Establishing Relationships with Suppliers

Principles of Partnership with Suppliers

· Mutual Need

· Compatibility of Interests

· Trust

· Openness

Financial Health

· Liquidity Ratios – how capable can they meet short term cash needs?

o Current ratio

o Quick ration

· Activity ratios – How is the company doing at managing its assets?

o Inventory turnover

o Average collection period

o Fixed asset turnover

o Return on assets

o Installed capacity

· Profitability ratios – Are they overcharging/undercharging?

o Gross profit margin

o Net profit margin

o Return on equity

o Return on investment

o Earnings before interest/taxes

o Price earnings ratio

· Debt ratios – overleveraged and incapable of paying long-term debts?

o Debt ratio

o Times interest earned

· Costs

o Direct labor

o Indirect labot

o Materials

o Sales and general admin

o Overhead

o Manufacturing and operating

o Logistical


· Financial Partnering

o Concern: holding stock in these companies

o Joint venture

o Buying group

o Limited partnership

· Operational cooperation

o Strategic alliance

o Cartel

o Consortium

o Electronic market

o Keiretsu: legally/economically independent though woven together in many ways

o Virtual organization

Tactical Buying: Low Risk

Strategic Sourcing: High Risk

Team Approach to Supplier Selection

· Commodity procurement strategy team

· Sourcing team

· Supplier performance evaluation team

· Supplier certification team

· New product development team

Strategic Alliances

· Formed at any business level

· Involves modifying business practices

· Technical and commercial partnering

· Operation partnering

· NOT a legal entity

Factors that drive Strategic Sourcing

· Agreements that do not minimize costs

· Purchasing organization goal that conflict with corporate goals

· Purchases accounting for over 50 % of the cost of goods and services

· Increased competitiveness

· Market volatility

Initiate Strategic Sourcing

· Supply strategy for key markets

· Supplier database

· Financial impact of investments

· Source of strategic materials

· Potential suppliers for partnering

· Capture supplier ideas

· Performance measures

Sole Sourcing: ONLY one supplier because of unique technology, distribution arrangement, or government regulation.

Single Sourcing: more than one source but it’s the company’s choice to buy from only one.

· Advantages

o Better quality

o Better pricing

o Delivery

o Reliance

o Buyer clout

· Disadvantages

o Slow response to changes

o Lose focus on market competitive price

o Excess Demand

Managed Inventory

· Consignment: also called Vendor-Owned Inventory (VOI)

· Vendor-Managed Inventory (VMI)

· Differences between VMI and VOI:

o Supplier’s role

o Technology used

· Benefits to Managed Inventory

o Fewer stock-outs

o Better Inventory Turns

o Lower Inventory

Supplier Involvement in Product Development

· Early as possible

· Especially current supplier base

· Leverage supplier knowledge

Advantages of Material Buying

· Shares supplier base and strategy

· Avoids additional transaction from engineering to manufacturing

· Increase speed of transfer to manufacturing

Disadvantages of Material Buying

· Communication of changes may be better if buying is done in engineering

· Response from material may be slower because of production and other commitments

· Tracking costs of development easier if done by engineering buyer

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