Developing and Evaluating Supply Chain Relationships: Putting Theory into Practice

Professor Richard Lamming and Dr. Paul Cousins work in the School of Management, University of Bath, UK, where they are, respectively, Director of the Center for Research in Strategic Purchasing and Supply, and Lecturer in Operations and Supply Management

What can and cannot be menaged?
Since its inception in the early 1980's the term 'supply chain management' has become steadily more popular cause and effect, there is an intuitive appeal in the 'chain' metaphor - we use it in many contexts (e.g. 'chain reaction', 'chain of command', 'food chain') and it is no surprise that supply chain has been adopted by managers, since it is a simplification that sits well with so-called rational decision making.

In fact, the multi-organizational operating system that supply managers seek to address is not as simple as a chain. To make sense of it, its complexity has to be viewed as a network or perhaps more realistically, as a mess. Theory exists to help us understand networks (ranging from the complex mathematical to the sociological) but to address the 'mess' we should need to apply theories of chaos and fuzzy logic-beyond the horizon for most purchasing and supply strategists at present. As for networks, most theory has argued that they cannot be managed and that strategists within them must seek to cope. Harland (1996) has neatly summarized the development of the supply perspective from supply chains within organizations, through dyadic (linking two organizations) and chains to the network (see Figure 1). We go even further to represent the complex mess that actually exists (see Figure 2). Perhaps a more appropriate term would be the supply system.

Supply Chain Management Relationships, Chain and NBetworks' British Journal of Management, Vol7: Special Issue pp S63-S80

The system contains (at least): - 'no-go areas', unknown quantities, feedback loops, 'Sweetheart deals', abuse, indolence, incompetence and duplication. Within the supply system there is one unit that can be addressed by supply strategists: the relationship between customer and supplier. While even this unit is not independent (for instance, it may be heavily influenced by relationships that either party has with other organizations), it is possible to consider it as manageable in some ways - although some aspects may not fit with arises is that the supply relationship can be managed but neither party can manage it alone. This has implications when the subject of performance arises

Fig-2 The Supply Network is often Aactually a mess

The relationship cannot be managed in the same way a firm is controlled: it is a process for facilitating the mechanisms of supply and demand. In other words the relationship may seem as the oil that allows the 'machine' to work, If a supply strategist tries to build an incorrect type relationship for delivery of good or services (for example, a traditional or adversarial approach based upon threat and counter threat of raw economic power in a situation where a more collaborative approach is needed) it is unlikely that the results (e.g. increased innovation, or total cost savings) will be achieved. To do so would be akin to putting the wrong oil in the engine of a car - it would eventually grind to a halt. It is clearly vital that supply strategists identify the correct relationship process, which matches with the desired relationship outputs.

Performance and Quality
Since the development of statistical quality control in the early part of the twentieth century, managers have sought to measure whatever they can within operating systems, repeating mantras such as 'what gets measured gets don't and 'if you can't measure it, it doesn't exist.' The manufacturing needs of the second world war fueled this development, resulting in widespread use of statistically based quality control systems in North America and Europe, and the influence of thinkers such Deming, Juran, Feiginbaum and Garvin in Japan. The principle was 'company-wide quality control'- a system that left no stone unturned in its drive for installing quality in every part of a manufacturing firm.

At some point in the 1960's manufacturers' attention appears to have turned to the external parts of their and materials that would to into the products they were assembling (and, later, into the services provided). Naturally, the statistical methods that had become very sophisticated in company-wide quality control were used in judging the inputs to the customers' operating systems and 'rolled out' into the operations of the suppliers themselves.

At this point, several implicit assumptions were made which were to become the basis for four subsequent decades of so-called 'best practice' management of supply.
These were that

  • The quality levels of parts supplied to a manufacturer by a supplier were that responsibility of the supplier (this also applied to the performance in terms of factors such as delivery on time)
  • The customer was able to judge the performance of all its suppliers and then able to compare one with another, excluding the impacts of its own behavior from the assessment;
  • The customer need not take into account the implications of any other customers' schemes, which the supplier was required to deal with
  • The supplier would reveal sensitive operating data to the customer in response to investigative questioning and that these data would be genuine, despite the un-hedged risk that the supplier was being asked to take in revealing them.

It says a lot for the power of management consultants (who quickly recognized the potential business in developing and selling such schemes) and the arrogance of traditional customers, that the obvious flaws in these assumptions were either ignored or not recognized. Vendor assessment schemes (as they became called) flourished and spread to all sectors of industry becoming the norm in leading sectors such as automotive and aerospace. In the UK, the British Standards Institute took up the theme, developing a management standard known as BS 5750 in the early 1980s. This standard subsequently became recognized internationally as the ISO 9000 series a few years later.

Challenging and Assumptions
The assumptions upon which vendor assessment is built are fundamentally challenged by the principles contained in the concept of lean supply, first explained in 1993. One of the tenets of lean supply is that many traditional purchasing management practices and devices at the interface between a supplier and customer actually tend to inhibit rather than encourage effective supply, unless both parties are investing in the relationship - e.g. unless both customer and supplier are seen to be taking (and managing) a risk in the interests of improving value transfer.

Typically, vendor assessment is based upon the customer setting up hurdles for the supplier to clear (competing within the customer's set of rules) using the measurement data thus generated as a 'stick' with which to beat the supplier in negotiations. In other words, the data are used to show how bad the supplier is at, say, on-time delivery, in order to weaken their commercial reasoning during the inevitable confrontation on prices. For example, a customer might tell a supplier that delivery on time has been 91 % over the last three months; perhaps thinking this will be seen as encouragement. In practice, since the only acceptable level of performance is 100%, the supplier will interpret this declaration as being judged to be 9% below par. The customer may be expected to exploit this position in situations such as price negotiations; the assessment is actually interpreted as blame.

If one party blames another, the second party has three possible responses: - (a) to dismiss the need for blame, (b) to capitulate and accept blame, (c) to retaliate - put the blame back on the first party. Response (a) is not sustainable in practice - once blame has been laid it is unlikely that dismissal will be satisfying; (b) is also not sustainable - a supplier that is constantly at fault and admits it will not be seen as an acceptable source. Thus (c) becomes the only long-term response for the supplier - to retaliate, either directly) point out the customer's mistake) or indirectly (by tolerating the blame and recovering the associated costs covertly, in risk premia or otherwise).

Using this logic, the principles of lean supply reveal that the use of blame in negotiations, while a natural human response to difficulties, results in a wasteful cost in the supply relationship. For leanness, the blame would need to be removed but this would clearly be very difficult to achieve in practice.

Purchasing Arrogance
It is customary for purchasing managers to speak of 'supplier management' - very often as part of a major corporate initiative. Such a principle is based upon the assumptions discussed above but falls foul of the practical situation in which the supplier operates. The paradox is that every company must manage itself - in order to convince its shareholders that it controls its own destiny and can provide a return on their investment. If it cannot do this, it risks losing investment and will fail. If a customer firm tries to use political or economic power to manage its supplier, therefore, the supplier will be faced with commercial disaster. In practice, when faced with the ultimatum of supplier management, the supplier has to cheat, in order to survive. There is nothing wrong with cheating in this sense - it has been standard practice for a very long time (some would say it is an unchangeable feature of human nature). However, it is costly and creates excess work without adding value; competition has already made it very difficult for firms to support such 'phantom work'.

For several years we have explored the ways that companies formulate supply strategies. Our conclusion is that purchasing strategists and managers have adopted the mantra coined by the great retail pioneer, Gordon Self ridge - "the customer is always right." Anybody in a sales role knows this is a trick; the customer is not always right - they are very often wrong - but sales people make a lot of money out of the customer being wrong. The fact that purchasing people actually believe that they are always right would only be a small problem if it were limited to the personal actions of individual buyers but senior managers appear to formulate supply strategies as if they were always right. Examples of this include supplier assessment and development schemes, driven by the customer as if they always know best. Buyers often seen themselves as being in control of the supply lines - or chains - within the network thinking they alone can see clearly above everyone else. This includes the assumption that their suppliers will passively to do what they are told.

It is a general rule of business that a firm that takes risks without hedging will soon fail. If two parties discussed a business venture and one said to the other "You take all the risk and I'll take all the benefits," the proposal would be deemed ridiculous - yet that is exactly what industrial and commercial customers ask suppliers to do constantly when they demand so-called 'open-book' negotiation. The risk for the supplier is that the customer will abuse the confidence. The benefit to the customer is that prices will be reduced (with the consequent reduction in sales turnover for the supplier, which is conveniently ignored by the customer). The supplier cannot possible afford to take such a risk without hedging. They do hedge - by distorting their responses to the demands. The information obtained under duress from suppliers during open-book negotiation is not to be trusted - if they are not lying, they are taking unheeded risks.

Customers may also try to out with the supplier by employing specialists to investigate the situation - to "know about" the business. Ironically, such individuals often end up in practice as the enemy of the Buyer, using secret information as a test of the Buyer's competence in negotiation (this leads to three-way cheating!) The more common problem is that the Buyers are well aware that the supplier is lying but accept them tell the truth. The false information becomes 'professionalised' -massaged into formal, persuasive it as valid. It becomes corporate knowledge.

If the customer is taking no risk in this matter, why should the supplier be expected to do so? The customer has simply to set the rules and design the implementation of the scheme. The supplier must agree to be constantly assessed, while the customer assumes the role of faultless partner. Not surprisingly, when faced with such a situation, suppliers will tend to cheat - that is they will become expert at dealing with such one-way schemes (they may have the benefit of experience in many such schemes in addition to the customer's - including those schemes in addition to the customer's - including those of the customer's competitors). The costs thus built into the interface (risk premium, policing, etc.) add to the cost of the value transfer from supplier to customer (or, seen another way, the cost to the supplier of extracting value from the transaction) with the result that the end product or service loses its economic appeal at least in the long run, when other sets of customers and suppliers develop ways of working without all this nonsense. For the purposes of this discussion, we can define 'value' as the financial return that makes the business worthwhile - for the customer and the supplier.

This is not to suggest, of course, that a firm employing vendor assessment is doing anything 'wrong' or inappropriate. In some cases, suppliers genuinely benefit from such schemes, as they lift their game to fit the customer's requirements. Some exemplar companies stand out, having developed well respected and genuinely helpful assessment programmes; in some cases, even the rather pretentious 'Supplier of the year" awards ceremonies are taken seriously.

In some schemes, customers have installed 'two way' assessment although this sometimes appears to result in I'll blame you for all the problems in our relationship, you blame me, and let's see who wins!" In some cases, a straightforward, head-on mutual exploitation may be the only way to work. What the theory suggests, however, is that the cost reduction and learning improvement opportunities that exist in lean supply may not be available under the traditional regime of supplier assessment, which remains a feature of nineteenth century mass production thinking.

When supplier assessment becomes supplier development, the problems may be even greater: a customer that seeks to develop a supplier actually wants that supplier to be a better part of only one supply chain its own ! Ideally for this customer, the supplier should be excellent for them and perform poorly for other. This is not practical, of course, and the supplier will not let it happen. Thus there is a tension in 'supplier development', often resolved by the supplier learning what it can from several sources (customers); no one customer can control this process. For performance measurement in practical supply management, then, the relationship is the appropriate focus of attention (the entity being assessed), rather than the supplier or the customer although both may need to develop internally for the effectiveness of supply to improve. This is rarely recognized in purchasing practices that are built upon the arrogant assumption that the customer is always right.

In early days with a new supplier and for purposes of pre-contract appraisal, a one-way assessment scheme may be appropriate for the customer to use. However, is assessment of the performance of a strategic supplier (which is actually the performance of the supply relationship) is a necessity; the question becomes "How might this be reconciled, at least partly, with the benefits offered by lean supply?

The Concept of Relationship Assessment
There is a wide range of existing literature, which focuses on relationships between firms. A general reading of this endorses our observation above - that the relationship between firms cannot be viewed as a static entity - it is a process which is capable of delivering given amounts of value to the parties involved. It follows that the supply relationship should be seen as a 'means to an end' and not the end in itself. As with any process, in order for it to provide competitive advantage, a relationship must have definable deliverables attached to it. This reinforces the conclusion made above that for genuine benefits; performance assessment is more appropriately focused on the relationship, not the supplier. Furthermore, supply relationships are not generic; it is clear that they need to be examined on a product-by product, or service-by service basis-It is not sufficient simply to regard the general relationship between firm A and B: it is the specific relationship process itself that becomes the unit of analysis of the product of service. This is important because it emphasizes the need for a practical method for focusing on specific relationships, revealing the complexity of the subject and the need for simplicity in the approach to managing it. With this central precept in mind it appears that any performance measurement within a supply relationship should facilitate the delivery of value to both the customer and supplier thorough the development of appropriate relationships.

In order for a relationship to deliver value in this way, it is important to develop the most appropriate relationship process for the product or service that is being managed. As in any process, there are both costs and benefits. Research suggests that firms rarely grasp the full complex nature of total costs of doing business (transaction costs) or at least do not recognize it in practice. For the purpose of assessment, the costs of relationship management may be classified into three distinct areas (See Figure 3)

  • Operational Costs: of the day - to day management of the relationship, such as invoice generation, purchase order development and requisition placing. These may be calculated in terms of time e.g. labour hours or computer time.
  • Managerial Costs: of managing the relationship itself, such as problem solving, communication management and account management. Again, labour hours may be used, or some measure of time spent in problem resolution.
  • Strategic Costs: associated with the exposure of the business to either a dedicated supplier or customer: potential costs of over- dependence, switching sources, or technology stagnation (e.g. getting left with redundant technology, in- house).

These costs can be offset by potential benefits from transparency in the relationship, such as improved pricing arrangement, delivery time reduction, and improved time-to-market and increased product innovation. The key point of this argument is that the benefits required must significantly outweigh the costs of developing the relationship, (and be seen to do so) otherwise firms will simply not do it.

Seeking to maximize profit or shareholder value should lead the firm to find the most cost-effective way of managing supply. In some instance, this will involve a focus on cost reduction, in others the emphasis will be on enhancing product performance and developing new and innovative products. It is clearly important that firms have the most appropriate relationship to deliver their end goal, perhaps selected from a portfolio of relationship types or styles, based on clear business cases for each product or service that they purchase and supported by the requisite resources and capabilities for measuring and managing these complex relationships.

The operational danger is that companies will measure only those costs that they can see, which are the 'objective' costs. However sophisticated the methods used for this appear, the approach is insufficient. As Figure 3 reveals, as the complexity of the costs increases so does its impact on the business. Thus where companies 'rationalize' their supply base, or seek ways to find improved value, it is necessary for them to assess not only the operational but also the managerial and strategic costs. Ignoring this complexity, however expedient it may appear, may lead to implementing strategies which reduce the costs that have low impact while increasing costs that have a high impact (and not assessing the latter.)

A pragmatic approach to supplier assessment at the pre-contract stage: the Vendor Management Model.

The Vendor Management Model (VMM) was developed by Cousins in 1992. The model was built on the concept of multiple criteria decision making (MCDM) using a technique known as Analytical Hierarchy Processing. The basis for this was empirical research that identified ten key selection criteria, which were involved in the selection and sustained management of buyer-supplier relationships. In use, the VMMK required buyer and supplier to rate and score each other using the computerized tool. The output of the process was a diagram that showed whether or not the relationship was aligned and, if not, which areas required focus. While the tool worked very well, two key points were self-evident. Firstly, the tool was a good mechanism for getting people together within and between organizations. This alone was a benefit in practice, providing a facilitating mechanism for people to discuss key issues associated with the relationship. Secondly, the use of a simple, numerically based computer tool might provide an easy and simple way to assess the relationship, focusing on joint (buyer and supplier) involvement. VMM took two-way assessment as far as it could go, reducing the blaming, discussed above, to a minimum, However, the real goal lay ahead: how to assess the relationship.

The development of the relationshiop: Assessment process
In 1993, to combine the strengths of the VMM and the principles of lean supply, in search of practical application of theory, an applied research project was launched at Bath, which was to develop the Relationship Assessment Process (RAPa). This was envisaged as a management too, simple in use but incorporating the complexity of the lean supply principles (i.e. as embodied in relationship assessment) and the Vendor Management Model. Working with industrial partners over three years, the project led to the development of and innovation base within the sector.

The initiative was called the Supply Chain Relationships in Aerospace (SCRIA). By the end of 1997, the SCRIA working party on supply relationships had developed its 'Next Steps' process for improvement and was looking for an assessment tool that would fit within it. The response was the development of the into practice the principles discussed above.

The intention with the SCRIA 'Self-assessment tool,' as it was known during the project, was to provide a component within the Next Steps process itself. This is a critically important point: while the principle of the Tool is general, this version would only be used as a part of the whole process.

To do this, several things are necessary. First, the people involved in the relationship - working within the customer and the supplier - have to agree that problems within it are probably not solely the fault of either party. Once this is clear, it becomes clear that systems designed to apportion blame can only do just that - giving one part the idea that no corrective action is necessary or their part (usually the customer) and the other the feeling that whatever they do, the other 'side' will always bring forward more operational problems to blame on them and thus take the only rational path: to cheat.

This is by far the greatest challenge in relationship assessment, a sine qua non that has to be recognized and the RAPa Tool as a working model at the end of 1996. The principle of relationship assessment is that the supplier and customer develop a framework that they can use for analyzing the relationship (again, specific to a product or service), using it together after first conducting in- house assessments of their own approaches to the relationship. This principle is shown in Figure 4. The RAP model is shown in Figure 5.

DEVELOPING RELATIONSHIP EVALUATION A CASE IN THE UK AEROSPACE INDUSTRY In the early 1990s the UK's Society of British Aerospace Companies (SBAC) began an initiative to improve its inter-organizational relationships, in pursuit of a more competitive cost constantly remember, even in the thick of crisis. It represents a complete reversal of traditional purchasing approaches and it is very, very difficult to accomplish. It was germane in this case that the British aerospace industry, in common with others elsewhere, was in a state of crisis following the reduction of military budgets as the cold was came to an end in the early 1990s' The need to work together throughout the sector was a positive force in support of the development of SCRIA and the relationship assessment principle within it.The next requirement is a framework for analysis. In the SCRIA project, this was developed through extensive interviewing with companies that would be likely to use the Next Steps process. The result was a matrix of thirty-six criteria, grouped in five categories that could be used to describe the relationship in terms of what typically happens within it. For each criterion, five levels of development were identified, from 'basic' to 'advanced'. To describe the current or desired relationship, it was necessary only to go through the 36 criteria and pick the description that best fitted the reality (or desired state). The matrix and the Tool itself were developed as a spreadsheet application, for use with Microsoft Excela. Figure 6

shows an example of the criteria. At this point it is worth restating a few basic principles. First, the description is of the relationship not the supplier. This is not a tool for criticizing the supplier or customer, since the response to constant, institutionalized criticism is inevitably cheating, not mutually beneficial relationship development. Secondly, the matrix within the SCRIA Tool is designed for the aerospace industry at the present time: other industries would require either other, bespoke tools, or the power of the full RAPa approach. Thirdly, the relationship to which the Tool refers is for one specific product or serviced that passes between the companies. A customer-supplier pair might have several different relationships at any one time, with different desired states. Lastly, the Tool is designed to be used as part of the Next Steps process - a facilitated development programme; used outside this context, it could easily do more harm than good. Having developed the framework (now known as the Relationship Evaluation Tool, or RET) the process for using the Tool was developed. This is shown in Figure 7 and explained below.

The Steps In the Process
The firm that starts the process (usually, but not always, the customer) must begin with a clear business opportunity (for example it might be seen feasible to reduce the costs of material control scheduling by providing a supplier with access to an intranet. Such a project might be driven by the mission statement:

"If we could remove the need for all progress chasing for deliveries, w4e could save x% on the operational costs in this immediate supply chain"). A business case or cost / benefit analysis is then necessary, in order to set up expected results (against which the firms will each pleasure the success of the whole exercise, in their own terms). Comparing the cost of the exercise with the benefit may make it possible to ensure that economic value addition is achieved. Each firm uses the scoring matrix to describe - or evaluate - the relationship as they currently judge it, weighting the criteria to represent, which they think are important in this specific case. This requires a cross-functional team - the relationship is not simply a matter for Purchasing or Sales. The two firms then meet (again with cross-functional teams) and agree one set of weightings and the criteria that describe the relationship, as it currently exists. This is clearly not a simple matter certainly not one that could be approached by firms that do not already have a good working relationship.

Having agreed the current state of the relationship, the two firms then use the same process (without changing the weightings but using the criteria to describe the way they need to do business to identify the state in which the relationship would need to exist in order to realize the benefits in the business case. This leads to a set of actions that must be undertaken to achieve the desired state. The actions become the inputs to a project management programme that is undertaken jointly by the firms, working as a relationship-based team (i.e. the relationship process takes on a focused nature, in pursuit of the jointly desired business goal). After a predetermined period, the Tool is used again, to assess how the relationship has developed, with respect to the desired state. The software in the Tool contains several microanalysis reports which may be used by one or both parties - as a basis for face - to - face discussion -an essential part of the process. Once the Tool has been used, and the opportunity initially envisaged has been realized, it should be possible to conduct business on this basis repeatedly. The SCRIA? Relationship Evaluation Tool was developed after four years of academic research and two years of work at the SBAC to prepare the industry for some radical approaches to supply management. Other initiatives within SCRIA have also "broken the mould," revealing new thinking and delivering benefits. The whole project illustrates what is possible when theory and practice are brought together.

Conclusion: the future of performance measurement in supply relationships

The flaws in traditional thinking revealed in this chapter are seldom acknowledged in current practice: customers continue to demand that suppliers kow-tow to their standardized assessment schemes and ignore the impact that their own behavior may have on performance in the supply system, shrugging off the responsibility for relationship effectiveness. Individually, Buyers recognize the lack of reason in one-sided assessment for anything more than initial, basic appraisal purposes but most corporate schemes have yet to move beyond the 'two way blame' arrangements of even the most highly developed assessment schemes.

It is possible that the advances in product technology, outsourcing, e-commerce and speed of transactions may reveal more of the flaws in existing systems for supplier assessment. It may also be that some radical thinking is necessary in purchasing strategists to break free from the systemic costs and constraints that may be associated with traditional method and imperfect relationships.

This chapter has recorded the journey of an idea from theory (itself grounded in empirical work in a global industry) into practice. The Relationship assessment Process and the Relationship Evaluation Tool may not enable firms to 'manage the mess' but they do address the one manageable part of the system - the relationship.

It is often said that the future has already arrived but not yet been evenly distributed. Radical ideas behave in this way and while vendor assessment schemes may be expected to remain for some time to some-perhaps for ever-the advance of the relationship assessment concept appears to have made a good beginning in the UK.

Brown, S. E., Lamming, R. C., Bessant, J. R. and Jones, P. (2000) Strategic Operations Management Butterworth Heinemann, UK.
Cousins, P. D. (1999) 'Supply Base Rationalization: Myth or Reality?' European Journal of Purchasing and Supply Management 5 (3/4) 1 43-155
Cox, A. W., Sanderson, J., and Watson, G. (2000) Power Regimes -Mapping the DNA of Business and Supply Chain Relationships Earlsgate Press UK

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