Establishing Relationships with Suppliers

Principles of Partnership with Suppliers Mutual Need Compatibility of Interests Trust Openness Financial Health Liquidity Ratios how capable can they meet short term cash needs? o Current ratio o Quick ration Activity ratios How is the company doing at managing its assets? o Inventory turnover o Average collection period o Fixed asset turnover o Return on assets o Installed capacity Profitability ratios Are they overcharging/undercharging? o Gross profit margin o Net profit margin o Return on equity o Return on investment o Earnings before interest/taxes o Price earnings ratio Debt ratios overleveraged and incapable of paying long-term debts? o Debt ratio o Times interest earned Costs o Direct labor o Indirect labot o Materials o Sales and general admin o Overhead o Manufacturing and operating o Logistical Involvement Financial Partnering o Concern: holding stock in these companies o Joint venture o Buying group o Limited partnership Operational cooperation o Strategic alliance o Cartel o Consortium o Electronic market

o Keiretsu: legally/economically independent though woven together in many ways o Virtual organization Tactical Buying: Low Risk Strategic Sourcing: High Risk Team Approach to Supplier Selection Commodity procurement strategy team Sourcing team Supplier performance evaluation team Supplier certification team New product development team Strategic Alliances Formed at any business level Involves modifying business practices Technical and commercial partnering Operation partnering NOT a legal entity Factors that drive Strategic Sourcing Agreements that do not minimize costs Purchasing organization goal that conflict with corporate goals Purchases accounting for over 50 % of the cost of goods and services Increased competitiveness Market volatility Initiate Strategic Sourcing Supply strategy for key markets Supplier database Financial impact of investments Source of strategic materials Potential suppliers for partnering Capture supplier ideas Performance measures Sole Sourcing: ONLY one supplier because of unique technology, distribution arrangement, or government regulation. Single Sourcing: more than one source but its the companys choice to buy from only one. Advantages o Better quality o Better pricing o Delivery o Reliance o Buyer clout Disadvantages o Slow response to changes o Lose focus on market competitive price o Excess Demand Managed Inventory Consignment: also called Vendor-Owned Inventory (VOI) Vendor-Managed Inventory (VMI)

 Differences between VMI and VOI: o Suppliers role o Technology used Benefits to Managed Inventory o Fewer stock-outs o Better Inventory Turns o Lower Inventory Supplier Involvement in Product Development Early as possible Especially current supplier base Leverage supplier knowledge Advantages of Material Buying Shares supplier base and strategy Avoids additional transaction from engineering to manufacturing Increase speed of transfer to manufacturing Disadvantages of Material Buying Communication of changes may be better if buying is done in engineering Response from material may be slower because of production and other commitments Tracking costs of development easier if done by engineering buyer