Suppliers are an integral part of the value chain as they provide the raw materials, components and parts that are needed to manufacture a finished product. Their strategic value in the value chain has traditionally been obscured because of lower visibility and poor specialization and integration among suppliers. Firms have traditionally put increasing pressure on suppliers to offer supplies at lower prices, frequently switching over to competing suppliers, thereby leading to the erosion of loyalty in the supplies market. On the other hand, newer approaches to supplier-buyer relationships have shed light on the impact of strategic supplier-buyer relationships on reduced time-to-market and enhanced quality for manufacturing firms.
The Role of Supplier Service to Business Success
With the development of a globalized economy that has made national and geographic boundaries irrelevant for competition, the importance of strategic supplier-buyer relationships has become recognized. This has led to the formation of a number of alliances and linkages of various kinds between buying firms and their suppliers. The main benefits expected to be derived from these strategic partnerships include assurance of a certain level of service that helps buyer firms guarantee a standard level of product quality and service to their own customers. Gans (2002)
observes that in the long run, buyers are able to switch suppliers on the basis of the perceived history of service quality from supplies.
Original equipment manufacturers may not possess the technical knowledge about the various specifications of the numerous components that may go into the making of a single product. Therefore, they depend on the level of service quality and guarantee provided by their suppliers. This also involves an undertaking by suppliers to resolve problems associated with the components and raw materials such as variability in quality, delivery lead times and so on.
However, the traditional nature of the relationship between suppliers and buyers has been unfairly sewed to favor buyers by giving them greater economic power over suppliers (Fram et al. 1993)
. Buyers, not being dependent on a single supplier, have been able to extract favorable terms from suppliers. Especially where suppliers have been numerous, buying firms have sought to treat them as commodities that can be substituted for other readily available alternatives (Valenzuela et al. 1999)
. They have also dictated price terms to suppliers without taking into consideration the impact on the profit margins of the suppliers. Suppliers have had to compete for the business of a buying firm solely on the basis of price, which has diminished their profitability and has also deprived buying firms of the opportunity to engage suppliers as partners in mutually beneficial relationships.
How a Strategic Supplier-Buyer Relationship Supports Business Strategy
More and more businesses are now coming to recognize the strategic role that the purchasing or sourcing function in the organization can play in the developing a competitive advantage (Goffinet al. 1997)
. A strategic relationship between suppliers and buyers can help the buyer firm in achieving its strategic objectives. Businesses have now started preferring long-term relationships with key suppliers instead of pitting suppliers against one another in a price war. The strategic approach to supplier-buyer relationships takes into account the fact that overall supplier service contributes more towards the attainment of strategic objectives than procuring supplies at the lowest cost. Reliable quality of the supplies along with timely delivery is equally important for enabling the business to manufacture and deliver quality products to customers. The relationship is equally beneficial to suppliers. Suppliers are assured of getting regular orders from their strategic partners, which saves them the cost of soliciting new business. It enables them to cater exclusively to the needs of strategic partners and develop economies of scale.
However, for these benefits to be realized, it is important for there to be congruence and open communication between suppliers and buyers. They need to have effective communication mechanisms and systems in place so that they are constantly aware of one another's goals, quality standards, business needs and problems. This is an important area because the quality of supplier service is most stringently tested when the components fail to conform to the agreed standard or turn out to be defective. Suppliers need to be readily available to sort out quality and delivery issues so that the operations of the buyer are not jeopardized. Since, the profitability of the supplier and the buyer are linked in a strategic relationship, suppliers and buyers are motivated to resolve quality issues to maintain efficiency and increase profitability.
Strategic supplier-buyer relationships also serve an ethical function in the business environment (Valenzuela et al. 1999). Kaynak et al. (2012)
also state that unethical actions by suppliers have a negative impact on the level of buyer satisfaction. Open sharing of information helps to create trust and honesty between supplier and buyer, ultimately leading to collaboration in product development, improving quality and lowering costs. Colombo et al. (2011)
discuss the importance of trust between suppliers and buyers in new product development efforts since these involve the sharing of intellectual property and R&D information between organizations. It can also make buying firms more open and less resistant to service innovations offered by their suppliers (Korhonen et al., 2011)
. In this way, increased profitability can be enjoyed by both partners as opposed to just one partner in the traditional model of supplier-buyer relationship.
Improving Supplier Service through TQM and JIT
The quality revolution that began in the latter part of the twentieth century stressed an improvement in product and service quality as a strategy for American firms competing with their Japanese counterparts. Total Quality Management and Just-In-Time were operations management techniques that sought to incorporate quality into the operations and supply chain management policies of American firms. The success of these techniques caused firms around the world to adapt these philosophies to their environment.
Under TQM, suppliers are encouraged to assume greater participation in the quality management and enhancement efforts of the buying company. Through communication of goals and needs, the suppliers are able to design parts and components to bring down the defect rate considerably and to assure their strategic partner of a dependable component quality. Supplier firms do this by instilling a commitment to quality in every employee involved in the manufacturing process and by empowering them to identify quality defects on the assembly line. In this way, TQM enables suppliers to alter the production process to prevent a batch of defective parts from being produced and shipped to the buyer. In the long run, this saves the buyer firm the cost of returning defective parts and holding up the production process until the delivery of quality parts. Shipments to customers can be prompt and revenues may increase.
Another related approach that invites suppliers and buyers to participate in a strategic relationship is Just-in-Time (JIT). JIT requires buyers and suppliers to share production related information such as production deadlines, delivery schedules, inventory requirements and usage rates. The information systems of the two partners are also linked with one another so that information can be shared in real time. Inventory levels of components, parts and raw materials are replenished as soon as the restocking levels are reached, thereby considerably reducing the lead time. Production can continue without stoppages since supplies are delivered just in time to prevent existing supplies from running out.
has identified "perception gaps" and "expectation gaps" between suppliers and buyers when it comes to issues like service quality, cost and delivery. He also states that bridging these gaps can result in an increase in the performance of buyer firms. Hence, by partnering more closely with suppliers, firms can increase their own competitive performance.
The Importance of Supplier Service in Service Industries
This section explores the relevance of high suppler service quality to the success of firms in the service industry and how a strategic partnership between the two can be strengthened. Frost et al. (2001)
have discussed this aspect of supplier service. In a service company, the service experienced by the customer is inextricable from the person delivering the service. This makes the staff of the company creating and delivering the service a crucial component of the service itself and the basis on which the revenues and profits of the firm are to be determined. In their paper, Frost et al. (2001) discuss the concept of internal buyers and internal suppliers that can be applied to any service firm to improve the quality of its service offering.
Frost et al. (2001) suggest that service firms should recognize the presence of internal buyers and suppliers in the organization. This is to be done by perceiving each person down the value chain as a buyer for the person in the preceding stage. In this way a series of supplier-buyer relationships is set up within an organization. This inculcates a focus on quality improvement among the employees and they develop a customer orientation over time. This is eventually reflected in the quality of the service received…