COOPERATIVE RELATIONSHIP:

THE NEXT CHAPTER IN THE

BUYER/SUPPLIER MANUAL

BY

SHAN RAJAGOPAL

KENNETH R DEANS

908

COOPERATIVE RELATIONSHIP: THE NEXT

CHAPTER IN THE BUYER/SUPPLIER MANUAL

BY

SHAN RAJAGOPAL & KENNETH R DEANS

SHAN RAJAGOPAL is lecturer in the Department of Marketing f University of Strathclyde. He is currently in the final year of his doctoral research which is related to the development of purchasing strategies.

KENNETH R DEANS is a lecturer in the Department of Marketing, University of Strathclyde.

* The authors like to express their kind appreciation to the material manager of ABC corporation for allowing them to undertake this study. In order to preserve confidentiality, the name is made fictitious, though the extracts are direct quotes. This is to highlight the effect of the discussions.

ADDRESSE:

University of Strathclyde Strathclyde Business School Department of Marketing Stenhouse Building 173 Cathedral Street Glasgow G4 ORQ

909

ABSTRACT

The article examines the long term importance of cooperative relationship and the problems with single source suppliers. It is argued that the underlying principles of comakership agreement have to be carefully considered by the buying organization. Using case study, the authors are able to identify the problems and generalize measures which a buying firm can adopt when embarking upon long term/single source agreement with their suppliers.

910

COOPERATIVE RELATIONSHIP: THE NEXT

CHAPTER IN THE BUYER/SUPPLIER MANUAL

INTRODUCTION

The increased emphasis on quality and specification

coupled with purchasing's role as a communication channel

has placed greater demand on the buyer. As the trend

moves towards a single source and long term supplier,

buyers must reorientate their philosophy to make it

successful. During the past decade, as the concern for

quality and specification has reached an unprecedented

level, British manufacturers (especially the high

technology and safety industry) have faced the challenge

of declining product quality and the danger of loosing

business. In some instances, Government Control Bodies

have placed great demand on manufacturing companies to

implement quality control_techniques as a condition for

continued business. In turn, buyers have turned to their

suppliers and levied similar requirements on them.

This paper attempts to present some of the findings

from a case study of an American subsidiary located in

Scotland. The article details a case study of the long

term importance of a cooperative relationship, which is

often neglected by buyers, who, once they have gone for

single source, tend to "forget" about the constant need to

monitor and enhance their cooperative relationship with

911

their suppliers. This is especially so for firms with

high product quality demand and tight specifications.

Much has been written about single sourcing, long term

suppliers and the need for cooperative relationship where

benefits can accrue to the buying organization [1] [2] [3]

[4] [5] [6] [7], However, the "dangers and problems of

complacency" has not been explored. This paper seeks to

fill that gap by identifying the problems from the case

and providing solutions from the company's perspective.

The authors also attempt to generalize precautionary

measures to be taken by buyers who are intending to embark

upon long term/single source agreement with suppliers.

CONCEPT OF COOPERATIVE AND SINGLE SOURCE RELATIONSHIP

WITH COMPETITIVE STRATEGY

The priorities of the purchasing function, as with

any function, must be derived from the firm's competitive

strategy [8]. It is the role of the purchasing function

within a firm to structure and manage itself to support

and enhance the firm's ability to attain its desired

competitive advantage. The philosophy of the purchasing

system and its capabilities in terms of suppliers,

personnel and information should focus on the elements of

the competitive strategy that management considers

essential to the firm's success [9], For instance, if the

competitive advantage sought by a firm is high quality,

purchasing personnel may focus on simplifying material

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specifications and developing the supplier's quality

performance. In essence, purchasing activities take on

the very nature of the competitive strategy [10].

Lenderos and Monczka [11] have stated that " a co­

operative buyer/seller relationship" with few preferred

suppliers has enhanced purchasing function's ability to

support several strategic postures for a manufacturing

firm. They have illustrated the competitive advantage

that can be achieved by purchasing if it can combine its

skill and resources together with cooperative relationship

to support the three strategic postures of overall cost

leadership, product differentiation and market segment

focusing.

Cooperative buyer/seller relationships allow

purchasing managers to better manage the interdependent

tasks of the buying and selling firms, and to become

conduit of information between the manufacturing firm and

its preferred suppliers. Any purchasing department is

only as good as the sources that it buys from. Its

performance is heavily dependent upon the "partners" that

it chooses to do business with. Optimum performance of

both a purchasing department and its associated vendor

pool require a good working relationship between them

[12].

There is great emphasize on single sourcing and long

term supplier relationships as a long term purchasing

policy due to the significant implication for quality,

913

cost, dependability and flexibility given by these

suppliers [13] [14] [15].

Burt [16] has admonished that purchasing managers who

advocate the award of two or more contracts for the supply

of critical materials are "anachronistic in their

thinking". The concept of Just-In-Time (JIT) and

Materials Requirement Planning (MRP) advocate the use of

long term supplier with cooperative relationship. There

is a body of literature available which highlights the

many benefits that accrue to a buying organization as a

result of single sourcing [17] [18] [19] [20].

ATTRIBUTES OF COOPERATIVE RELATIONSHIP

There are five attributes in the cooperatitive

buyer/seller relationship which affects the competitive

performance of the buying firm [21]. These are:-

1. A supply pool consisting of one or a few preferred

suppliers

2. An alliance incorporating credible commitment

between the buying and selling firms

3. Joint problem solving activities

4. An exchange of information between the firms

5. Joint adjustments to market conditions

The major benefits of cooperative relationship can be

summarized as follows:-

* Purchasing professionals using a preferred supply

pool can maximise their bargaining power by concentrating

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their purchasing requirements and achieving economy of

scale that result in price discounts due to volume

purchases [22]. In addition, administrative costs are

reduced for both the buying and selling firms since

purchase orders, receiving reports, inspection reports,

payment and sales calls are reduced. Quality variability

is reduced, and often quality can be improved by focusing

problem solving efforts more sharply on one or a few

suppliers [23].

* There is a credible commitment between the buying

and selling firms, as there is a concentrated effort to

jointly improve quality and productivity and to reduce

overall cost. A buying firm's credible commitment is

extended to a selling firm (and vice versa) quite often

when both firms are facing uncertainities in their

operating environments and are highly interdependent [24].

* Firms participating in a cooperative buyer/seller

relationship attempt to work jointly to resolve the

disputes when they experience performance problems. It is

in the best long term interest of both firms to do so.

* In a cooperative buyer/seller relationship,

information must be exchanged to develop a credible

commitment between the buying and selling firms. The

exchange of information between the buying and selling

firms allows the firms to stabilize and co-ordinate their

interdependence [25] [26]. A cooperative buyer/seller

relationship, also provides a channel through which a

915

supplier may obtain useful information about such things

as product design and demand schedules. The enlightened

buyers willingly provide such information to help promote

mutual productivity improvements or lower total costs.

Additionally, the seller can provide the buying firm with

interrelated costs, quality and design data that can be

used to make intelligent trade off decisions that benefit

both firms [27] [28].

* Joint problem solving efforts can be used by the

buying and selling firms to develop mutual response to

changes in the market place.

Many manufacturing firms have found that major

economies and operating improvements can be made by

developing cooperative relationships with selected

suppliers [29] [30]. On the other hand, Newman [31]

identified eight major concerns as a supplier enters into

a long term working relationship with their customers.

These are:-

1. Shrinking customer base

2. All or nothing contract awards

3. Capacity obligations and profit margins

4. Supplier cost data

5. Misdirected cost reduction efforts

6. Cost of innovations

7. Interorganizational problems

8. Supplier identity

These concerns can give rise to problems in the long

916

term, if the suppliers are not exceptionally creative.

Thus, single sourcing with mediocre suppliers will produce

mediocre results. Single sourcing should follow once

suppliers, through their actual performance, have proven

they can be reliable and high quality producers.

Unfortunately, it is much easier to change from multiple

sources to a single source than to create outstanding

suppliers. Hence, "instead of climbing on the bandwagon

of single sourcing, the buying organization need to put

forth efforts to create outstanding sources. If not the

sources will produce nothing but disappointment" [32].

Though the brief review of the above literature

favours single sourcing/long term suppliers with co­

operative relationship, the last statements by Leenders

and Blenkhorn signify an important point for organizations

to consider. It is also the belief of the authors that

due considerations need to be given by firms embarking

upon long term relationship with sellers. The following

case study attempts to highlight the pitfalls in a long

term relationship and the necessity for firms to be

cautious and to take necessary precautions. Instead of

gaining its competitive strategic posture, the firm almost

lost the competitive advantage of its long term supplier

relationship.

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THE CASE STUDY: ABC CORPORATION

ABC is an American subsidiary based in Scotland. It

has been in existence for 25 years. Its function in

Scotland is to serve the European market. Other plants in

England and West Germany are co-ordinated to support

Europe's demand.

ABC's competitive advantage lies in its technical

expertise and design patents. They manufacture safety

products for the petrochemical, biomedical and mining

industries. As the products are used by people for their

safety, there is great emphasis on the products' quality

and specification needs. In Britain, the Health and

Safety Certificate (HSC) issued by the British Standard

Institute (BSI) is a prerequisite for ABC to manufacture

in United Kingdom.

The recent "Piper Alpha" disaster in the North Sea,

had a significant impact on the industry. This gave rise

to tightening of specifications and greater demand on

quality of finished product. The BSI tends to be very

stringent in their approval of licenses for the manufacture

of safety products.

ABC in its early days of production had identified

and selected suppliers for their critical materials. To

this date, these critical part suppliers are single source

* Note: In order to preserve confidentiality this is a

fictitious name.

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suppliers who have been supplying for almost 20 years.

The following section will identify two major problems

encountered by the ABC corporation with their long term

suppliers.

PROBLEMS ENCOUNTERED

PROBLEM # 1

PRODUCT: EXPLOSION PROOF DETECTOR HEADS

The explosion proof detector head is a specially

designed helmet which detects gases which are explosive in

nature. The most important component inside the detector

head is the "explosion proof centre". The "centre" allows

the gas to filter through and then determines its volume.

When the gas entering the centre is more than a certain

value an alarm is set off and alerts the user. The

"centre" which allows the gas to come through is called

the "critical flame path".

The supplier who has been supplying for 20 years

changed the raw material to make the "centre" in the

detector heads. This resulted in the "critical flame

path" deviating from specification. No information was

given to buyer organization as the suppliers were

confident that they knew "what's best for their

purchasers".

By pure coincidence, when BSI/HSC inspectors checked

the centre of the detector heads, which will be used in a

new model for a new contract, they found the centre was

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not according to specification. This resulted in a complete

halt of production for all the models of the explosion

proof detector heads. Quality assurance people started

checking product dimensions aganist drawing

specifications. The whole incident gave rise to near loss

of license to manufacture the product. Unless ABC takes

immediate measures to show their improved operation, they

are liable to loose their license to manufacture.

PROBLEM # 2

PRODUCT: SELF RESCUER UNIT FOR MINERS

The self rescuer unit is a high temperature

respirator for miners. It allows miners to breathe high

temperature air in an emergency. Every miner has to be

trained in the use of this apparatus. During training

high temperature air is produced by a mixture of chemicals

when a handle is released. The temperature is specified

in the range 69 to 71 degrees Celsius. Due to chemical

mixture variance, the temperature can be 1-2 degrees

Celsius lower. Thus the temperature was not according to

specification1. The batch was rejected by the quality

assurance personnel. As a result of problem f 1 the

quality assurance engineers were not taking any chances in

their acceptance criteria. The entire batch had to be

"scrapped". The irony of the situation was the chemicals

in the mixture are classified "dangerous" by the Ministry

of Environment and have to be disposed of correctly. The

buying organization had to pay the disposal costs of the

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rejected batch.

When ABC highlighted problems # 1 and # 2 to their

suppliers, the suppliers' comment were......

"We have been making it like that for 20 years and it

has always been right.......J "

"It always worked and it has always been like

that.... 1 "

KEY OBSERVATIONS

As a result of this study, the authors observed the

following characteristics which gave rise to these

problems. These are:-

1. Purchasers are not "bothered" how the component

is manufactured. Nor did they care what type of material

was used in the process, as long the supplier meets the

specifications in the drawing. This is one of the fallible

attitude of buyers. With long term suppliers, buyers are

content and complacent, with the knowledge that, as

suppliers have been delivering for so long that they know

what they are supplying. As the supplier management gain

stronger bargaining power as being the single source, they

have taken the buyers for granted. This has also been a

direct result of buyer's complacent attitude to suppliers.

The suppliers' negative attitude, have resulted in

shipping "anything" which they think can be accepted. The

vendors belief is " send something, and when eventually

they (buyers) need it, they will deviate (increase

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tolerance) it for acceptance !". The outlook by single

source/long term suppliers is that the buyers are at

"their mercy". The top management of the buying

organization put all the responsibility and blame of any

quality problems on the quality engineers. This "point

finger" attitude has caused the quality assurance

engineers to overreact "keep to the drawing".

2. The most important benefit for the long term

supplier relationship is two way communications. There is

a lack of integration and communication between the buying

organization and the supplier. The purchasing, design,

quality and production engineers are not willing to

discuss issues on specifications, designs and quality

performance of product. The comment from the ABC pur­

chaser, "... my two senior purchasing guys and even myself

have difficulty in understanding the nature of

specification..." exemplifies the need for buyers to be

both technically orientated with commercial flair. Such

a background will "bridge the gap" between the engineering

staff and it will facilitate better interaction between

and discussions with, supplier engineers. There needs to

be discussions and exchange of information if problems are

to be solved jointly. A mutual understanding must be

established through communication for a cooperative

relationship to be constructive in its problem solving.

3. Being single source and long term suppliers with

no direct competitors, the suppliers have allowed quality

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to "slip" by, in an attempt to cut costs.

4. The buying organization has no manual or

procedure which dictates that single suppliers are to be

appraised on a regular basis. In addition, there is no

monitoring and development system by ABC for its long term

suppliers.

With the occurence of these problems, ABC realized

the strategic impact on its operation. ABC were about to

loose their manufacturing license and in turn close their

operation in Scotland.

GENERALIZED MEASURES

From the case, the authors are able to identify and

generalize the following measures which a buying firm can

adopt when they are intending to embark upon long

term/single source agreement with suppliers. Typically,

there is no single option that will close all windows of

vulnerability for the buyer. The usefulness and

applicability of these measures depends on the individual

buying situation.

1. Establish the correct attitudes and ensure

trust through contractual obligation

2. Establish communication and computerization

3. Initiate program and procedure for supplier per­

formance evaluation and development

4. Monitor performance evaluation and launch supplier

development activities

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5. Implementation and further evaluation of the

supplier development program

ATTITUDE AND TRUST

When a firm adopts single source strategy/long term

supplier, it is essential that the buyer-supplier

relationship be one of genuine cooperation, including the

sharing of pertinent cost information. Buyers must

understand vendors' motivations and concerns about single

source relationships if they expect to deal effectively

with selected vendors in developing such relationships.

Most single source relationships are initiated by buyers,

however, once a vendor has positioned itself to be a

suitable single source, it should capitalize on its

distinctive advantage, eg. improved product quality.

This mutual understanding and trust is the basis for

cooperative and constructive problem solving. As noted in

the case, with no direct competitors, the vendors may

allow quality to "slip" in an attempt to cut costs. How­

ever, if a vendor truly understands the benefits of

greater quality, they will realize that such action is

counter productive. Nevertheless it does happen and it

can have an adverse impact on the buyer as well as the

seller. Although single source/long term relationships

should involve considerably mutual trust, the buyer

probably needs to write some type of "unacceptable quality

escape clause" in the long term contract. If objectively

14

written, such clause benefits both parties because

conditions and management change over time.

COMMUNICATIONS AND COMPUTERIZATION

The developments in computerization and communication

technology have had a major impact on the management and

execution of the procurement function. Their effective

combination offers massive opportunities for major changes

in the field of purchasing and the accomplishment of

different objectives. An improved two-way communication

can be established if the performance of the supplier is

computerized. An objective monthly/weekly performance

report can increase the rapport between buyers and

suppliers. The suppliers will be on their "toes" as they

are constantly made aware of their performance.

Furthermore, communication can be enhanced if the

purchasers have a technical background especially in the

case of technically orientated firms. Such a background

enables the buyer to communicate with engineers as he can

speak the same "lingo". This also enhances the inter­

action with suppliers, as they don't have to wait to meet

engineers but discuss technical issues with the buyers. A

computerized supplier data bank with continuous updating

of capacity and capabilities will add a dimension of

alertness to the buyers and instil that alertness in the

suppliers. Another form of communication is for the firm

to provide a "vendor clinic" or "vendor workshop" for

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925

suppliers. This will enable them to share their concerns

and plans and to ask for their suggestions and co­

operation. This needs to be done on a regular basis. Such

continuous interaction and mutual assistance from these

meetings will result in a concerted effort to build a

relationship, hence producing a team spirit of "joint

pursuit of compatible goals".

INITIATE PROGRAM AND PROCEDURE

The need to initiate a program and procedure for

supplier performane evaluation and development must first

be recognized by top management. Generally, the need for

a program is recognized through management's desire to

improve the firm's competitive position or to meet specific

competitive challenges in the market place. It can be

initiated by purchasing or by other concerned functional

areas within the buying firm. The program is then

formalized into procedures to initiate follow-up

discussions with suppliers. The recognition of these

needs is then translated into a set of objectives dealing

with various performance measures such as quality

improvement, cost reduction, or more reliable delivery

performance. This should be followed by the formation of

a management team, department or committee. The team

can be organized by categorization of critical suppliers

or materials.

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MONITOR PERFORMANCE EVALUATION AND LAUNCH SUPPLIER

DEVELOPMENT ACTIVITIES

For long term/single source suppliers , there need to

be continuous performance evaluation. When the buying

firm is not satisfied with current performance levels of

the existing suppliers or recognize the need for further

improvement, it may have to initiate supplier development

activities with the supplier. If the firm has new or

modified requirement that cannot be adequately satisfied

by existing suppliers, it may proceed to evaluate new

vendors. Such an evaluation facilitates the final

selection of new suppliers and can further identify the

developmental areas that must be worked on with each

existing supplier.

Suppliers can be evaluated on the basis of their

technical, quality, delivery, cost, managerial and

attitude capabilities. Evaluation results subsequently

have to be compared aganist the buying firm's requirements

or future objectives. When each supplier's performance is

evaluated regularly, the degree of developmental

assistance required can be determined on the basis of this

evaluation. Hence, supplier evaluation is an integral

part of supplier development and the evaluation result can

serve as a basis to launch an ongoing improvement program.

The basic purpose of supplier evaluation is to

continuously improve the supplier's performance.

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Once supplier evaluation is completed, the next step

is to identify the areas for improvement. Supplier

evaluation results provide valuable information about

general areas of weakness, but the results are usually

too general to be useful. For example, the supplier

evaluation process may show that the supplier is weak in

its ability to maintain quality. However, the buyer still

does not know the exact cause of the quality problem. It

could be related to design, to the manufacturing process

or simply to poor workmanship. Chan K. H et.al [33]

provide a supplier development activities matrix where

they classify supplier performance problems into 2

categories. Firstly, the supplier capabilities

technical, manufacturing, quality, delivery, financial and

managerial. Secondly, in terms of their sources - e.g

product, process or operating systems. The matrix

assists in defining the problem more precisely (see also

[34] [35] [36] [37]). At this point, the supplier's

management must be invited to participate in the analysis.

It is important that early supplier involvement in the

analysis be encouraged as it is critical for successful

program implementation.

IMPLEMENTATION AND FURTHER EVALUATION

The development program must be implemented and when

the implementation is completed, the results again have to

be evaluated on the basis of developmental as well as the

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specific technical, quality, delivery and cost capability

objectives. As market conditions demand continuing

improvements in products and services, the program has to

be the continuous monitoring and upgrading of the

supplier's capabilities to meet the long term objectives

of the buying firm.

CONCLUSION

Current market conditions necessitate a longer

planning time horizon than was traditionally employed in

the field of procurement. Improved quality, delivery,

cost, flexibility, positions in learning curve,

computerization and communication systems all require

purchasing to achieve better results and this in turn

requires time.

Time is an element which has both positive and

negative aspects related to long term planning. This is

especially so in respect of single sourcing and long term

relationship. In today's competitive market environment,

however, there is a critical need to monitor, appraise,

evaluate and provide continuous development programme for

suppliers. The authors [38] do not dispute that single

source/long term suppliers with cooperative relationship

can contribute positively to the strategic advantage of

the firm, but the experience from the case highlights that

the buying organization must always anticipate long term

problems and take necessary precautionary measures to

avoid them.

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22

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