Collaboration features in supply chain

Some basic features of relationships with suppliers are discussed within the issue of supply management, including in the purchasing portfolio model proposed by Kraljic (1983). The model suggests that supplier-buyer relationships are driven by the type of material exchanged. Even though several firms may not fully follow the suggested approach, this purchasing portfolio has helped researchers and business

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practitioners in SCM to understand and model the partnerships between buyer and supplier.

The Kraljic’s portfolio model is described by two dimensions: the strategic importance of the items, and the complexity of the sourcing market. The strategic importance of the items represents “the value added by product line, the percentage of raw materials in total costs and their impact on profitability”, whilst the complexity of the supply market gauged by “supply scarcity, pace of technology and/or materials substitution, entry barriers, logistics cost or complexity, and monopoly or oligopoly conditions". Based on these dimensions, it is found that the most complex procurement activities occur when the level of both the item strategic importance and sourcing market complexity are relatively high. The number of firms which can supply the items is limited, and it can cause a significant impact on manufacturers’ profitability as well as their survivability. As the items in this category are considered strategic to the manufacturers, Kraljic (1983) recommends long-term partnerships with suppliers to minimise the risk in supply chains.

The model has assisted many SCM researchers to gain a basic understanding of the supply market features (Caniëls and Gelderman 2005). It helps the identification of the partnership approach with the supplier by determining the appropriate sourcing approach based on the characteristics of the supplied materials. However, this portfolio does not view the dynamic aspect of supply market, such as competition among the supply firms. The dynamics of the market can lead the portfolio model to be less accurate for some industries.

Similar to the competition strategy in SCM, supply chain collaboration strategies are categorised into responsive supply chain and efficient supply chain.

This classification of strategies is the key driver of the sourcing decision or supplier selection, which is essential in establishing a successful collaboration (Matopoulos et al. 2007). Functional product supply chains are suggested to apply the efficient or lean supply chain strategy. Because the main materials of this product category are not difficult to obtain from the supply market, the collaboration issue with the

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supplier does not often become the main topic. The collaboration focus of these supply chains is mostly to improve the accuracy of the forecast of finished products so that collaborations with downstream trading partners, such as between manufacturers and distributors or retailers, are often raised. The collaboration approaches employed in this supply chain are designed to boost the product marketability (Alvarado and Kotzab 2001). The most popular collaboration strategies proposed are vendor managed inventory (VMI) and collaborative planning, forecasting, and replenishment (CPFR).

Meanwhile, supply chains for innovative products are considered to be best suited to adopting a responsive or agile supply chain strategy. This approach requires not only competitive product innovations but also competitive cycle time, which is defined as the time required from design to market. It means that the materials supplied by the suppliers have a significant influence on the manufacturing process and the value of the finished/end product. Hence, involving suppliers to the product design is important in order to achieve these goals, particularly the vendors of critical or strategic items.

The feature of partnerships in supply chains is detailed by considering the manufacturer or assembly plant of a finished product as the middle point of supply chains. Two categories of relationships are classified into the upstream level of the supply chain, and the downstream level of the supply chain. The interaction between a manufacturer and its supplier, including inbound logistics services, is considered as the upstream level of supply chains. Meanwhile, the relationships between the manufacturer and its customers, such as warehouses, retailers, end consumers, and outbound logistics services, are regarded as cooperation in the downstream level of supply chains.

The characteristics of supply chain collaboration, as well as the competition features, do not only depend on the supply chain strategy adopted (efficient and responsive supply chains) but also the stage of the supply chain. For the supply chain strategy, it has been clear that supply chain decisions, including the

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collaboration approach, are driven by the supply chain competitive strategy:

efficient and responsive supply chains. Each supply chain strategy has different focus regarding the stage of the supply chain. These collaboration characteristics are summarised in Table 2.4. This study focuses on the relationship between manufacturer and supplier which is critical for innovative product supply chains;

hence, discussions in the remaining sections of this chapter focus on purchasing activities between manufacturer and supplier.

Table 2.4 Supply chain elements that influence supply chain collaboration and competition Functional Efficient/lean Downstream supply

chain Finished product

Innovative* Responsive/agile Upstream supply

chain Strategic or

bottleneck items

*this study focuses on upstream supply chains of innovative products

As an essential part of collaboration with suppliers, procurement activities provide a significant contribution to the manufacturer competitiveness. It has been found that product performance in the market is related to the performance of sourcing strategy (Kotabe and Omura 1989). Kraljic (1983) points out that working with the right supplier affects the supply chain performance significantly because it influences all the purchasing activities, which cost 40-70% of the cost of goods sold. Chopra and Meindl (2007) also find that 50-70% of total manufacturer’s expenses are from procurement. The reason for this is that procurement requires many processes, such as defining the criteria for materials and suppliers required, organising meetings for bidding and negotiations, preparing contracts and even aligning the information system to improve the communication between manufacturer and supplier. Managing the relationships with suppliers has led

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several firms to achieve business success and made them be referred as the SCM best practices, such as Zara and Toyota (Gelderman and van Weele 2005).

However, this literature does not consider the dynamic aspect in the supply market, with regards to competition among suppliers.