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Consistency of supply management processes, supplier
relationships and operative purchasing in a global
company
Aki Laiho, Riikka Kaipia, Jussi Heikkilä
Department of Industrial Engineering and Management, Helsinki University of
Technology POB. 5500 FI-02015 TKK, Espoo Finland
Abstract
The paper elaborates on purchasing and supply management (PSM), with focus on
consistency in different aspects of the function. To understand the phenomenon, we
wanted to find out the connections between questions who should you deal with to best
satisfy the needs of your company, how should you deal with each of the selected
suppliers, and how to operate day to day in a selected relationship. Based on the
findings we develop a categorization of supply management processes, and position the
categorization to a broader framework, including portfolio models and relationship
management.
Keywords: Purchasing and supply management, supply chain management,
differentiation
Introduction
The phenomenon this paper studies is consistency and coherency of different levels of
operations in a global purchasing environment. Discussion on differences and fit in a
broader context, in supply chain management (SCM) overall, was initiated by Fisher
(1997) with his article on responsive vs. efficient supply chains. To improve the
performance of supply chains the problem is to decide – out of all alternatives – how to
build the right supply chain for a particular business situation (Fisher 1997). In a spirit
of an end-to-end consideration regarding supply chain performance and
competitiveness, alignment of supply chain capabilities should take place across the
chain, including the upstream i.e. supplier capabilities, in a consistent manner. So far
discussion on supply chain alignment, integration and fit to a certain business situation
has focused on differentiating demand chains according to customer demand (J. Aitken
et al. 2005).
However, the challenge continues to be pressing also upstream, where fit and
alignment of supply chain capabilities in a particular business situation needs to be
achieved. The paper proposes an initial framework to address the alignment on
upstream part of a supply chain, i.e. global PSM processes. The paper starts with a
literature review and continues by presenting the methodology. Next the case and case
results are presented, and the initial framework is proposed. The results are then
discussed in the light of the literature findings.
Literature review
Aligning purchasing portfolio approach and purchasing categories
Portfolio approach in purchasing, originally presented by Kraljic (1983) refers to
analyzing and classifying purchasing items and creating purchasing strategies for each
group. The introduction of portfolio approach has been considered as the major
breakthrough in the development of professional purchasing (Gelderman, 2003). The
benefit of portfolio models is that they simplify a complex situation, and help
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companies to better understand purchasing problems to differentiate purchasing
strategies, which has lead to a more common use of portfolio approaches (Gelderman,
2003; Van Weele, 2005).
These models (Kraljic 1983) aim to 1) analyse products and classify them into four
groups according to two dimensions, 2) analyse of required supplier relationships to
deliver the products in each category, 3) develop action plans in order to bridge the gap
between current and required supplier relationships. In the original Kraljic matrix the
classification dimensions are importance of purchasing and complexity of supply
market. The items are divided into four classes: strategic items, leverage items,
bottleneck items and non-critical items. A later tendency in the development of portfolio
approaches is to focus more on supplier relationships instead of purchasing items (Olsen
and Ellram 2003, Bensaou 1999). Weighting of each factor, for example complexity of
supply market, is the most important part of the implementation process (Olsen and
Ellram, 1997). As such, portfolio approaches do not provide adequate support for daily
business situations, but serve as a strategic tool.
A common way to manage supplier base in industrial firms is purchasing category
management (Heikkilä and Kaipia, 2009). Purchasing category refers to a group of
similar purchasing items for special business activities in a firm (Trautmann et al,
forthcoming). Purchasing category management refers to global sourcing, which
involves integrating and coordinating common items and materials across different
manufacturing or purchasing locations (Trent and Monczka 2003). Forming purchasing
categories has been practiced for decades in companies, in particular for direct
expenses. A recent phenomenon is that companies are systematically analyzing all of
their purchasing costs spent across different locations and forming purchasing
categories covering the whole purchasing spend, including indirect purchases and
services.
An information processing perspective to category management is taken by
Trautmann et al. (forthcoming), who study management of 12 categories in three firms
in order to understand the use of integration mechanisms among purchasing units. They
conclude that the type of uncertainty in each category varies and requires different
integration mechanisms: different information processing capacities and organizational
designs are needed. Similar conclusions are presented by Das et al. (2006) based on a
survey on the efficiency of integration mechanisms. The results from over 300
respondents indicate that the ideal profile of supplier integration practices depend on
industry, product life cycle, and production strategy.
Supplier relationships and integration
A general opinion seems to be that buyer-supplier relationships should not be treated in
a homogenous manner (Van Weele, 2005). Supplier and customer relationships are
discussed in various ways, e.g. as an integration continuum (Spekman et al., 1998,
Hines et al. 2000). The authors agree that integration improves supply chain
performance, but implementing such a relationship is a challenge and requires trust,
commitment, and resources and capabilities that are not always possible to allocate to a
specific supply chain relationship. Therefore, not all relationships target the highest
level of integration, but rather need to find an appropriate level of integration.
When looking at supply base management from the perspective of overall SCM,
needs for alignment and fit are recognized. Fisher (1997) sees a difference in supplier
selection between innovative and functional supply chains: Where in functional supply
chains suppliers should be selected based on cost and quality, in innovative supply
chains the criteria should be speed, flexibility, and quality. Lee (2004) supports this
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perspective, and highlights the criticality of supplier selection from the point of view of
adaptability. Complementary suppliers are necessary to ensure adaptability, and in
complex cases vendors should be found close to main markets (Lee, 2004).
Considerations of consistency and fit from SCM perspective
From an architectural point of view, order penetration point (OPP) considerations
appear among the most discussed means to modify a supply chain structure (e.g.
Childerhouse et al., 2002; Heikkilä, 2002; Pagh and Cooper, 1998; Naylor et al., 1999;
Olhager, 2003). Location of OPP influences various aspects of supply chain design and
performance, e.g. operating model, i.e. whether the overall production and delivery
takes place in e.g. make-to-order, assembly-to-order or make-to-stock model
(Childerhouse et al., 2002; Naylor et al., 1999) or postponement strategy including
aspects of product design and variation (Pagh and Cooper; 1998, Olhager, 2003).
Through selection of OPP the core logic of a particular supply chain, and frame for
achievable performance, is largely defined. Right positioning of inventory buffers in
relation to OPP offer responsive supply capability i.e. speed (Pagh & Cooper 1998).
Inventory is having a role as a hedging mechanism against demand uncertainty (Fisher,
1997; Heikkilä, 2002), or it absorbs the fluctuation of demand (Fisher, 1997; Lee,
2004).
Manufacturing responsiveness to different customer needs and competitive situations
can be illustrated e.g. by the famous product-process matrix (Hayes & Wheelwright
1984), introducing how fit is reached with manufacturing and product demand
characteristics. Second essential manufacturing perspective from supply chain
differentiation point of view is dimensioning of manufacturing: How to manage
capacity as such, and in particular excess capacity for flexibility. Fisher (1997) sees
excess capacity as an alternative hedging mechanism, in addition to inventories. Product
assembly and configuration capacity is widely recognized as a differentiating factor,
which can provide agility and speed of delivery when needed (e.g. Childerhouse et al.,
2002; Heikkilä, 2002).
Planning is one of the backbones of a supply chain, and a way to strive for fit is
planning differentiation according to demand features. The purpose in selecting
planning features for products is to ensure good quality planning result and to use
resources efficiently (Kaipia and Holmström, 2007). The approach suggests that
planning process needs to fit to the required flexibility in the supply chain.
Summary of the literature findings
According to the dominant views in PSM field, differentiation should take place either
between purchasing categories, dimensions in portfolio models (Kraljic 1983, Bensaou
1999, Olsen and Ellram 1997), or suppliers, or through various types of buyer/supplier
relationships (e.g. Dyer et al. 1988, Harland and Knight, 2001, Gelderman and Van
Weele 2005, Hald et al., 2008). Guidelines for selecting alternative ways of organizing
operative management of material supply and inbound material flow are discussed in
few cases only. In the same way, alignment of operative processes which link buyer and
supplier in a particular business context, are discussed separately from purchasing.
Research Design
Methodology
This research is an inductive case study research, rooted to literature around purchasing,
integration, and SCM. The rationale for a case study is the depth of data that needed to
be studied to understand the phenomenon, differentiating in supply chain upstream
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operations. Purpose of the case study is 1) to identify the use of different management
mechanisms in the supplier relationships, 2) to identify the factors in the relationships
that differentiate the use of integration mechanisms, and 3) to identify the processes and
practices which enable the case company to maintain consistency and alignment of
actions in purchasing through its large global organization.
The case company is a large globally operating electronics manufacturer with
manufacturing plants in Europe, Asia and the US. The company sources globally, and in
many cases the suppliers are global players in their field. The product is delivered to
customer sites and assembled. The complexity in the business comes from the wide
variety of products, where the delivery size and configuration varies. Furthermore, the
uncertainty in business has increased due to intensive competition. In the case, three
supplier relationships were selected for investigation to cover all inbound logistics
models, and different purchasing practices, but at the same time be able to limit to a
number of cases which can be investigated in-depth, when considering the significant
complexity of the case company.
Data collection
Main data collection method was structured interviews, supported by review of process
descriptions, strategy documents and company operating guidelines. We carried out 28
interviews in four countries. Interviewees included persons who are mostly involved in
buying (6 persons), supply chain planning (5), supplier development, quality and
supplier integration (7), planning process development (3), and top management in
procurement function (4). To ensure that each interview focuses on each person’s
specific expertise, three separate questionnaire forms were formulated. The first part
targeted on daily operative tasks, and it was used with buyers and supply chain planners.
The second part on supplier development and selection of collaborative modes was used
with persons working with supply and supplier development and category management.
The third part focused on broader perspective of overall strategy, and long-term
directions in each supplier relationship. In most interviews there were two interviewers
and one respondent. Seven interviews were made by phone. Questionnaires were sent to
interviewees beforehand. Interviews were documented as memos, and, to ensure
correctness, the interviewees checked the memos afterwards.
We analyzed the case data in two dimensions: Horizontally, comparing the buyer-
seller relationships in question, and vertically, in order to identify the bridges between
the different activities of the overall purchasing of the company.
In the horizontal data analysis the focus was on identification of interaction between
the case company and the suppliers. Based on our literature review, we identified
approximately 50 parameters to use for profiling and comparison of the three buyer-
seller relationships. All collected information was summarized into excel-sheets using
those parameters to formulate supplier profiles. Our main focus in data analysis was to
identify differences and similarities between the relationships, with purpose to create a
logical profile of each of the relationships answering our original research question, on
how a company can align its PSM processes in a particular buyer-supplier relationship.
In our vertical analysis internal integration efforts as well as external linkages were
studied, as suggested by Das et al (2006). We followed the logic of strategy process,
reviewed strategy documents and templates used, and interviewed the organization also
from this perspective.
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Results
On portfolios and category management
All selected suppliers were strategic suppliers, based on the classification developed by
Kraljic (Kraljic 1983). First supplier, Supplier 1, is a component supplier. The second
supplier, Supplier 2, is a contract manufacturer, and the third, Supplier 3, is a provider
of a complementary OEM product, a ready end product and an essential part of a total
system provided by the case company. Supplier 1 has a high technological capability
and the ability to develop both products and processes with the case company. Supplier
2 acts as a capacity provider, and also collaborates in product development. Supplier 3
is a global OEM company. The monetary purchasing volume is relatively high in all
three relationships, and all the suppliers operate globally, serving the manufacturing
locations of the case company worldwide (Table 1).
Table 1: Key figures of the three buyer-supplier relationships
Volume Supplier 1 Supplier 2 Supplier 3
Type of supplier Component supplier Contract m anufacturer OEM
# of items 500 SKU:s 5500 SKU:s
standard configurations,
600-1000 units annually
Purchases of total spend % 1,6 2,6 0,8
Purchasing order lines Thousands / year Over 10000 /year appr. 500-1000 /year
Relationship coverage
global
global
global
From category management perspective, the importance of the suppliers is visible. The
case company has over 100 purchasing categories in use, which are organized as larger
category clusters. All three suppliers are major strategic suppliers in the category they
belong to. The case company is applying Kraljic matrix -based portfolio models to help
formulate a category strategy for each category. A significant amount of managerial and
development resources, as well as executive support was dedicated to operate and
develop various aspects of the important relationships.
On Buyer-Supplier relationships
When we consider the power-dependency situation in the relationships (Table 2) the
differences between the suppliers becomes evident. In the relationship with Supplier 1
there is a strong dependency particularly for customized components. In the interviews
the supplier was described as ‘willing and fast to implement changes’, ‘able to deliver
technologically advanced products’, ‘able to offer several logistics models’ and ‘has a
strong e-commerce capability’.
Supplier 2 is one of the largest suppliers for the case company. It has several plants
located near case company plants that serve as capacity buffer for the case company.
The companies are in a deep cooperation relationship also in product development,
design, and new product introduction (NPI) activities. The supplier is flexible and is
able to deliver changing volumes; typical variation between months may be from -70 %
to +150 % of average load. In the interviews this supplier was described as ‘flexible’,
‘easy to do business with’ and ‘willing to implement changes in the business models’.
In the relationship with Supplier 3, the dependency is lowest. The Supplier 3 is
considered as the technological leader in its field. For the supplier, case company
purchasing volume is relatively low, compared to total sales of the supplier. The
comments used to describe this supplier were ‘not easy to change practices due to
inflexible business agreement’ and ‘quality of operations is on an average level’.
We analyzed the relationships also against a recent framework of buyer-supplier
relationship attractiveness, developed by Hald et al (2009). They analyze the
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relationship via four perspectives: Adaptation, specific investments, communication,
and institutionalization. The results are illustrated in the Table 2 below:
Table 2: Buyer-Supplier relationship analysis
Supplier 1 Supplier 2 Supplier 3
Adaptation
Tightly aligned product
architecture
Tightly aligned and
integrated business
processes
Standard configurations,
buyer adapting to fit
supplier operations
Specific inv estments
Yes: R&D driven
collaboration, joint action
plans
Yes: dedicated assets
and resources especially
by the suppliers
No dedicated assets,
investments some process
development activi ties
Communication
Extensive commm unication
and contacts
Extensive
communication and
contacts, shared budget
and action plans
Regular communication,
limited coverage especially
on supplier side
Institutionalization
High level of personal and
formal relationships
High level of personal
and formal relationships
Medium level of personal
relationships, formal
relationship management
Operative supply management processes
Based on our case analysis it is possible to identify how the case company is modifying
the three supplier interfaces within the existing strategic supplier role and long-term
relationship, focusing on the interaction with the suppliers on operative level. We can
identify four generic processes linking the buyer and supplier, which are modifiable in a
relatively modular way. The processes are:
• Communication processes, involving operative communication and managerial
support for execution
• Supply chain planning processes, strictly standardized, company-wide monthly
processes, which capture customer information and transform supply plans for
suppliers
• Fulfillment processes i.e. physical material flow including ordering, logistics
and inventory management
• Performance management, including both KPI:s used, and the review methods
and consequent improvement actions
Within each of the processes the differentiation takes place through:
• Configuration: Selection of activities that are taking place at each of the four
processes (yes/no decision, or selection of operative mode , e.g. VMI
implementation vs classical purchasing)
• Frequency: Frequency of the selected activities (monthly/weekly/daily/hourly)
• Depth: One-directional i.e. based on “broadcasting of information”, or whether
activities are truly collaborative – two-directional – involving multiple people
throughout both organizations, and oriented towards mutual actions as a result.
By modifying these four processes the case company has created three different
operative interfaces, adapting to operative business situation at each case. In certain
aspects the case company has made similar selections with suppliers 1 and 2, but
differentiated for supplier 3. Summary of the modifications at the case company is
presented in Table 3.
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Table 3: Summary of modifications of operative supply management processes in the
case company relationships
Supp lier 1 Su pplie r 2 S uppli er 3
Con figurati on sys tem s + follow -up
cal ls twic e/ week
sys tem s / we ekly calls
+ da ily ema il
comm u nic atio n
sy ste m-b ased, regu lar
cal ls
Fre que ncy week ly/d aily da ily/ hou rly Bi- wee kly call s
Dep th
56 -60 p eo ple i nvolve d,
cro ss -fun cti onal
broad cros s-fu nctional
invol vem e nt, ded icate d
peo ple
A fe w c ont act po ints +
acc ount t eam
Con fig urati on 1 3-mont h f orec ast +
de m and vis ibil ity
13 -mon th fore cast +
m an ual wee kly upd ates
+ d em an d vis ibi lity
13 mo nth fore cas t
ba sed o n pla nn ing
item s
Fre que ncy week ly week ly mo nthl y
Dep th Col labo rat ive C olla bor ativ e O ne-di rec ti onal
Con fig urati on cla ss ical pu rcha sing,
3rd party W H, V MI
Cl ass ical pu rcha sing,
VM I
Dir ect de liv ery t o
cus to mer
Fre que ncy n o / wee kly ord eri ng,
de liv eries we ekly
dail y ord ering, d aily
bu yer-c oordina ted
deli veri es
daily /week ly or de ring
an d d aily buy er-
coo rdinated deli veri es
Dep th c oll abora t ive
manag em ent
col lab orati ve
ma nage ment cus tome r sp ec ifies
Con figurati on sha red m etric s sha red m etri cs s hared met rics
Fre que ncy reg ular di scus sions regu lar disc ussio ns m onth ly r eviews
Dep th c ros s-f unc tion al
invol vem e nt, supp lie r
propos ing a ctio ns
cro ss-fun ctio nal
invol vem e nt, corre ctive
actio ns agree d acc ount t eam
Com m uni catio n
Pl anni ng
Fu lfil lm ent
Perf orma nce m anag emen t
Strategic integration across purchasing
In our vertical case analysis we identify three distinct linkages which are essential for
achieving consistency:
• link between overall strategic direction in purchasing, and the actual activities
affecting the evolution of the buyer-supplier relationship
• link between direction and objectives in a buyer-supplier relationship, and the
actual configuration of the operative supply management activities
• link between strategic direction, and organization and use of development
resources
In the case company, the main mechanism for achieving consistency between overall
strategic direction in purchasing, and the rest of the activities, is the well established
strategy process, and in particular the category strategy which is developed twice a year
in a very collaborative fashion, and is mandatory for each of the purchasing categories.
The category strategy specifies positioning of each supplier in the particular category to
a purchasing portfolio, sets the targets for the most important relationships, and guides
the use of resources. The category strategy, and the personal objectives set for every
employee based on the strategy were identified by the interviewees as the most
important guidance for daily work.
Consistency between the objectives set for a buyer-supplier relationship, and
operative supply management activities can be analyzed through adaptation of
processes, operative communication, and availability of resources to manage the
interface between buyer and a supplier. This emphasizes in particular the
implementation of the strategy, whether the targets set for a relationship can be brought
to practice. Through the implementation perspective also the third link, availability and
use of development resources become clear: Adaptation of the operative supply
management to a relationship usually requires changes in processes and tools. This
change is implemented by development resources, in the case company by supplier
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development organization, and supplier integration organization focusing on logistics
processes and tools. Decisions related to use of these resources determine whether the
operative interface in a particular buyer-supplier relationship can be advanced in
practice. The linkages are illustrated below at figure 3.
St rat egi c di rec tio n
Bu ye r-Su pp lie r
Re la tio ns hi p
Op e rati ve supp ly
m an a g e m e nt
Or g an i za ti o n
D ev el o pm e n t d e c is io n s
Av ai lab ilit y o f
d eve lo pm en t res ou rce s
C ateg o ry St ra tegy
C o n fi g ur a t io n
Figure 1: Linkages between levels of purchasing
We also identified gaps in the company activities, which further emphasize the
importance in the linkages between layers. First, quality of the category strategies were
perceived to vary. This was causing unclear priorities: Both overlapping activities with
one supplier and at the same time slow progress with another. Second, the category
management organization responsible for Supplier3 was not perfectly established to
cover all the activities taking place locally at remote countries. This was a known
problem, causing lowered business performance through variation on operative level in
logistics terms, service levels, and prices.
Discussion and conclusions
Based on the literature review and case study, we argue that the consistency and
coherence of the purchasing activities of a company is an essential perspective. Supply
chain configuration should start by understanding the specific customer needs, how to
serve them competitively, and continue by design of the overall chain, from customers
to suppliers, to satisfy these needs (Heikkilä, 2002, Fisher, 1997, Juttner et al., 2006).
The literature review shows, that current models discuss the problemacy more on a
siloed basis. However, our case study demonstrates how strategic supply base
management, buyer-supplier relationship management, and operative supply
management including inbound logistics are connected to each others, and how they can
be aligned. The framework is illustrated in the Figure 4 below.
Su p pl ier B a se M an ag e m e nt
Re lat io n sh ip M ana ge m en t
Re lat io n sh ip M ana ge m en t
Bu y er
B uy er Sup p lie r
Su pp lie r
Met r ic s
Met ric s
Fu lfil lm en t
Fu lfi llm e nt
Plan n ing
Plan n ing
Co m m u n ic at i on
Co m m un ic at io n
Su p ply
Ma n ag em ent
Su p pl ier B a se M an ag e m e nt
Re lat io n sh ip M ana ge m en t
Re lat io n sh ip M ana ge m en t
Bu y er
B uy er
Bu y er
B uy er Sup p lie r
Su pp lie r
S upp lie r
Su pp lie r
Met r ic s
Met ric s
Fu lfil lm en t
Fu lfi llm e nt
Plan n ing
Plan n ing
Co m m u n ic at i on
Co m m un ic at io n
Su p ply
Ma n ag em ent
Figure 2: Framework for alignment of supplier based management, buyer-supplier
relationship management, and operative supply management
Based on the findings from our case, we also argue that implementation should take
place through the following step-wise approach:
1. Categorization of the purchasing, design of category-based organization, and
overall strategic considerations from supplier base management perspective
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2. Definition of strategic objectives and desired development activities for each
buyer-supplier relationship
3. Design of operative supply management interface, and allocation of resources to
implement the changes
4. Allocation of resources to operate the buyer-supplier relationship and supply
management processes
When we compare the case findings to literature, our conclusion is that portfolio
models, in particular relationship portfolio model developed by Bensaou (1999),
provide a decent support for the first steps, strategic considerations and definition of
strategic objectives for a relationship. On the other hand, the formation of purchasing
categories play a central role here, and may affect the result. Our finding regarding the
connection between purchasing categories and purchasing portfolio models is supported
by the recent study by Kaipia and Heikkilä (2009); the case company methods however
represents only one logic applied. From the perspective of buyer-supplier relationships
as such, our analysis and findings are well in line with the existing literature. Looking at
the operative purchasing level, supplier integration is also a relatively well-discussed
topic in integration and SCM literature.
Contribution of this paper is two-fold. First, through the case study we identify the
three logical layers of global purchasing: Supply management, supplier relationship
management, and operative purchasing, and the linkages between the layers. Second, it
becomes obvious that the case company has a good ability to differentiate its supplier
interface at all of the three layers, and thus create alignment and fit to a broad range of
different business situations. This ability, however, stresses further the importance of
connecting mechanisms maintaining consistency and coherency in purchasing, ‘one
voice towards the supplier’.
Due to the nature of the case study, it is not possible to generalize the results and
specify optimal configurations for various business situations; that would require
controlled testing of fit with higher number of buyer-seller relationship of different
characteristics. We would propose that to be further research.
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