Creating value through supplier relations management and strategic partnerships
The cost-share of purchased materials in a transformer starts with at least 50 % and could go up to 80 % depending on the market and type of the transformer. Suppliers have a very high impact on the quality level, delivery reliability, and cost competitiveness of transformer operation. In the previous article , specific factors in power transformer supply markets were analysed, and it was concluded that the transformers needed a supply chain, which is efficient and responsive at the same time, and this is a very challenging demand to fulfil. Therefore, the management of supplier relations is a critical dimension of running a successful transformer business.
This article will define four major categories of supplier relations. Three important tools (Kraljic matric, ATK Purchasing Chessboard, and Customer categorisation matrix) will be discussed as potential analysis tools for supplier relations. Finally, important elements of strategic partnerships will be analysed.
There are four supplier relation categories: spot / opportunistic business relations, transactional / commercial relations, collaborative relations, and strategic relations
2. Supplier relation categories
We can classify the supplier relations in 4 categories:
1. Spot / opportunistic business relations: there is no long-term commitment from either side. The parties agree for a spot deal, and the relation is limited to the execution of the deal. There may be other deals in different instances, but the suppliers for every deal may as well change. Price is the main decision criteria. Tough competition and hard negotiations are the main characteristics of the relation. This type of relation requires more time and effort and very close monitoring of the market conditions in order to be successful.
2. Transactional / commercial relations: traditional buying and selling relation. The interactions are limited to commercial and operational issues only. Other company information is not shared. Price is still the main decision criteria, although delivery reliability and quality may get some attention. The relation is typically organised with a period contract.
3. Collaborative relations: both parties have a longer-term view on the relationship, and beyond traditional buying and selling, there will be collaborative activities, which could create benefits. The parties will share information to enable these activities. The focus will cover other cost elements in addition to the price.
4. Strategic relations: both parties have a strong commitment to long-term business relations. Sensitive and strategic information will be shared between the parties, and they will try to create synergies by aligning their strategic plans. There will be collaboration at all levels of the organisations. The parties see each other as indispensable parts of their business.
When professionally managed, it is possible to create value with all the 4 types of relations. However, the highest potential for value creation is through strategic relations.
It may not always be so obvious to decide which type of relation is the appropriate one with a particular supplier. Let us study some of the tools, which may help to analyse this.