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We shall now consider some of the sourcing initiatives that are taking place in today’s supply chain companies. As product companies have moved from a func- tional structure to a category management structure, category sourcing has become a strategic goal. The category sourcing concept also aims to achieve a shift in customer and supplier relationship, striving for joint benefits and co-ownership of the sale. This has moved organisations from short-term transactional relationships to more integrated relationships. A set of skills and way of working can be seen distinctly here in supplier relationship management.

3.2.1

Category Sourcing

Category Sourcing (CS) is a concept where the products an organisation requires are broken down into discrete groups of related products. A specific team is allocated for each product group or category. For example, in a large retailer a category might be “fresh food” and another “garden”. These categories can be operated as stand-alone businesses within the organisation, often with their own profit and loss. The steps for a category sourcing process adapted from O’Brian (2009) are:

1. Profile the category group 2. Select the sourcing strategy 3. Generate the supplier portfolio 4. Follow the purchasing process 5. Negotiation

The first step is to profile the category group. In this step, the CS team will establish how many suppliers there are and what power they have. Power is an important concept in CS. The more powerful a supplier, the more leverage they have in negotiations. If a component can only be produced by one supplier and it is an essential part of a product, the supplier can dictate terms much more easily than if there were a hundred competing suppliers providing the same component.

The second step is toselect the sourcing strategy. Using the correct CS strategy for a category is critical if the optimum sourcing benefits are to be realised. Buyers can choose what strategy to use; do they work closely with suppliers in face-to-face weekly meetings or do they communicate by telephone only on a monthly basis? Depending on how much the organisation spends and the risk to the business, if the chosen supplier fails to deliver, the sourcing team can use the appropriate strategy. The third step is to generate the supplier portfolio. During this process step, potential suppliers that satisfy the required criteria, such as size, credit rating, company ethics, or sustainability requirements, are recorded.

The next step refers back to the pre- and post-order steps covered earlier in this chapter where the CS teamfollows the purchasing process.

The final step ofnegotiation is covered at the end of this chapter.

Going back to step one of the category sourcing process, the sourcing strategy matrix adapted from Kraljic (1983) is a tool to segment the different category groups (see Fig.3.5).

We can see in the bottom left hand corner the routine items, which could be stationery in an organisation. These are low expenditure items and if the suppliers fail to deliver, there is usually little risk to the business.

Bottleneck items usually have a low spend but provide significant risk to an organisation if there is no supply. Bottleneck items are often low in number, but if out of stock, thus can stop production. A unique valve that is required in the oil production process is a good example for such a bottleneck item. If the valve breaks and there is no spare, the oil production halts.

Bottleneck Routine Critical Leverage Low High High Spend Sourcing risk

Fig. 3.5 The sourcing strategy matrix adapted from

Kraljic (1983)

Leverage items are found in the bottom right corner. For a transport company, protective clothing is an example of a leverage item. The company spends a lot on protective clothing for the drivers, but there are many suppliers and it is not critical if a supplier fails to deliver. It is important to invest time in sourcing leverage items as there is an opportunity to reduce the money spent and make them routine items.

Finally, there arecritical items in the top right corner. In car manufacturing, these could be the windscreens or car seats. These items, often bought in large quantities, can be classified as high in expenditure and high in risk. If no car seats and windscreens are supplied, car manufacturers like Audi and Renault can’t deliver any cars to their customers.

The matrix is a useful way to categorise items and to set different strategies to manage risk. The matrix tells us that we should take different approaches when managing different categories. Whereas routine items can be simply bought online, critical items require more attention and some face-to-face interaction in managing the supplier relationship. For critical items, we would go through the entire purchas- ing process and have rigorous performance indicators with our suppliers in place.

3.2.2

Supplier Relationship Management

Supplier Relationship Management (SRM) is the process that looks at proactively managing the link between buyer and supplier. It is a mutually beneficial process that works in two ways and should improve the performance of both.

Some benefits of SRM include:

l Breaking down functional barriers and functional mindsets l Promoting innovation and joint thinking for “doing things better” l _{Improving supply chain visibility for buyer and supplier}

l _{Sharing assets across supply chain, removing duplications}

l _{Enhancing forward looking visibility giving more reliability to all parties} In SRM, there are different models of buyer and supplier interaction (see Fig.3.6).

In the basic relationship approach – sometimes referred to as the bow-tie model – there is only one single point of contact (McDonald and Woodburn2006). The basic relationship model is easy to manage as there are only two people involved in the B2B relationship. The downside of this approach is that decision-making might take longer, and the relationship is very much dependent on the two personalities in charge.

Therefore, an alternative approach is to create an interdependent relationship model (see Fig.3.7). The interdependent approach looks very different and its set- up resembles the shape of a diamond. There are now many points of contact, and the main business customer teams work closely with the corresponding supplier teams. For example, the supplier’s Research and Development (R&D) team work with the customer’s marketing team. This way, the R&D team know what the customer wants to do in terms of marketing strategy and the customer’s marketing team know the timescales and constraints of the supplier’s R&D.

Unfortunately, a structure alone does not create sound SRM. There is a mindset change required and people within both suppliers and customers need to think differently. It is not enough for the customer to just have sourcing knowledge; they now need multi-dimensional business skills. Both buyer and supplier skills become less transactional and more consultative.

Finally, both parties need to develop a holistic relationship management approach, thinking about shared goals short-term individual gains. With the appro- priate structure and armed with new skills, SRM can be adopted and benefits for both buyer and supplier achieved.

R&D Make Deliver Plan Operations Marketing Legal Finance Sales Buyer Supplier Customer

Fig. 3.7 Interdependent relationship approach

Source: McDonald, M. and D. Woodburn, Key account management: the definitive guide, Butter-

worth-Heinemann, Oxford, Copyright# 2006

R&D Operations Make Deliver Plan Marketing Legal Finance Sales Buyer Supplier Customer

Fig. 3.6 Basic relationship approach

Source: McDonald, M. and D. Woodburn, Key account management: the definitive guide, Butter-

worth-Heinemann, Oxford, Copyright# 2006