What is purchasing and supply relationship

Supplier relationship management - Wikipedia

what is purchasing and supply relationship

Supplier relationship management (SRM) is the discipline of strategically planning for, and Just as companies have multiple interactions over time with their customers, so too do they interact with suppliers – negotiating contracts, purchasing. Foundation Diploma in. Purchasing and Supply. Managing Purchasing and. Supply Relationships. L Senior Assessor's Report. May LEVEL 4. 10 Strategies for Improving Supplier Relationship Management (SRM) Review article titled “Purchasing Must Become Supply Management.”.

Strategic Purchasing: Supplier Relationship Performance Outcomes – Part 4

The starting point for defining SRM is a recognition that these various interactions with suppliers are not discrete and independent — instead they are accurately and usefully thought of as comprising a relationship, one which can and should be managed in a coordinated fashion across functional and business unit touch-points, and throughout the relationship life-cycle. Effective SRM requires not only institutionalizing new ways of collaborating with key suppliers, but also actively dismantling existing policies and practices that can impede collaboration and limit the potential value that can be derived from key supplier relationships.

Organizational structure[ edit ] While there is no one correct model for deploying SRM at an organizational level, there are sets of structural elements that are relevant in most contexts: A formal SRM team or office at the corporate level. The purpose of such a group is to facilitate and coordinate SRM activities across functions and business units. SRM is inherently cross-functional, and requires a good combination of commercial, technical and interpersonal skills.

Supplier relationship management

Such individuals often sit within the business unit that interacts most frequently with that supplier, or may be filled by a category manager in the procurement function. This role can be a full-time, dedicated positions, although relationship management responsibilities may be part of broader roles depending on the complexity and importance of the supplier relationship see Supplier Segmentation.

LCC analysis helps engineers justify equipment and process selection based on total costs rather than the initial purchase price of equipment or projects.

what is purchasing and supply relationship

LCC provides best results when both art and science are merged together with good judgment as is true with most engineering tools. LCC costs have two major elements: Acquisition and sustaining costs are not mutually exclusive.

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Frequently the cost of sustaining equipment is 2 to 20 times the acquisition cost. In order to handle these decisions, firms have to make an assessment of the size of the outflows and inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of obtaining funds.

The main stages in the capital budgeting cycle can be summarized as follows: Identifying project s to meet needs. Selecting the best alternatives. Looking at investment appraisal involves us in stage 3 and 4 of this cycle. We can classify capital expenditure projects into four broad categories: Even the projects that are unlikely to generate profits should be subjected to investment appraisal.

So investment appraisal may help to find the cheapest way to provide a new staff restaurant, even though such a project may be unlikely to earn profits for the company.

One of the most important steps in the capital budgeting cycle is working out if the benefits of investing large capital sums outweigh the costs of these investments. The range of methods that business organizations use can be categorized one of two ways: This is literally the amount of time required for the cash inflows from a capital investment project to equal the cash outflows.

The usual way that firms deal with deciding between two or more competing projects is to accept the project that has the shortest payback period. Payback is often used as an initial screening method. But what if the project has more uneven cash inflows?

what is purchasing and supply relationship

Then we need to work out the payback period on the cumulative cash flow over the duration of the project as a whole. Arguments in favor of payback Firstly, it is popular because of its simplicity. Research over the years has shown that UK firms favor it and perhaps this is understandable given how easy it is to calculate. Secondly, in a business environment of rapid technological change, new plant and machinery may need to be replaced sooner than in the past, so a quick payback on investment is essential.

Thirdly, the investment climate in the UK in particular, demands that investors are rewarded with fast returns. Many profitable opportunities for long-term investment are overlooked because they involve a longer wait for revenues to flow.


Arguments against payback It lacks objectivity. Who decides the length of optimal payback time? No one does — it is decided by pitting one investment opportunity against another. Cash flows are regarded as either pre-payback or post-paybackbut the latter tend to be ignored. Payback takes no account of the effect on business profitability.

what is purchasing and supply relationship

Its sole concern is cash flow. Average Rate of Return: The average rate of return expresses the profits arising from a project as a percentage of the initial capital cost. However the definition of profits and capital cost are different depending on which textbook you use.

what is purchasing and supply relationship

Like their customers, they often focus on short term benefits to the detriment of larger, long-term opportunities. They act like vendors, even as they complain that they are not treated like trusted partners.

Others were disappointingly passive and said: When confronted with such frustrating behaviour from important suppliers, a useful exercise — not easy, and often uncomfortable — is to take a look in the mirror.

In what ways do our organisation, probably unintentionally, encourage such behaviour? How do we discourage the very ways of working with our company that we say we want from suppliers? Actions speak louder than words, and to a large extent, consciously or not, compa- nies teach their suppliers how to work with them.

SSRM requires both sides to change, and to help each other change what are often deeply engrained ways of operating. What is the danger of that approach? A recent conversation I had with a sourcing executive at a global manufacturing company is instructive.

Despite having a relatively mature and sophisticated procurement organisation, he acknowledged: For example, we regularly switch out key suppliers when we find a new supplier often in a low cost region offering a significantly lower bid price.

And then, in fact, they fail to deliver. The costs of finding new suppliers, certifying them, and negotiating new contracts, far outweighs the original cost savings. And that is before we even try to estimate the lost sales that occur during the transition. Perhaps even more disturbing, we have periodically negotiated so aggressively with our key suppliers that we know we are depriving them of the margin they need to operate a healthy business.

We do our best, but we feel caught between a rock and a hard place. Do a better job than your competitors sharing your business strategies, plans, and objectives versus rigid requirements with your suppliers — provide them with the context and information to deliver more value to your organisation; understand their strategies and needs — and identify ways you can help them; treat their staff, in every interaction, with professionalism and respect.

From a cultural and attitudinal perspective, SSRM is about recognising the full range of supplier motivations — from the organisational, to the interpersonal. Of course, suppliers are motivated by revenue and profitability goals. Financial considerations cannot be ignored, but, as long as business is conducted by people, assuming that absolutely everything simply comes down to money is deeply misguided.

Even in the current economic downturn, many industries face a critical shortage of skilled, experienced personnel. I think, sometimes people assume that SSRM is mostly relevant in the context of direct materials, but in so many supply scenarios value is a function of the quality of supplier staff who work with your organisation.

Whether you are a pharmaceutical company outsourcing clinical development, or an energy company contracting for engineering services, or any organisation relying on IT suppliers for application development and other complex services, you need to be asking yourself how you get the most experienced, and best qualified people from top suppliers working for you rather than your competitors. Of course, you also need to make sure the people in your own company have the requisite collaborative skills to take advantage of supplier knowledge and expertise.

what is purchasing and supply relationship

There are clearly significant benefits from engaging in SSRM, so why are some companies reluctant to do so? Buyers often fear becoming dependent on suppliers by virtue of forming closer relationships.

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They fear that dependency will lead suppliers to become complacent, or even to behave opportunistically. Such risks are real; they should not simply be discounted.

Entering a new market is risky, but staying in a market that is being commoditised and failing to evolve your business is also risky. You need to weigh the downside risks of any decision or strategy against the potential upside.

I would argue that, in general, the benefits of closer collaboration with key suppliers greatly outweigh the risks. One other concern is that, by working more closely with suppliers and perhaps engaging in joint technology development, you might somehow enable them to become competitors, or share trade secrets that could be leaked to competitors, intentionally or inadvertently.