BF982 Strategic Procurement Management Individual Assignment - COLLABORATION BETWEEN THE ORGANISATIONS, ITS INFLUENCE ON THE PURCHASING STRATERGIES

AND SUPPLY CHAIN

Panchami Mugthihalli Shadakshari MSc Supply Chain & Operations Management Submitted to: Prof Douglas K Macbeth Submitted on: 03 May 2012 201193757

TABLE OF CONTENTS
Introduction Why collaboration Collaboration influencing supply chain Purchasing strategies in collaborated supply chain Influence of collaboration on purchasing strategies Conclusions References 3 3 4 6 7 8 8

COLLABORATION BETWEEN THE ORGANISATIONS, ITS INFLUENCE ON THE PURCHASING STRATERGIES AND SUPPLY CHAIN

Introduction:
The concept of supply chain management (SCM), according to Thomas and Griffin (1996) represents the most advanced state in the evolutionary development of purchasing, procurement and other supply chain activities. This essay tries to highlight the importance of collaboration in an organisation and its influence on the supply chain and most importantly the purchasing behaviours within the collaborative organisation. The focus here is on the outcomes of the collaboration and the changes in terms of improvements in supply chain and purchasing strategies. The most important aspect of the collaboration is to improve the performance of the business by sharing mutual goals and objectives in all the forms of operations and activities. Collaboration does bring changes throughout the organisations involved. In this essay, the changes that are required for an effective and an efficient performance are highlighted. An effort has been done to identify the areas of improvement in supply chain and how the improvements affects the overall organisational performance with respect to the product, customer and financially. With respect to the purchasing strategies, ideas on possible influences and changes have been discussed. Since purchasing activity is the most important process for any organisation, it is essential that the purchasing department makes the best use of the competencies and negotiating skills form the other organisations involved. Handling the well established supplier buyer bonds is very important even in the collaborative atmosphere. Maintaining a Win-Win situation is most desired.

Why collaboration?
Firms are no longer able to develop major product or service innovations alone because of the dispersion of knowledge and technological resources driven by organisational specialisation (Srahn.S & Westerlun.M, 2009). Collaboration between the organisations happens, mainly to utilise the core competencies of the organisations in question and develop a stronger competency in the similar domain. The core competencies of the two organisations complement each other in the collaborated organisation. According to Simatupang.T.M & Sridharan .R (2002) A collaborative supply chain simply means that two or more independent companies work jointly to plan and execute supply chain operations with greater success than when acting in isolation. It is understood the organisations enter into collaborating with each other to maximise the business performance, supply chain profitability and to hold a strong market share by competing with product and service innovations.

Collaboration influencing supply chain

When the collaboration happens between the organisations, it is the collaboration between all the elements of the respective supply chains, the processes, supplier partners. So having a greater exchange of information in all the domains is important for the supply chains to perform better in achieving greater profitability. Meeting the demand and supply of the materials and satisfying the customers with various range of products and shorter lead times is the objective of any organisation. This is achieved with overall participation of the network elements and collaboration between them. Participation, clear objectives, complementing competencies, knowledge pool, skill sets, technology and organisational leadership makes the collaborated supply chain stronger by improving the effectiveness and efficiency of the supply chain. This is achieved because of the enhancements in the activities of demand forecasting, inventory management, planning and execution, production management and facilitation. Collaboration not only enhances the supply chain efficiency and effectiveness, but it introduces better methods of process improvements since the activities are shared amongst the organisations which operate supply chains in a unique manner. Thus it takes the best out of the two organisations and the risks are shared and moreover reduced. Extracting the best out of the two supply chains and integrating the operations into one outsized supply chain needs the most demanding factor which is communication flow and clarity on roles and responsibilities. With the collaboration, there are possibilities of reducing the outsourced activities since there is involvement of two organisations and mutual sharing of resources, services and capabilities. The collaboration increases the revenue growth from the supply chain as there is reduction in total supply chain costs by terminating some of the outsourced activities and a better scope for product development and innovation in parallel. This improves the responsiveness of the supply chain and customer services are amplified with the existing combined resources and capabilities. Reduction in the supply chain costs are seen in warehousing and distribution costs, procurement costs since there is wider supplier base and bulk buying. The reduction in these costs from supply chain in the collaborated organisations can then be invested in improving product designs satisfying the customer demands, improving the services by reducing lead times in the supply chain and accelerating the product and service flow along the supply chain. Collaboration between the organisations can be divided into short term relation, medium term and long term relation. It depends on the organisations and what the mutual goals are. Most of this is controlled by the market dynamics and product demands. Table 1.1 below shows various behaviours amongst the organisations when they are in collaboration. It describes the objectives that collaborated organisations share, and the domains the objectives are set. In the table it is mostly seen the domains are mutual objectives, integrated policies, appropriate performance measures and so on. These are the few important domains that influence the changes in supply chain. They control the performance of the collaborated supply chain. The table here shows both the product and service part of the supply chain along with the cost incentives that the organisations in collaboration agree on.

Table 1.1

Source: (Simatupang. T.M & Sridharan .R, 2002)

Collaboration is done not only on the basis of short term, medium term or long term basis. We see other kinds of collaboration like, vertical, horizontal and lateral collaboration. This type of collaboration is mostly integration of the organisations in various levels. Collaborations can me integration of supply chain vertically like VMI, CPFR which is seen in companies like Apple and Microsoft. Merger and acquisitions of the supply chains and organisations is the horizontal collaboration where companies have integrated supply chains, obtained joint distribution centres. The collaboration of this nature increases the scale of the supply chain but costs on inventory, distribution and resources are notably reduced. ArcelorMittal was one of the recent widely known examples for horizontal collaboration. Coming to the lateral collaboration, here organisations have both vertical and horizontal integrations of the supply chain. This kind of integration gives supply chain flexibility and improves its responsiveness. When organisations decide on the collaboration the factor which decides the type of collaboration is mostly found to be the degree of dependency each organisation is targeting. The influence of collaboration on the supply chain is observed through various performance systems like, metrics, models and measurements. Balanced Score card, SCOR model, Lamberts model can be used as frameworks in measuring the collaborative performance of the company. Collaboration thus

influences supply chain in being a better performer and leads to globalisation with wide and varied supplier base. Collaboration facilitates in identifying the bottlenecks and problems in the existing processes and policies in supply chain with the involvement of personnel and resources from the other organisations. Collaboration also increases the visibility and control on supply chain since roles and responsibilities of each department are clearly defined in the initial agreements and objectives. They are the key performance metrics and indicators.

Disadvantages of collaboration: In collaboration supply chains might not consider themselves as

one integrated supply chain, they consider as separate units and with separate goals/objectives. Considering the overall interest of the integrated supply chain is important and this yields better supply chain profit. Another notable disadvantage is the mismatch between the supply and demand of the materials and products. Collaboration sometimes if not initiated with right amount of leadership might affect the organisations, the products and services. Commitment and effort from the top management and the employees is essential for the success of the venture.

Purchasing strategies in collaborated supply chain:

When the organisations collaborate with each other, collaboration between the suppliers increases, because the traditional purchasing activities that were carried on by the individual organisations changes and the concept of strategic approach procurement as termed by Macbeth (1994) and Spekman et al. (1994) takes place. The purchasing strategies are well crafted within the collaborated organisations on mutual consensus and needs from the various operating departments. Purchasing strategies within the collaborative organisation differs for different types of collaboration. Various factors to be considered before planning the purchasing strategy are Vertical integration Short/medium/long term Horizontal integration Lateral integration Spend analysis

One of the above factors is what majorly influences the purchasing strategy. With the collaboration between the organisations, every department and every product will have its specific material requirements. So in such scenarios having procurement department with the negotiators and procurement managers involved in drafting the purchasing strategy is essential. The strategy of negotiation, supplier selection, cooperation should attend to all the requirements from different product family and new products. The purchasing strategy should reflect the same amount of collaboration with its supplier; this will reap a mutual benefit to both the buyer and supplier.

The very advantage of collaboration towards purchasing is introduction to the wider supplier base and the power is vested in the buyer. Negotiation skills and techniques of the collaborated company improve since there is sharing of knowledge and tactics amongst the personnel. Though the complexities of the buyer and supplier relation is higher in this wide scaled company, involvement of personnel in studying the market trends and dynamics will provide sufficient data that is used in purchasing and negotiating. The approach is more strategic and accuracy level increases.

Influence of collaboration on purchasing strategies

Collaboration might expose the organisation to global status and the purchasing behaviours towards the supplier globally changes. The most important part of this collaboration is the activity of the personnel indulging in interacting with the suppliers from various sectors. The interaction with the suppliers is believed to be a strong trait of purchasing strategy. The personnel involved in the negotiations should be trained on the cultural, political and local market behaviours. The training of the personnel and forming a centralised procurement team in the organisation takes the priority. Since the scalability of operations increases, the organisation drafts purchasing strategies which highlights bulk buying from the suppliers. It also initiates supplier selection programmes in order to have reliable supplier with quality raw materials to supply. These programs ensure healthy and long term relation between the buyer and supplier. With the increased supplier base the company might be transforming from single sourcing to multi sourcing and here the selection of the supplier and evaluation is essential. This is a part of the purchasing strategy where bidding and tendering process is highlighted. In the collaboration, the initial process is defining roles and responsibilities. During this procedure, there might be possibilities where the purchasing department(s) might be assigned with personnel based on the hierarchy. But it is essential to retain the Point Of Contact personnel previously who worked with the suppliers. Negotiating skills and tapping the best potential out of the suppliers will be vested in those POCs. Even though the activities, resources and actors in the purchasing activities tend to change, it is always necessary to parallel train the people in the procurement division as a part of the purchasing strategy. In a collaborative atmosphere, having smooth flow of communication, commitment from actors involved and accurate information on forecasting demands is important since it is reflected in the information exchange between the supplier and the negotiator. This is achieved by joint planning and cooperation within the organisation. Usually in the routine procedure of purchasing activities, organisations are seen to follow one of the two approaches in purchasing. Axelsson and Wynstra (2002) claim that purchasing behaviour in regard to supplier relationships becomes either transaction or relation oriented. In a collaborative setup, the organisations purchasing strategy includes both transactional and relational approach. This is due to the wider and competitive supplier base and probably global. Having both the approaches in the strategy will work in favour of the organisation because, of two main reasons With the dynamic changes in market and customer demands, suppliers can be contacted through transactional approach in order to keep up with the demand and recent product innovations and parallel product developments. Maintaining the reliable set of suppliers for the continuous supply of materials through relational approach. Long term suppliers for the organisations before the collaboration.

By promoting competition among suppliers, customers are expected to be given both better control of price levels and more reliable supply through the diversification of risks (Gadde and Hakansson, 1994). Through both of these approaches the organisation as a buyer emphasises on the primary function of buyers business strategy, operational efficiency and effectiveness. This is in sync with the idea of collaboration between the organisation which is to improve the efficiency and effectiveness of the processes in supply chain. By this the purchasing activities can achieve cost reductions and supplier relations through the two approaches.

Disadvantages of drafting a purchasing strategy in a collaborative atmosphere is the complexity of the network and the number of actors involved in the decision. As the supplier base expands it poses difficulties for the organisation in selecting them even with the transactional approach. With more than one organisation involved, tendering and bidding processes in selecting the suppliers can sometime be a difficult procedure. Often, it can be seen the various disapprovals in the purchasing strategies because of the cultural issues and also the requirement for the product. Individual purchasing policies might clash in with the interest of the overall strategy. Debates on centralising and decentralising the procurement activities can pose some issues in the performance and other activities of the organisation.

Conclusions:
It can be concluded that in any organisation that has ventured into a collaborative function, it is important that the organisations and its management have mutual objectives and goals. The clear definition of roles and responsibilities throughout the organisation is essential for a better performance of the supply chain. Collaboration does amplify the processes throughout supply chain and it also provides sharing of skill sets and capabilities. This can refine the supply chain and improve its flexibility and responsiveness. The purchasing activities might remain the same, but the scale at which it is done changes. It is necessary to retain the positions of the prime actors in negotiation as a part of the purchasing strategy. Through collaboration, organisation can achieve wider supply base and this can place the company at a competitive advantage by exposing to varieties and backup suppliers. Collaboration can bring about innovation and new product developments and thus making the organisation obtain better market shares and retain customer loyalty. Ultimate goal of collaboration is to tend to the ever changing customer demands and this is achieved by sharing of knowledge, core competencies between the organisations. This also leads to reduction in total supply chain costs and the procurement costs and initiates competition amongst the suppliers on improving quality of the materials.

References:
Swinder Janda, Srivatsa Seshadri, (2001),"The influence of purchasing strategies on performance", Journal of Business & Industrial Marketing, Vol. 16 Iss: 4 pp. 294 308 Senja Svahn, Mika Westerlund, (2009),"Purchasing strategies in supply relationships", Journal of Business & Industrial Marketing, Vol. 24 Iss: 3 pp. 173 181 Togar M. Simatupang, R. Sridharan, (2002),"The Collaborative Supply Chain", The International Journal of Logistics Management, Vol. 13 Iss: 1 pp. 15 30 Mark Barratt, (2004),"Understanding the meaning of collaboration in the supply chain", Supply Chain Management: An International Journal, Vol. 9 Iss: 1 pp. 30 42 Jurong Zheng, Louise Knight, Christine Harland, Stuart Humby, Ken James, An analysis of research into the future of purchasing and supply management, Journal of Purchasing and Supply Management, Volume 13, Issue 1, January 2007, Pages 69-83