and foster the human rights
covered in the Bill of Rights – South Africa’s cornerstone
of democracy.
Source: Johnsen et al (2019)
Activity 3.2: Building and importance of trust between buyers and suppliers
Visit the following link to read an article that reports Stellantis’ alterations to the terms and
conditions
of
purchase
order
contracts
with
their
suppliers:
https://www.forbes.com/sites/katevitasek/2022/04/04/tips-to-prevent-and-avoidadversarial-supplier-relationships/?sh=7f192f8b79e1
As you have learned from the Cox model in Lesson 2, an adversarial relationship is the
least desirable type of relationship. Several professionals voice their opinions in the article
about Stellantis’ new approach. Consider each professional’s opinion and address the
following:
•
•
•
•
Evaluate the professionals’ opinions and debate whether or not you agree with the
opinion, and explain your reasoning.
Stellantis’ decision may break down the trust that has been built with suppliers.
Revisit what you have learned and recommend the first step in rebuilding trust with
Stellantis’ current suppliers.
Motivate how damage control can save business relationships, with examples from
your own work experience or at work.
The article is based on trust between organisations in the United States of America.
Debate whether African cultures will trust the other party from the start, or not at all,
in circumstances similar to those in the scenario.
Feedback on Activity 3.2
•
•
•
•
Which professional’s opinion had the greatest impact on your understanding of how
relationships are built?
What made you realise the importance of building relationships over time?
Would you have approached saving the relationship in your example differently?
Why or why not?
In your debate about trust in African cultures, did you consider if one of the parties
may decide to continue to build a relationship even if they have been disappointed?
Or will the culture halt the development and move on to a new buyer or supplier?
Page 49
•
Do you think that trust in African cultures will rather start slowly and progress as the
relationship builds?
Taking all of the above aspects into account, a buyer can establish the standing of their
relationships with their suppliers and consider what type of relationship will be required to
the mutual benefit of both organisations.
In the next section, we explore relationship structuring by examining the types of contracts
or terms associated with various relationships between buyers and suppliers.
3.3 TYPES OF CONTRACTS AND BUYER–SUPPLIER RELATIONSHIPS
Typically, we can differentiate between seven types of buyer–supplier relationships, as
seen on the buyer–supplier relationship continuum in Figure 3.4. Each has its own
characteristics and is suitable in different situations and for different contracts or terms.
The contracts/terms of relationships include spot purchases, regular trading, call-off
contracts, fixed contracts, partnerships, joint ventures and internal provision. Let us
review each of these relationship types (Putri, Suliantoro & Pujotomo, 2020).
In Figure 3.4, the contracts or terms of various buyer–supplier relationships are illustrated
on the buyer–supplier relationship continuum. It is clear that one extreme of this
continuum (the left-hand side) constitutes the least intricate and loose relationship type in
the form of spot purchases (individual purchases on a day-to-day basis), while the most
intricate and close relationships are illustrated on the other extreme (right-hand side)
where an organisation can make internal provision for certain products or services. The
relationship in the continuum can be anywhere between the two extreme sides.
Figure 3.4: The contracts/terms on the buyer–supplier relationship continuum (Lysons &
Farrington, 2020; Putri et al, 2020)
Page 50
3.3.1 Spot purchases
Spot contracts/purchases are for once-off purchases where there is no intention of
developing a longer relationship with the supplier.
A spot purchase occurs when a buyer places the purchase order with whichever supplier
offers the best deal at the time of the purchase. The value of the purchase can range from
small to relative substantial expenditures. It stands to reason that the larger the value, the
stronger the bargaining position of the buyer will be. It is nevertheless true that a supplier
is only expected to fulfil the immediate contractual obligations and not any additional
responsibilities, as there are no expectations of future business.
The relationship between the buyer and the seller will be a distant one, and each party
will attempt to gain as much as possible and to give the minimum away – with a shortterm focus. Each organisation will endeavour to gain as much as they can from the
acquaintance. This can be illustrated by the following example: The supplier will demand
additional payment for any changes to a spot purchase order, while the buyer may
experience supply shortages if a supplier encounters any problems.
This type of buyer–supplier relationship can lead to a large supply base, which in turn can
lead to a lack of effective and efficient supply base management and lost supplier
leverage opportunities. Although spot purchases are the only option in the case of
requirements that will not be purchased repeatedly, it can also be useful in the following
circumstances pertaining to repeat purchases:
•
•
•
•
when standard products or services are required and the risk of a supply problem
occurring is low
where there are many suppliers for a requirement
where the cost of switching to a different supplier (when a problem arises) is low
where the annual expenditure is significant enough to justify both the cost of inviting
many offers and the administrative effort of dealing with many suppliers
It is important to note that once a buyer’s basic requirements are met, price comparison
will remain the most important decision tool for a spot purchase. The initial quotation by
the spot supplier will therefore appear very lucrative, but they will charge higher prices for
any additional services required by the buyer or maintenance required. Supplier
performance management will not be required in this instance, as it is a once-off
transaction.
Currently, however, buyers are trying to limit the use of spot purchases. They would rather
place all spot purchases for a variety of products and services under contract with a
specific supplier. This can lead to the value of the purchases and the risk experienced by
the buyer in terms of the contract being very significant, and increasing the importance of
Page 51
the supplier to the buyer in such a manner that they can even be regarded as a strategic
supplier.
3.3.2
Regular trading or short-term contracts
Short-term contracts are for routine purchases over a relatively limited time, typically one
year or less.
Regular trading can be regarded as several spot purchases from one or more suppliers,
although each purchase is still treated individually.
There are no long-term contracts involved, and buyers must ensure that these suppliers
remain competitive over time and continue to deliver acceptable products or services.
Suppliers in this situation are often referred to as having "preferred supplier" status.
This degree of involvement with the supplier should lead to a familiar relationship,
including mutual understanding and trust of each other’s processes. A greater degree of
expectation for future business exists within these circumstances than that of spot
purchases, and the suppliers are more likely to treat the buyer with more priority.
Regular trading is preferred in instances where
•
•
it is difficult for an organisation to predict requirements in advance
requirements have varied specifications
Supplier performance management will be executed on a minimal level, as it will involve
repeated transactions with a supplier contending to increase their share of potential
business with the buyer organisation.
3.3.3
Call-off contracts (also known as system contracts)
A call-off contract is a negotiated agreement with a supplier to offer a certain price for
products or services that remains valid for all purchases made within a certain period,
without any commitment on the part of the buyer to buy a certain amount – typically for
the term of a year or more.
They are also referred to as framework agreements or standing orders. These contracts
are aimed at minimising the small order problem (also known as “stockless” purchasing).
These contracts are frequently used for regularly required products or services to avoid
the time and cost associated with individual purchases. It is basically a standing offer by
the supplier to offer products and services to a buyer at an agreed price and within an
agreed period.
Page 52
Call-off contracts are typically used in situations where
•
•
•
there is a need for a product or a service
it is difficult to determine the amount required in advance
the price of the product or service can be easily determined
It is essential in this type of buyer–supplier relationship to measure the supplier’s
performance against certain key target areas on a regular basis, such as delivery time,
quality and so on. It is good to link performance to the contract to avoid unnecessary
service deterioration.
It is not effective to change suppliers every year, since the benefits of forming personal
relationships will be lost. However, it is essential to ensure that suppliers under call-off
contracts remain competitively priced and that their service levels are satisfactory.
3.3.4
Fixed contracts
Fixed contracts are similar to call-off contracts, but with important differences such as a
commitment to buy a certain number of products or services within a certain timeframe.
This type of contract is more attractive for a supplier, as there might be penalties involved
if the buyer does not comply with the contractual obligations, and suppliers are more likely
to offer better prices and other supply conditions. In this case, it is necessary that the
purchasing and supply department of the buyer becomes directly involved in the contract
to ensure operational efficiency and it is best if the end users draw their requirements
against the contract directly.
Fixed contracts are appropriate where
•
•
•
there is a frequent requirement for a product or service
the amount of the requirements over a period can be easily predicted with
reasonable accuracy
the price of the product or service can be easily determined
As in the case of the call-off contract, it is advisable to ensure maintaining a certain level
of service by writing performance measurement into the contract.
3.3.5
Partnerships
Strategic supplier alliances refer to any type of relationship where two organisations
decide to work together in achieving their goals.
It is therefore an umbrella term for strategic relationships between buyers and suppliers.
Within this umbrella term, there are partnerships and joint ventures. Therefore,
partnerships and joint ventures are not the same type of relationship, but are covered
under the same umbrella term. We consider partnerships in more detail than we did the
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other relationships, as partnerships form the cornerstone of the supply base of most
buyers.
Partnerships are long-term collaborative forms of relationships that are based on high
levels of trust.
This relationship is entered into to improve the overall efficiency of the supply chain,
increase competitiveness, reduce cost by sharing information, reduce supply risk and
collaborate on product development, to name a few of the reasons. Selecting the right
partner is of fundamental importance, as great cost, effort and time are invested in the
partnership. The suppliers remain their own separate organisations and only work
together. Where contracts are entered into, the partnerships are based more on
incentives than on penalties – with the understanding that both parties will go beyond
their contractual obligations and that problems that arise will be dealt with by negotiation
rather than reference to the contract. This is usually a cheaper type of strategic supplier
alliance contract if a contract is entered into.
Table 3.4: Characteristics of a successful partnership
Mutual interdependence
High levels of trust
High degree of interaction on
various organisational levels
High levels of information
sharing
A focus on costs, and not
prices
Establishing joint teams to
address specific problems
Investing in the relationship
A genuine interest by both parties in the other’s
success and a sense of mutual obligation
A belief that both parties will honour the
commitment made
The development of close personal relationships by
including the supplier as an extension of the buying
organisation
Increased availability of information to improve the
quality of decision making
A focus on determining and understanding both the
buying organisation and the supplier’s costs, with
mutual agreement to eliminate or reduce it
The development of solutions that are optimal for
both parties by joining forces
The belief that the relationship is adequately long
term to realise investments made by both parties
Source: Adapted from Crouch et al (2019)
3.3.6
Joint ventures
A joint venture is a separate entity formed by two or more parent organisations and owned
by them – therefore one fully independent, separate organisation.
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This might be created for reasons similar to those of partnerships, such as reducing risk,
developing new products or improving operational efficiency. However, here there is no
need to depend on the cooperation of individual organisations to achieve success, as
direct influence can be exerted through ownership.
They are, however, more expensive to set up and to manage. The issue of trust is
nonetheless less important because all the organisations involved will have the ability to
control the joint venture, delivering a product or service that is significant to them and
thereby improving their competitive advantage.
Performance measurement against vital key organisational objectives is of vital
importance in this circumstance, as products or services delivered by the joint venture will
probably influence the individual organisation’s competitive advantage.
3.3.7
Internal provision
Internal provision occurs where an organisation decides to make provision for certain
products and services itself through vertical integration (making or providing an item or
service internally that was previously bought externally), rather than relying on the supply
market.
If a relationship with a key strategic supplier cannot be amended, internal provision
becomes a viable proposition. The business unit put in place becomes part of the
organisation, with its objectives and applicable measuring systems. Internal provision is
therefore the opposite of outsourcing (buying or providing an item or product externally
that was previously made internally).
Internal provision has a number of advantages:
•
•
•
•
•
There is maximum control.
The goals of the business unit providing the product or service are in line with those
of the organisation.
Common systems are shared.
Supply capacity is ensured.
The supplier’s profit margin is excluded from the cost.
Activity 3.3: Applying the seven buyer–supplier relationships
Visit the Coca-Cola Beverages Company South Africa (CCBSA) Mintirho Foundation
website: https://www.ccbsamintirhofoundation.co.za.
Apply information from Beyond 360, one of the beneficiaries of the Mintirho Foundation,
to explain which buyer–supplier relationship are currently best suited for Beyond 360 and
CCBSA.
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Guideline:
•
•
Identify the appropriate relationship.
Analyse why you believe this would currently be the most suitable relationship.
Feedback on Activity 3.3
Some aspects to consider while the most appropriate buyer–supplier relationship
between Beyond 360 and CCBSA is identified include:
•
•
•
The frequency that CCBSA will need the products from the beneficiaries.
The level of accuracy that CCBSA will need to estimate how much of the products
they will need from these beneficiaries.
Whether the price of products or services can be determined in advance.
3.4
STAGES OF A PARTNERHIP AS A BUYER–SUPPLIER RELATIONSHIP
Partnerships are moulded over time by both parties in a principled and ethical manner,
adding value to all involved. It is not necessarily a written contract, but an agreement
brought about by mutual understanding and respect. It is important to evaluate
partnerships and ensure that the relationship is maintained. To achieve this, four stages
of developing partnerships are suggested. In this section, we first focus on the basis of
partnerships and then discuss the four stages of developing partnerships.
a)
What should be considered when a partnership is being developed?
It is important to be aware of the following activities pertaining to a partnership.
•
•
•
•
Awareness of the need for a partnership: The initiating organisation (be it the
buyer or supplier) notices that a change of strategy is required in a specific
circumstance and considers a partnership as a possible solution. An analysis of all
the purchase products is then made by them using the supply positioning model (as
discussed in Lesson 2).
Conceptualising the partnership: If the initiating organisation determines that
collaboration is appealing, they research the concept and implications of this
strategy.
Pursuing the partnership: If the initiating organisation makes a final decision to
form a partnership, the strategic and operations considerations are established to
select suitable partners. This occurs by (1) determining the selection criteria, (2)
searching for partner candidates by establishing a small pool of candidates and (3)
then making the final selection.
Co-structuring the partnership: During this activity, both organisations agree to
form a partnership, and establish the operational expectations and arrangement.
This is drawn up in a memorandum of understanding and publicised among the
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•
•
•
b)
workforce of all the organisations involved. The performance measures must also
be identified and a feedback mechanism put in place to ensure continuity.
Implementing and administering the partnership: Implementation must then
commence by concluding operational modifications. Dispute resolution aspects
must also be addressed.
Assessing the partnership: The partners must continuously assess the alliance in
a formal manner and review the original goals. The partners must then determine if
the alliance will be sustained, modified or terminated.
Terminating the partnership: Termination arrangements should be considered
and established at the outset of the relationship to enable both parties to execute
such an event in a suitable manner (Crouch et al, 2019).
Evaluating a partnership
It is important to continuously evaluate the strategic effectiveness of a supply chain
partnership or alliance, especially the manner in which the agreement achieves the
expectations and requirements set out from the start. Table 3.5 indicates the six most
important aspects to consider.
Table 3.5: Evaluation considerations of a partnership
Adherence…
to the operational standards and service level satisfaction
established.
Operational
cooperation…
measured in terms of information access and fluidity, and the
level to which the partners integrate their communication and
production systems to allow joint decision making in real-time.
Partner
coordination…
as a substantive measure of partnership effectiveness relating to
character-based trust and cooperation between individuals.
Organisational
compatibility and
style…
and the sustainable length of the partnership or alliance
relationship.
Power imbalance…
which can result in the partnership or alliance operating without
mutual benefit.
The level of strategic by the degree of joint planning of new products that takes place
coordination…
and whether the partners share similar organisational goals.
Source: Crouch et al (2019)
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c) Maintaining buyer–supplier partnerships
Partnerships between industrial buyers and industrial sellers are becoming more common
all over the world. However, evidence suggests that many of these relationships do not
reach their full potential because of actions taken or not taken by the partners. While
some partnerships are doomed to failure from the beginning, many fail because the
partners do not have a process established to maintain the relationship. This section
offers a model for developing and maintaining buyer–supplier partnerships. The
development portion of the model consists of four stages: (1) buyer’s expectations, (2)
seller’s perceptions, (3) mutual understanding and commitment, and (4) performance
activity. However, certain problems at the performance activity stage can place the
relationship in jeopardy and move the partnership to another stage: (5) corrective action.
The model continues by illustrating three approaches to mitigate these performance
problems and bring stability back to the relationship: (1) operational unilateral adjustment,
(2) operational bilateral adjustment and (3) managerial bilateral adjustment. The key to a
stable, mutually beneficial buyer–supplier partnership over time is to understand how
problems may enter a relationship and how they can best be eliminated.
In the following section, the four stages in developing partnerships are discussed:
Stage 1: Buyer’s expectations
A primary reason for buyers to develop partnerships with suppliers is to become more
competitive. A competitive advantage can be enhanced by contributions from suppliers
in areas such as quality, cost, delivery, product development, product and process
innovations, and productivity. Through partnerships, buyers induce selected suppliers to
become contributors to the buyer’s competitive posture. This approach requires the
supply function and the individual buyer to deal with suppliers in a fundamentally different
way. Instead of diversifying risk by spreading purchases over a number of suppliers and
switching from one supplier to another to obtain desirable performance, a partnership
concentrates efforts with one supplier to continuously improve performance in critical
areas.
For a seller to become a contributor to a buyer’s competitive posture, it is imperative that
buyers consciously formulate and develop expectations of performance and contributions
that the partner will make to the buyer’s competitive position. These expectations are
linked to the strategic intent of the organisation, and should be clear enough to create a
precise image of how the buyer and the seller will contribute to each other’s competitive
advantage. Precise expectations define the type of working relationships a buyer desires
from its supply partner and determine the degree of commitment required to achieve the
desired results. Unless these expectations are clearly communicated to a prospective
partner, a great potential for misperceptions by either party exists. And, if left unchecked,
this could lead to problematic deviations within a partnership after it is established.
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Once a potential partner’s performance expectations have been formulated and
understood, they should be translated into specific selection and subsequent
performance criteria. These criteria will vary depending on a buyer’s expectations for the
specific purchasing situation at hand. Most partnering arrangements, however, require a
careful assessment of things such as the organisation’s basic management philosophy
and managerial attitudes toward quality, collaborative problem solving and so on,
because these less tangible factors often can be more important than specific operational
criteria. In such cases, a buyer may have performance expectations requiring the
potential supplier to have
•
•
•
•
•
•
strong top management commitment
a desire to work towards continuous improvement
a focus on eliminating production process variation
a desire for open and candid communication
knowledge of the buyer’s business, products and applications
the capability to deliver within time and cost constraints
By linking performance expectations with the buyer’s understanding of a seller’s
managerial attitudes and its performance requirements, the buyer can construct concise
requests for proposals, conduct informative on-site visits, evaluate supplier capabilities
and establish the necessary performance criteria.
In other words, buyers must know their needs and expectations before developing a
partnering arrangement, and these must be communicated unambiguously to the
potential partner. The result should be a mutually precise understanding that establishes
the foundation for a successful relationship that will lead to the achievement of both
organisations’ strategic intent.
Stage 2: Seller’s perception
A seller’s perception and knowledge of its targeted customers’ needs should drive its
operational and strategic decisions. In addition, a clear perception of a specific buyer’s
needs and expectations facilitates a seller’s response to a proposal request. The more
accurately the seller understands the buyer’s expectations, the more likely it is that the
proposal will match the actual requirements of the buyer. However, in today’s business
environment of shifting priorities, numerous false starts and conflicting communications,
sellers often lose sight of buyers’ expectations. Suppliers may not always understand
what types of activities and levels of performance are necessary to match or exceed a
buyer’s expectations. This lack of understanding can have a detrimental effect on the
proposal developed, negotiations conducted and performance executed by the seller
during the critical period of relationship development.
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The seller’s perceptions of a buyer’s expectations are partially based on communication,
history or experience, and the buyer’s credibility. For example, a buyer may say that
quality and delivery are primary requirements, yet decisions may appear to be based
largely on price. The seller may be aware of this divergence of rhetoric from action, and
respond to a proposal request accordingly. The more a purchaser communicates its
needs and expectations and the more consistently it executes its intentions and
requirements, the clearer the seller’s perceptions of the purchaser become – thus
facilitating a strategic match of the two.
Stage 3: Mutual understanding and commitment
Awareness and detailed knowledge of each partner’s requirements and expectations are
necessary to achieve a mutual understanding of performance requirements for a
partnership. This essential background information is obtained through an exchange of
information about the partners’ technical abilities, operational capabilities and managerial
philosophies. The partners must express a genuine commitment to the relationship and
a corresponding desire to work towards its continuous improvement. It is on this
foundation that partners can begin to reconcile differing expectations, establish
measurements and corrective action plans, eliminate waste and move to a higher level of
competitive advantage. Without this mutual exchange of information, the partners are
destined to operate in a system with
•
•
•
•
•
•
•
•
conflicting measurements
inappropriate definitions of customer service
inaccurate performance status
ineffective information systems
discrimination against certain customers
poor coordination
inappropriate shipping methods
organisational barriers
There are numerous avenues for information exchange between a buyer and a supplier.
These include on-site visits, exchanges of proposals, fact-finding meetings and sales
interviews. Within the context of a partnership, the exchange of information must occur
between those individuals who will be involved in the partnership (for example, executive
management, purchasing, marketing, production, quality assurance, and research and
development). Open and candid communication flow at all levels and across functional
areas of the two organisations is essential for successful partnership development.
Negotiations must give way to dialogue if collaborative relationships are to be successful;
these relationships are held together by the sharing of information.
After a series of successful dialogues, the purchaser and the supplier should have a
thorough understanding of each other’s requirements and expectations, along with
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appropriately designed mechanisms to ensure the commitment and execution of a
continuous improvement programme. Such a programme should include formal
acknowledgment of each other’s responsibilities in the relationship (for example,
achieving a certain level of quality, providing production schedules, maintaining a certain
delivery schedule, offering training, transferring technological innovations and so on). To
perform effectively, each participating individual must have a precise understanding of his
or her specific role in the relationship and must understand how it contributes to the
success of the partnership – ultimately adding value for the final customers. Otherwise,
the relationships may break down into task ambiguity and role myopia.
Stage 4: Performance activity
During this culminating stage of the partnership, the roles of each participant usually
become organisationally clearer and clearer. As each organisation successfully fulfils its
responsibilities, the original expectations usually are reinforced, leading to the
development of satisfaction and mutual trust. Successful fulfilment of the partnership’s
performance requirements is shown in the model as performance feedback to the buyer’s
expectations (Stage 1) and the seller’s perception (Stage 2). However, failure to
adequately discharge one’s responsibilities can create a performance deviation that may
result in dissatisfaction; and if left unresolved, it might threaten the viability of the
partnership. When such a deviation occurs, the partnership model shows performance
feedback going to Stage 5: corrective action. At this stage, the deviation is addressed
with the objective of stabilising the performance activity. Consequently, it is essential that
each of the partner’s participating personnel know specifically what is expected, and what
they can expect from their counterparts. Failure by any one of them in fulfilling their tasks
or responsibilities as they relate to the partnership will disrupt the performance activity
and necessitate the use of a corrective action available in Stage 5 of the model.
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Activity 3.4: Four stages of building partnerships
Download and read the following scenario about Tremendous Technologies and its
business dealings with Enduring Developers.
Enduring Developers chooses to agree to a partnership with Tremendous Technologies.
Such a partnership may be developed during four stages. Analyse information from the
scenario to report on the following:
•
•
•
•
•
Tremendous Technologies’ expectations during the first stage of developing a
partnership.
Enduring Developers’ perception of the partnership during the second stage of
development.
What Tremendous Technologies and Enduring Developers should attend to when
they commit to a partnership during the third stage of development.
Recommendations for each party’s roles in the partnership and suggestions on the
type of benefits that a successful partnership may hold.
Think of examples in your work environment or read about organisations that
developed partnerships. Provide examples for each of the four stages during the
development.
Feedback on Activity 3.4
•
Did you follow and understand the systematic stages during the development of the
partnership?
Page 62
•
•
•
Do you think that the expectations that you identified for Tremendous Technologies
are reasonable for a partnership? Why or why not?
Were you able to identify specific matters that would influence Enduring Developers’
perception during developing the partnership?
Which roles did you suggest for each party? Did your own examples lead you in
identifying each party’s role?
SUMMARY
Lesson 3 confirmed that it is important to structure a buyer–supplier relationship correctly
from the outset of the interaction between the buyer and the supplier. We focused on
several aspects in this regard. First, we explained the establishment of the status of a
relationship between the buyer and the supplier. We then distinguished between the
seven typical types of buyer–supplier relationships: spot purchases, regular trading, calloff contracts, fixed contracts, partnerships, joint ventures and internal provision. It stands
to reason that the buyer will not establish the same type of relationship with all suppliers
because of the diverse nature of goods and services it acquires. This highlighted the
importance of the correct type of contract with the supplier in order to support the specific
type of buyer–supplier relationship envisioned by the buyer.
In Lesson 4, we look at the management of change in good supplier relationships.
SELF-REFLECTION
Think about what you have learned in this lesson and then answer the following questions:
•
•
•
•
Did you realise how important the conscious decision is to structure the buyer–
supplier relationship?
Have any of your thoughts or beliefs about the importance of trust in buyer–supplier
relationships changed – and if so, how?
Did you realise how many relationships and contracts there are to define and
structure the buyer–supplier relationship?
Were you able to apply the theory in this lesson to real-life case studies?
LIST OF REFERENCES
Arvidsson, AP & Melander, L. 2020. The multiple levels of trust when selecting suppliers
– Insights from an automobile manufacturer. Industrial Marketing Management
87(1):138–149.
https://www.sciencedirect.com/science/article/pii/S0019850118308095?via%3Dihub
(accessed: 12 September 2022).
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Crouch, G, Feasey, K, Wayne, K, Funder, M, Roberto, A & Smith, G. 2019. International
purchasing and supply chain management: Modular learning system. Geneva:
International Trade Centre (UNCTAD/WTO).
Johnsen, TE, Howard, M & Miemczyk, J. 2019. Purchasing and supply chain
management: A sustainability perspective. New York: Routledge.
https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=1923625&site=eds
-live&scope=site (accessed: 12 September 2022).
Lysons, K & Farrington, B. 2020. Procurement and supply chain management. 10th ed.
[Online] https://0-ebookcentral-proquest-com.oasis.unisa.ac.za/lib/unisa1ebooks/detail.action?docID=6118332 (accessed: 24 January 2022).
Moreira, AC, Ferreira, LMDF & Zimmermann, RA (eds). 2018. Innovation and supply
chain management: Relationship, collaboration and strategies. Cham: Springer
International Publishing.
Putri, SK, Suliantoro, H & Pujotomo, D. 2020. Strategic planning in procurement of raw
materials based on Kraljic’s purchasing portfolio model. AIP Conference Proceedings,
2217(1). doi:10.1063/5.0000785.
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LESSON 4: MANAGING CHANGE
INTRODUCTION
Organisations exist and operate in a rapidly changing environment. They are subjected
to constant change; to survive and remain competitive, they must adapt and change. This
is because change is the only viable reaction to any business opportunity. In Lesson 3,
you learned that relationships can be maintained with effort by investigating the buyer’s
expectations, the seller’s perceptions, agreeing to a mutual understanding and monitoring
performance. Buyers expect their suppliers to change in step with them, moving forward
collectively, with common goals and objectives. If this happens, organisations in a close
relationship with other organisations (such as a supplier) can regard each other as a
strategic asset and they can harness all resources and creativity in a holistic manner. To
achieve this goal, organisations need to understand the changes.
In Lesson 4, we first look at the management of change in buyer–supplier relationships.
We will then explore the different sources of change. Then we explore the different
reactions to change. Next, we study the importance of communicating change. Then we
investigate the implementation of change in buyer–supplier relationships. Lastly, we
interpret the way change should be controlled in supplier relationships. An understanding
of change influences is important because it provides guidance in managing changes
before and while they happen in buyer–supplier relationships.
The overview of Lesson 4 is illustrated in Figure 4.1 below:
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Introduction to
the management
of change.
Sources of
change
Change control.
Lesson 4:
Managing
change
The
implementation
of change.
Reaction to
change.
Change and
communication.
Figure 4.1: Schematic overview of Lesson 4
Learning outcomes
After studying this lesson, you should be able to do the following:
•
•
•
•
•
Apply the sources of change and how they relate to buyer–supplier relationships to
relevant scenarios.
Critically discuss the different components of reactions to change.
Correlate the relationship between change and communication.
Interpret the phases during the implementation of change.
Analyse the concept of change control.
Key terms
•
•
•
•
•
•
•
change management
sources of change
forces of change
reaction to change
communication
change implementation
change control
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Recommended resources
Cordell, A & Thompson, I. 2019. The procurement models handbook. 3rd edition.
London: Routledge. https://0-doi-org.oasis.unisa.ac.za/10.4324/9781351239509
(accessed: 24 January 2022).
Hu, S, Chen, P & Chen, X. 2021. Do personalized economic incentives work in
promoting shared mobility? Examining customer churn using a time-varying Cox model.
Transportation Research Part C: Emerging Technologies. [Online].
https://www.sciencedirect.com/science/article/pii/S0968090X21002382 (accessed: 10
January 2022).
Liu, Y, Luo, Y, Huang, Y & Yang, Q. 2017. A diagnostic model of private control and
collective control in buyer–supplier relationships. Industrial Marketing Management,
63:116–128.
https://www.sciencedirect.com/science/article/pii/S0019850116302954#bb0015
(accessed: 20 January 2022).
2.2 INTRODUCTION TO THE MANAGEMENT OF CHANGE
The aim of the supply chain concept is to add value to all the organisations involved.
Unfortunately, convincing suppliers to become part of this approach is not easy, as
different organisations rarely share the same goals and objectives. It is, however, possible
once the internal stakeholders of the hub organisation (in this case, from the buyer’s
perspective) and the external shareholders (such as the supplier and customers in the
supply chain) buy in to the concept. How is this achieved?
It can be achieved by ensuring that the buyer itself is geared to responding to internal
changes in a constructive manner. However, merely responding to changes is not
enough; changes should be driven to incorporate greater efficiency, eliminating wasted
effort and eradicating irrelevant activities that do not contribute to the organisation’s
bottom-line in any manner. Then the focus can shift to include responsiveness to external
changes, including changing market conditions, new business opportunities, new
technology, more convenient distribution channels and more demanding customer
expectations.
This lesson will assist you to understand that change is the only constant in business. In
the next section, we investigate which sources of change exist.
2.3
SOURCES OF CHANGE
As noted above, resistance to change should be expected. Managing change involves
the full and complete management repertoire.
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There are many sources of external change, such as:
•
•
•
•
•
•
political changes, for example trade agreements
economic changes, for example currency fluctuations and inflation levels
social changes, for example lifestyles and increased leisure
technological changes, for example ICT and new technology
legal changes, for example legislation and regulatory bodies
organisational changes, for example takeovers, closures, new start-ups and
competitor actions
Some of the changes may well sponsor the adoption of better supply chain relationships.
Lysons and Farrington (2020) identify four basic types of change that particularly affect
purchasing and supply management, and therefore also buyer–supplier relationships:
•
•
•
•
•
technology changes, including effects by IT and e-procurement
changes in product or service purchasing, for example purchasing was traditionally
mainly a transactional process, concerned with obtaining items for production or
other internal use, and increasingly being involved with strategic issues
administrative changes and the move from discrete purchasing “departments” to
functional procedures, such as the scanning, screening and selection of crossfunctional sourcing teams
changing human resources needs, such as the need for trained purchasing
professionals
changing business relationships which arise from acquisitions, mergers, joint
ventures and partnership alliances
Activity 4.1: Sources of change in the external environment
Watch the video of President Cyril Ramaphosa addressing the nation on 15 March 2020
to declare a state of disaster in South Africa due to the outbreak of the Covid-19.
Coronavirus: President Ramaphosa addresses nation on Covid-19, 15 March 2020:
https://youtu.be/E8v_qA4IcDY?t=109 (duration 29:32 minutes)
In not more than 200 words, analyse how political change may have impacted buyer–
supplier relationships in South Africa because of the lockdown implementation in 2020.
Also, comment on two posts of fellow students.
Feedback on Activity 4.1
As you have learned, buyer–supplier relationships are complex and should be formed
with great care and consideration. Many of these relationships were affected by the
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lockdown. We hope that you realised the level of impact that the lockdown had or
potentially had on buyer–supplier relationships. We also hope that you learned something
from your fellow students.
•
•
•
Which political changes that may affect buyer–supplier relationships were you able
to identify?
Can you think in which ways the other external changes would have influenced
buyer–supplier relationships?
Read the responses of fellow students. Have you thought of the changes raised by
other students?
Do you now realise that most relationships between buyers and suppliers change at some
point? Do you realise that by classifying the source of the change, the change may be
anticipated and a proper response may be formulated? In the next section we investigate
the range of reactions to change.
2.4 REACTION TO CHANGE
Change can be dramatic and can, if handled incorrectly, be traumatic enough to cause
an organisation to fail. Change almost always influences people at some time. The impact
varies, but all those involved experience and go through more or less the same stages
but usually at different times. Figure 4.2 shows the stages involved and some typical
responses. Stage 1 commences when a person first hears about the change.
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Stage 1: Shock or immobilisation
Comment: "They cannot do it."
Focus: Past orientation
Stage 2: Denial
"We will never do it."
Focus: Past orientation
Stage 3: Frustration and defense
"It is just too difficult."
Focus: Past orientation
Stage 4: Acceptance and discarding
"I might try it."
Focus: Past/future orientation
"Let's try."
Stage 5: Testing
Focus: Future orientation
Stage 6: Search for meaning
"It seems to work."
Focus: Future orientation
"I can do it."
Stage 7: Integration
Focus: Future orientation
Figure 4.2: Stages of reaction to change
People’s attitudes to change will therefore vary in any group of people. It is critical to
appreciate that all people go through such emotional responses, but they do it differently
and at different times. Managers need to be alert to such variations and manage them
effectively. Remember that people have to cope and deal with changes one at a time.
Resistance to change can be minimised when
•
•
•
•
•
•
•
•
•
it is agreed to by all
it is owned by individuals
it is supported by the management
it follows culture and values
it decreases current problems
it increases new experiences and interests
emotions are understood by the management
reactions are allowed to be discussed with the management
it does not cause personal security to be threatened
The dynamics of change are found in any change situation. There are two forces that are
dynamically involved: driving forces and restraining forces.
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Table 4.1: Driving and restraining forces of change
Examples of driving forces
Examples of restraining forces
Job enrichment
De-skilling
Upgrading
Degrading
Broadening
Changed jobs
More responsibility
Redundancy
More reward
No promotions
More status
Insignificance
Better conditions
No discretion
Easier work
More difficult work
One force represents the “foot on the gas”, while the other one represents the “foot on
the brake”. A key action, therefore, is to identify the driving forces (and the backers) and
the restraining forces (and the blockers) in a change situation. Next is to recognise that if
we move forward by increasing the driving forces, resistance may well increase to
maintain the balance. Consequently, the best way to move forward is by analysing the
restraining forces and trying to minimise their impact.
Buyer–supplier relationships need to take both internal and external changes into account
to strategically position the offered product or service to satisfy the customer’s latest
wants and needs, generating additional revenue and profits. This means that both the
buyer and its network of suppliers need to be responsive.
The natural inclination of the buyer may include the following, which do not promote
supplier relationships:
•
•
•
Push as much risk as possible downstream to the supplier network.
Pay minimum prices, although greater returns are available in the market.
Give the suppliers only the necessary information they need to directly respond to
the changes in the marketplace.
However, in the “hostile” changing world, suppliers will want to do the following, which are
not good for relationships between the supplier and the buyer (which is the customer):
•
•
Defer as much risk as possible to the buyer.
Make the most profit they can.
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•
Get as much intelligence as they can for their own benefit to maximise profits and
lock the buyer into business with them.
Both the buyer and the supplier put their competitive position in danger if they continue
to operate with such diverse, independent and conflicting strategies. It is, however, the
natural reaction in uncertain times. A great degree of integration might be the most
extreme solution – but it is exactly what is sometimes required in the supply chain context.
This approach can lead to a sharp increase in initial costs, but will render larger cost
savings on a long-term basis.
Activity 4.2: Forces of change
The outbreak of the Covid-19 in 2019 caused several challenges worldwide. South Africa
announced its lockdown, which brought many changes to all industries and organisations.
Consider the changes organisations had to implement to ensure survival.
•
•
Visit myUnisa and provide examples of applicable changes in your workplace, or
choose a specific industry, and discuss these changes with your fellow students.
Read the responses of your fellow students. Do you think their examples are valid
changes that organisations had to make?
Feedback on Activity 4.2
•
•
•
•
•
Were you able to identify specific restraining forces that the changes of the complete
lockdown brought on?
What type of ICT changes would have assisted organisations in ensuring that
employees were able to work?
Did you think of how wearing masks affected organisations that relied on personal
customer service?
Were you able to recognise how changes in various industries differed?
Did you think of how changes varied when different levels of lockdown were
implemented?
In the next section, we highlight the importance of communicating change.
4.4
CHANGE AND COMMUNICATION
Communication involves sharing information between people, up and down and side to
side, with the objective of preventing misunderstanding.
Unfortunately, much of what passes for communication is actually one way and no
attempt is made to check whether or not it has been understood. In order for
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communication to be effective, it is not sufficient simply to transmit a message; it must be
received and understood.
Managing change is a skilful process, and a key skill in dealing with change is
communication. It has been said that communication and change are synonymous, as
people are fearful and uncertain and therefore need to be communicated with clearly.
This communication involves the following:
•
•
•
•
•
•
•
•
•
Do not “tell” propaganda, but “sell” proper communication.
Inform at all stages.
Ask questions to uncover feeling.
Listen carefully to answers.
Use written communications only where appropriate. Concentrate mainly on faceto-face methods.
Consult wherever possible.
Admit any mistakes and learn from them.
Celebrate individual and group success.
Be as open as you can be.
In a buyer–supplier relationship, communication within the organisations and across to
the other organisation in the relationship is of vital importance. Continuous
communication about changes in the environment that cause risks and opportunities for
both parties should regularly be reviewed and communicated between the buyer and the
supplier. A close relationship and open communication channels, and particularly trust
(refer to Lesson 3), should govern buyer–supplier relationships in uncertain times.
Activity 4.3: Connection between communication and change
It is extremely important that organisations communicate any changes and that they are
informed of any changes. In not more than 200 words, share your experience with
communication in your organisation in terms of the following:
•
•
•
The Covid-19 policies that were implemented.
The way in which the policies and implementation of the policies were
communicated.
The way the changes were managed during the Covid-19 pandemic.
Feedback on Activity 4.3
•
•
When you consider the theory, do you feel that your organisation should have
communicated the changes better?
Do you feel that the communication was exaggerated?
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•
Did you consider how your organisation’s ability to implement the policies may have
been different if the communication was not efficient?
Were you able to recognise how changes in various industries differed?
•
Did you realise that communication in buyer–supplier relationships is not a once-off
exercise but should be continual during change? It is critical to involve people –
communicate, listen, give people a chance to air objections and give people time to adapt.
In the next section, we investigate how change should be implemented in buyer–supplier
relationships.
4.5
THE IMPLEMENTATION OF CHANGE
Previously, we mentioned that changes take place in organisations and in relationships
because of a changing environment. Kurt Lewin, a behavioural scientist, argues that the
process of implementing change involves three basic steps (Lysons & Farrington, 2020):
Step 1: Enabling people or organisations to be willing to change (unfreezing).
Step 2: Changing selection of techniques to implement change.
Step 3: Reinforcing and supporting the change so that it becomes a relatively
permanent part of organisational processes (refreezing).
Phase 1
Phase 2
Phase 3
Unfreezing
Changing
Refreezing
•Recognition of
the need for
change
•Overcoming
resistance to
change
•Techniques for
changing
people, tasks,
structure and
technology
•Overcoming
resistance to
change
•Trying out
changes
•Modifications
where required
Figure 4.3: Lewin’s model of the change process (Lysons & Farrington, 2020)
Numerous writers have produced step-by-step guides for the implementation of change,
but we regard the outline of the extension of Lewin’s model by Kotter and Schlesinger to
suffice (Lysons & Farrington, 2020). They suggest an eight-step process for the
successful implementation of change – the first four steps are directed at the defrosting
of a hardened status quo (or culture), steps five and seven introduce new practices, and
the last step corresponds to the first process (“refreezing”), which helps to make them
stick.
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The eight steps are as follows.
Step 1: Establish a sense of urgency. Recognise the need for the enterprise or a
function within the enterprise to change if it is to achieve and retain competitive
advantage or cope with crises and opportunities.
Step 2: Create the guiding coalition. Creating and empowering a group to lead change
encourage the group to work as a team.
Step 3: Develop a vision and a strategy. “Vision” in this context means having a clear
sense of what the future requires and the strategies required to turn the vision
into reality.
Step 4: Communicate the change. Use every available communication medium to
create an awareness of the visions and strategies among employees and others
affected, and secure their cooperation and involvement.
Step 5: Empower broad-based action. Remove obstacles, change structures or
systems, and encourage new approaches.
Step 6: Generate short-term wins. Strategies usually involve some shorter-term goals,
as the achievement of these goals provides encouragement to sustain people
in their efforts to attain longer-term objectives.
Step 7: Consolidate gains and produce more change. Reinvigorate the process with
new projects, themes and change agents.
Step 8: Anchor new approaches in the culture. Stabilise change at the new level and
reinforce it by means of supporting mechanisms such as policies, structure or
norms.
There are those who criticise these “step” models of change (such as the one outlining
the eight steps to successful implementation of change) on the following grounds:
•
•
•
Step models assume that organisations act in a rational predictable way, while the
reality is that they consist of a diverse range of people with diverse ideas and
opinions about the right course of action.
Step models assume that change management can be reduced to a number of
discrete, sequential steps and that change has an identifiable beginning and end,
while the reality is that it is uncertain, unpredictable and contingent and “we cannot
expect the processes and final outcomes of change to map out clearly before us”.
Step models fail to recognise that the creative and critical skills required by
managers to successfully engender change cannot be captured in “a few rules or
simple recipes for success”.
They therefore concluded that rather than offering simplistic n-step accounts, writers
should recognise that their models need to incorporate some of the complexities of real
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life. Thus they view step models as being dishonest and painting an inaccurate and
oversimplified picture of the change process.
Probably the best approach is to recognise the importance in all change situations of
communicating the need for change, consulting with all those affected by the change and
ensuring commitment to the successful implementation of change by all those involved.
In any event, learning organisations do not suddenly adopt strategic change, but rather
are perpetually seeking it.
Activity 4.4: Implementation of change
Organisations are better off to have a starting point on how to approach change
implementation. Lewin’s model about the phases of the change process may provide
guidance on such a starting point. In not more than 100 words, address the following
topics:
•
•
Assess the way that your organisation implemented changed during Covid-19
according to the three phases of Lewin’s model.
Analyse whether your organisation completed all the steps to implement changes
successfully.
Feedback on Activity 4.4
•
•
•
When you look back at the way in which your organisation implemented change, did
your view change regarding the success of the implementation?
Do you think that there were shortfalls in the management’s approach to the
implementation?
If any, what would you have suggested to the management of your organisation to
do differently during the implementation of the changes?
In the next section, we focus on controlling change before it is implemented.
4.6 CHANGE CONTROL
Contracts that preclude changes are counterproductive to identifying and reacting to new
opportunities for either the buyer or its supplier network. It is unrealistic to believe that
one can deflect any changes, but it is imperative to control the way changes are
contended with between the buyer and the supplier. Change control is aimed at ensuring
that all changes are assessed and approved by the management before, during and after
implementation.
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The aims of change control are:
•
•
•
minimal disruption to services
deduction in back-out activities
economic use of resources involved in implementing change
Change control is a formal process that is used to ensure that a product, service or
process is only modified in line with the identified necessary change. It is particularly
related to software development because of the danger of unnecessary changes being
introduced without forethought, introducing faults into the system or undoing changes
made by other users of the software. It became a fundamental process in quality control.
A change “freeze point” was introduced to suspend any further changes until after the
completion of the initial project. Change control is also formally used where the impact of
a change could have severe risk and/or financial consequence. Typical examples from
the computer and network environments are the upgrade of operating systems, network
routing tables or the electrical power systems supporting such infrastructure – not
forgetting changes to the contract itself. Open communication is needed between buyers
and suppliers in a change control situation.
Activity 4.5: Understanding change control
Read the article “Incentives and control mechanisms in change management” by Irimias
Tudor (2021):
https://eds.p.ebscohost.com/eds/pdfviewer/pdfviewer?vid=1&sid=2dfc39e3-0416-4688ad25-cf4716d756bb%40redis.
In not more than 100 words, critically discuss which aspects need to be determined before
change control can be effective.
Feedback on Activity 4.5
Were you able to determine the aspects of the concept of change control?
As you have learned, it is important to identify the barriers to change by focusing on
people and the organisation’s reaction to change. This is crucial in monitoring change
throughout the process. Decisions cannot be made to implement changes if the source
and the possible barriers of these changes are not known. Only after these aspects have
been determined can the advantages and disadvantages of the change be established.
The buyer or supplier will then be able to select their strategy and allocate available
resources to implement that change. This process allows organisations to continuously
evaluate, monitor and control the change.
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SUMMARY
Lesson 4 was about the concept of change and the management of change in buyer–
supplier relationships. You discovered that there are various sources of change and that
buyers and suppliers may be better geared for change if they can pinpoint the source of
the change. We explored possible reactions that changes may bring to buyer–supplier
relationships. We reviewed the importance of communication before, during and after
changes occurred. Lastly, we investigated the process of implementing changes in the
relationship and then to control the changes that were implemented effectively.
In Lesson 5, we look at how contracts should be managed in buyer–supplier relationships
once changes have been implemented.
SELF-REFLECTION
Think about what you have learned in this lesson and then answer the following questions:
•
•
•
Did you realise how important it is to actively manage changes in the relationship
between the buyer and the supplier?
Have any of your thoughts or beliefs about anticipating and controlling changes in
supplier relationships change – and if so, how?
Were you able to apply the theory in this lesson to real-life case studies?
LIST OF REFERENCES
Lysons, K & Farrington, B. 2020. Procurement and supply chain management. 10th
edition. Hoboken, CA: Pearson. https://0-ebookcentral-proquestcom.oasis.unisa.ac.za/lib/unisa1-ebooks/detail.action?docID=6118332 (accessed: 24
January 2022).
Tudor, I. 2021. Incentives and control mechanisms in change management. Annals of
Constantin Brancusi University of Targu-Jiu, Economy Series, (4):140–146.
https://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=156310776&site=ed
s-live&scope=site (accessed: 20 September 2022).
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LESSON 5: MANAGING BUYER–SUPPLIER CONTRACTS
INTRODUCTION
Lesson 4 confirmed that the establishment of a new or the transformation of an existing
buyer–supplier relationship is by no means complete once the changes are negotiated
and implemented, and the contract is compiled and signed. This is only the starting block
when managing the buyer–supplier agreement in a performance-based manner.
However, this is not true for all types of buyer–supplier relationships, as the management
effort increases with the increased complexity of the contract. In Lesson 5, we explore the
gist of supplier contract management in a strategic supply management environment. The
lesson focuses on the definition of supplier contract management, explaining the use of
the contract lifecycle and answering the question “Why the need for supplier contract
management?” We cover several ways to respond to the challenges brought on by
supplier contract management, as well as improving the management of supplier
contracts. We then outline the best practice supplier contract management strategies,
and distinguish between the benefits and risks of supplier contract management. Lastly,
we focus on the organisation of supplier contract management and the supplier contract
management functions.
The overview of Lesson 5 is illustrated in Figure 5.1 below:
Defining "supplier
contract
management'
Organising the
functions and
control in supplier
contract
management
Using contract
lifecycle.
Lesson 5
Managing
buyer--supplier
contracts
Benefits and risks
of supplier contract
management
The need for
supplier contract
management.
Challenges of
supplier contract
management.
Figure 5.1: Overview of Lesson 5
Page 79
The focus of this lesson is therefore on achieving specific outcomes. You can use the
outcomes to guide you throughout the learning process and to monitor your progress.
Learning outcomes
After studying this lesson, you should be able to do the following:
•
•
•
•
•
•
•
Define the concept “supplier contract management” in your own words.
Apply the contract lifecycle.
Critically discuss why there is a need for supplier contract management.
Distinguish between the ways to respond to the challenges of supplier contract
management.
Suggest ways to improve the management of supplier contracts.
Critically discuss the benefits and risks of supplier contract management.
Apply the supplier contract management functions involved in every level of
supplier relationship management with the aid of a schematic diagram.
Key terms
•
•
•
•
•
•
•
•
•
•
•
supplier contract management
supplier contract lifecycle
visibility into contract
contract management
long-term supplier performance
short-term supplier performance
supplier opportunism
captive supplier
compliance management
performance management
long-term programmed performance
Recommended resources
Cordell, A & Thompson, I. 2019. The procurement models handbook. 3rd edition.
London: Routledge. https://0-www-taylorfranciscom.oasis.unisa.ac.za/chapters/mono/10.4324/9781351239509-2/contractmanagement-cycle-andrea-cordell-ian-thompson?context=ubx&refId=a194957e-18724272-994f-cf2ae9d188a8 (accessed: 24 April 2022).
Dubey, VK, Chavas, JP & Veeramani, D. 2018. Analytical framework for sustainable
supply-chain contract management. International Journal of Production Economics
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200:240–261. Https://www.sciencedirect.com/science/article/pii/s0925527318301208
(accessed: 23 April 2022).
Lysons, K & Farrington, B. 2020. Procurement and supply chain management. 10th
edition. [Online]. https://0-ebookcentral-proquest-com.oasis.unisa.ac.za/lib/unisa1ebooks/detail.action?docID=6118332 (accessed: 24 January 2022).
1.5. DEFINING SUPPLIER CONTRACT MANAGEMENT
A buyer must appoint a supplier relationship team (or contract management team) with
the necessary skills to manage all their longer-term contracts with strategic suppliers
optimally on a day-to-day basis. As soon as a contract has been negotiated and signed,
it is the responsibility of the supplier relationship team to ensure that all the agreed terms
and conditions are fulfilled. They must also resolve any conflict that ensues from the
breach of the agreement.
It is important to note from the outset that every type of buyer–supplier relationship
discussed in Lesson 3 is not underpinned by the same type of contract. It is clear that a
buyer will refrain from committing the time, effort and cost involved to establish an intricate
contract for a clear spot purchase. In this case, the simple agreement (generally referred
to as a purchase order) will be executed and terminated in a short period.
More and more buyers are attempting to put all purchases made under the structured
framework of a written agreement. They even attempt to eliminate spot purchases (many
once-off or small amount purchases) by consolidating the spending on spot purchases
(be it products or services) under a contract with a particular supplier of a variety of
products and services. Where a buyer and one of their large suppliers decide to establish
a strategic partnership or alliance, it needs to be supported by a constructive buyer–
supplier relationship process. The business objectives, processes and procedures of the
different organisations may vary considerably, and will influence the manner in which they
approach the agreement in the execution and maintenance phase. A clear, written
agreement is required to outline the nature of the agreement and constitute the scope of
the relationship between the parties.
Contract management requires the systematic management of contract creation,
execution, compliance and analysis to maximise performance while minimising risk
(Conlin, 2021). The increase in the complexity of doing business, coupled with the
increase in transaction volumes and value in an ever-tightening regulatory framework,
has resulted in businesses taking note of the importance of proper management of
contracts with their suppliers. Many organisations manage their contracts through a
decentralised, paper-based approach using ad hoc spreadsheets or databases. This
exposes the enterprise to significant risk.
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We can thus define contract management as safeguarding the implementation of a
reciprocal agreement between all parties to require the fulfilment of their contractual
obligations in order to ensure that immediate action can be taken to effectively and
efficiently manage any changes that may occur.
Activity 5.1: Defining contract management
Search the internet for relevant articles on “what is contract management”. Read a
minimum of two definitions on contract management. Below are some links that you may
find useful to understand the definition.
https://www.businessnewsdaily.com/4813-contract-management.html
https://www.contractscounsel.com/b/contract-manager
http://sslej.in/index.php/sslej/article/view/3508/3107
In not more than 100 words, write your own understanding of what constitutes contract
management.
As you study the different definitions, take note of the common concepts and terms used
in each definition. You will use the common terms and concepts to formulate your own
definition.
Read the posts of your fellow students and comment on at least two posts. Compare your
answers to those of your peers. See how your definition compares to those of your peers.
You may then consider modifying your own definition.
Feedback on Activity 5.1
Did you consider any of the following points in your definition?
•
•
•
•
•
•
Foundation of business relationships
Process of managing agreements
Managing contracts from their creation to their termination or renewal
Classifying the content of a contract
Developing drafts and negotiating clauses
Continuously analysing performance to maximise risk mitigation
In the next section, you will learn about the stages of the contract lifecycle.
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1.6. USING THE CONTRACT LIFECYCLE
The adoption of a contract lifecycle model assists in following a structured approach to
supplier contract management. Contract lifecycle management allows for enhanced
visibility, control and performance in the areas of meeting and complying with regulatory
requirements, risk management and cost control. This requires that organisations
improve the processes and tools they use to manage the various activities in contract
management, from contract creation to performance measurement. The lifecycle of a
contract can be described as follows and is presented in Figure 5.2:
•
•
•
•
Creation, including negotiations and collaboration; document redlining and
approval; ensuring the use of standardised contract templates and clauses; and
enforcing business oversight and controls.
Activation, including the establishment of a central repository for all contract
information. This repository should be searchable and integrate directly with key
transactional systems in order to make contracts “active”.
Compliance, including proactive tracking of internal usage of preferred suppliers
and contracted pricing, as well as monitoring and auditing contract terms, changes
and performance, to ensure regulatory compliance.
Analysis, including the active enforcement of spending against budgets; balancing
orders between preferred suppliers to optimise usage and returns; and term analysis
of contract performance and attributes to determine budgeting, sourcing, supplier
management and risk strategies.
Figure 5.2: Supplier contract lifecycle stages (Conlin, 2021)
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Activity 5.2: Using the contract lifecycle
Read the article by Conlin (2021) entitled “The fundamentals of contract management”:
https://www.businessnewsdaily.com/4813-contract-management.html
After reading the article, in approximately 200 words, share with your fellow students on
the discussion forum your understanding of how Nissan can build trust between Nissan
South Africa and Asian car part manufacturers.
Feedback on Activity 5.2
•
•
•
•
What type of documents will be necessary to create contracts?
Why should employees compare versions of the contract?
Can you think of examples where an amendment in the core agreement of the
contract was justified?
Which risks do you think organisations should consider when automating the
renewal of contracts?
In the next section, you will learn why supplier contract management is necessary.
1.7. WHY THE NEED FOR SUPPLIER CONTRACT MANAGEMENT?
With the continuous drive to provide and improve shareholder value and competitive
advantage, organisations are required to take stock seriously in terms of how they
manage their contracts with suppliers. This is further re-enforced by organisations facing
pressures to improve risk management and mitigation by gaining more control and insight
into their contracts. The ongoing increase in the complexity of the regulatory environment,
both internally and externally, requires organisations to ensure that compliance with all
regulatory requirements is maintained. In addition, supplier contracts are increasing in
complexity due to issues such as globalisation, outsourcing and intricate partnerships.
Lysons and Farrington (2020) identify several reasons that contribute to the failure of
successful contract management:
•
•
•
•
•
•
•
•
The contract management process is unpublished or ill-explained.
The buyer or supplier undermines the process.
A limited number or only one supplier can fulfil the product or service specifications.
Confidential information is shared with a preferred bidder.
The tendering process is not credible.
The tender evaluation is biased towards specific suppliers.
Tenders are not evaluated in a consistent manner.
Buyers engage in fraudulent practices.
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•
•
•
•
•
Suppliers’ capabilities are reported misleadingly.
A buyer has a personal interest (mostly financial) in the supplier.
Timescales to submit tenders or for evaluation are manipulated.
Buyers and suppliers engage in selective negotiations.
Buyers reveal the tender prices to preferred suppliers.
The above list provides good insight into the importance of supplier contract management
– a key area within strategic sourcing. Suppliers that are not properly managed will seek
ways to maximise this position, often to the detriment of the organisation in question. The
challenges of poor supplier contract management may also result in frustration, as efforts
to evaluate contract performance prove to be more than a simple challenge.
Activity 5.3: Why the need for supplier contract management?
Read the article by Dubey, Chavas and Veeramani (2018) entitled “Analytical
framework for sustainable supply-chain contract management”:
https://reader.elsevier.com/reader/sd/pii/S0925527318301208?token=18F4AAAA308C8
F91DE4D9C4150EA182B1E2166DD87C42B08514DAD43DECEC1148727BEBC19CE
E09857BCF817435F1DDB&originRegion=eu-west-1&originCreation=20220925022124.
In not more than 300 words, critically discuss the importance of managing supplier
contracts.
Feedback on Activity 5.3
Think of a situation in your organisation or in an organisation of your choice where the
management of a supplier contract failed and assess the following:
•
•
•
•
Which factors do you think brought on the failure? Were the reasons clear at the
time?
Looking back at the reasons, do you think that it could have been prevented?
What should the management have done to prevent the failure?
Has a successful contract management process been restored? How?
In the next section, you will learn about the different ways to respond to the challenges of
supplier contract management.
1.8. WAYS TO RESPOND TO THE CHALLENGES OF SUPPLIER CONTRACT
MANAGEMENT
Organisations of all sizes are experiencing the challenges of supplier contract
management across the globe. Some organisations respond better than others due to
many factors, including their size, processes, systems, people and macroeconomic
Page 85
elements. Research conducted by global research firms in the purchasing and risk space
have identified a number of actions that would provide assistance in responding to these
challenges. These actions will certainly improve contract management efficiency and
performance.
Standardising contract management processes and methods
This includes implementing policies that enforce the use of standard risk-assessed and
approved contract “language” and templates. An examination of the enterprise contract
management programmes of many organisations has shown that while many
organisations have defined processes and protocols for contract negotiations, few have
well-defined roles, responsibilities or processes for contract administration. In many
cases, contracts and related compliance are only reviewed as contracts come to term.
Such an approach to contract administration can lead to countless factors, including
incorrect pricing, late payments, missed service milestones and revenue opportunities,
insufficient certifications and insurance, and increased risk.
The adoption of technology
In conjunction with standardisation, the adoption of technology proves to be of great value
and really makes the processes efficient. Establishing a formal programme to manage
supplier contracts is a critical step – however, it is not enough. Technology plays a key
role in enhancing visibility in contracts, which is one of the factors that impede effective
management of supplier relationships and performance. The ability to search through
contracts and having visibility in pricing, terms, clauses and so on is critical to gaining
control and managing supplier contracts. Technology is also a key element of monitoring
and tracking contract compliance and performance.
Securing executive support
Without the support of top management (executive management), little can be achieved
in the business. This support is vital if organisations want to improve their levels of
compliant purchases. With high-level support, people are likely to adhere to their
organisation’s various policies and procedures. Input and buy-in from executives and
other key stakeholders, a clear vision, objectives and a set of matching targets should be
established for the contracting process and contract process capabilities (Sammons,
2017). These must also reflect the higher-level business objectives and strategies.
Performance measurement
Performance measurement is an essential activity that allows organisations to measure
improvements in the performance of suppliers. (This is discussed in more detail in Lesson
6.)
Page 86
The following three areas are of importance:
(1)
(2)
(3)
Transactional compliance. This refers to internal operational compliance (for
example, employees’ use of preferred suppliers, pricing accuracy, service execution
and payment accuracy)
Process compliance and performance. This refers to compliance with preestablished protocols, governance and pre-approved contract language; also
measuring the efficiency and accuracy of the contract process (such as contracting
cycle times by contract type and group, and completeness and accuracy of records
in the contract database).
Regulatory compliance. Be sure to track all financial, environmental and industryspecific regulations and reporting requirements. Ensure that contract language,
administration and reporting comply with regulations. The impact of broad-based
black economic empowerment (BBEE) with specific reference to preferential
procurement and BBEE sector charter compliance should be considered.
Activity 5.4: Ways to respond to the challenges of supplier contract management
Read the article by Guo, Liu, Shi, Gao, Luo and Chen (2021) entitled “A blockchain-driven
electronic contract management system for commodity procurement in electronic power
industry”: https://ieeexplore.ieee.org/abstract/document/9316177.
During the Covid-19 pandemic, organisations around the world suffered great losses and
some buyer–supplier relationships were ruined due to poor contract management.
Innovative buyers and suppliers may have found ways in which to address challenges
that came with these challenges. In not more than 200 words, discuss in which way the
authors of the article suggest to respond to managing supplier contracts despite its
challenges.
Read the posts of your fellow students and comment on at least two posts.
Feedback on Activity 5.4
Compare your answers to those of your peers. See how your thinking compares to that
of your peers. Did you consider which challenges specific organisations had to
overcome? Do you think that the authors’ suggested response would be justified for the
challenges that those organisations had to overcome?
In the next section, we provide guidelines to assist buyers to improve the management of
supplier contracts.
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5.5 GUIDELINES
CONTRACTS
FOR
IMPROVING
THE
MANAGEMENT
OF
SUPPLIER
With the ongoing need to ensure that suppliers are effectively managed, the need for
formalising the business relationship through contracts is imperative. To ensure effective
management of supplier contracts, a few guidelines are suggested in Table 5.1.
Table 5.1: Guidelines for effective supplier contract management
Contract procedures
Clearly define and communicate procedures and protocols
for the complete contracting process and contract
administration.
Contract language
Use risk-assessed contract language, wherever possible, to
streamline and improve efficiency of the contracting
process.
Stakeholder support
Ensure proper executive and stakeholder support for both
contract management initiatives and automation
investment.
Internal collaboration
Increase collaboration among internal stakeholders,
especially procurement and finance. This will ensure that all
internal stakeholders work in a cohesive manner for the
benefit of the business, its customers and suppliers – a
necessary ingredient for success.
Reporting
Define
information
and
reporting
requirements
comprehensively for contract management. This will permit
visibility on consumer performance coupled with early
identification of supplier issues.
Investment
management
Make appropriate mid- to longer-term investments in
procurement contracts management process capabilities.
By planning and investing in suppliers accordingly, the
business will be able to manage its capacity more
effectively.
Usage of tools
Adopt advanced tools for better reporting, analysis and risk
management. Using tools and technology will allow a more
informed approach to managing supplier relationships and
the supply chain. This will result in savings over the long
term, coupled with more improved supplier relationships.
Development
Continually develop and enforce standard processes for
contract management.
Management
solutions
Use commercially available contract management
solutions, with an emphasis on having capabilities to store,
search and retrieve critical contract information.
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Schedule audits
Perform regularly scheduled audits and performance
checks using pre-defined metrics to measure improvements
in compliance and overall contract performance. In addition,
conduct regular monitoring and tracking of supplier
contracts.
Successful
management
Identify contract management “champions” and secure
strong executive and stakeholder support to drive adoption
and internal contract compliance.
Selection team
Gather contract management system requirements and
preferences from each division and communicate the intent
and progress of the programmes.
Activity 5.5: Improving the management of supplier contracts
Search the internet for relevant articles on “improving supplier contract management”.
Visit and read a minimum of three webpages on improving supplier contract management.
Below are some links that you may find useful to suggest improvement ideas.
https://www.contractworks.com/blog/6-key-strategic-ideas-for-improved-suppliercontract-management
https://docucollab.com/contract-management-practices-in-the-procurement-department/
https://www.icertis.com/blog/the-top-8-contract-management-challenges-and-how-toovercome-them-with-contract-management-software/
https://www.businessnewsdaily.com/4813-contract-management.html
In not more than 200 words, write your suggestions of ways in which supplier contracts
can be managed better.
Feedback on Activity 5.5
Did you consider any of the following points in your discussion?
•
•
•
What should be expected from the legal department?
Are you able to motivate specific obligations for all the parties in the contract?
Are you aware of any contract management software in South Africa? Which
software did your fellow students identify?
In the next section, you will learn about the benefits and risks of supplier contract
management.
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5.6 BENEFITS AND RISKS OF SUPPLIER CONTRACT MANAGEMENT
5.6.1 Benefits of supplier contract management
Supplier contract management is the enabler of a multitude of benefits, if it is executed
properly. A few of these benefits are detailed below (Cordell & Thompson, 2019):
•
•
•
•
•
•
Prioritise activities, such as cost reduction and quality improvement, for the supplier
relationship team.
Guide performance improvement targets.
Proactively target key risk mitigation opportunities.
Focus on key value improvement opportunities.
Evaluate the performance of suppliers throughout the contract lifecycle.
Reduce uncertainty of expectations for both buyers and suppliers.
5.6.2 Risks supplier contract management encounters
The following primary questions should be considered when considering contract
management:
•
•
•
What is the potential for opportunism by the buyer or the supplier?
Is this the right supplier to engage in a longer-term arrangement?
Is there a fair distribution of risk and gains between the parties involved?
There is an endless list of risks that organisations should take into account while supplier
contracts are managed. Many have voiced their concerns and opinions about which risks
organisations should keep an eye out for, including authors, directors, managers and
entrepreneurs. Some of these risks are captured in Table 5.2.
Table 5.2: Risks for supplier contract management
Supplier
opportunism
Selecting the
wrong
supplier
Supplier
volume
uncertainty
Supplier
abandons
other
business
A supplier can become complacent and lose motivation to maintain
or even improve performance as the contract progresses.
Once a contract with a specific supplier is in place, it may be very
difficult to switch suppliers.
Over-forecasting of requirements, lack of marketability of the final
product or service, competition in the marketplace and other
environmental considerations may affect the contract management
process.
Contracts might lock the supplier’s ability to serve the buyer’s
competitors and lead to lost profitable business opportunities.
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Buyer
is Unforeseen customer demands typically result in higher costs that
unreasonable the supplier may or may not be able to recover under the terms of
the agreement.
Excessive
Generally, it may be dangerous if buyers or suppliers have access
access
to to confidential information. Partnerships and alliances share most
information
information, but there is information that should be handled with
care.
Missed
Missing expiration or renewal dates of contracts may expose buyers
scheduled
or suppliers to liabilities.
dates
Compliance
Noncompliance, such as rogue spending, can lead to legal costs.
issues
Approval
Issues related to the approval process may delay the activation and
process
is implementation of contracts.
ineffective
The benefits of a contract should outweigh the risks involved in the contract. However,
there are red-line risks that a buyer will not be able to compromise on, for example safety
in transport operations. It is important that buyers identify true red-line risks before
compiling and signing contracts (Sammons, 2017).
Activity 5.6: Benefits and risks of contract management
Search the internet for relevant articles on the benefits and risks involved in the
management of buyer–supplier contracts. Read a minimum of two articles each for
benefits and risks.
In not more than 100 words, provide two examples of benefits due to proper contract
management, and two risks that buyers and suppliers may encounter during contract
management.
Read the posts of your fellow students and comment on at least two posts.
Feedback on Activity 5.6
There are a multitude of benefits and risks that should be considered for contract
management. Compare your answers to those of your peers.
•
•
•
•
Did you consider your fellow students’ examples and benefits and risks?
Do you agree with their examples?
Are there any benefits that your fellow students identified that you would rather
consider to be a risk?
Are there any risks that your fellow students identified that you would rather consider
to be a benefit?
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In the next section, you will learn about the functions in supplier contract management
and the parties in control of the management.
5.7 ORGANISING THE FUNCTIONS AND CONTROL IN SUPPLIER CONTRACT
MANAGEMENT
After the buyer’s management is convinced that critical high-order supplier contract
management functionality is required to monitor and enhance supplier performance, two
questions arise:
(1)
(2)
What should be managed within the contract?
Who should be responsible for managing the contract?
Unfortunately, there is not only one correct answer to these questions and this often is a
source of heated debates within organisations. This can be assigned to the IT
department, the purchasing office, or even a separate department tasked only with the
implementation and contract management activities. This decision will depend on a
number of factors, including the skill levels of key staff within a certain functional area of
the organisation.
In many organisations, contract management never gets off the ground because
responsibility is not assigned to a specific department or individual. It is understood that
the first step in any contract management situation is to assign responsibility for it to a
contract management team (Nieman, 2018).
It is crucial that the management recognise the importance of contract management. Too
often suppliers are not managed to obtain the minimum requirements in the contract.
Without proper tracking, buyers often do not realise that they are being defrauded. Ideally,
contract management teams should include employees from other departments (such as
projects, technical and finance) who should be involved throughout the bidding and
evaluation processes (Nieman, 2018). In this section, we attempt to give you an overview
of the different levels of supplier relationship management as well as the contract
functions necessary to complete the objective of each (see Figure 5.3).
•
•
•
•
Level 1: administration
Level 2: compliance management
Level 3: performance management
Level 4: long-term programmed improvement
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Figure 5.3: Contract management functions and levels (Nieman, 2018)
5.7.1
Administration
The starting point of contract management is to simply know what is going on. Several
functions can fall in this level, and they are not less important than any other contract
management function. In fact, they are the foundation of the contract management
endeavour.
Document management
Significant amounts of data are required concurrently with the supplier’s performance.
Training, operation and maintenance manuals, design reviews, architecture, scheduling,
financial reports and logistics schedules are a few of the documents that may be required
by contract. Failure to effectively manage these documents can lead to a buyer not
receiving adequate service levels from its suppliers, as it does not only take time and
money to get these documents in place if they are not, but tracking these documents is
potentially vital for the completion of a project. Should a request for clarification, a
compliance demand or other notice go unanswered, a project can completely miss its
objective.
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Financial management
Purely from a cashflow perspective, the buyer should try to keep its money as long as
possible during the performance of a contract. This does not only make fiscal sense, but
it also sustains leverage during contract performance. Nevertheless, suppliers will want
as much money as fast as possible. Structuring payment competently is thus of vital
importance, as well as tracking that those payments are made as scheduled. Most
complex deals are negotiated with a financial profile that correlated performance to
cashflow. Set milestones are verified before payment is made.
Asset management
All assets (moveable and immoveable) must be coordinated, tracked and delivered by
either of the two parties as is instructed in the contract. First, the assets must be identified
and documented. The primary responsibilities of the administrator for assets are to: (1)
develop an ongoing accounting and inventory of all the assets acquired by either party
under contract; (2) develop or implement an existing identification system; (3) ensure that
the assets are properly marked; and (4) create a database that lists information such as
the date acquired, location of asset and value of asset.
Change management
We discussed change management in great length in Lesson 4. What is important to note,
however, is that controlling constant change in this environment is paramount for success.
The idea is to create processes to allow change to occur with the least cost and the
greatest competitive impact. This can be implemented by (1) the administration of a
requirements baseline and (2) a contract change mechanism that makes the
implementation of change a routine process.
5.7.2
Compliance management
Comparing the baseline with actual performance provides the mechanism for ensuring
that suppliers comply with the requirements of the contract. This provides the bare
necessities to determine if a buyer is getting what they paid for. The comparison also
provides the baseline for measuring change proposals to determine if there are in fact
changes and to what degree the original scope of the contract has to be changed. This
function touches on the foundation of the routine administration management setup, as it
aims to use information assimilated for performing the monitor–measurement–feedback
loop that is the essence of compliance management.
The measurement of performance against a baseline is where contract management and
performance management complement each other. The following tools presented in
Table 5.3 can be used to ensure that compliance management is executed with a project
baseline:
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Table 5.3: Tools to measure performance
Work breakdown This is a tool to break the project into manageable tasks. This
schedule (WBS)
can include a WBS dictionary to provide additional descriptive
information about what each task entails.
WBS
network A tool that uses the WBS and illustrates the relationship
diagram
between individual tasks to ensure completion of tasks further
down the line. In other words, identifying interdependencies
between tasks and the critical path when combined with the
schedule.
Responsibilities
Each function in the requirements document should be placed
matrix
under the authority of an employee of the buyer. It is beneficial
for every party involved to identify the responsible person by
name and have their contact details readily available.
Requirements
This tool combines the WBS, task description and the
identification information from the responsibilities matrix with the
matrix
required due dates indicated in the schedule. It is a reformatting
of the scope document to automate notification around eventdriven requirements in the contract. This is thus also used for
monitoring changes.
Performance
This tool combines requirements, schedules and budget
measurement
forecasts under the contract into a performance baseline. By
baseline
using this baseline and comparing it to actual performance, it is
possible to predict outcomes based on earned value
measurement – a comparison between the estimated budgets
and the actual expense for tasks in terms of cost and effort.
Risk
This tool looks at each task, or logical grouping of tasks, and
management
makes predictions about things that could go wrong. By
assessment
assessing the impact (low to high) and the likelihood of
occurrence (low to high), the project management team can
determine where to add resources to ensure schedules and
milestones are met and to have contingency plans in case they
are not.
Supplier
A plan to compile the results from the tools listed above, as well
performance
as procedure guidelines for the management of the contract,
management plan handling of changes, checking status performance and
updating the plan itself.
It is important to note that not all the tools are necessary for every project undertaken
within the framework of a contract. The value of the project and its criticality to the buyer
are again two aspects that must be taken into consideration when deciding how much or
how little effort will be committed to the supplier agreement.
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5.7.3
Performance management
The process of performance management starts on the same basis as the monitor–
measurement–feedback loop that is essential to compliance management. It is aimed at
getting more out of the supplier than the minimum, but by focusing on adequate
performance. It is preferable to define expectations in a contract with a supplier clearly
from the outset. The better the requirements are defined and documented, the better the
chance that the supplier will understand and comply with the obligations created by the
contract. However, in some instances problems will arise.
Performance-based contracting or incentive management describes the creation of
agreements where clear specifications for the supplier’s compliance to the contractual
obligations are set out in the written document. If the supplier executes all these
obligations in a satisfactory manner, the supplier is rewarded in some manner. Should
the supplier not comply with certain aspects, remedies are suggested to avert subsequent
problems that are sure to arise in the buyer–supplier relationship.
There can be positive or negative consequences for underperformance or excellent
performance for nearly any remedy or reward technique created and incorporated in an
exchange. Both should be available tools. Too often, the focus is only placed on remedies
– and that usually means liquidated damages. Simply stated, the supplier is penalised or
praised in monetary terms by adding or subtracting payment under the contract. The
problem with liquidated damages is that more often than not, the supplier retrieves these
costs from the buyer because they are in a position to pre-empt the potential risks.
Certainly, the buyer does not want the supplier to increase their price or purposefully build
unrealistic objectives into the contract schedule to increase their profits.
The focus should rather be on all the requirements of a contract that can be captured as
three basic scope elements: time, money and quality (Cant, 2020). Using these
requirements, remedies and rewards can be created that codifies acceptable and
unacceptable performance. In the final analysis, money might be the best motivator for
the supplier.
Time
Creative remedies and rewards are the best choice in situations where there is a detailed
programme schedule and the buyer has access to that schedule. A milestone schedule
can then be compiled, where interim tasks completion steps are set out. This will allow
the buyer to monitor performance against the milestones executed, and intervene
immediately if a slight breach of contract is suspected. Instead of attaching these
milestones to liquidated damages, a buyer can include clauses such as (1) a deliverable
action plan to remove any schedule obstacles remaining for the delayed task; (2) an
impact analysis describing whether the delayed task was on the critical path and if so,
what the overall schedule impact is predicted to be; or (3) a requirement for additional
Page 96
efforts to be expended by the supplier to get back on schedule by using measures such
as overtime or additional labour. This will force the supplier to deliver the product or
service timeously and to incorporate extra measures if they are not on schedule without
being able to add them to their price structure.
Money
A direct conflict of objectives between the buyer and the supplier exists if money is
involved in an agreement. The buyer aims to purchase as much products or services with
as little cost involved as possible, while the supplier wants to spend more as a justification
to earn more. This causes friction that can ultimately lead to substantial problems in the
execution of the contract. The contract must therefore be written with incentives for the
supplier to manage costs and mechanisms for the buyer to measure, monitor and provide
feedback on performance. Negotiations in this regard must be continuous and ongoing
remedies must be implemented if the supplier’s prices become extreme. A reliable
manner in which to document this is to set an index for cost elements managed under the
contract.
Quality
Quality is the most difficult aspect to monitor. It is quantitative by nature and often forms
the entire focus of remedies and rewards under the contract, as cutting service levels is
the easiest way for suppliers to exceed the schedule and cut costs. Qualitative measures
are needed to ensure that a supplier continues to perform on time and at a certain cost
level throughout the duration of the performance. It is therefore important to also include
a service level agreement with the supplier to enable the buyer to monitor and measure
against certain specifications, and check with end users if the supplier is performing
according to the set specifications.
5.7.4
Long-term performance improvement
If a buyer is not happy with a supplier’s performance, there can be no positive relationship
between them. Contract management is an organised way to assure that suppliers
perform as expected and that there is continuous and open communication with suppliers
about their performance. Therefore, contract management is vital for a good relationship
with suppliers.
This module focuses more on endeavours to improve performance by the supplier over
the long term. Buyers seldom experience ultimate performance of suppliers from the
outset or continuously during the lifecycle of the contract. Therefore, contract managers
should try to get suppliers to continuously improve during the lifecycle of the contract, as
suggested in Figure 5.4.
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Figure 5.4: The continuous improvement performance lifecycle (Nel & De Beer, 2018)
Activity 5.7: Organising the functions and control in supplier contract management
Evaluate the following problems that might occur without the application of proactive
supplier contract management and provide guidelines suggesting how the scenario could
have been prevented or, if not, solved. Visit myUnisa and compare your suggestions with
those of your fellow students.
Problem 1
A buying organisation has an existing contract with a supplier for a product or service,
and identifies an opportunity for increased sales by using this specific product or service.
The buying organisation negotiated the added demand with the supplier and the supplier
makes initial investments to comply. The parties have an exclusive arrangement.
Problems of poor reliability and service performance on the part of the supplier arise. This
leads to arguments in the buying organisation, as the procurement camp wants to attempt
to solve the problems and the operations camp wants to find a new source altogether.
However, neither of the teams is able to deliver documents proving the performance
problems with the supplier and after consulting the contract, they realise that little
performance standards have been written into the contract.
Problem 2
Products, software and services acquired from the supplier fail to meet the required
acceptance tests and are eventually reengineered out of the buyer’s product. This creates
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significant cost and reduction problems, and a delay in getting the buyer’s product to
market. A special committee appointed by the buyer investigates and concludes that the
supplier failed to meet several early deadlines under the agreement, such as meeting
dates and design documents. Documentation is available to indicate several complaints
by the buyer, but they continuously accept late or faulty consignments from the supplier.
Problem 3
The buyer’s purchasing, sourcing and supply department, or their IT department, has no
processes in place to track complex arrangements for multiple parties to work
simultaneous obligations on the same project. Certain key facility alterations, hardware
upgrades and so on are therefore delayed, if it is implemented at all. As a result, the buyer
is unable to accept delivery under the contract and these key issues are tackled on an
emergency basis.
Feedback on Activity 5.7
•
•
What was your assessment of each problem? Did you consider any of the problems
to be unsolvable?
Did you consider similar suggestions as your fellow students? Or how did your
suggestions differ?
SUMMARY
In Lesson 5, we introduced you to supplier contract management in strategic supply
management by focusing on the definition of supplier contract management, explaining
the use of the contract lifecycle and answering the question “Why the need for supplier
contract management?” We discussed several ways to respond to the challenges of
supplier contract management, as well as improving the management of supplier
contracts. We then outlined the best practice supplier contract management strategies,
and distinguished between the benefits and risks of supplier contract management.
Lastly, we focused on the organisation of supplier contract management, and the supplier
contract management functions.
In Lesson 6, we move beyond contract management by concentrating on ensuring
supplier performance.
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SELF-REFLECTION
Think about what you have learned in this lesson and then answer the following questions:
•
•
•
•
•
Did you realise how important the management of supplier contracts could be?
What was your view of the management of supplier contracts before you started the
learning process?
Have any of your thoughts or beliefs about managing supplier contracts changed –
and if so, how?
Were you able to apply the theory in this lesson to real-life case studies?
Did you achieve the learning outcomes successfully or did you struggle? If you were
struggling or could not complete the lesson in the recommended time, which strategies
could you apply to improve your learning?
LIST OF REFERENCES
Cant, M. 2020. Business-to-business marketing. 2nd edition. Cape Town: Juta &
Company.
https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=2902919&site=eds
-live&scope=site (accessed: 25 September 2022).
Conlin, B. 2021. The fundamentals of contract management.
https://www.businessnewsdaily.com/4813-contract-management.html (accessed: 23
April 2022).
Lysons, K & Farrington, B. 2020. Procurement and supply chain management. 10th ed.
[Online] https://0-ebookcentral-proquest-com.oasis.unisa.ac.za/lib/unisa1ebooks/detail.action?docID=6118332 (accessed: 24 January 2022).
Nel, J & De Beer, A. 2018. Business management: A contemporary approach. 3rd
edition. Cape Town: Juta & Company.
https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=1926028&site=eds
-live&scope=site (accessed: 25 September 2022).
Nieman, G. 2018. Contract management: An introduction. Pretoria: Van Schaik
Publishers.
https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=1647430&site=eds
-live&scope=site (accessed: 24 September 2022).
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Sammons, P. 2017. Contract management: Core business competence. Croydon: CPI
Group. Available: https://0-ebookcentral-proquest-com.oasis.unisa.ac.za/lib/unisa1ebooks/reader.action?docID=4887204&ppg=85#ppg=138?service=https%3a%2f%2foa
sis.unisa.ac.za%2fwamredirect%2f0-ebookcentral-proquest-com.%2flib%2funisa1ebooks%2freader.action%3fdocID%3d4887204%26ppg%3d85#ppg=138#ppg=138
(accessed on 26 April 2022).
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LESSON 6: MANAGING SUPPLIER PERFORMANCE
INTRODUCTION
In Lesson 5, we touched on the role of supplier contract management in providing a
baseline for supplier relationship management. With the baseline established by supplier
contract management’s functions of administration and compliance management, the
buyer can monitor the status of the contracted effort and measure progress and
performance against the standard agreed to. The buyer can provide feedback to the
supplier for correcting deficiencies or preventing problems before they arise. If you refer
back to Figure 5.2, you can see that an organisation moves from the administration of a
contract past pure compliance measurement to expecting more than the minimum from
suppliers in terms of performance measurement.
Supplier performance management is the process of measuring, analysing and managing
supplier performance to improve quality, reduce costs, mitigate supply risk and drive
continuous improvement in the supply base.
Supplier performance management is not merely a scorecard and survey. It spans the
continuum of the supplier relationship management process. From identifying qualified
suppliers for sourcing events to measuring adherence against contracts, invoice
payments or on-time delivery, supplier performance management enables an
organisation to have a clear line of sight into the performance of suppliers. That is
something a scorecard – even though it is a valuable component – cannot do alone.
In this lesson, we focus on supplier performance management. An outline of the supplier
performance management model is provided. We discuss the methods of evaluating
supplier performance and how suppliers can be further developed. We investigate the
value of rewarding suppliers. We end off by explaining how to leverage suppliers for
continuous improvement.
The overview of Lesson 6 is illustrated in Figure 6.1 below:
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Supplier
performance
management
model
Leveraging
suppliers for
continuous
improvement
Evaluating
supplier
performance.
Lesson 6
Managing
supplier
performance
Supplier awards
Supplier
development
Figure 6.1: Overview of Lesson 6
The focus of this lesson is therefore on achieving specific outcomes. You can use the
outcomes to guide you throughout the learning process and to monitor your progress.
Learning outcomes
After studying this lesson, you should be able to do the following:
•
•
•
•
•
Apply the supplier performance management model to relevant scenarios.
Provide an in-depth discussion on the evaluation of supplier performance.
Apply supplier development to relevant scenarios.
Put supplier awards in perspective.
Apply the steps of the supplier leverage plan of action to relevant case studies.
Key terms
•
•
•
•
•
key performance indicators (KPIs)
quantitative supplier evaluation approaches
subjective method
survey method
comparative method
Page 103
•
•
•
•
•
•
•
•
•
•
•
•
•
•
weighted-point method
percentage-based method
cost-based method
supplier scorecard
supplier certification
conditional suppliers
certified suppliers
preferred suppliers
ISO 9000
ISO 14000
supplier development
supplier awards
supplier leverage plan of action
a SWOT analysis
Recommended resources
Manufacturing Software Channel. 2021. Supplier performance management best
practices. https://www.youtube.com/watch?v=1l3fKYfKzeA (accessed: 24 April 2022).
Patrucco, A, Frattini, F & Di Benedetto, A. 2022 Characteristics of supplier performance
measurement systems in collaborative innovation projects: The role of the purchasing
department. Supply Chain Management: An International Journal 27(2):207–231.
Available: https://0-doi-org.oasis.unisa.ac.za/10.1108/SCM-11-2020-0551 (accessed:
24 April 2022).
6.1 A SUPPLIER PERFORMANCE MANAGEMENT MODEL
In lesson 5, we established that performance-based contracting requires performance
standards be it in terms of time, money or quality that the supplier understands. Complex
buyer/supplier relationships often set satisfactory performance as a range and not a
specific point. Managing these relationships necessitates remedies to manage corrective
measures should it be needed or rewards to encourage excellent supplier performance
(as already indicated in the previous lesson). Let us focus on the latter for a moment.
‘Structuring rewards’ demands of the buyer to implement a few steps in order to
administer it in such a manner that it is reasonable and fair.
This section is based on the incentive-based performance management model developed
by Moore (2002) and consist of four steps:
(1)
(2)
Identify the KPIs.
Create the incentives.
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(3)
(4)
6.1.1
Negotiate the performance milestones upon which the incentives are based.
After the contract is awarded and performance starts, hold periodic award-fee
events.
Identify the KPIs
It is important to note that not all obligations created by a contract require a performance
incentive. Additional resources are required to administer a performance-assertive
agreement and therefore only those critical to the success or competitive posture of a
buyer should be offered incentives. It is therefore important to identify the KPIs against
which an organisation will be measured. This is discussed at greater length in Section
6.2.2.
6.1.2
Create the incentives
It is necessary to indicate exactly what the proposed incentive scheme will consist of
before the final negotiations with the involved supplier are over. Ensure that you involve
the supplier in the creation of the incentive model in order to ensure that they understand
that this can be fully used if, and when, they perform on higher levels than expected.
6.1.3
Negotiate the performance milestones upon which the incentives are based
Both parties need to clearly identify and agree on the performance milestones on which
the incentives are based. This can deter any misunderstandings at a later stage. Specific
occurrences should be identified. Let us say a supplier of an urgently required specialised
product delivers the product designs before the scheduled time; the organisation will be
entitled to a R5 000 bonus. This is discussed in Lesson 7.
6.1.4
After the contract is awarded and performance starts, hold periodic awardfee events
After the milestones have been identified on which the supplier’s performance will be
measured, regular meetings between the buyer and the supplier should take place to
verify the positive execution thereof. This will also serve as an early warning system to
enable the buyer to detect any breaches of contract at an early stage. We pay closer
attention to this in Lesson 9.
It is therefore clear that getting performance out of suppliers means monitoring
performance, measuring performance against a baseline and providing performance
feedback to the supplier. However, going through this monitor–measurement–feedback
loop is not sufficient for sustained performance or continuous improvement. It requires
incentives that motivate all the parties involved to either take corrective measures to get
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back on track or additional steps to further enhance performance, thereby sustaining
survival for both organisations in these hypercompetitive times.
Activity 6.1: Applying the supplier performance management model
Watch the video by the Manufacturing Software Channel (2021) entitled “Supplier
performance management best practices”: https://youtu.be/1l3fKYfKzeA (duration 10:54).
In not more than 100 words, report on practical KPIs that buyers should consider in their
evaluation of their supplier’s performance.
Read the posts of your fellow students and comment on at least two posts. Compare your
answers to those of your peers. See what your peers identified that you may not have
considered.
Feedback on Activity 6.1
Did you realise how many KPIs should be considered in the evaluation of suppliers’
performance? Do you understand that there are KPIs that may be more important to some
buyers than others? Therefore, each buyer should consider their operations to identify
the KPIs that are most important to them. These KPIs will then lead to the creation of
incentives, negotiation of milestones and awarding the incentives.
In the next section, you will learn how to evaluate suppliers’ performance practically.
6.2 EVALUATING SUPPLIER PERFORMANCE
The danger of a poorly designed or executed supplier performance management
programme is the failure to realise potential savings or watching those savings deteriorate
over time. The purchasing, sourcing and supply department may have conducted a
successful negotiation or online event. However, if your hard-won savings are leaking
away, it is all for nothing.
6.2.1 Why evaluate supplier performance?
There are various reasons why the evaluation of supplier performance is important
(Lysons & Farrington, 2020):
•
Evaluation can significantly improve supplier performance. When properly done,
supplier performance management can provide answers to questions such as the
following:
o Who are the highest-quality suppliers?
o How can relationships with the best suppliers be enhanced?
o How can supplier performance be incorporated into total cost analysis?
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•
•
•
•
6.2.2
o How can buyers ensure that suppliers live up to what was promised?
o How can feedback be shared based on experience with a supplier?
o How can problems with underperforming suppliers be tracked and fixed?
Evaluation assists decision making on when a supplier should be retained or
removed from an approved list.
Evaluation assists in deciding with which suppliers a specific order should be placed.
Evaluation provides suppliers with an incentive for continuous improvement and
prevents performance “slippage”.
Evaluation can assist in decisions on how to distribute spend for an item among
several suppliers in order to manage risk better.
What to evaluate?
KPIs for the evaluation of supplier performance are usually based on price, quality and
delivery. These KPIs lay the foundation for supply evaluation. Lysons and Farrington
(2020) acknowledge that further developments (such as just-in-time, lean manufacturing,
integrated supply chain and e-procurement) have made the fuller evaluation of supplier
relationships an important consideration. Relationships that include qualitative factors
such as intercompany communication and high levels of trust are not easy to assess other
than subjectively. Apart from subjectivity, qualitative evaluations are often subject to “halo
effects” (which is the tendency to prefer a particular supplier due to irrelevant
considerations such as the friendly approach of its sales representatives). There is,
however, an element of subjectivity in all evaluation systems.
The number of KPIs that is used is almost limitless. According to Lysons and Farrington
(2020), a survey conducted in the USA reported 142 evaluation items, which they
arranged under 19 categories of criteria. These include: (1) quality and process control;
(2) continuous improvement; (3) facility environment; (4) customer relationship; (5)
delivery; (6) inventory and warehousing; (7) ordering; (8) financial considerations; (9)
certifications; and (10) price.
Based on these criteria, suppliers should concentrate on quality issues first. Suppliers
should ensure that customers’ order requirements are met, followed by continuous
improvement and innovation efforts. Although pricing issues should be kept in mind,
suppliers may want to place less emphasis on price when attempting to secure and retain
customers.
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6.2.3
Quantitative approaches to supplier evaluation
The aim of quantitative ratings is to provide a sounder basis for evaluation than subjective
ratings. The main problems of quantitative ratings relate to the following:
•
•
•
The high cost of collecting the data on which ratings are based. Quality ratings, for
example, require data on the costs of defect prevention, detection and correction,
involving considerable sub-analysis of what is involved under each heading. This
problem has, however, been largely overcome by the development of appropriate
software. Such programs collect and process quality and delivery performance data
from all or specified suppliers (the latter are normally suppliers of critical or high-cost
items identified on an A, B, C or Pareto basis). From the data, ratings and reports
are provided monthly, quarterly or at other required intervals.
Ratings may give the impression of scientific accuracy; whereas, in fact, they are no
more accurate than the assumptions on which they are based.
Supplier performance is often affected by circumstances beyond the control of the
vendor.
Lysons and Farrington (2020) acknowledge that there are several common supplier
performance-rating methods (of which six are clarified in this section). A few advantages
and disadvantages generally associated with each method are explained in Table 6.1.
Common situations in which the method is applied are described.
Table 6.1: Common supplier performance rating methods
Advantages
Disadvantages
Application
SUBJECTIVE METHOD
Generally designed as questionnaires with a numerical rating scale (say 1–5),
completed by a number of reviewers
• Easy to develop
• After the first survey, the
• Usually, first attempt at a rating
and administer
method loses its impact.
system
• Can be completed • There is no objective basis, and • A simple approach for a small
by an unlimited
ratings may be subject to “halo” business with a small supplier
number of
effect and short-term memory.
base
reviewers
• If five evaluators can answer 10
questions for 50 suppliers on a
quarterly basis, there will be 10
000 data entry points annually
to enter into the database.
SURVEY METHOD
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A purchased service where a research organisation contacts a number of other
customers and obtains their views on the performance of the supplier
• Easy to implement • It is expensive.
Large corporations
• Research
• The quality of data collected
organisation
may be poor and depends on
provides regular
the source from which
updates
information is collected.
• Evaluation is based on the
experience of other companies.
COMPARATIVE METHOD
Supplier is evaluated independently by evaluators on agreed factors such as price,
quality and delivery; individual ratings are then tabulated and a final rating awarded by
the value team
• Speed – can be
• The relative importance of
• Traditionally used to compare
used to quickly
various rating factors is not
multiple suppliers prior to
evaluate a supplier considered.
awarding a contract or
on a short-term
• It is not applicable to long-term selecting from an approved list
basis
evaluation of supplier
• May be used in a manner
• Easy to develop
performance.
similar to the subjective
• May take the
• It is dependent on the subjective method
supplier’s historical opinions of the evaluators.
performance into • It is easily “rigged” by an
consideration
evaluator to give the desired
outcome.
WEIGHTED-POINT METHOD
Weighting factor is established for each of the areas indicating the value of the area in
relation to each of the other factors; score is then assigned to each factor that indicates
the supplier’s performance; score is multiplied by the weight and then averaged
• Excellent tool for • It is less useful for long-term
Used primarily as tool for the
proposal evaluation evaluation, as evaluators may long-term rating of suppliers
• Allows evaluators
lose interest.
to take all factors • Data entry may become
into account, yet
excessively time-consuming
provides the facility and labour intensive. The
to emphasise the
information has no objective
importance of one basis and may be based on
factor over another short-term memory.
PERCENTAGE-BASED METHOD
Percentage systems measure the percentage of quality defects or late deliveries: If a
supplier has made eight late deliveries out of 64, that supplier would be given a rating
of 121/2 or 13
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• Easy to
• Data may be accurate but misleading on
Initially the
accumulate data
the number of receipts or types of problems percentage method
• Provides
encountered by a particular supplier.
was applied to quality
compliance targets • It does not reflect the severity of quality
and later expanded to
and expectations, problems.
include delivery
such as “excellent” • It does not accurately reflect the level of on- performance
(95–100%) versus time performance: If one delivery in 100 is
“good” (90–94%)
three days or 60 days late, a percentageand “acceptable”
based system will still give a percentage of
(85–89%)
1%.
COST-BASED METHOD
Evaluates supplier performance on total non-productive costs associated with each
supplier’s performance
Non-productive costs are estimated costs of non-compliance, such as cost of rejection:
R200 returning suppliers – R75–R150; these are added to actual cost performance
index = Purchase order price + Non-productive cost/Purchase order price
• Suppliers held
• It is difficult to build internally.
responsible for
• It is difficult to determine non-productive
their actions
cost ranges.
• Promotes supplier
improvement more
rapidly than other
methods
• Provides suppliers
with the level of
detail they need to
understand the
issues and
additional costs
associated with
their performance
• Suppliers have
greater motivation
to improve their
performance
Used to evaluate the
performance of
individual suppliers
as well as
performance trends
of the supplier base
Source: Lysons & Farrington (2020)
The weighted-point evaluation system is particularly important. The evaluation is
developed in seven steps:
Step 1: Select the key dimensions of performance mutually acceptable to both the buyer
and the supplier.
Step 2: Monitor and collect performance data.
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Step 3: Assign weights to each of the dimensions of performance based on their relative
importance to the buyer’s objectives. The weights for all the dimensions must
sum to 1.
Step 4: Evaluate each of the performance measures on a rating between zero (fails to
meet any intended purpose or performance) and 100 (exceptional in meeting
intended purpose or performance).
Step 5: Multiply the dimension rating by the importance weight and sum to get an overall
score.
Step 6: Classify suppliers based on their overall score:
• Unacceptable (less than 50): Supplier is dropped from further business.
• Conditional (between 50 and 70): Supplier needs development work to
improve performance, but may be dropped if performance continues to lag.
• Certified (between 70 and 90): Supplier meets intended purpose or
performance.
• Preferred (greater than 90): Supplier will be considered for involvement in
new product development and opportunities for more business.
Step 7: Audit and perform ongoing certification review.
6.2.4
Supplier scorecards and certification
Supplier ratings are usually presented in the form of a scorecard that provides objective
measurements of performance and indicates the supplier’s conformance to requirements.
The term “scorecard” is borrowed from the academic report card on which pupil
performance is measured in terms of several subject grades and other performance
indicators, such as homework, attendance, class participation and class behaviour.
Scores for each performance indicator are then aggregated to give an overall grade that
provides feedback that should act as an incentive to improvement.
A balanced scorecard is a concise report with a set of measures that show the
organisational performance of an organisation. Because each measure is associated with
one or more expected values, managers are able to monitor organisational performance.
The power of information systems means that supplier relationships may increasingly be
measured in the context of the balanced scorecard approach. With proper
measurements, it then becomes possible to embed outcomes onto KPIs. Performance
indicators such as product prices, delivery performance, customer satisfaction and
percentage of defects and errors on delivered products are (as stated earlier) usually
weighted to indicate their relative importance, such as:
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Figure 6.2: Example of a supplier scorecard
It is clear that the aim of any supplier evaluation system is to certify the suppliers within
the buyer. The internal certification ranking used most often was highlighted in Step 6 of
the weighted-point supplier evaluation system. If you refer to Figure 6.2, you can see that
based on the total score of 88.25, this supplier will be considered a certified supplier by
the buyer. According to Wisner, Tan & Leong (2022), in the past, external certifications
such as ISO 9000 and ISO 14000 were popular globally as a natural extension of an
organisation’s internal supplier evaluation and certification programme.
ISO 9000
In 1987, the International Organisation for Standardisation (ISO) developed ISO 9000 –
a series of management and quality assurance standards in design, development,
production, installation and service (American Society for Quality, 2022). In 1992, the
European Union adopted a plan recognising ISO 9000 as a third-party certification,
resulting in many European organisations preferring suppliers with ISO 9000 certification.
Therefore, American organisations wanting to sell in the global marketplace are
compelled to seek ISO 9000 certification. The standards of the certification are reviewed
every five years, with the latest version published in September 2015. There are over one
million organisations in over 170 countries that are ISO 9000 certified. Obtaining ISO
9000 certification provides further verification that the supplier has an established quality
management system in place. For example, the Q1 process of the automaker Ford has
for several years required suppliers to be ISO 9000 certified (Stephens, 1997).
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ISO 14000
In 1996, ISO 14000 (a family of international standards for environmental management)
was first introduced. The benefits of investing in an environmental management system
based on ISO 14000 standards include reduced energy and other resource consumption,
decreased environmental liability and risk, reduced waste and pollution, and improved
community goodwill. As such, investment in environmental management systems is likely
to increase in the future. In addition, as more organisations are certified in ISO 14000,
they are likely to pass this requirement on to their suppliers in the future. For example,
Ford is one of the first automakers to certify all its manufacturing plants globally under
ISO 14001 and requires its suppliers to have at least one manufacturing site certified to
ISO 14001 (Reliable Plant, 2022). Ford of Europe offers ISO 14001 awareness training
programmes to assist suppliers in meeting this objective.
6.2.5
Service levels
Service levels are performance requirements that are usually divided in contracts for
outsourcing and the provision of internal support services. Service levels should be:
•
•
•
•
reasonable – as unnecessarily high service levels may entail higher charges and
focus the attention of service providers on those aspects of service that they
monitored on with possible reduced attention on those that are not
prioritised by the customer – that is, customers should identify the aspects of a
service that are important and prioritise them in order along an agreed scale.
Computer software errors may be categorised as (1) critical; (2) major; (3) urgent;
(4) important and (5) minor. A three-point scale might be criteria that are (1) most
important, (2) important, (3) less important
easily monitored – this means avoiding the specification of levels that are
subjective, intangible or incapable of quantification, such as “the provider will furnish
a high level of service”, which is meaningless
readily understood by the staff of both customers and providers
Let us focus on service level agreements for a moment. Naomi Karten (n.d.) is an expert
in the field. She explains exactly what a service level agreement is:
If you want to better manage your customers’ expectations, a service level
agreement (SLA) may be worth considering. An SLA is a negotiated
agreement designed to create a common understanding about services,
priorities and responsibilities.
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Although an SLA is an excellent expectations-managing mechanism, it is important
to manage your own expectations of what it can realistically accomplish.
Unfortunately, some people view an SLA as a complaint-stifling mechanism or a
quick fix to a troubled relationship; however, using it for such purposes creates more
problems than it solves. Instead, think of an SLA as:
•
•
•
•
A communications tool. The value of an agreement is not just in the final
product; the very process of establishing an SLA helps to open up
communications.
A conflict-prevention tool. An agreement helps to avoid or alleviate disputes
by providing a shared understanding of needs and priorities. And if conflicts do
occur, they tend to be resolved more readily and with less gnashing of teeth.
A living document. This is one of its most important benefits. The agreement
is not a dead-end document consigned to the Forget Forever file. On a
predetermined frequency, the parties to the SLA review the agreement to
assess service adequacy and negotiate adjustments.
An objective basis for gauging service effectiveness. An SLA ensures that
both parties use the same criteria to evaluate service quality.
Table 6.2 shows that an SLA must incorporate two sets of elements to be successful:
service elements and management elements:
Table 6.2: Elements to focus on in a service level agreement
Service elements communicate
Management elements focus on
The services provided (and perhaps How service effectiveness will be tracked
certain services not provided, if
customers might reasonably assume the
availability of such services)
Conditions of service availability
How
information
about
service
effectiveness will be reported and
addressed
Service standards (such as the How service-related disagreements will
timeframes within which services will be be resolved
provided)
The responsibilities of both parties
How the parties will review and revise the
agreement
Cost vs service trade-offs
Escalation procedures
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When is an agreement not an agreement?
Both service and management elements are necessary if an SLA is to be effective;
yet, in many of the SLAs that we have reviewed, the management elements are
lacking. The result, typically, is an SLA that has not been functioning as the parties
had hoped. Even with attention to both sets of elements, a successful agreement
requires much more than simply plugging the elements into an SLA template. The
process of planning, establishing and implementing an agreement is typically a
many-months process of information gathering, analysing, documenting,
presenting, educating, negotiating and consensus building – and the process must
involve customers. If customers are not part of the process, it is not an agreement!
The assumption that creating an SLA is a “start-today, done-tomorrow” process is
the most common misconception among participants in SLA seminars. Before
initiating an SLA effort, be sure to appreciate the effort involved and have both the
time and the know-how to proceed. Even more importantly, think carefully about
whether an SLA is really what you need. Most organisations can significantly
improve their ability to manage expectations with some relatively simple service
improvements. One such improvement is to create service standards, and to
document and communicate them. Having done so, you are one step closer if you
decide to establish an SLA.
Activity 6.2: Supplier performance evaluation
Watch the video from Activity 6.1 by the Manufacturing Software Channel (2021) entitled
“Supplier performance management best practices”: https://youtu.be/1l3fKYfKzeA
(duration 10:54).
In not more than 200 words, apply the KPIs that you have identified in Activity 6.1 to a
supplier scorecard. Use an example of one of your organisation’s suppliers or identify a
supplier of a large organisation.
Feedback on Activity 6.2
Read the posts of your fellow students and comment on at least two posts. Compare your
answers to those of your peers. See what your peers identified that you may not have
considered.
In the next section, you will learn about how a buyer can develop a supplier.
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6.3 SUPPLIER DEVELOPMENT
According to Wisner et al (2022), supplier development is defined as “any activity that a
buyer undertakes to improve a supplier’s performance and/or capabilities to meet the
buyer’s short- and/or long-term supply needs”. Supplier development requires financial
and human resource investments by both parties, and includes a wide range of activities
such as training the supplier’s personnel, investing in the supplier’s operations and
ongoing performance assessment. As organisations outsource more and more parts, a
larger portion of costs lie outside the organisation in a supply chain, and it becomes
increasingly difficult to achieve further cost savings internally. One way out of this
dilemma is for organisations to work with their suppliers to lower the total cost of materials
purchased. Organisations that are able to leverage their supply base to impact their total
cost structure will have a competitive advantage in their markets.
A seven-step approach to supplier development is recommended (Wisner et al, 2022):
Step 1: Identify critical products and services. Assess the relative importance of the
products and services from a strategic perspective. Products and services that
are purchased in high volume, do not have good substitutes, or have limited
sources of supply are considered strategic supplies.
Step 2: Identify critical suppliers. Suppliers of strategic supplies who do not meet
minimum performance in quality, on-time delivery, cost, technology, or cycle time
are targets for development.
Step 3: Form a cross-functional team. Next, the buyer must develop an internal crossfunctional team with a clear agreement for the development initiative.
Step 4: Meet with the top management of the supplier. The buyer’s cross-functional
team meets with the supplier’s top management to discuss details of strategic
alignment,
supplier
performance
measurement,
improvement,
and
professionalism.
Step 5: Identify key projects. After the promising opportunities have been identified,
they are evaluated in terms of feasibility, resource and time commitment, and
expected return on investment. The most promising projects are selected.
Step 6: Define details of the agreement. After an agreement has been reached on the
development projects, both parties must jointly decide on the metrics to be
monitored such as percentage improvement in quality, delivery, and cycle time.
Step 7: Monitor status and modify strategies. To ensure continued success,
management must actively monitor progress, promote exchange of information,
and revise the strategy as business conditions warrant.
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Activity 6.3: Guiding supplier development through seven steps
Visit the following link and read the news article about Vehicle Energy Japan and their
relationship with Nissan: https://global.nissannews.com/en/releases/release5078281d19ed36853371357c4a03e1fa-220907-01-e.
As a supplier relationship management student, you have been approached by Nissan
South Africa to help them leverage an Asian supply base in order to fulfil their dream of
saving money for the people and still containing their total cost structure to remain
competitive in the market. Identify and apply the seven-step approach to develop local
car parts makers.
Feedback on Activity 6.3
•
•
•
Have you considered stating each of the seven steps of developing the supplier?
Were you able to apply the information in the case study to each of the seven steps
of developing the supplier?
Did you think about the way in which you will communicate this strategy to Nissan
South Africa?
Figure 5.2 in Lesson 5 displays that performance management includes both incentives
management and relationship management. We therefore look at rewards (incentives) in
the next section.
6.4 SUPPLIER AWARDS
Fundamentally, supplier performance management (just like any performance
measurement) has three main components: (1) goal setting, (2) measurement against the
goals and (3) a feedback mechanism to provide performance improvements over time.
However, it takes more than merely going through the motions of monitor–measure–
feedback to ensure continuous improvement. It requires positive incentives that motivate
suppliers to repeat exceptional performance or negative incentives if the performance
does not meet the minimum requirements (Tudor, 2021).
Furthermore, it is not sufficient to evaluate and assess suppliers on how well they perform
with respect to the metrics jointly agreed upon. Buyers should recognise and celebrate
the achievements of their best suppliers. Award winners exemplify true partnerships with
respect to continuous improvement, organisational commitment and excellence. As
award-winning suppliers, they serve as role models for other suppliers.
For example, the Ford Motor Company’s World Excellence Award is a comprehensive
global supplier awards programme that annually recognises Ford’s global suppliers based
on three performance metrics: quality, cost and delivery. These metrics are jointly
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developed with Ford’s suppliers. The Gold Award is for suppliers who meet the excellence
requirements in all three areas of quality, cost and delivery. The Silver Award is given to
suppliers that meet the quality excellence requirement and either the cost or the delivery
excellence requirement. The Recognition of Achievement Awards are given to suppliers
who have made a significant contribution to Ford’s key initiatives of high mileage
improvement, environmental leadership, Warranty Reduction Programme, new
consumer-focused technology and customer-driven Six-Sigma supplier achievement
(Ford Motor Company, 2016).
Activity 6.4: Supplier rewards
Search the internet for relevant examples of South African buyers that reward their
suppliers for excellent service.
Consider well-known large organisations in your search. You may also consider the
organisation where you work.
Identify at least two South African buyers that sponsor supplier reward initiatives.
Feedback on Activity 6.4
Read the responses of your peers and comment on two posts. Did you consider or know
about their examples?
In the next section, you will learn about leveraging suppliers for continuous improvement.
6.5 LEVERAGING SUPPLIERS FOR CONTINUOUS IMPROVEMENT
In the context of supplier relationship management, we have now covered most of the
aspects involved in ensuring supplier performance management, focusing on the contract
management functions at the various levels of supplier relationship management, from
pure administration of contracts, through compliance management and performance
management to long-term programmed performance of suppliers. One central theme has
been noticeable throughout the discussion thus far. It is imperative to structure the buyer–
supplier relationship in such a way that both parties have some level of influence.
Leverage is specifically important to the buyer, as not all relationships go as well in actual
performance as originally intended, and leveraging of the supplier’s performance under
the obligations created by the agreement becomes necessary more often than not. Again,
this does not occur automatically and must be managed in a proactive, structured
manner.
In this section, we focus on leveraging suppliers. First, we must choose a specific project
and assign a team to identify the leverage prospects. Then we must do a SWOT analysis
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to determine the strengths, weaknesses, opportunities and threats associated with the
leverage prospects. A strategy must be developed to take advantage of the viable
leverage prospects. Documentation of the whole process is very important to guarantee
that the implementation of leverage targets set can be measured and the success thereof
ascertained.
The steps of leveraging suppliers are discussed in the following section. As a summary,
they are as follows.
Step 1:
Step 2:
Step 3:
Step 4:
Identify the project and form the team.
Identify leverage.
Execute a SWOT analysis.
Develop and execute a strategy for corrective measures.
6.5.1
Identify the project and form the team
The starting point for leveraging suppliers is the selection of specific projects and its
suppliers to be leveraged by a designated group of employees. This will allow for a more
structured approach to supplier leveraging, as specific teams are responsible for the
leveraging of particular suppliers. If the buyer has never engaged in such an exercise, it
is advisable that they launch this through a pilot project. This will allow the buyer to
overcome:
•
•
•
•
unwillingness to take risks in sustaining buyer–supplier relationships
mismatches between the capabilities that are expected and those that are available
from suppliers
misunderstanding how each supplier organisation really operates
difficulty in assigning the profit share resulting from supplier leveraging fairly
Team members must be open-minded and capable of taking advice from non-traditional
sources. It must be said that including employees who doubt the concept of supplier
leverage as team members can lead to more productive results, as they tend to stimulate
reasoning and allow for clear justifications for most leveraging possibilities.
6.5.2
Identify leverage
When faced with a situation where a supplier is not performing, the immediate question
is always the same: “What can one do to make them perform?” The question is only asked
after the buyers become aware of what a supplier is doing or (more aptly) not doing. There
are two ways in which a buyer can prompt the supplier to improve its performance.
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Firstly, it can urge the supplier to perform based on respect, concern, dedication, attention
and cooperation. Unfortunately, this approach is not very effective, as the supplier is
placed under no real pressure to perform.
Secondly, and most often, the answer to this question compels the buyer to use an
approach of influence, power, control, force and respect for position, pull and weight. In
other words, identify the leverage. Stated simply, this typifies the following statement
made to an underperforming supplier: “You will comply with the strategy that requires
your performance – or else!”
The words “strategy that requires your performance” are crucial in this instance. The
buyer can only revert to true leveraging of suppliers if they have (1) compiled a structured
relationship with a supplier detailing what is expected of them and (2) have knowledge
about the various sources of leverage that exist. We have now covered the management
of a structured agreement with a supplier in-depth, but we need to review the sources
used by a buyer to identify leverage (Table 6.3).
Table 6.3: Sources of leverage
Contract
Market place
Relationships
Law
The terms and conditions of the contract provide a solid foundation
for leveraging, hopefully not only focused on liquidated damages but
also on the statement of work. The contract should outline the
specific duties of the supplier and specific remedies if these duties
are in dispute.
A large buyer may influence a supplier through its buying power.
The threat of losing a large portion of its business can compel the
supplier to increase its performance levels. If a supplier is aware of
the potential expansion of the supplier’s sales, it may provide a
positive incentive to perform. If a supplier is aware that its nonperformance will be made public in the marketplace, it may provide
a negative incentive to improve.
Not all disputes require extensive leveraging if a successful buyer–
supplier relationship exists. It may be sufficient to only involve the
management executives, who conducted the initial negotiations, in
the resolution process. This, however, has its limits with aspects
such as the change of senior management in either of the two
organisations. Nevertheless, the relationship should not be
dismissed as a source of leverage without careful consideration.
Recourse to the legal system should be considered as the buyer’s
last resort. However, taking legal action early in a dispute can
eliminate various problems. The contract will determine what
constitutes just cause for a dispute. Under the threat of termination,
or at least partial termination, the buyer can obtain useful leverage
to compel the supplier to increase its performance.
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Finance
6.5.3
The ability to negotiate additional payments may enforce the
desired level of performance from a supplier. This most often takes
place when a product or service that you require is not included in
the scope of the contract. It can, however, occur under the umbrella
of the contract to ensure that a supplier delivers as scheduled. The
supplier must be evaluated attentively before the buyer can
consider this action, as it may be found that the supplier simply
cannot perform.
Execute a SWOT analysis
Each of these leverage prospects has their own strengths and weaknesses. It also
presents its own opportunities and threats. To determine which of these leveraging
prospects are viable to pursue in the supplier relationship management context, a SWOT
analysis must firstly be executed. The SWOT analysis follows only after possible leverage
points and the application thereof have been clearly distinguished. Now it is time to
identify the viable leverage opportunities based on the information gathered on each
aspect.
6.5.4
Develop and execute a strategy for corrective measures
So far, in the supplier leverage plan of action, we have established the following:
•
•
•
•
•
a specific project, with certain suppliers
a team to drive the supplier leverage for those particular suppliers
supplier leverage possibilities pertaining to those suppliers
the strengths, weaknesses, opportunities and threats of each of the identified
leverage prospects
the viable supplier leverage prospects
It is now time to address the strategy that the buyers will follow when attempting to take
corrective measures. This entails that the buyer considers the worst possible scenario
associated with the viable supplier leverage prospects and plan for that contingency. The
following are some of the questions that must be answered when creating such a strategy:
(1) What are the targets to be reached with the leveraging of suppliers? (2) What are the
step-by-step actions (based on the leverage opportunities) that the buyer will take in
dealing with the supplier leverage opportunities? (3) What are the step-by-step actions in
the worst-case scenario?
Using the “You will comply with the strategy that requires your performance – or else!”
approach can initially lead to disagreements with the supplier. This can be solved through
negotiations between the involved parties. Sometimes negotiations can already lead to
the desired effect – improved supplier performance. To obtain improved supplier
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performance, the buyer should be willing to bluff. If this means that they must advertise a
request for proposal in the market to get the attention of the supplier, so be it. Any action
that will send a clear message to the supplier is worth the risk. However, the buyer should
not bluff if they are not willing to follow through. Empty threats are the surest way to lose
any leverage that the buyer might have had. The buyer’s actions/reactions set out in the
strategy should escalate. Every step taken should intensify the influence exerted over the
supplier to coerce them to improve their supplier performance. This could stretch from a
letter informing the supplier of the buyer’s intentions to the termination of their contract. It
is sometimes wise to involve the buyer’s legal team. They should, again, not threaten the
supplier with legal action if they are not willing to see it through. The buyer must be aware
of and even anticipate the supplier’s intentions. This will allow them to stay one step
ahead of their supplier at all times.
Implementation of the developed strategy is of paramount importance to achieve the
objective of improved supplier performance. Re-assessing the relationship may provide
clear feedback that should dictate corrective measures. At this stage, additional reporting
deadlines should be set to keep track of the implementation process (Tudor, 2021).
6.5.5
Document the process
To extract the full benefit of this supplier leverage plan of action, the team should
document the whole process. This will allow them to ascertain exactly how they
determined the leveraging prospects and how they decided on certain viable leveraging
possibilities, and outline the strategy that they intend to follow to achieve the proposed
supplier leverage.
The aim of the documentation of all these aspects is to create a baseline against which
to assess whether or not the implementation of the leveraging options was successful. It
also guides future efforts and ensures that mistakes made in establishing the leverage
strategy are not repeated. These documents must be communicated across the spectrum
of the buyer, as it can also provide key lessons learned for other teams busy with the
same exercise.
Activity 6.5: Leveraging suppliers for continuous improvement
Think of a prominent buyer–supplier relationship at the organisation where you work or
another organisation with which you may be familiar.
Evaluate the sources of supplier leverage and identify possible leverage points in the
relationship.
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Feedback on Activity 6.5
Your answer will depend on the specific buyer and buyer–supplier relationship, which you
have identified and described. Make sure that your reasoning is correct by providing a
clear background of the chosen buyer–supplier relationship. Identify all the parties
involved in the buyer–supplier relationship. Determine the type of relationship and the
scope of the activities involved as stipulated in the contract. Do a SWOT analysis to
determine the strengths, weaknesses, opportunities and threats associated with the
leverage prospects. Also, refer to the market in which the organisations operate and add
a synopsis of their financial situation. Recognise the importance of documenting the
whole process to guarantee that the implementation of set leverage targets can be
measured and the success thereof ascertained.
SUMMARY
Lesson 6 focused on supplier performance management. An outline of the supplier
performance management model was provided. We discussed all the aspects relating to
the evaluation of supplier performance, provided an overview of the development of
suppliers and encouraged the use of supplier awards. We concluded the discussion by
highlighting ways in which suppliers may be leveraged to continuously improve their
performance.
In Lesson 7, we look at the negotiation between buyers and suppliers.
SELF-REFLECTION
Think about what you have learned in this lesson and then answer the following questions:
•
•
•
•
•
Did you realise how important the management of supplier performance is?
What was your view of managing supplier performance before you started the
learning process?
Have any of your thoughts or beliefs about managing supplier performance
change’– and if so, how?
Were you able to apply the theory in this lesson to real-life case studies?
Did you achieve the learning outcomes successfully or did you struggle? If you were
struggling or could not complete the lesson in the recommended time, which
strategies could you apply to improve your learning?
LIST OF REFERENCES
American Society for Quality. 2022. What is the ISO 9000 standard series? [Online].
https://asq.org/quality-resources/iso-9000 (accessed: 24 May 2022).
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Ford Motor Company. 2016. Ford honors top global suppliers at 18th annual World
Excellence Awards. [Online].
https://media.ford.com/content/fordmedia/fna/us/en/news/2016/05/20/ford-honors-topglobal-suppliers-at-18th-annual-world-excellence.html (accessed: 13 May 2022).
Karten, N. (n.d.) How to establish service level agreements. [Online].
http://www.nkarten.com/sla.html (accessed: 4 May 2022).
Lysons, K & Farrington, B. 2020. Procurement and supply chain management. 10th ed.
[Online]. https://0-ebookcentral-proquest-com.oasis.unisa.ac.za/lib/unisa1ebooks/detail.action?docID=6118332 (accessed: 24 January 2022).
Moore, RA. 2002. The science of high-performance supplier management – A
systematic approach to improving procurement costs, quality, and relationships. New
York: American Management Association.
Reliable Plant. 2022. Ford reduces manufacturing impact on environment. [Online].
https://www.reliableplant.com/Read/11570/ford-reduces-manufacturing-impact-onenvironment (accessed: 24 May 2022).
Stephens, B. 1997. Implementation of ISO9000 or Ford’s Q1 Awards: Effects on
organizational knowledge and application of TQM principles and quality tools. [Online]
https://www.emerald.com/insight/content/doi/10.1108/09544789710168975/full/pdf?title
=implementation-of-iso-9000-or-fords-q1-award-effects-on-organizational-knowledgeand-application-of-tqm-principles-and-quality-tools (accessed: 24 May 2022).
Tudor, I. 2021. Incentives and control mechanisms in change management. Annals of
Constantin Brancusi University of Targu-Jiu. Economy Series (4):140–146.
https://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=156310776&site=ed
s-live&scope=site (accessed: 20 September 2022).
Wisner, JD, Tan, KC & Leong, GK. 2022. Principles of supply chain management: A
balanced approach. 6th edition. Hampshire: Cengage.
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LESSON 7: NEGOTIATING WITH SUPPLIERS
INTRODUCTION
In Lesson 6, you learned about suitable performance management strategies to ensure
continuous performance from suppliers. The way buyers and new suppliers communicate
with each other may set the tone for a future relationship. Through the life cycle of supply
contracts, buyers and suppliers should constantly engage in negotiations to ensure the
continuation of the relationship. It is therefore necessary to include Lesson 7 on
negotiations in this module about supplier relationship management.
These days, many of us use internet search engines such as Google as a starting point
when researching any issue. Typing in “negotiations” delivered a staggering 4 450 000
000 results worldwide – proving that we are living in an era of negotiations. South Africa
and the world have changed around us, and are still changing rapidly, because of and by
means of negotiations. Negotiation is a fact of life. A global culture has emerged that
emphasises negotiation instead of confrontation. The entire world seems to agree and
subscribe to this cultural movement, thus ensuring that negotiation is truly an intriguing
field of study.
Today, everyone negotiates. The remarkable progress achieved through negotiation in
the political and social arenas has stimulated demand from commerce and industry for
knowledge on negotiation processes and skills. This is particularly prevalent in the
modern sourcing and supply field, where professionals have to influence and motivate as
part of their daily activities a diversity of people (often of different language groups and
cultures). They have to balance conflicting aspirations within their own organisations and
that of suppliers through the enormous potential of negotiation.
It is therefore necessary to take an in-depth look at what negotiation entails. As the topic
has been repeatedly covered in previous modules, we restrict this discussion to a
definition of negotiation, alternative options to negotiation and the approaches to
negotiation. We explore ethics during negotiation. We also look at an overview of the
negotiation process and classify negotiations. Lastly, we answer the question “What is
effective negotiation?”
The overview of Lesson 7 is illustrated in Figure 7.1 below:
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Figure 7.1: Schematic overview of Lesson 7
The focus of this lesson is therefore on achieving specific outcomes. You can use the
outcomes to guide you throughout the learning process and to monitor your progress.
Learning outcomes
After studying this lesson, you should be able to do the following:
• Formulate a definition about the concept of negotiation.
• Evaluate available alternatives to negotiation.
• Distinguish between collaborative negotiation and adversarial negotiation.
• Grasp the ethics of negotiation.
• Apply the negotiation process to various case studies.
• Apply various types of negotiation by classifying the objectives, relationships, styles
and content of negotiation situations.
• Critically discuss what effective negotiation is.
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Key terms
•
•
•
•
•
collaborative negotiation
adversarial negotiation
negotiation ethics
negotiation objectives
negotiation relationships
Recommended resources
Chartered Institute of Procurement & Supply (CIPS). 2022. Negotiations. [Online]
https://www.cips.org/knowledge/procurement-topics-and-skills/strategypolicy/negotiation/ (accessed: 10 May 2022).
Katz, L. 2017a. Negotiating international business – Egypt. [Online]
http://www.leadershipcrossroads.com/mat/cou/Egypt.pdf (accessed: 1 June 2022).
Katz, L. 2017b. Negotiating international business – Nigeria. [Online]
http://www.leadershipcrossroads.com/mat/cou/Nigeria.pdf (accessed: 1 June 2022).
Katz, L. 2017c. Negotiating international business – South Africa. [Online]
http://www.leadershipcrossroads.com/mat/cou/South%20Africa.pdf (accessed: 1 June
2022).
Kaufmann, L, Rottenburger, J, Carter, CR and Schlereth, C. 2018. Bluffs, lies, and
consequences: A reconceptualization of bluffing in buyer–supplier negotiations. Journal
of Supply Chain Management 54:49–70.
https://onlinelibrary.wiley.com/doi/epdf/10.1111/jscm.12155 (accessed: 10 May 2022).
7.1 WHAT IS NEGOTIATION?
Negotiation has been defined by numerous sources. Evaluate the typical examples and
highlight the most common characteristics of negotiation.
Negotiation is
•
•
•
“an occasion where one or more representatives of two or more parties interact in
an explicit attempt to reach a jointly acceptable position on one or more divisive
issues about which they would like to agree” (Lysons & Farrington, 2020)
“a strategic discussion that resolves an issue in a way that both parties find
acceptable” (Kenton, 2021)
“an interactive process between two or more negotiators or parties seeking to find
common ground on issues of mutual interest, where the negotiators or parties seek
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•
to make a mutually acceptable agreement that will be honoured by all” (The
Negotiation Experts, 2022).
“the process by which individuals or groups attempt to realize their goals by
bargaining with another party who has at least some control over goal attainment”
(Openstaxs, 2019).
Negotiation is not merely an event of mutual concessions made to ensure an agreement,
but rather an attempt to find a creative formula for attaining the objectives of both parties.
It is important to realise that there are many definitions of negotiation, and all of them are
inadequate in some way. If sourcing and supply professionals view all their negotiations
as a process and not an event, this could affect the way in which they negotiate.
It could mean that those in sourcing and supply acknowledge the long-term aspect of
their work, and therefore deal with people in such a way that long-term relationships
could be established. It may also mean that differences are viewed as challenges and
that buyers focus on creativity to overcome those differences. It is further of vital
importance to realise that organisations and individuals who have differences could in
many ways be dependent on each other in the same way that the concept “positive” is
dependent on the concept “negative”. Thus, in some ways, a buyer is dependent on a
supplier and a supplier is dependent on a buyer. We can to some extent act on our own
but in many ways, we are dependent. Buyers seldom have their own supply lines, and
suppliers seldom have their own channels of marketing and selling. Thus, although they
may be somewhat competitive in their approach, they should still realise that they are also
dependent on others because they are often in business with others. Hence, there are
extremes to which anybody can negotiate and if there are no gains for both sides, most
negotiations will reach a stalemate and fail.
Activity 7.1: Defining negotiation
Search the internet for relevant articles on “what is negotiation”. Read a minimum of five
definitions of negotiation. Below are some links that you may find useful to understand
the definition.
https://resources.saylor.org/wwwresources/archived/site/wpcontent/uploads/2013/01/BUS209-5.2-Negotiation.pdf
https://www.etymonline.com/word/negotiation
As you study the different definitions, take note of the common concepts and terms used
in them. You will use the common terms and concepts to formulate your own definition.
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Feedback on Activity 7.1
Read the posts of your fellow students and comment on at least two posts. Compare your
answers to those of your peers. See how your definition compares to those of your peers.
You may then consider modifying your definition.
In the next section, you will learn that there are alternative options to entering into
negotiations.
7.2
ALTERNATIVES TO NEGOTIATION
Before actual negotiations commence, it should be considered whether there are other
options to resolve matters. Some alternative methods to negotiation are:
•
•
•
•
Yielding. Simply give up and accept all the demands of the other side.
Avoidance, particularly when the outcome is not important.
Prevention. especially where there is more to lose than to gain.
Walk away, used as a strategy to strong-arm the other party into acceptance with
no concessions from yourself.
•
Ignore the fact that the conflict exists.
(The Negotiation Experts, 2020)
Activity 7.2: Evaluating alternatives options to negotiation
Watch the video by Marty Latz (2008) entitled “Negotiating – Listing alternatives:
https://www.youtube.com/watch?v=n2psXmv9mQE (duration 3:44).
In not more than 300 words, explain the concept of BATNA and what it entails before
negotiations commence.
Read the posts of your fellow students and comment on at least two posts.
Feedback on Activity 7.2
•
•
•
•
Have you considered what the acronym BATNA stand for?
Who should consider BATNA?
Were you able to provide an example of a situation where BATNA will be most
appropriate?
Do you agree with your peers’ examples?
In the next section, you will learn how to approach negotiation when alternative options
are not available.
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7.3 APPROACHES TO NEGOTIATION
The structure of negotiation differs from one situation to the next, depending on the nature
of the buyer–supplier relationship (discussed in Lessons 1 and 3), the position of power
occupied by the various parties, and the measure in which one or both of the parties are
committed to reaching an agreement.
The negotiating party’s perception of their own and their “opponent’s” power may
influence the outcome of the negotiation. Supplier relationship teams often frame
themselves as having more or less power in negotiation. In many simulations, supplier
relationship teams usually seem to outperform suppliers on average. In other words, even
when someone is framed as a buyer, he/she outperforms someone framed as a supplier
in a simulated situation. In real life, the reverse may be true – buyers feel that they have
no power when they are highly dependent on a supplier for a crucial service. This is
exactly the situation associated with supplier relationship management.
7.3.1 Sources of power
Supplier relationship teams can derive their power and/or perception of the power of the
other side from various sources.
•
•
The power of possession is an important power base that can be established by
creating perceptions of wealth, connections, abilities and strong demands.
Employees from large organisations may sometimes feel that they have more power
when they negotiate with a small organisation, especially if the small organisation
has to compete with others for the contract from the buyer. Depending on supply
and demand, the buyer and supplier may however be very dependent on each other.
Power can also be derived from the size of the organisation or the financial
resources of the buyer.
The concept of parity (equality) in power refers to the situation where opposing
parties find themselves unable to increase their negotiating power. In most cases,
buyers should attempt to achieve at least some sort of parity in power so that the
other side realises that it will be detrimental to them to try to increase their power
base and to become more flexible.
It is important to understand that power can be real or perceived. There does not seem
to be much difference between real and perceived power. In other words, if someone
thinks that the other has power, this is as good as having real power. Sometimes buyers
believe that they have no power, while in fact their assumptions are unrealistic and
unfounded.
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7.3.2 Bases of power
There are different bases of power such as legitimate power, the power of reward, the
power of punishment, coalition power and the power of expertise that may be important
in the perception of power in negotiation.
•
•
•
•
Legitimate power in buying refers to a situation where a supplier relationship team
may have the legitimate mandate to make decisions and place orders while a
supplier may not have the mandate to adjust the written contract that the buyer is
looking for. These differences in power make it difficult to negotiate.
The power of reward and the power of punishment are both important sources of
buying power. Buyers build in rewards for performance by suppliers. Depending on
the size of the reward, the buyer may have even more or less power. In the same
way, punishment can be extremely manipulative because some buyers are able to
cause huge losses to suppliers if the suppliers are not able to perform according to
contract.
Coalition power is the source of power where suppliers or buyers may be part of
an organised buying or selling group that will give them more power, for example
Koopkrag, Fabcos, Eskom, agricultural cooperatives and taxi associations. Although
they may be small operators, they cooperate with other small suppliers and create
more negotiating power for themselves in the process.
Lack of expert power may cause a feeling of dependence and being powerless,
and could give the side with the expertise more power in negotiation. Often one side
has more information than the other, which can also lead to a power advantage.
In this framework of the source and base of power, negotiation will focus on the issues
pertaining to supplier relationship management specifically associated with the power of
reward and the power of punishment. This framework will identify circumstances where
suppliers perform either beyond expectation or not adequately at all. Most researchers
agree that negotiation can be approached in either a collaborative or an adversarial
manner. These terms are sometimes known as a constructive approach (referring to
collaborative outcomes for both parties, thus a win-win result) and a competitive approach
(referring to adversarial outcomes or win-lose results). Lysons and Farrington (2020)
briefly discuss each of the approaches as follows.
7.3.3 Collaborative (or constructive) negotiation
As the name indicates, the parties endeavour to reach a compromise through creative
problem solving in which both parties gain and none of them have to lose. The objective
of collaborative negotiation is obviously to ensure sound long-term relations between the
buyer and its various stakeholders, including suppliers. However, there are situations that
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could hinder win-win negotiations. If any of them are present, the likelihood of
collaborative negotiation fades. Table 7.1 presents the advantages and disadvantages
often associated with collaborative negotiation.
Table 7.1: Advantages and disadvantages of collaborative negotiation
Advantages
The parties are regarded as collaborators
rather than adversaries, encouraging a
willingness to share concerns, information
and expectations.
Both parties have the right and obligation
to set specific objectives for the
transaction, with an emphasis on
obtaining shared objectives.
The strategy is based on openness, and
a high level of trust in the perceived
partner.
Strategies are predictable, but flexible –
aiming to reach the agreement
acceptable to the other party.
the parties refrain from counterproductive
behaviour such as threats.
A friendly and non-aggressive approach
downplaying hostility and giving credit to
constructive contributions made by either
party to the negotiation.
The risks and costs resulting from one or
both parties’ objectives also imply the
obligation to take measures that will
provide protection for the other against
these risks and costs.
Responsibilities, costs and risks should
be discussed frankly and in a businesslike manner during the negotiation.
The desired outcomes of the negotiation
are made known so that there are no
hidden agendas and issues are clearly
understood.
The best outcome of negotiation is an
agreement reflecting the stand of both
parties on all the points of dispute.
Disadvantages
An unsatisfactory past relationship
between (or among) the parties.
A belief that the issues can only be
resolved if one party gains at the expense
of the other.
The “mixed-motive” of negotiators, where
both parties want to achieve their goals
while maintaining an ongoing relationship
with the other party. This makes it difficult
for pure collaborative negotiation to
occur.
Win-win negotiators are vulnerable to the
tactics of win-lose negotiators. This
means that many negotiators are
reluctant to lower their barriers first.
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The object of negotiation is to achieve a
transaction that will permit optimum
benefit to both parties through
imaginative, creative, logical ideas and
approaches.
The key attitude is: How can the
respective goals of each party be
achieved so that both win?
If an impasse occurs, this is regarded as
a further problem to be solved, possibly
by the intervention of higher management
or an internal or external mediator or
arbitrator.
Source: Badenhorst (2018)
7.3.4 Adversarial (or competitive) negotiation
Adversarial negotiation has specific characteristics that distinguish it from collaborative
negotiation. It is very important to develop a plan to guide the negotiation team through
adversarial negotiation when faced with a win-lose negotiating strategy. Table 7.2
presents the advantages and disadvantages associated with adversarial negotiation.
Table 7.2: Advantages and disadvantages of adversarial negotiation
Advantages
The parties are regarded as adversaries,
as a result of all the viewpoints; cost data
and information supplied by the other
party are unreliable and therefore subject
to verification
In any business transaction, each party
upholds the right and the obligation to set
their own specific objectives for the
transaction, and the emphasis is on
obtaining those objectives at the
adversary’s expense.
The strategy is based on secrecy, and a
low level of trust in the perceived partner.
Strategies are unpredictable, based on
various ploys designed to outmanoeuvre
the other party.
Disadvantages
Ignore it. This will sometimes help the
other party to understand that you are not
interested in win-lose bargaining.
Discuss whether a win-lose strategy is in
the interest of both parties. Here you may
be able to sell the other party on the
merits of moving towards a win-win
strategy.
Confront the other party. Politely, but
firmly, explain to the other party that you
understand their tactics but are not
interested in participating in win-lose
negotiation.
Respond with a win-lose strategy. While
this may amplify the conflict, it may be the
appropriate response when the other
party is not willing to participate in win-win
negotiation.
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Because the basic premise is that each
party is pursuing only its own interests, all
the parties use ploys and unacceptable
business practices that will make it
justifiable for the others to act in exactly
the same way.
The approach is essentially hostile and
aggressive, where antagonism in team
negotiation is enhanced when members
of the team may seek to outdo their
colleagues.
The other party in the negotiating
situation is the opponent, whose sole aim
is to accept as little responsibility as
possible in respect of risk, cost and
obligations.
The desired outcomes of the negotiation
are often misrepresented so that the
adversary does not know what the
opponent really requires the outcome to
be.
The best contract that can be negotiated
is one that puts maximum obligation on
the other party and entails minimum
accountability for oneself.
One of the objectives of negotiation is to
prevent the other party from achieving its
goals.
The key attitude is “We win, you lose.”
If an impasse occurs, the negotiation may
be broken off.
Source: Badenhorst (2018)
It is sometimes important to try not to classify negotiation too rigidly and too narrowly,
because this often limits the ability of sourcing and supply professionals to think broadly
and creatively about many aspects of their work. Most negotiations occur along a
continuum between pure win-win and pure win-lose. However, the emphasis on
collaborative and adversarial bargaining may vary among issues, or at various stages of
negotiation.
Activity 7.3: Collaborative vs adversarial negotiation
Consider examples of negotiations in your own environment. Think of the organisation
you work for or read news articles. Which approach did the buyer and supplier use in the
negotiation – collaborative or adversarial?
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In not more than 300 words, briefly explain your example and state why you believe that
the negotiation was either collaborative or adversarial.
Read the posts of your fellow students and comment on at least two posts. Compare your
example to those of your peers. Do you agree with their views on which approach they
followed in their example of negotiation?
Feedback on Activity 7.3
Did you consider all the characteristics of both approaches before deciding on your
answer? Which of the characteristics did you find most appropriate for the approach that
you identified? Did you take the effects of power in the relationship into account? It is
important to identify if one party has more power than the other, and how they use their
power in the negotiation.
In the next section, you will learn about ethical negotiation.
7.4
ETHICS OF NEGOTIATION
Negotiation ethics is an aspect of the wider subject of purchasing ethics. Ethical
perspectives largely determine whether a particular negotiation is adversarial or
collaborative. Commonly held assumptions reflect negatively on the ethics of the
negotiation tactics of car salespeople, lawyers, horse traders and other people who have
a reputation for trying to influence other parties into reaching agreements by
misrepresenting facts.
7.4.1 Can negotiation be ethical?
Lysons and Farrington (2020) list several arguments that negotiation cannot be
completely ethical. Some of these arguments are:
•
•
•
•
•
•
It is commonly believed that success in negotiation is enhanced by the successful
use of deceitful tactics, such as bluffing and outright misrepresentation.
Negotiators have the responsibility of obtaining the best results for those they
represent.
What is ethical is affected by cultural factors, such as bribery and deception that can
be acceptable in some global negotiations: “When in Rome, do as the Romans do.”
Self-interest is the most powerful of all motivations – few negotiations can be wholly
altruistic.
Ethical negotiation is an idealistic concept that does not work in practice.
Sharing information may put a negotiator at a disadvantage.
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Negotiation is about many things. One of its central elements is convincing others to
accept the accuracy or reality of information that will influence their decision. Most
negotiators know that it is indeed possible to influence people by lying to them. However,
good negotiators also realise that when other parties find out they have been on the
receiving end of lies, the lying negotiator’s credibility is irreparably damaged. Crampton
and Dees (in Lysons & Farrington, 2020) indicate that there are a number of reasons why
it is possible to gain from deceptive tactics:
•
•
•
•
•
•
•
•
•
Information asymmetry is great – the greater the information disparity between the
two parties, the greater the opportunity one has for profitable deception.
Verification of details such as long-term maintenance costs and performance is
difficult.
The intention to deceive is difficult to establish – it is hard to distinguish it from a
mistake or an oversight.
The parties have insufficient resources to adequately safeguard against deception.
Interaction between the parties is infrequent – deception is more likely in once-off
relationships.
Ex-post redress is too costly; however, the deceived party may prefer to make an
effort, even when the costs exceed the expected compensation.
Reputable information is unavailable, unreliable or very costly to communicate.
The circumstances are unusual in a way that limits inferences about future
behaviour and deceptions are unlikely to damage future negotiations because they
occur in distinctly different circumstances.
One party has little to lose (or much to gain) from deception – a negotiator may not
be concerned about the prospect of being caught, provided that it does not occur
before the deal has been closed.
7.4.2 Honesty in negotiation
Crampton and Dees (in Lysons & Farrington, 2020) state that they cannot recommend a
single strategy that will work effectively to promote honesty in all negotiations; however,
they make the following suggestions:
•
•
Assess the situation. Incentives for deception should be considered. What
incentives are there for suppressing or misrepresenting information? What is known
about the principles of the other side? What is the competence and character of the
other side?
Build mutual trust. In most cases, the incentive for deception in negotiation is
defensive. It arises from the fear that the other party will unfairly exploit any
weakness. This also involves building mutual goodwill, creating opportunities for
displaying trust and demonstrating trustworthiness.
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•
Place the negotiation in a long-term context. To be cautious is reasonable advice
for negotiators. Select negotiating partners wisely; verify when you can; request
bonds and warranties; get important claims in writing; and, where applicable such
as in IT and outsourcing negotiations, it may be advisable to hire a skilled
intermediary.
Ethical negotiation can only take place in a climate of trust. Ascertaining whether such a
climate exists requires negotiators to answer two questions: “Can the other party trust
us?” and “Can we trust them?” Each party can answer the first question with some
certainty, although they should be aware of self-deception. Not until both sides have
established a working relationship can a certain answer be given to the second question.
In the interim, both sides should show diligence in obtaining information to provide
assurance that the other party will negotiate ethically.
The ethics of negotiation should be based on several understandings:
•
•
•
•
Reluctant partners make undependable partners, so treating negotiation partners
with respect and honesty simply makes common sense.
Negotiators need to recognise upfront that the only reason to use negotiation to
resolve a conflict, agree on a project or conclude a sale is because other parties
may be able to add value that an individual or a single organisation cannot do when
acting alone.
Transparency in the negotiation process is far more likely to bring about buy-in than
hidden agendas or tricky manoeuvres.
Other parties have feelings.
Thus, the Golden Rule of treating others as you would wish to be treated has the bottomline value of increasing other parties’ enthusiasm about negotiating with you as well as
their enthusiasm about the ultimate agreement. Good negotiation ethics such as honesty,
transparency and respect for others are all genuinely pragmatic approaches to use. A
negotiator’s reputation is not unlike that of a restaurant: If you have a bad meal, you are
not likely to return. And a negotiator with whom others do not want to deal is effectively
out of business.
Activity 7.4: Ethical negotiation and culture
Gather information from friends, family, colleagues and the internet about the different
expectations and ways in which negotiation are conducted in Africa.
In not more than 200 words, provide an example of a misconception about ethical
negotiation in Africa.
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Further guidelines
•
Identify the local culture or African country for which you are identifying a
misconception.
You can consider the following sources for information:
Egypt: http://www.leadershipcrossroads.com/mat/cou/Egypt.pdf
Nigeria: http://www.leadershipcrossroads.com/mat/cou/Nigeria.pdf
South Africa: http://www.leadershipcrossroads.com/mat/cou/South%20Africa.pdf
o
o
o
•
Provide a practical example of the misconception of the culture or country.
Use a similar format in your reporting as the following formats:
http://www.leadershipcrossroads.com/resources/quizzes/negotiation_quiz.asp?
http://www.leadershipcrossroads.com/resources/quizzes/culture_quiz.asp
•
Think of a possible influence that this misconception may have on expectations during
negotiation with suppliers.
Read the responses of your fellow students and comment on two posts of your peers that
differ from the culture or country that you have discussed.
Feedback on Activity 7.4
Before this activity, have you ever thought about negotiations with the culture or country
that you have identified? Do you think that Africa is considered ethical in its negotiations?
Have you thought of the cultures or countries that your fellow students have identified?
Which similarities did you notice between the cultures and countries? Which differences
did you notice between the cultures and countries? These are all very important questions
and should lead us to believe in the ethics of our culture, our country and our continent.
Now that we understand what negotiation is, the different approaches to negotiation and
the importance of ethics in negotiation, we look at the negotiation process in the next
section.
7.5
THE NEGOTIATION PROCESS
In a supplier relationship management context, two-party negotiation usually begins with
a buyer’s request from suppliers to attain either different performance or corrective
measures for current performance. The process develops as the negotiator considers the
requests and reactions, and prepares for discussion of important issues that might arise
during the meeting. The negotiation process ends with the resolution of all the issues that
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have arisen. Most experts agree that it is useful to consider negotiation as a process
consisting of various phases. Some negotiations concern a single issue and are relatively
straightforward. Consider a situation where all the aspects of an agreement are agreed
to, except for the price per unit. The buyer is tasked solely with the objective to negotiate
a lower price. Other negotiations can be far more complicated and consist of multiple
issues relating to price, cost, contracts and delivery (Lysons & Farrington, 2020).
However, across the continuum of complexity, the negotiation process consists of the
following basic phases (as illustrated in Figure 7.2): (1) pre-negotiation, (2) the actual
negotiation and (3) post-negotiation.
Figure 7.2: Overview of the negotiation process
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The time and funds spent on the different phases depend on the complexity of the
negotiation situation at hand. Essentially, they include the following:
• Various decisions are made in the pre-negotiation phase. This includes aspects
relating to the negotiators, the venue, gathering intelligence, determining objectives,
strategy, tactics and practicing the actual negotiation.
• The actual negotiation phase takes place once all the parties have completed their
preparation. This involves various stages, techniques, behaviour and ploys.
• The post-negotiation phase involves drafting a statement detailing the agreements
reached, selling the agreement to the constituents of both parties, implementing the
agreements, and establishing procedures for monitoring the implementation of the
agreements and dealing with any problems along the way.
The first phase (pre-negotiation) is separately, individually performed by both the
purchasing firm and the supplier. The approach differs during this phase: The purchasing
firm’s approach is that of obtaining optimum value in the purchasing process and takes
place in accordance with overall purchasing policy and strategy. However, the supplier’s
approach is that of marketing policy and strategy, and therefore focuses on product, price,
marketing communication and distribution objectives. It is specifically because there are
differences in the objectives of the purchaser and the objectives of the supplier that the
second (the actual negotiation) and third (post-negotiation) phases of the negotiating
process occur jointly. In the last two phases, the endeavour is to negotiate the transaction
to the mutual benefit of the parties concerned.
Activity 7.5: The negotiation process
Watch the video by Kavin Kanagasabai (2011) from the Cavendish College entitled “The
negotiation process”: https://www.youtube.com/watch?v=4HIKFI_SpIQ (duration 6:38).
Write a brief case study and apply each stage of the negotiation process to the events in
your case study.
Feedback on Activity 7.5
•
•
•
•
•
Were you able to identify what the buyer and supplier negotiated about?
How did each party prepare for the negotiation?
What did the actual negotiation involve?
Did the parties come to an agreement?
How did the outcome of the negotiation influence the relationship or contract
between the buyer and supplier?
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In the next section, we look at the way in which negotiations can be classified during the
negotiation process.
7.6 CLASSIFICATION OF NEGOTIATION
The nature of negotiation can differ significantly, depending on the classification of
variables such as the objectives or outcomes of the negotiation, the relationship between
the parties, the different styles of negotiation and the content that needs to be addressed.
It therefore makes sense that the characteristics of negotiation rely on the type of
negotiation conducted, for example to achieve a new political dispensation for public
procurement, to secure a new contract or a repurchase situation.
The classification of the variables will assist parties to decide in what kind of situation they
find themselves and to plan their negotiation process, strategies and tactics in a more
meaningful way.
7.6.1
Classifying objectives
We discussed the approach to negotiation in Section 7.2. We distinguished between
collaborative and adversarial negotiation, and identified the objectives associated with
each. Essentially, collaborative negotiation takes place when the objective of the
negotiation team is a stable, long-term relationship focused on creative solutions to
mutual problems. Adversarial negotiation is only appropriate where no ongoing
relationship, the potential for one exists or is desired (in other words, the deal is a onceoff), or a quick, simple solution to a disagreement is required (Lysons & Farrington, 2020).
7.6.2
Classifying relationships
Relationship is an important variable in negotiation. Relationships in negotiations can be
classified as follows:
• Cooperative negotiation turns conflict into a partnership without either party entering
into the competitive mode – win or lose is thus irrelevant.
• Continuous negotiation focuses on an ongoing relationship between the parties that
has to be maintained throughout the negotiation itself and into the future, regardless of
difficulties and problems.
• Intermittent negotiation takes place when a problem arises that may threaten the
current excellent relationship between the parties.
• Crisis negotiation occurs when one party elicits a confrontation by creating a crisis
before negotiation starts.
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Relationship goals are concerned with the outcomes relating to how well those involved
in the negotiation are able to work together once the process is completed and how well
their respective organisations may work together. Some areas for relationship goals
include partnership sourcing; preferred supplier status; supplier involvement in design,
development and value analysis; and sharing of technology. This should be regarded as
an important part of all purchasing negotiations. Often there seems to be a lack of
awareness of the importance of the effect of present actions on the future. Some sourcing
and supply professionals seem to be experts in victimisation and intimidation. Many
stories are told about buyers and sellers, and the way in which they “intimidate” each
other to “trick” the other into acceptance. Many manipulative actions have only a shortterm effect.
Sourcing and supply professionals should realise that in many ways, negotiation is all
about the establishment of a relationship and nothing else. If a relationship is such that it
fosters understanding and a realisation of why people are together, the fact that they need
each other to survive and the fact that they should be sensitive to each other’s needs over
the long term can often help enterprises to survive difficult times. It is well known that the
Japanese often adopt the approach that because of a strong relationship, they help their
suppliers through difficult times by ordering goods they do not need just to help them
survive. However, they also expect their suppliers to understand that sometimes they
cannot adhere to buying contracts when they are experiencing tough times. Thus, some
contracts are known to have lasted for 50 years and are still going strong because of the
strength of the relationship that is negotiated.
There is an increasing emphasis on buying “value” and in long term relationships,
strategic alliances, partnerships and long-term contracts with important suppliers.
Therefore, sourcing and supply professionals should move away from a short-term
attitude during negotiation with suppliers.
7.6.3 Direct and indirect negotiations
The kind of contact – be it direct or indirect – that a negotiator deals with could have an
important impact on the outcome.
•
•
Direct (explicit) negotiation refers to face-to-face contact, enabling open
communication, making demands, stating preferences, asking for information,
offering proposals and making concessions. In doing so, parties manoeuvre, use
tactics and follow strategies that are observable by an onlooker.
Indirect (tacit) negotiation involves the use of representatives to conduct the
negotiation process on behalf of any party. Nowadays, sourcing and supply
professionals negotiate indirectly in many different ways. Technology has added
various indirect forms of communication that can be used in addition to direct face-
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to-face contact, including:
o
Telephone conversations. Buyers often negotiate over the telephone; it
would be interesting to calculate the percentage of agreements reached
telephonically compared to those reached face-to-face.
o
Email and internet communication. The postal services are used seldom
these days, and it is most uncommon to receive orders through the post and
to communicate by writing letters. In also indicates that negotiation involves far
more than mere face-to-face direct contact over a table. It involves the
establishment of a network; it includes sound information that is within easy
access of any potential buyer. It includes products that are well defined and
clearly described, even by e-mail or the internet. It also means that buyers and
suppliers should be geared to react and make decisions quickly.
o
Computerised systems, Many buyers are linked up with their suppliers’
intranets and obtain immediate information on computer screens about ranges
of products and prices. The question that buyers need to answer is: How can
we use the computer medium to improve our negotiation ability?
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7.6.4 Classifying content
Negotiation can also be defined according to content characteristics or substance goals.
There is a multitude of possible content issues in the sourcing and supply arena, and it
depends on the requirements of a situation. Most negotiations will be about high-value
items (in other words, the 15 to 20% that constitutes the major portion of inventory
investment).
Price negotiation is the most common type of sourcing and supply negotiation. The factor
under discussion is the supplier’s selling price, including the impact of quantity, quality
and services performed. Figure 7.3 provides some examples of issues to be negotiated
relating to price.
Figure 7.3: Examples of price content of negotiation
Cost negotiation focuses on the cost of final quotes. Typically, these are labour, materials,
overheads, administrative costs, profits, methods of production and others. The amount
of knowledge and preparation necessary for this type of negotiation is considerably
greater than that needed for price negotiation. However, the benefits are usually
correspondingly greater. This type of negotiation is more common in Japan, where the
emphasis is more on transparency in negotiation. In other words, the supplier views the
buyer as a partner to a greater extent, and trust is developed to the extent that the buyer
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is involved in everything the supplier does. The supplier therefore virtually opens up his
books to the buyer, giving him all the detail, all costs and benefits, relying on the buyer’s
ethics to agreeing on an accepted profit on top of costs.
Negotiation of contract represents quite a number of negotiations nowadays, and is in
fact renegotiations at which price and cost in relationship are negotiated continuously
every year on fixed dates. Figure 7.4 provides some examples of contractual issues to be
negotiated.
Figure 7.4: Examples of contractual issues for negotiation
Other aspects may also become important when negotiating an agreement. Delivery, for
example, can become of vital importance, especially in the fast-moving consumer goods
industry. Figure 7.5 identifies some delivery issues for negotiation.
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Figure 7.5: Examples of delivery issues for negotiation
Understanding “packaging” and “progressive summarisation” may be important for buyers
because they are often confronted with a “take it or leave it” offer from sellers; or, in some
cases, have to deal with small parts of a problem one by one and only when all the parts
have been put together, can a decision be reached. Sometimes they have to be extremely
creative in creating a “package or formula” that is acceptable to both sides at the table.
Activity 7.6: Classifying the content of negotiation
During cost negotiation, buyers sometimes benefit by breaking up the cost of tendered
quotes and negotiating each part of the quote separately, resulting in huge benefits to the
organisation.
Practically explain in what ways a negotiator can go about breaking up the separate
issues of cost negotiation.
Feedback on Activity 7.6
•
•
•
•
Have you considered factory overheads and why it is important?
Were you able to identify specific administrative expenses for the organisation?
What would you consider to be an example of cost related to methods of production?
Can you think of examples where it would be wise for a buyer to negotiate fixed
prices, even at a higher price?
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Let us n continue with what constitutes effective negotiation.
7.7
WHAT IS EFFECTIVE NEGOTIATION?
Most people would say it is something out of a classic movie: In a smoke-clouded room,
a blockbuster business deal is taking place. Parties from either side of the table eye each
other, trying to see what are behind those eyes. Terms and limitations are tossed out as
feelers. Each party makes discreet phone calls and has side conferences to play the catand-mouse game required during the “old” negotiation drama. The position focused on
getting a better deal than the sales counterpart, and authority, power struggles and
emotional haggling were the tools (Lysons & Farrington, 2020).
However, there is a new look and principles for negotiation. Negotiation is fuelled by data,
not emotions. In its extreme form, the negotiation almost becomes a non-issue. When
measurable price, benchmark and contract objectives are universally known – thanks to
shared information – much less time is spent on negotiation and more is spent on
formulating a plan or process for executing those goals (Lysons & Farrington, 2020).
Effective negotiation has the following characteristics, according to Lysons and Farrington
(2020):
•
•
•
Substance issues are satisfactorily resolved (in other words, a wise agreement has
been reached that is satisfactory to all the parties).
Harmonious working relationships are preserved or enhanced (fosters rather than
inhibits good interpersonal relationships).
Efficient negotiation, using no more time or money than necessary.
Activity 7.7: Effective negotiation
Watch the video by Woolworths (2021) entitled “Isibag local
https://www.youtube.com/watch?v=XMLQ2m5dwV8&t=1s (duration 2:42).
supplier”:
In not more than 200 words, discuss the effective outcomes for each of the parties as a
result of the negotiation between Woolworths and Isibag.
Feedback on Activity 7.7
The negotiation between Woolworths and Isibag provided effective outcomes that were
acceptable for both organisations. A harmonious working relationship was created that
continues today.
•
•
Which outcomes do you believe Woolworths achieved?
Which outcomes do you believe Isibag achieved?
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•
Why would these outcomes be important for the opposing party?
SUMMARY
A vast amount of literature has emerged on the theory and practice of negotiation, and
the topic continues to provide scope for a considerable amount of research and
publication. Good theory, however, only becomes valuable if it is mirrored in practice.
In Lesson 7, we discussed the theory and practice of negotiation. Firstly, we defined
negotiation. We then uncovered alternatives to negotiation before negotiation should
even be considered. We then studied the approaches to negotiation by considering the
source and base of power of the negotiating parties, and then we distinguished between
collaborative and adversarial negotiations flowing from the power position. We explored
what ethics during negotiation should entail by asking whether negotiation can be ethical,
and emphasised honesty during negotiation. An overview of negotiation was explained.
We then classified negotiations by classifying the objectives and the relationships in the
negotiation, distinguished between direct and indirect negotiations, and classified the
content to consider. Lastly, we explained what effective negotiation is.
In Lesson 8, we look at the termination of supplier relationships.
SELF-REFLECTION
Think about what you have learned in this lesson and then answer the following questions:
•
•
•
•
•
Did you realise how complex negotiations between buyers and suppliers can be?
Were you able to evaluate news and circumstances related to proper ethical
negotiation principles?
Has your understanding changed about the preparations, actual negotiations and
management of the relationship once negotiations have concluded? If so, how?
Did you consider the impacts of effective negotiation between buyers and suppliers?
Were you able to apply the theory in this lesson to real-life case studies?
LIST OF REFERENCES
Badenhorst, JA. 2018. Purchasing and supply management. Pretoria: Van Schaik
Publishers.
https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=1775027&site=eds
-live&scope=site (accessed: 27 September 2022).
Kenton, W. 2021. Negotiation. [Online]
https://www.investopedia.com/terms/n/negotiation.asp (accessed: 06 May 2022).
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Lysons, K & Farrington, B. 2020. Procurement and supply chain management. 10th
edition. https://0-ebookcentral-proquest-com.oasis.unisa.ac.za/lib/unisa1ebooks/detail.action?docID=6118332 (accessed: 24 January 2022).
Openstax. 2019. Organizational behaviour. [Online]
https://openstax.org/details/books/organizational-behavior (accessed: 06 May 2022).
The Negotiation Experts. 2020. Knowing when it is time to walk away. [Online]
https://www.negotiations.com/articles/negotiate-when/ (accessed: 26 September 2022).
The Negotiation Experts. 2022. Negotiation. [Online]
https://www.negotiations.com/definition/negotiation/ (accessed: 06 May 2022).
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LESSON 8: TERMINATING BUYER–SUPPLIER RELATIONSHIPS
INTRODUCTION
In Lesson 7, we took an in-depth look at what negotiation entails. In Lesson 8, we examine
what happens when negotiations on existing relationships are unsuccessful and
organisations decide to terminate the relationship. It takes too many resources to
continuously search for new suppliers (and customers for that matter). Therefore,
according to modern management practices, organisations should try to keep suppliers
(and customers). Decisions to terminate a contract or a relationship with a supplier should
therefore not be taken lightly.
Building a sustainable, mutually beneficial relationship with a supplier takes a vast
number of resources (time, money and effort), as we mentioned above and in the previous
lessons. It also requires work to renegotiate and select a new supplier, and to build a new
relationship and a new measurement system. Subsequently, before implementing a
termination plan, the first action should be preservation. What can be done to preserve
the relationship? Yet, if all of the options have been exhausted to preserve the relationship
and the group discussions, meetings and memoranda have been completed, it is time to
move forward with a termination plan. No buyer–supplier relationship can or should be
expected to last forever, as organisations operate in a dynamic environment. The ending
of a buyer–supplier relationship does not necessarily mean failure, and there may be
positive as well as negative outcomes for one or both of the parties involved.
In Lesson 8, we first explore the reasons for terminating buyer–supplier relationships.
Guidance on how to settle contractual disputes follow, as we discuss non-legal action,
arbitration and other forms of conflict resolution. The process of termination is explained.
Several aspects are considered before the final decision to terminate the relationship,
such as the timing of the termination, relationship aspects and legal considerations.
Lastly, we discuss succession issues after the termination of the relationship.
The overview of Lesson 8 is illustrated in Figure 8.1 below:
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Figure 8.1: Schematic overview of Lesson 8
The focus of this lesson is therefore on achieving specific outcomes. You can use the
outcomes to guide you throughout the learning process and to monitor your progress.
Learning outcomes
After studying this lesson, you should be able to do the following:
•
•
•
•
•
Critically discuss some of the typical reasons for terminating a buyer–supplier
relationship.
Suggest practical ways in which contractual disputes can be settled before termination
of relationships is considered.
Apply the process of terminating a buyer–supplier relationship.
Apply the relationship aspects involved when terminating a buyer–supplier
relationship or contract to applicable scenarios.
Critically discuss succession issues to consider when terminating a buyer–supplier
relationship.
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Key terms
•
•
•
•
termination of relationships
contractual disputes
legal considerations
succession issues
Recommended resources
Armstrong Teasdale, LLP. 2015. Ten key considerations for suppliers when terminating
a distributorship agreement. [Online] https://www.armstrongteasdale.com/thoughtleadership/ten-key-considerations-for-suppliers-when-terminating-a-distributorshipagreement/ (accessed: 13 June 2022).
Butt, AS. 2021. Termination of personal relationship and their effects on knowledge
sharing in supply chains. Knowledge & Process Management 28(1):18–28. [Online]
https://eds.s.ebscohost.com/eds/pdfviewer/pdfviewer?vid=1&sid=bca9285c-d0cb-459e94e8-28dda6c5721f%40redis (accessed: 13 June 2022).
Calisir, F & Altin, C. 2009. Factors causing the termination of the relationship with
suppliers. [Online] https://0-ieeexplore-ieeeorg.oasis.unisa.ac.za/stamp/stamp.jsp?tp=&arnumber=5373057 (accessed: 13 June
2022).
8.1 REASONS FOR THE TERMINATION OF BUYER–SUPPLIER RELATIONSHIPS
Supplier termination should not be a surprise. By conducting regular performance reviews
and frequent communications with suppliers, the supplier should know how it is
performing. Terminating suppliers can be stressful, yet it can be done professionally. The
goal is to create a seamless transition from the previous to the new supplier without
jeopardising customer service, creating financial impacts or affecting the organisation’s
reputation. While unavoidable at times, care should be taken to soften any bitterness or
hostility on either side. Both parties may need each other again in the future. Keep the
process cordial, business-like and impersonal. It is also important to sustain confidentiality
as much as possible, because leakage of information can lead to premature decisions
and reactions driven by emotion instead of by common business sense by both the
supplier and the customer.
Lysons and Farrington (2020) describe how to detect that a relationship is changing: A
primary tip-off that the nature of the relationship is changing can be seen in requests
made by you or by the supplier. Are multiple requests necessary before action is taken?
Are requests necessary for items or services that used to be offered without asking?
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Perhaps the request is granted, but the requester feels that he/she is cashing in on his/her
favour with each request. When you start to work out issues and compromises and you
get the impression that your partner is short-changing you all the way, you know your
alliance is ending.
Although collaborating principles and objectives can be well outlined at an organisational
level, success is often dependent on individuals. All individuals in both organisations must
be committed and resistance can begin on either side of the fence. If the problems have
roots in the buyer’s purchasing and supply, at least the buyer’s supply manager will be
able to take an active part in determining the cause and correcting it. If the problem seems
to stem from the supplier organisation, the outcome is a bit more unpredictable.
In practice, most buyer–supplier relationship break-ups derive from
• inadequate understanding of what “partnership” means
• rapidly changing circumstances that cause one or both parties to revise their priorities
and concentrate on achieving their own organisational objectives at the expense of the
partnership for reasons explained in Table 8.1.
Table 8.1: Circumstances causing revision of priorities
Changes in business
direction(s)
Product
obsolescence
The supplier is
unable to meet
service levels
Short-term attitude
Economic factors
External economics
An existing partnership may no longer have consensus, as
either the purchasing or supplier organisation has shifted
its strategic direction.
The product or service provided by the supplier is
becoming obsolete without any replacement options.
Certain objectives basic to the partnership can no longer
be met.
Either partner may consider that the long-term benefits of
the partnership have not been realised sufficiently quickly
or have been insufficient to warrant a continued
commitment to a particular supplier/purchaser.
A supplier has become “at risk” financially, with the danger
of initial liquidation.
A recession may force suppliers to cut back on product
development, training and other resources such as
product engineers, and consequently will be unable to
meet the continuous improvement objectives of the
partnership.
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Mergers and
acquisitions
Corporate divestiture
Instability and
inconsistency
Lack of trust
Such ventures can create new business models for either
the purchaser or the supplier.
There may be a situation where, because parts of the
business have been sold, the organisation can no longer
provide a product or service.
Acquisitions or disposals of companies or rapid changes in
key personnel or organisational philosophy often adversely
affect years of previous relationship building based on
trust and stability.
Successful partnerships can only be built if trust and
cooperation exist between the purchaser and the supplier.
Source: Lysons and Farrington (2020)
Activity 8.1: Reasons for terminating a buyer–supplier relationship
After completing this activity, you should be able to justify the termination of a relationship
between a buyer and a supplier.
Read the news article by Steyn (2022) entitled “Invalid – Exxaro questions Transnet’s
force majeure”:
https://www.news24.com/fin24/Companies/Mining/transnet-signals-force-majeure-as-itmoves-to-amend-coal-railing-contracts-20220414.
In not more than 200 words, discuss the circumstances that lead to Transnet’s force
majeure that may cause a termination of their contracts with some of the coal exporters.
Feedback on Activity 8.1
•
•
Which factors did you identify that Transnet Freight Rail (TFR) provides as reasons
for their inability to perform?
Do you think that Exxaro’s view and intervention may save the contract between
TFR and Thungela? Why or why not?
In the next section, you will learn about ways in which contractual disputes can be settled
before deciding to terminate the relationship.
8.2 SETTLING CONTRACTUAL
RELATIONSHIPS
DISPUTES
BEFORE
TERMINATION
OF
Many times, relationships need to be terminated too early due to contractual disputes. All
contracts (and for that matter relationships), no matter how carefully prepared and
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worded, can be subject to some form of dispute or disagreement. Probably the most
common source of disputes is the interpretation of contracts or the non-performance of
one of the parties. Taking legal action should be the last resort for settling disputes due
to the cost and uncertainty involved.
8.2.1 Non-legal action
The simplest way to resolve a contractual disagreement is face-to-face negotiation
between the two parties (as we discussed in Lesson 7). Other factors surrounding the
dispute can be brought into consideration by the parties, even though these factors are
not directly involved in the dispute. For example, if a buyer and supplier disagree on the
interpretation of a contract’s terms for delivery, they might be able to compromise by
adjusting other conditions such as price or scheduling. The option to have a face-to-face
discussion is exhausted when both parties recognise that they are unlikely ever to agree
on a solution by themselves. At this point, both parties probably have an emotional
reaction to their lack of success, such as frustration, disappointment and anger. This
reaction may prevent further rational analysis of the disagreement, and it becomes very
difficult to negotiate without assistance from outside parties – perhaps by using
arbitration.
8.2.2 Arbitration
The use of an outside arbitrator, or third party, to help settle a dispute is becoming
increasingly popular. When properly designed, arbitration can protect the interest of both
parties to a dispute, generally giving a reasonable solution, relatively inexpensively,
quickly and in private. This is such a popular option that purchasing managers routinely
include an arbitration clause in the terms and conditions. The decision of the arbitrator
(usually a judge) is binding on both parties.
8.2.3
Other forms of conflict resolution
Mediation is also a popular option. Instead of making a decision, the arbitrator actively
seeks a solution and promotes reconciliation. Looking at the facts and the cases of both
parties, he tries to get agreement on a solution that reconciles the interests of both parties.
Mediation is not binding and the parties reserve the right to make a final decision
themselves.
Another alternative is dispute prevention. This should be a key element of collaborative
business relationships such as long-term contracts and strategic alliances. When parties
initially design a contract, they include specific processes to prevent disputes form
escalating. These processes typically involve a progressive schedule of negotiation,
mediation and arbitration, followed by litigation as a last resort. By working closely
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together in the mechanics of dispute resolution, both sides appreciate what is involved –
and are more likely to reach early settlement.
Activity 8.2: Settling disputes before the termination of a relationship
After completing this activity, you should be able to apply the settlement of a dispute
before a decision is made to terminate a relationship.
Watch the video by the Open University Law Society (2015), where a fictional situation
between a buyer and supplier demonstrates an alternative option to settle disputes –
mediation:
Mediation demonstration
(duration 13:26)
–
https://www.youtube.com/watch?v=jNrwwtcTMMY&t=2s
In not more than 200 words, explain why mediation may be regarded as appropriate to
settle the dispute in this situation.
Read the posts of your fellow students and comment on at least two posts.
Feedback on Activity 8.2
•
•
•
•
Have you considered what the reason for entering into mediation was?
Did any of the parties present a different alternative to the situation during the
meeting?
What was the outcome of the mediation?
Do you agree with your peers’ answers?
In the next section, you will learn about the process of termination.
8.3 THE TERMINATION PROCESS
Terminating a supplier relationship is a project and should be treated as one. A buyer–
supplier relationship manager should serve as the project leader. Tasks need to be
performed in an orderly fashion (Johnsen, Howard & Miemczyk, 2019). Resources need
to be assigned and schedules need to be developed.
Some of the tasks are:
1)
2)
3)
4)
5)
Form a transfer team.
Develop a termination strategy.
Gain executive sponsor approval.
Select a replacement supplier.
Develop a transition plan.
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6)
7)
8)
9)
10)
11)
12)
13)
Ramp up a new supplier.
De-ramp the current supplier.
Deplete inventories.
Clear invoices.
Inform clients.
Communicate with the current supplier.
Communicate with the stakeholders and business units.
Terminate the supplier transactions.
It makes sense that communication is of the utmost importance when terminating a
buyer–supplier relationship. The closer the time to termination of the contract, the more
difficult it is to retain confidentiality. Eventually, the internal customers will need to know
what is happening. A professional communication programme should be created and
executed ahead of rumours. Communication plans need to be targeted for executive
sponsors, stakeholders and committees. Depending on the sensitivity and context of the
termination, corporate communication professionals should be engaged in the process.
This is especially important if the news media would find this event important.
Change happens. Goals differ. Speedy and equitable handling of transition issues is the
primary objective. List clearly what the buyer needs from the supplier, namely to stop
work as instructed, agree to the contract termination and terminate subcontracts promptly.
It is also expected that the supplier protects and ships back property, advices the buyer
of legal or other sub-tier issues, submits settlement charges promptly and works jointly
on inventory disposition at the lowest cost to both parties.
Recognise in turn what the supplier needs from the buyer’s supply management team.
Primary considerations are likely to be
•
•
•
a fair presentation of facts surrounding termination
prompt settlement of outstanding charges, and
assistance with inventory disposition in recognition of the supply manager’s
contribution to those same inventory levels (via poor forecasts and so on)
Remember that both the supply manager and the supplier need to set a reasonable
timeframe for transition. If the buyer was a large portion of the supplier’s business, see
what can be done to come up with viable suggestions on filling the capacity gap that will
be left. Lastly, create a contract close-out checklist, a formal review of all the details and
issues showing responsibility and a completion date, so that there are no lingering
questions (Cordell & Thompson, 2019).
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Activity 8.3: Application of the termination process
After completing this activity, you should be able to apply the termination process to
practical scenarios.
Consider examples of relationships that were terminated in your own environment. Think
of the organisation that you work for or read news articles. Which actions did the buyer
or supplier take to terminate the relationship?
In not more than 300 words, briefly explain your example and whether all the theoretical
tasks were attended to during the termination.
Feedback on Activity 8.3
•
•
•
To which of the tasks in the termination process (in Section 8.3) did your
organisation attend?
Why did they leave out certain tasks, if any?
Advise them on tasks that they can consider, including in the future and why it is
important to include it.
In the next section, you will learn about aspects to consider in the termination process.
8.4 ASPECTS TO CONSIDER IN THE TERMINATION PROCESS
There are several aspects to consider during the termination of a relationship. Lysons
and Farrington (2020) argue that aspects such as the timing of the termination, the
influence on the emotions between the parties and legal matters should be considered.
8.4.1 Timing
Whenever possible, the timing of the termination should be synchronised with the
expiration of the agreement currently in force. Giving too much advance warning to a
supplier can lead to deterioration in service. However, termination may not come as a
surprise to a supplier that has received regular negative feedback on performance.
Decisions may also have to be made on whether the termination should be immediate or
gradual. Such decisions may be governed by terms and conditions relating to termination
in the current agreement.
8.4.2 Relationship aspects
Terminations may be polite or hostile. The following aspects can aid in minimising
possible hostility encountered in the termination process:
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•
•
•
A positive attitude needs to be maintained. Both organisations will survive apart
and recriminations at this stage help no one. Rather than accepting continued
frustrations, the buyer is ending the relationship now. If in the future circumstances
change on either side, the organisations may want to try again.
A pleasant tone can be more effective than harsh words. Supply managers are not
trying to insult anyone personally or professionally. It is natural that both sides feel
a sense of failure, like a person would during a divorce.
Professional justification is essential. It is not a personal issue (unless the owner
of the organisation is also responsible for the poor performance). The supply
manager’s responsibility is to deliver the best value to the organisation in order to
attract and retain customers. If an employee was not meeting expectations, he/she
would be terminated. The buyer–supplier relationship is no different.
8.4.3 Legal considerations
Among these factors are:
•
•
•
•
•
•
The financial consequences of terminating the agreement. In some cases, it
may be possible to negotiate a settlement; in others, the contract will be specific.
Confidentiality agreements. Where such agreements are part of the contract
terms, the contract must be honoured for the prescribed time.
Intellectual property issues. This includes drawings, designs prepared during the
agreement, computer software and so on.
Capital property issues, especially in relation to materials or capital equipment
located at the supplier’s site.
Security issues. It will be necessary to change passwords or security codes shared
with the other party to the agreement.
Obtaining clear signed records of any settlement of employee rights.
Activity 8.4: Considering aspects during the termination process
After completing this activity, you should be able to consider and apply specific aspects
during the termination of a contract or relationship with a supplier.
Read the news article entitled “Axe to fall in hospital laundry scandal”:
https://www.news24.com/citypress/News/axe-to-fall-in-hospital-laundry-scandal20151220.
In not more than 300 words, apply the case study of the Limpopo Health Department and
Mphefhedzi Business Enterprises to the aspects when termination of the contract is
considered.
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Feedback on Activity 8.4
•
•
•
•
Have you identified the services that Mphefhedzi Business Enterprises deliver to the
Limpopo Health Department?
Have you considered the timing of the termination of the contract?
Were you able to determine what the tone of the relationship will most likely be in
the event of a termination?
Have you reviewed which legal factors will need to be considered for a potential
termination of the contract?
In the last section, we advise on succession issues relevant to the final decision to
terminate the relationship.
8.5
SUCCESSION ISSUES
Before deciding to terminate, it will be necessary to confirm that steps have been taken
to ensure a continuity of supplies. This entails
•
•
•
•
•
•
discussion with internal customers regarding groups, systems and projects that will
be affected by the change of supplier
reflecting on the lessons learned from the terminated relationship
conducting market analysis to determine other supplier options
preparing or possibly revising specifications
selection of a new supplier – an important factor is the potential supplier’s reputation
of trustworthiness
negotiation of a relationship agreement
Activity 8.5: Considering succession issues
After completing this activity, you should be able to critically discuss succession issues to
consider when terminating a buyer–supplier relationship.
Read the article by Weissman (2019) entitled “When your sole source supplier closes up
shop,
what
happens
next?”:
https://www.supplychaindive.com/news/suppliersuccession-planning-risk-management/559464/.
In not more than 200 words, critically discuss how suppliers may be involved when the
supplier weighs up options for succession.
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Feedback on Activity 8.5
•
•
•
•
Can you think of examples from your organisation or an organisation of your choice
that held a periodic review?
Which questions was the supplier asked in the periodic review?
How was the supplier involved in the process?
What was the outcome of the review?
Even if suppliers are not obligated to share their future plans, the possibility of receiving
such information may guide actions in planning when, where and who to involve in future
business.
SUMMARY
In Lesson 8, we took a closer look at the termination of existing buyer–supplier
relationships by exploring the reasons for terminating the relationship. We guided you
through settling contractual disputes by addressing non-legal action, arbitration and other
forms of conflict resolution. We learned about the termination process. We looked at
several aspects that should be considered before the final decision to terminate the
relationship, such as the timing of the termination, relationship aspects and legal
considerations. Lastly, we addressed succession issues after the termination of the
relationship.
Lesson 9 concerns the creation a generic supplier relationship management process
based on all the lessons that you have studied thus far.
SELF-REFLECTION
Think about what you have learned in this lesson and then answer the following questions:
•
•
•
•
•
Did you realise how complex it can be to terminate relationships between buyers
and suppliers?
Were you aware of the ways in which relationships can be terminated?
Did you consider that the termination process adds new responsibilities to the
buyer’s workload?
Have your considerations to terminate a relationship changed? If so, how?
Were you able to apply the theory in this lesson to real-life case studies?
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LIST OF REFERENCES
Cordell, A & Thompson, I. 2019. The procurement models handbook. 3rd edition.
London: Routledge. https://0-www-taylorfranciscom.oasis.unisa.ac.za/chapters/mono/10.4324/9781351239509-2/contractmanagement-cycle-andrea-cordell-ian-thompson?context=ubx&refId=a194957e-18724272-994f-cf2ae9d188a8 (accessed: 24 September 2022).
Johnsen, TE, Howard, M & Miemczyk, J. 2019. Purchasing and supply chain
management: A sustainability perspective. New York: Routledge.
https://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=1923625&site=eds
-live&scope=site (accessed: 12 September 2022).
Lysons, K & Farrington, B. 2020. Procurement and supply chain management. 10th
edition. [Online] https://0-ebookcentral-proquest-com.oasis.unisa.ac.za/lib/unisa1ebooks/detail.action?docID=6118332 (accessed: 24 January 2022).
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LESSON 9: A GENERIC SUPPLIER RELATIONSHIPS MANAGEMENT PROCESS
INTRODUCTION
In Lesson 8, you learned that a relationship can be concluded for several reasons and in
various ways. Lesson 9 concludes the module with a holistic review of the management
process of supplier relationships. Supplier relationship management creates an
environment of mutual understanding between the buyer and the supplier. It allows for
the expectations of both companies to be managed in accordance with pre-set service
level agreements. In order to create value from contracts or tenders awarded, purchasing,
sourcing and supply professionals must look at how to manage suppliers after the
contract is awarded. In the South African context, buyers often ignore this important
element of the relationship between the buyer and the supplier. Buyers treat suppliers at
arm’s length or leave the relationship to individuals instead of managing suppliers
holistically in terms of the delivery of their products or services.
It is important that supplier relationship management is done properly with clearly
measurable criteria; it must be managed similar to a marketing division where the focus
is on customer relationship management. It is regrettable that purchasing, sourcing and
supply professionals are not quietly involved in setting these criteria, as most of the buying
organisation focuses on tenders, contracting and evaluation. This important element is
often left to an individual or the department that uses the product or service, instead of
using cross-functional input in managing supplier relationship management. It is
imperative that buyers start to incorporate supplier relationship management as a key
strategic process of their procurement, and supply strategy to improve the overall supply
chain to the mutual benefit of all the organisations involved (University of South Africa,
2017).
In Lesson 9, we show you exactly how a buyer can adopt a generic supplier relationships
management process to achieve infinite benefits to the mutual advantage of both itself
and its supply base. We highlight some lessons learned from launching the supplier
relationship management process, and provide examples of South African organisations
employing the supplier relationship management process.
The overview of Lesson 9 is illustrated in Figure 9.1 below:
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Formulating a
generic supplier
relationship
management
process
lessons learned
from launching
the supplier
relationship
management
process.
Monitoring
supplier
performance
Lesson 9
Generic
supplier
relationship
management
process
Creating a
supplier
relationship
management
team
Developing a
supplier
relationship
management
programme
Measuring
supplier
performance
Figure 9.1: Schematic overview of Lesson 9
The focus of this lesson is therefore on achieving specific outcomes. You can use the
outcomes to guide you throughout the learning process and to monitor your progress.
Learning outcomes
After studying this lesson, you should be able to do the following:
•
•
Formulate a generic supplier relationship management process with the aid of a
diagram.
Critically discuss the lessons learned from launching the supplier relationship
management process.
Key terms
•
•
•
•
supplier relationship management process
supplier relationship management programme
ABC analysis
end user
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•
•
technical writer
spend analysis
Recommended resources
Ammara, AA. 2022. Supply chain & procurement in African local content – Part I.
[Online] https://smartprocurement.co.za/supply-chain-procurement-in-african-localcontent-%e2%80%93-part-i/ (accessed: 16 June 2022).
Gutzmann, M. 2020. How to build superior supplier relationships like Honda. [Online]
https://smartprocurement.co.za/how-to-build-superior-supplier-relationships-like-honda/
(accessed: 16 June 2022).
Powell, T & Sammut-Bonnici, T. 2015. Pareto analysis. [Online]
https://onlinelibrary.wiley.com/doi/10.1002/9781118785317.weom120202 (accessed: 15
June 2022).
Wollenhaupt, G. 2022. Suppliers in control – What’s next for procurement? [Online]
https://smartprocurement.co.za/suppliers-in-control-what%e2%80%99s-next-forprocurement/ (accessed: 16 June 2022).
9.1 FORMULATING A GENERIC SUPPLIER RELATIONSHIPS MANAGEMENT
PROCESS
We have now addressed all the major aspects of supplier relationship management: (1)
What is supplier relationship management? (2) forming and structuring buyer–supplier
relationships; (3) changing and improving buyer–supplier relationships; and (4) ending
buyer–supplier relationships.
You may wonder: How do all these initiatives get absorbed by the buyer in order to reap
the benefits, whether the objective is to save money, boost quality and/or achieve tighter
regulatory compliance. Many purchasing, sourcing and supply professionals regard
supplier relationship management as purely a technological solution. Although there are
wonderful hi-tech tools that can be used by any organisation that is willing to pay for it,
the tool alone will not drive strategic sourcing – and certainly not the supplier relationship
management concept in an organisation.
It is imperative to launch a supplier relationship management course of action within the
buying organisation, contemplate the tangible procedure, and then only continue to
choose and procure a tool if it would ease the implementation and endurance of the
designed buyer–supplier relationship process. It is of paramount importance to
acknowledge the following true words by Noland (in University of South Africa, 2017):
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Supplier relationship management is not just an automation tool. It is not just a
consultant delivered solution set. It is not just supplier development. Supplier
relationship management is a broad-based management methodology
describing how an organisation interacts with its strategic supply base. It is a
philosophy about buyer–supplier relationships that is driven from the
boardroom and shared throughout the organisation by the rank-and-file
members.
We reiterate that supplier relationship management is a process that requires knowledge,
a cultural change and careful premeditation. In this section, we evaluate a generic
process that can be implemented by an organisation to achieve effective and efficient
supplier relationship management. Schematically, this process is depicted in Figure 9.2.
Figure 9.2: A generic supplier relationship management process
You will recognise concepts from previous lessons as the steps. It is important to combine
all these concepts into a process. We provide a summary of each important step in the
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supplier relationship management process and if it was already dealt with earlier, we refer
you back to the section in which it was originally discussed.
Before going into detail, we would like to summarise the steps in the supplier relationship
management process:
Step 1:
Step 2:
Step 3:
Step 4:
Step 5:
Step 6:
Step 7:
Create a supplier relationship management team.
Develop a supplier relationship management programme.
Determine which suppliers to involve first.
Measure supplier performance.
Restructure buyer–supplier relationships.
Leverage suppliers for continuous performance.
Monitor supplier performance.
9.1.1
Create a supplier relationship management team
Probably the single most important step of any supplier relationship management
process is to create, train and authorise one or more dedicated supplier relationship
teams to serve as the main driver(s) of the successful implementation of the buyer–
supplier relationship vehicle. This is not an easy task. Preferably, these supplier
relationship team members should have no other responsibilities, but this is not always
possible.
It is important to gain internal buy-in from senior executives – along with the managers
and stakeholders in the business units who need to participate. Noland (in University of
South Africa, 2017) suggests that this may be achieved if the supplier relationship team
is driven through specific responsibilities. Some of these are:
•
•
•
•
•
•
•
•
•
•
•
•
teaching suppliers how to develop themselves after initial guidance
focusing on underlying causes of discrepancies in supplier performance
focusing on wasteful activities of all supplier efforts
involving suppliers in new products and process development at the buyer
providing training programmes and training time to suppliers
providing education programmes that go beyond training
providing tooling and technical assistance to suppliers
providing supplier support centres
loaning executives to suppliers, such as process engineers and quality managers
eliminating fear that a supplier’s work force may have towards supplier involvement
with a buyer
setting stretch goals to encourage radical change in suppliers, as well as the aim of
continuous improvement
ensuring that the savings of improvements are shared with suppliers
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•
•
•
encouraging suppliers to contribute to improving processes of a buyer
providing the monitor–measure–feedback loop
documenting the supplier relationship management process in order to gain internal
buy-in from senior executives – along with the managers and stakeholders in the
business units who need to participate
The structure of such supplier relationship teams will vary from organisation to
organisation. It is advisable that these teams consist of members who are experts in
various functions to ensure an optimal knowledge foundation. At a minimum, each of the
following disciplines should be represented – either on a full- or part-time basis:
•
•
•
•
•
End user. This team member is tasked with the responsibility of representing the
end-user community. This representative must preferably also have been involved
in the strategic sourcing team, enabling the person to evaluate clearly if the supplier
is performing in accordance with the requirements set.
Legal. A contractual agreement is a legally binding document and should be
prepared and evaluated with the assistance of competent council. In a supplier
relationship management environment, the legal component of the driving team is
very important because there are bound to be legal implications with the
implementation of an agreement. This expertise is particularly vital when
renegotiating the deal and re-evaluating the buyer–supplier relationship. It is
obvious that if a prerequisite is not addressed in the written agreement, it is in fact
not part of the deal.
Purchasing, sourcing and supply professionals. These representatives are
trained to achieve the best price and the most contractual protection. They
understand and have the most experience in traditional interaction between buyers
and suppliers. It is important to include purchasing, sourcing and supply
professionals who are good dealmakers (excellent negotiators who comprehend
the data that they need to know, understand how to analyse this on a real-time basis
and reassess their strategy according to changes that occur), as well as excellent
administrators (managing day-to-day operations, including requirement fulfilment
by the supplier, monitoring this performance and keeping record of the status quo).
Finance. The supplier relationship team needs financial expertise from a number
of perspectives. The team should know what the current financial structure of the
agreement with the strategic supplier is and be able to assess any changes that
may have occurred. The finance member can advise the team on the implications
of various financial options.
Technical. Technical personnel can assist in determining if the product or service
supplied by the strategic supplier is still best suited for a purpose, and evaluate the
performance on the grounds of acceptance, reliability and compatibility. In some
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•
•
•
cases, the technical expert and the end user are the same person. In most cases,
however, they are not. Often, the most critical assessor of a product or service is its
particular user forum.
Technical writer. The team members themselves can perform the job of translating
everything that the team produces into requirement documents. However, a
technical writer can improve the efficiency of the process by freeing the team
members to efficiently scrutinise the buyer–supplier relationship and the
performance of the strategic supplier.
Senior management. Senior management only becomes involved in the supplier
relationship team once a breach of contract leads to the implementation of a remedy
to resolve the particular matter as specified in the written agreement.
Other members can be added based on the requirements of a particular situation
(Moore, 2002).
Training the team is just as imperative as staffing the team. It is important to note that an
experienced teamwork trainer or team facilitator can go a long way in preparing the team
for their task, especially if they cover areas such as team dynamics, roles and goals,
tools and techniques, and team decision making.
Overall, the supplier relationship team is authorised to contribute to and drive the supplier
relationship management effort on behalf of the buyer, as this is not an automatic process
by any means. This is largely because suppliers are inclined to become complacent and
deliver unsatisfactory service levels as more and more time lapses without any
intervention by the buyer.
9.1.2 Develop a supplier relationship management programme
a) Choose a supplier relationship model. The supplier relationship management team
should choose a supplier relationship management model to implement within the
organisation, as was discussed in Lesson 2. Three of the supplier relationship models
are: (1) the Cox model (Section 2.2) – creating a step ladder of external and internal
contractual relationships based on the transaction cost theory and resource-based theory;
(2) the Bensaou model (Section 2.3) – identifying four buyer–supplier relationship profiles
(market exchange, captive buyer, captive supplier and strategic partnerships) by
answering the two basic questions “Which governance structure or relational design
should an organisation choose under different external contingencies?” and “What is the
appropriate way to manage each different type of relationship?”; and (3) the IMP model
(Section 2.4) – evaluating the buyer/supplier environment according to four basic
elements: the interaction process, the interacting parties, the interaction environment and
the atmosphere.
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b) Determine organisational stages of supplier integration. In this step, the supplier
relationship management team should also be sensitive to the manner in which they
will go about establishing a buyer–supplier relationship (in other words, integrate the
supplier with the buyer). We know that a relationship is formed according to hierarchical
levels, ranging from a single exchange to the portfolio of relationships of one particular
enterprise (as discussed in Section 2.1).
o
Actions: These are individual initiatives by the buyer (such as a telephone call or
plant visit) that may relate to products, information, money or social contacts.
o
Episodes: These are groups of interrelated actions, such as a negotiation
encompassing a number of actions.
o
Sequences: These are larger and more extensive entities of interactions. This
level may be defined in terms of a contract, product, campaign or project. A
sequence, in enterprises, can also be related to the presence of a significant
human action in either of the organisations.
o
Relationships: These comprise all the sequences, which in turn comprise all
related episodes and actions in one particular relationship between two
organisations.
o
Partner base: This refers to the relationship portfolio of a particular enterprise
(that is, all the relationships that a particular enterprise has at a particular time).
The formation of long-term personal relationships usually takes place through the same
stages. Thus, a meeting (action level) may develop into a friendship (episode level),
courtship (sequential level) and marriage (relationship level). Each level is normally of a
longer and more permanent duration than the preceding one.
9.1.3 Determine which suppliers to involve first
Now that the supplier relationship management team has its set values, vision and
objectives, and a specific supplier relationship management process was developed, the
buyer can proceed to determine which suppliers to involve in the programme first. This
can be done by analysing the buyer’s spend and segmenting the suppliers.
Analyse spend
The supplier relationship team’s first task is to analyse the buyer’s spend by categorising
their purchases of products and services. This is done by arranging the current products
and services on the supply positioning model (as discussed in Section 1.2.3), by
comparing the complexity of the purchase to the monetary amount spent on the product
or service. This is done to answer the following questions: (1) What is being bought? and
(2) How much does it cost?
If we refer back to the supply positioning model (Figure 1.2), it is clear that all products or
services coming into an organisation can be categorised as either one of the following:
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•
•
•
•
Routine products or services – a low level of risk and complexity associated with
the item or service for the organisation in relation to the low value spend allocated
to the item or service. Substitution of these products and services is possible, as
alternative suppliers and even alternative products and services are available.
Usually, this category includes products or services with standard specifications.
Bottleneck products or services – a high level of risk and complexity associated
with the item or service for the organisation in relation to the low value spend
allocated to the item or service. Substitution of these products or services is difficult
due to a number of reasons, including monopolistic markets, high barriers to enter
these markets, and geographical or political complexity. Usually, this category
includes products or services with unique specifications.
Leverage products or services – a low level of risk and complexity associated with
the item or service for the organisation in relation to the high value spend allocated
to the item or service. Substitution of these products and services are possible, as
alternative suppliers and even alternative products and services are available.
Usually, this category has standard item or service specifications.
Critical products or services – a high level of risk and complexity associated with
the item or service for the organisation in relation to the high value spend allocated
to the item or service. Substitution of these products or services is difficult due to a
number of reasons, including monopolistic markets, high barriers to enter these
markets, and geographical or political complexity. The high value of spend in
comparison with total spend constitutes the strategic importance of these products
and services to the profitability and operations of the buyer.
The most important aspects pertaining to a spend analysis include the following:
•
•
•
•
•
•
Focus on obvious high-spend items first.
Allow sufficient time and resources for the planning of conducting a spend analysis.
Spend must be understood and consolidated.
Identify the overall manifestations of purchasing, sourcing and supply impact.
Ensure stakeholder involvement, be it internal or external.
Validate the data with the stakeholders concerned.
Once products and services are categorised as either bottleneck, routine, leverage or
critical purchases, the supplier relationship team can do a diagnostic of the total spend
on these categories by using an ABC analysis (similar to a Pareto analysis). All products
and services are not equally important and do not have an equal impact on the buyer. An
ABC analysis is done to determine the importance of the different products and services
in each of the four categories in terms of monetary value to a buyer. The ABC analysis
can only be done after a thorough investigation is launched concerning aspects such as
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price, demand for different inventory items, delivery times, and the particular problems
relating to the purchasing of different products and services.
Products and services are divided into classes based on the investment that is made in
monetary value in relation to the percentage of products or services. The purpose of the
analysis is to prioritise the highest impacts on the buyer’s success. By placing all the
products and services in the correct order, three clear classifications can usually be found:
(1)
(2)
(3)
Class A products or services represent approximately only 20% of the total number
of items, but 70% of the monetary spend.
Class B products or services represent approximately 30% of the total number of
items, but only 20% of the monetary spend.
Class C products or services represent approximately 50% of the total number of
items, but only 10% of the monetary spend.
Class A is illustrated by Figure 9.3.
Figure 9.3: Class A of the ABC analysis plotted as a graph
Segment the suppliers
The supply strategy and buyer–supplier relationships will differ substantially from one
purchase to another. By effectively and efficiently analysing the spend of the buyer, the
various products and services are categorised as either bottleneck, routine, leverage or
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critical, representing Class A, B or C products in the scope of the organisation’s spend.
We have thus answered the questions posed: (1) What is currently being bought? and (2)
How much does it cost? The supplier relationship team can now use these categories
and classes as a guide to answer a third question: Who is supplying it?
What does the supplier relationship team want to achieve here? By stratifying the
suppliers, they can determine which to bring into the supplier relationship management
programme first. Ideally, the buyer should start with a small number of strategic suppliers.
They must consider running a pilot programme in a business unit or well-understood
commodity with a handful of suppliers that grows over time. The goal is to focus on those
that deliver the highest value and align most closely with organisational goals and culture.
This phased approach provides the buyer with the experience to successfully implement
supplier relationship management processes across the board. Best-in-class
organisations manage roughly 25% of their suppliers under the supplier relationship
management process and historically show much higher performance gains than those
managing less than 25% of their supply base.
It is important to note that the objective of this exercise is not to complete the strategic
sourcing process all over again. In most cases, complete supplier registers (summarising
all the suppliers of a particular buyer) already exist. These registers can then be used to
select the strategic suppliers to involve in the supplier relationship management
endeavour, and the team can move on selecting the key strategic suppliers and
implement the negotiation process. However, in some instances, no such data exist. It is
therefore necessary to retrace the steps of identifying, screening and researching
strategic suppliers. This is explained based on research conducted by Crouch, Feasey,
Wayne, Funder, Roberto and Smith (2019).
Remember that we established in Lesson 1 that supplier relationship management shifts
the focus to the maintenance of buyer–supplier relationships through the buyer’s efforts
in order to obtain superior performance from the suppliers for the span of their association.
Remember too that we established in Lesson 1 that by using the supply positioning
model, the direct suppliers can be divided into various tiers such as Tier I (Critical), Tier
II (Bottleneck), Tier III (Leverage) and Tier IV (Routine).
We have now established that it would be wise to start the supplier relationship
management programme by involving only a few suppliers strategic to the success of the
buyer. Moore (2002) suggests that the strategic suppliers
are those who can exert extreme influence over some strategic aspect of your
organisation. They are those who can, through non-performance or
malfeasance, seriously impair or destroy your ability to operate. Or, they are
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those who can, through superior performance, leverage you to a higher level
of competitiveness or success.
We can therefore conclude that the strategic suppliers of the buyer will include Class A
suppliers categorised as Tier I (Critical) and Tier II (Bottleneck) because they provide
products and services that can exert extreme influence over some strategic aspect of the
buyer’s operation, and involve substantial amounts of money. Implementing the supplier
relationship management process can become quite complex and time-consuming,
especially since it involves suppliers of products and services that are strategic to the
buyer. In other words, complexity and risk to the organisation is high and the level of
expenditure is relatively substantial. Clearly, the buyer would therefore not employ all of
its strategic suppliers to pilot the process. It is hence important to screen as many
strategic suppliers as possible to accentuate those suppliers who least likely to meet the
requirements set by the supplier relationship team before embarking on a more
comprehensive analysis.
Concisely, strategic suppliers should be screened in order to
•
•
quickly establish whether or not they are worthy of full consideration so as not to
waste time researching and appraising suppliers who will never be selected, and
reduce the number of involved strategic suppliers to a manageable number
according to the organisation’s allocated resources
The most important aspect to remember in this respect is that screening criteria should
be easily accessible. However, you could also enlist more than one screening session,
eliminating a few strategic suppliers based on elementary information. Then reconvene
after more information has been collected on the remaining suppliers and again
eliminating the obvious choices. Repeat the process as many times as necessary.
Selecting the key strategic suppliers of the buyer for the supplier relationship
management pilot project involves choosing those who have preferably not delivered
superior performance throughout their association with the buyer. It should be necessary
for the buyer to make considerable changes to enable the supplier to deliver the required
and ultimately superior performance. Changes must be made in the first instance to the
buyer–supplier relationship (as discussed in Lesson 4) and, secondly, to the supplier
performance management practices employed on those suppliers.
This reasoning is based on the following premises:
•
It is important to correct the performance and motivation of the key strategic
suppliers of the buyer who are not performing in order to obtain adequate
performance levels of all strategic suppliers, thereby creating a platform from which
a continuous improvement programme can be launched.
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•
•
9.1.4
Starting with the more difficult strategic suppliers first will ensure that the supplier
relationship team can fine-tune the process to such an extent that the full launch will
not be as problematic.
Correcting the performance of these strategic suppliers has the possibility of yielding
more tangible returns upon the presentation, for which the buy-in of other strategic
suppliers (and the unconvinced internal stakeholders of the buyer) is more easily
obtained when the full supplier relationship management programme is launched.
Measuring supplier performance
Choose a supplier performance evaluation model
The supplier relationship management should now have ranked the suppliers in sequence
in order to determine which will be involved in the newly developed supplier relationship
management programme first. Once this is done, they will draw attention to the
measurement of the supplier performance by choosing a supplier evaluation model to be
used within the buying organisation such as the one outlined in Lesson 6 (Section 6.1):
(1) Identify the key performance indicators (KPIs); (2) create the incentives; (3) negotiate
the performance milestones upon which the incentives are based; and (4) after the
contract is awarded and performance starts, hold periodic award-fee events.
Evaluate supplier performance and certification
They will then proceed to evaluate the suppliers (according to the subjective method,
survey method, comparative method, weighted-point method, percentage-based method
or cost-based method as outlined in Lesson 6, section 6.2). The buyer can then establish
the supplier certification. Internal classification of this is: an unacceptable supplier, a
conditional supplier, a certified supplier or a preferred supplier; external certification
entails ISO 9000, ISO 14000 or black economic empowerment aspects.
9.1.5
Restructure buyer–supplier relationships
a) Apply supplier contract management functions to either reconstruct the
existing buyer–supplier relationship or to terminate old and establish a new buyer–
supplier relationship. Once the key strategic suppliers have been chosen, the supplier
relationship team should evaluate each of them individually and adapt the generic
supplier relationship management process to suit their specific circumstances. However,
this should be done very restrictively, as the supplier relationship team would strive to
implement as homogeneous a process as possible to obtain the same results in every
situation with the aim of integrating the supplier with the buyer as one of their strategic
assets. The supplier contract management aspects discussed in Lesson 5 should now be
used to correct the buyer–supplier relationship or to terminate it (as discussed in Lesson
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8) and establish a brand-new relationship with a different supplier.
b) Negotiate the supplier performance milestones upon which the incentives are
based. Only then do the supplier relationship team involve the strategic supplier
directly, by identifying the negotiable issues pertinent in each individual situation.
This was outlined in Lesson 7. The negotiation process will then be used to negotiate
the supplier performance indicators upon which the incentives were based.
9.1.6 Leverage the supplier for continuous performance
Now that all the buyer–supplier relationships are in place, we can continue by identifying
leverage within the relationships. In Lesson 6 (Section 6.5), we assisted you to
understand this endeavour by focusing on the leveraging of suppliers. Firstly, we must
choose a specific project and assign a team to identify the leverage prospects. Then we
must do a SWOT analysis to determine the strengths, weaknesses, opportunities and
threats associated with the leverage prospects. A strategy must be developed to take
advantage of the viable leverage prospects. Documentation of the whole process is very
important to guarantee that the implementation of leverage targets set can be measured,
and the success thereof ascertained.
9.1.7 Monitor supplier performance
We have now reached the stage of the supplier relationship management process where
the buyer has exhausted all avenues for continuous improvement regarding its supply
base. There are, however, still ways to ensure that the mutual benefit to the organisation
and the supplier is maintained:
c)
d)
Develop suppliers. Based on the discussion in Lesson 6 (Section 6.3), supplier
development is defined as any activity that a buyer undertakes to improve a
supplier’s performance and/or capabilities to meet the buyer’s short- and/or longterm supply needs. Supplier development requires financial and human resource
investments by both partners, and includes a wide range of activities such as training
the supplier’s personnel, investing in the supplier’s operations and ongoing
performance assessment. A seven-step approach to supplier development is as
follows: (1) Identify critical products and services; (2) identify critical suppliers; (3)
form a cross-functional team; (4) meet with the top management of the supplier; (5)
identify key projects; (6) define details of agreement; and (7) monitor status and
modify strategies.
Award suppliers. We also established in Lesson 6 (Section 6.4) that it is not
sufficient to evaluate and assess suppliers on how well they perform with respect to
the metrics jointly agreed upon. Companies should recognise and celebrate the
achievements of their best suppliers. Award winners exemplify true partnerships
with respect to continuous improvement, organisational commitment and
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e)
f)
g)
excellence. As award-winning suppliers, they serve as role models for other
suppliers.
Continuously manage change. Unfortunately, convincing suppliers to become
part of this approach is not an easy task, as different organisations rarely share the
same goals and objectives. It is, however, possible once the internal stakeholders
of the hub organisation (in this instance the buyer) and the external shareholders
buy into the concept. How is this achieved?
Establish sources and forces of change, and determine reaction to change.
We discussed this aspect in Lesson 4 (Sections 4.2 and 4.3). Change management
can be achieved by ensuring that the buyer itself is geared to respond to internal
changes in a constructive manner. However, merely responding to changes is not
enough; changes should be driven to incorporate greater efficiency, eliminating
wasted effort and eradicating irrelevant activities that do not contribute to the
organisation’s bottom-line in any manner. Then the focus can shift to include
responsiveness to external changes, including changing market conditions, new
business opportunities, different product technology, more convenient distribution
channels and more demanding customer expectations.
Implement change. Numerous writers have produced step-by-step guides for the
implementation of change. The following is a summary of the eight generic steps for
the implementation of change (as discussed in greater detail in Section 4.5 of
Lesson 4).
Step 1: Establish a sense of urgency.
Step 2: Create the guiding coalition.
Step 3: Develop a vision and a strategy.
Step 4: Communicate the change.
Step 5: Empower broad-based action.
Step 6: Generate short-term wins.
Step 7: Consolidate gains and produce more change.
Step 8: Anchor new approaches in the culture.
Activity 9.1: Formulate a generic supplier relationship process
Read the following fictious case study:
Following the floods in KwaZulu-Natal in 2022, a leading car manufacturer in South Africa
realised that it needed to terminate a partnership spanning decades with Pro Alternator
due to the supplier’s inability to deliver alternators. The floods created irreparable damage
to their property and equipment that exceeded the insurance claim extensively. To
recreate and restore their assets would take a couple of years. Alternators are technically
complicated components of cars’ charging systems and are manufactured engine specific
and sometimes even model specific. The majority of cars in South Africa have an
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alternator; therefore, the product is an integral part of the car manufacturer’s production
output. They identified a potential substitute supplier: All Auto Electrical.
The car manufacturer realises the importance of supplier relationship management and
has established a supplier relationship management team that includes end users; legal,
purchasing, sourcing and supply professionals; finance and technical people, a technical
writer and senior management.
They have approached you, as the technical writer, to assist in the management process
of current and potential suppliers. You are asked to present a management plan that
addresses the following topics.
Section A:
Section B:
Section C:
Section D:
Section E:
Restructuring buyer–supplier relationships
Developing a supplier relationship management programme
Measuring supplier performance
Leveraging the supplier for continuous performance
Monitoring supplier performance
In not more than 400 words, describe which activities you will suggest for each section of
the management plan presentation.
Read the posts of your fellow students and comment on at least two posts.
Feedback on Activity 9.1
•
•
•
•
•
Which matters will the car manufacturer have to consider before the termination of
the contract?
What will you advise the car manufacturer to do in each step of the Bensaou model
when building a relationship with All Auto Electrical?
How will the car manufacturer evaluate All Auto Electrical?
Where would you advise the car manufacturer to search for leverage over All Auto
Electrical to improve their performance?
Do you agree with your fellow students’ advice on how to continuously monitor
supplier performance? Why or why not?
In the next section, you will discover the lessons that have been learned from launching
the supplier relationship management process in organisations.
9.2 LESSONS LEARNED FROM LAUNCHING THE SUPPLIER RELATIONSHIP
MANAGEMENT PROCESS
As with any process, there might be substantial adjustments to the supplier relationship
management process after it is launched within the buying organisation. This can be due
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to a number of reasons, the most important being that the buyer operates in the real world
with real-world problems (University of Unisa, 2017).
These problems include:
•
•
•
•
Commodity buyers who were out of their depth could have compiled the incorrect
contract shaping the buyer–supplier relationship.
The organisation fails at their own customer commitments because of the suppliers’
failure to perform.
Senior management pressure the supplier relationship team to juggle – solving the
problem, making the supplier perform, not missing the schedule deadlines, not
litigating and staying within the budget.
The supplier’s reasons for not performing are almost always attributed to the buyer
– information, equipment or access was supposedly supplied late by the buyer.
This can lead to the fact that you can win the battle with the supplier, but lose the war for
adequate performance maintenance. In the buyer–supplier relationship endeavour, the
buyer might achieve a combination of the following:
•
•
•
•
Maintain the buyer–supplier relationship without additional cost and succeed in
obtaining the required performance.
Maintain the buyer–supplier relationship without additional cost and fail to obtain the
required performance.
Maintain the buyer–supplier relationship with additional costs, but succeed in
obtaining the required performance.
Ultimately end the buyer–supplier relationship, after additional costs were incurred
and they failed to obtain the required performance.
In fact, there are many degrees of possible permutations of these four general outcomes.
The buyer could end up paying a little, paying a lot or paying a whole lot. In doing so, they
might initially meet one, two or all their objectives. The supplier relationship team can now
reconvene and fine-tune the buyer–supplier relationship management process.
Activity 9.2: Lessons learned from launching the supplier relationship management
process
Search the internet for relevant examples of South African buyers that implemented a
supplier relationship management process. Consider well-known large organisations in
your search. You may also consider the organisation that you work for.
In not more than 300 words, critically discuss at least two lessons that can be learned
from your example. Read the responses of your fellow students and comment on two
posts.
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Further guidelines
Decide whether the lesson produced a positive or negative outcome for the buyer.
Read the posts of your fellow students and comment on at least two posts. Do you agree
with your peers’ answers?
Feedback on Activity 9.2
Each organisation will learn unique lessons in their business dealings with other
organisations. Some lessons will be positive and others negative. Were you able to
determine whether the buyer has implemented corrective actions for negative outcomes
of the process? Did the buyer reinforce the processes that had a positive outcome? Is the
buyer forthcoming with the lessons it has learned? Often there are setbacks in a supplier
relationship management process that may have been prevented if other organisations
would have shared the lessons that they learned in similar situations.
SUMMARY
This lesson ends the content of the module Supplier relationship management
(MNP3703). We hope you found the module appealing and intriguing! We urge you to
constantly update your knowledge on the subject by reading websites and articles
containing information on the subject.
Good luck with your supplier relationship management endeavours!
SELF-REFLECTION
Think about what you have learned in this lesson and then answer the following questions:
•
•
Did you comprehend the complexity of the supplier relationship management
process as a whole?
Were you able to apply the theory in this lesson to real-life case studies?
LIST OF REFERENCES
Crouch, G, Feasey, K, Wayne, K, Funder, M, Roberto, A & Smith, G. 2019. International
purchasing and supply chain management: Modular learning system. Geneva:
International Trade Centre (UNCTAD/WTO).
Moore, RA. 2002. The science of high-performance supplier management – A systematic
approach to improving procurement costs, quality and relationships. New York: American
Management Association.
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University of South Africa. 2017. Supplier relationship management. Pretoria: University
of South Africa.