Financial Contributions of Sector Procurement

¶ … Financial Contributions of Sector Procurement Collaboratives

The paradoxical nature of strategic sourcing, consortia-based procurement exchanges, and Sector Procurement Collaboratives are that from the standpoint of efficiency these buying consortia must strive to continually reduce costs and suppliers, yet on the other must remain flexible enough to respond to the needs of the customers they serve. In other words, a balance must in effect be achieved between efficiency and customer service. There are various ways in which to achieve this, as indicated by the literature.

From the customer service viewpoint, supply chain relationships have a significant effect upon both the perceived and actual effectiveness of collaborations. Generally, these relationships manifest themselves in the phenomena of trust and commitment, both of which entail elements of efficiency and customer service relationships. Indeed, Kwon and Suh (2004, p. 5) suggest that supply chain performance is directly related to the level of trust and commitment among the partners along the supply chain.

Inherent in these relationships is effective information sharing, which in turn heavily relies upon trust. The type of information to be shared will be dictated not only by supply chain necessity, but also by the level of trust and commitment as shared by supply chain partners. Only in collaboration can commitment and trust effect an optimal relationship among all partners within the supply chain.

A lack of trust in turn leads to a lack of both efficiency, velocity and cost-effectiveness within the supply chain, where scrutiny and verification will need to be increased to fill the gap created by this lack. The cornerstones of supply chain goals, namely efficiency and effectiveness, will be lost if a significant amount of trust is lost. In addition, inventory, cross-docking, collaborative forecasting, planning and replenishment will also be lost.

It follows that shared knowledge, as based upon both trust and commitment, leads to sufficient Sector Procurement Collaborative agility, as suggested by studies (Hazlett, Mcadam, Beggs, 2008). Maturation plays an important role in this regard, as mature relationships and the history of extensive collaboration in the supply chain tend to lead to a higher level of trust. (ELSamen, Chakraborty, Frankwick, 2006). It therefore appears that the literature offers considerable evidence towards the positive results to be gained from cross-functional teams, collaborative teams encompassing suppliers, and the broader strategic sourcing initiatives delivering efficiency gains (Anderson, Katz, 1998) (Talluri, Narasimhan, 2004).

On the other hand, there is a noteworthy lack of critical reflection upon the cumulative effects of knowledge sharing on transaction velocities and accuracy over time. The measurable performance gains of advanced supply chain strategies such as Vendor Managed Inventory (VMI) and Collaborative Planning Forecasting & Replenishment (CPFR) (Huber, Sweeney, Smyth, 2004) nonetheless do not provide insight into increasing the agility of supply chains, or how challenges such as significant fluctuations in supplier quality levels, sourcing capacity and variations in pricing can be handled. Instead, empirical studies tend to link such advanced strategies to increased efficiency and financial results, as well as how consortia exchanges and Sector Procurement Collaboratives capitalize on process maturity delivering higher levels of inter-process accuracy and efficiency over time.

In order to achieve a closer focus on this research need, a closer attention will be paid to causation within the various phenomena that guide the supply chain management process. In other words, the causal factors behind phenomena such as commitment, satisfaction, superior performance, and the like, as well as their correlation with one another and the rest of the supply chain, will be the focus of investigation (Dant, Brown, Bagozzi, 2007, p. 2).

At the same time, it is also important to investigate the negative effects of certain phenomena within the supply chain; which also have causal bases (Dant, Brown, Bagozzi, 2007, p. 2). Trust, commitment, satisfaction and heightened performance can thus be contrasted with opportunism and dysfunctional conflict within the non-functioning supply chain relationship. By eliminating such negative factors, it is contended that a correlative positive effect and increase of desirable factors will occur, and supply chain efficiency will improve.

The purpose of this research study focuses upon two main contentions: firstly, that the efficiency of Sector Procurement Collaboratives correlates highly with inter-process maturity and transaction velocity; and secondly, it is contended that the catalysts of inter-process maturity and transaction velocity are more dependent on accumulated trust and transparency (ELSamen, Chakraborty, Frankwick, 2006) than on aggressive price and supplier reduction strategies (Devine, Dugan, Semaca, Speicher, 2001). In order to substantiate these contentions, the study intends to measure the contributory effects of inter-process accuracy and efficiency on the financial performance of a Sector Procurement Collaborative over time.

2.

Hypotheses

The hypotheses for the study emerge from the basic contentions mentioned above, and from the research questions the study seeks to address. The study focuses upon the levels of knowledge sharing and collaboration with and between suppliers, which are hypothesized to affect the probability of higher order accuracy and velocity, and the ultimate level of lean procurement workflows and lower costs resulting from this.

The first research question then addresses is the correlation of knowledge sharing (Dyer, Nobeoka, 2000) and the potential trust it creates (ELSamen, Chakraborty, Frankwick, 2006) as researched from the supplier cross-collaboration viewpoint. From this, the first hypothesis is that there is a high correlation between supply chain relationship factors such as knowledge sharing, trust, commitment and supply chain effects such as cost-effectiveness and procurement velocity.

Within this framework, more specific elements of trust, such as joint relationship effort and its effect upon mutual trust (Nyaga, Whipple and Lynch, 2009, p. 109), can be investigated. Significantly joint relationship effort results in a higher level of trust on both the parts of the buyer and supplier in the supply chain collaborative relationship. The authors make the point that a joint effort is seen as operationally focused, and thus creates an environment within which all parties concerned can demonstrate their effort for the better efficiency of operations.

Sector Procurement relationships and trust are generally built up over the long-term, which requires consistency from all parties involved. Hence, both the relatively short-term elements such as joint relationship effort and the more long-term trust elements such effective communication and knowledge sharing need to be applied in a consistent manner in order to provide a sound foundation of transaction velocity and process efficiency.

The second hypothesis is considered in conjunction with the first, and addresses the issue of communication: both inter- and intra-supplier communication influence the balance among the supply chain elements, providing, as mentioned above, a sound basis of transaction velocity while strengthening consistency and predictability. Hence the hypothesis seeks to suggest that effective knowledge sharing and communication within and among supply chain relationships will positively affect the desirable elements of the supply chain while minimizing the undesirable ones. Strong links among the elements of trust and communication will therefore be likely to also increase efficiency and velocity within the supply chain and its operations.

Biehl, Cook and Johnston (2006, p. 27) for example suggest that a match between communication mode and product customization within the supply chain correlates positively with the efficiency of joint decision making. Here, the appropriate level of communication for both routine and non-routine types of communication, where there is a high volume of decision making.

Learning and knowledge creation are also important factors within the supply chain relationship, where long-term relationships, along with the communication and trust modes inherent in these relationships, lead to a process not only of knowledge sharing, but also learning and knowledge creation. The third hypothesis is therefore that healthy, long-term relationships, where the above-mentioned elements of communication, trust and commitment are present, result in a process of learning and knowledge creation that would not have been possible without the collaboration of all parties involved (Dyer, Nobeoka, 2000). The relative level of maturity among within the supplier relationship is hypothesized to result in higher levels of collaboration over time. This increased collaboration in turn leads to the creation of synchronization across a multi-supplier federation. Furthermore, knowledge is not only shared and learned, but also created from this sharing and learning process. The supply chain in general then becomes more efficient as a result.

Johnston et al. (2003, p. 23) for example suggest that differentiation is one of the effects of this learning and knowledge creation process. This is directly related to the functioning of the supply chain as a whole. Without effective functioning across the supply chain as a whole, product differentiation cannot occur in an effective manner and the competitive edge of the company involved is lost. This relates directly back to the initial element to be investigation, which is trust. Trust leads to communication sharing, in turn creating a long-term relationship, the ultimate result of which is both learning and knowledge creation. From this level of maturity, the supply chain can create a truly competitive edge.

3.

Literature Review

Although many investigations offer insight into the supply chain from the perspective of efficiency elements such as operations velocity and cost, there is an increasing body of writing on the issue suggesting that there is a basic lack of focus on the correlation of relationship issues such as trust and communication upon efficiency and effectiveness.

Research conducted to date for example suggests that, for consortia-based procurement exchanges and Sector Procurement Collaboratives the bargaining power of representing multiple groups of buyers and their collective purchasing power provides economies of scale and leverage in bargaining with suppliers (Devine, Dugan, Semaca, Speicher, 2001). The motivations of purchasing consortia are primarily focused upon gaining expected cost savings and collect information on supply markets (Tella, Virolainen, 2005). Although perfectly in line with accepted marketing views and strategies, there is a gap in this research, which does not take into account the long-term effects of inter-process maturity and transaction velocity over time.

According to Johnston et al. (2003, p. 23), the recognition of trust as an important part of the buyer-supplier relationship does not preclude fact of paucity of empirical evidence to suggest the level of such importance. Trust and its dependent behaviors, as well as its impact on inter-organizational activities, have simply not received the attention they deserve. The authors suggest that this is a significant shortcoming, as a lack of empirical evidence also means a lack of basis for future study. A further shortcoming is the fact that few studies at the time of writing address the perspectives of buyers and suppliers separately. This is also important in determining the exact dynamic of the buyer-supplier relationship and how this can mature into a relationship that creates knowledge rather than only exchanging it.

The current global trend does not appear to support long-term supply chain relationship management for the ultimate aims of both sharing and creating knowledge. Indeed, it is one of continually reducing the number of suppliers in many consortia-based exchanges and Sector Procurement Collaboratives. This in turn creates increased price pressure, which can lead to the rapid degradation of product and service quality over time (Edgell, Meister, Stamp, 2008).

The danger of this is that competition may become one- rather than multi-dimensional. The critical supply chain processes necessary to deliver products of high quality are then severely reduced. This has a negative effect upon trust, which erodes over time as a result of quality issues (ELSamen, Chakraborty, Frankwick, 2006). This is a fundamental flaw within a supplier strategy that is driven not so much by managing effective interrelational issues, as by logistics and efficiency issues.

When a supplier strategy mindset is purely price-driven on the part of Sector Procurement Collaboratives, specific benchmarks of performance relative to supplier-wide enterprise compliance and quality management become necessary (Kumar, Ozdamar, Ng, 2005). This is a most common occurrence in industries that are highly regulated, including healthcare and historically established businesses. In order to continue operating, these industries and businesses must follow stringent safeguards defined by federal agencies such as the Federal Drug Administration (FDA) and others.

Such compliance is not driven by a long-term sense of trust and learning within the supply chain, but rather by a strategy that focuses exclusively upon longstanding requirements, demands and rules. Sector Procurement Collaboratives also need to qualify suppliers based on such prerequisites to mitigate the risk of operating in an unsafe way and putting the public at risk. Although the need for regulation is clear, it is also clear that there is a significant lack of focus upon the long-term effects of trust and transparency, particularly as these relate to transaction velocity, supplier coordination and inter-process communication.

Particularly in industries where the public good is at issue, these are extremely important issues to consider and optimize. These examples suggest that quality affects trust, which has been research to quite some extent. What has however not been studied at great length is the fact that trust also affects the quality and other supply chain deliverables.

Johnston et al. (2003, p. 24) for example note that there are three critical components to a supply chain management strategy; the first of which is information flows, the second product flow, and the third relationship management. The third, according to the authors, have received the least critical and committed attention, as it is both "fragile and tenuous." Nonetheless, this does not detract from the necessity or importance of cultivating a long-term trusting relationship with the partners within the supply chain.

Johnston et al. suggest a model for trust building that consists of three construct groups: the supplier's level of trust in the buyer, the level of cooperative buyer-supplier behaviors, while the third concerns the buyer's perspective. The supplier's level of trust is based upon observation regarding the dependability and benevolence of the buyer. The model suggests that a mutual level of trust must be maintained between buyer and supplier in order to optimize the rest of the operations within the supply chain. This correlates with the concept of maturity models as applied to the long-term effectiveness of consortia-based exchanges and Sector Procurement Collaboratives (Sislian, Satir, 2000). These have followed a process-centric approach over time. Such an approach seeks to define process capability and maturities from a systematic approach vs. one that capitalizes on minimizing strategic risk by optimizing inter-process coordination.

Additional frameworks and maturity models concentrate on creating causal relationships to the process workflow level and seek to define it as the enabler of process efficiency (Scott, 2007). This defined role of it as the inter-process enabler is also consistent with previous consortia-based exchanges and Sector Procurement Collaborative frameworks, yet the lack of empirical research as to the long-term effects of a quantification of trust contributing to more efficient process performance and Procurement Collaborative performance is significant.

This translates to some very specific factors in the supply chain relationship. Nyage, Whipple and Lynch (2009, p. 101) for example relate the lack of research to the collaboration process itself. Because parties within a supply chain who attempt to form collaborations cannot do so on the basis of specific research, there is some difficulty in achieving the desired trust level. According to the authors, this is because specific factors such as partner selection, interorganizational needs and capabilities, as well as clearly defined goals or not sufficiently addressed. This corroborates with the above assertion that trust and inter-organizational processes are a two-way process, each influencing the other. In other words, a lack of trust would translate to a lack of clearly defined goals and communication, whereas the lack of sufficient information would cumulatively influence the perpetuation of the trust problem. This in turn leads to one or all of the parties involved experiencing some inequity in the business relationship -- leading to further trust-eroding sentiments such as resentment.

A further lack in the literature is the problem of defining the specific concepts surrounding the supply chain relationship. The issue of trust as opposed to commitment appears to inspire different views in various authors. Some for example regard the two concepts as exclusive of each other, each with its own influencing factors, while others regard them as continual influences upon each other as well as upon the rest of the relationships within the supply chain.

Kwon and Suh (2004, p. 4) for example note that trust fosters commitment. They also note that there is a significant lack of empirical study that addresses the relationship between trust and commitment within the supply chain, whereas theoretical writing on the topic is numerous. Once again, these issues cannot be separated from the logistics of the supply chain, and the authors indicate that asset investments positively correlate with the level of trust in a supply chain partner.

Indeed, Johnston et al. also note that trust cannot and does not occur in isolation. It is itself influenced by several factors an in turn influences other factors within the supply chain relationship. Autry and Colicic (2009: 87) corroborate that there is only limited literature available that addresses the specific supply chain relationship among the various parties operating within it. This shortcoming must be addressed in the interest of better business practices within the supply chain management sector.

This study intends to devise methods to more fully understand the significant gaps in the literature, as surrounding supply chain issues and the specific problems related to it. While the it field has received some investigation in terms of its contribution to process efficiency, its link to transaction velocity and accuracy, as well as the quantification of trust remains problematic (Kishore, Agrawal, Rao, 2005). It is not difficult to understand why this is so, particularly in the case of trust. Trust, being an interpersonal paradigm, defies quantification as an operational variable (Yeh, 2008).

However, it does remain crucial to develop a framework for defining the interrelationships of supplier performance in conjunction with accumulated process maturity. The need for the quick deployment of contract management, pricing, catalogs and the rapid deployment of customer segment specific content is rather the merit of an agile supply chain integration strategy than of the structure of contracts and Service Level Agreements (Le, Rao, Truong, 2004).

Thus, consortia exchanges in the private sector and Sector Collaboratives in the public sector (Oliveira, Amorim, 2001) must then both create an integrated platform for procurement. Support for direct and indirect procurement is then often defined from the requirements of the Transaction Phase and Post-Transaction Phase. The Transaction Phase includes elements such as electronic catalogs, electronic requisitioning, electronic order placement, online access to supplier inventory information, electronic invoice payment, and online order status. Of these electronically-based applications, the most critical is online order status. It provides both members of the Procurement Collaborative and the actual customers with critically important information regarding the shipment and arrival velocity of a given medication or treatment.

In the Post-Transaction Phase of the development and integration of suppliers into a Procurement Collaborative, the ability to generate a range of summary reports create integration links to ERP systems so that inter-process integration can be achieved more effectively as well. ERP integration is also critically important for measuring the transaction accuracies and velocities that are attributed to higher levels of knowledge and therefore trust growing over time (ELSamen, Chakraborty, Frankwick, 2006).

When both sets of factors within each phase are taken into account, from the Transaction Phase to the Post-Transaction Phase, it is evident that even the most advanced supply chain strategies may fail to capture the agility of a given Procurement Collaborative to gain competitive agility and strength as a result of accumulated learning, and with it, trust over time (Dyer, Nobeoka, 2000). It is therefore vital to supplement existing research with newly created models to analyze not only the effectiveness of visible elements within the supply change, but also those elements that cannot be seen or readily quantified. It is often these very elements that provide the basis of effectiveness for a supply chain, as well as its applicability in the business world today. For business models to succeed, a healthy supply chain must be cultivated and maintained. This can only be done by means of thorough investigation into the issues that surround its effectiveness, especially where current literature leaves a gap in the collective knowledge.

4.

Methodology

The methodology is initially focused upon building a sound theoretical basis for later practical study. The dynamics inherent in the Sector Procurement Framework will be investigated by taking into account a sufficiently wide spectrum of key performance indicators (KPIs) and metrics.

In order to accomplish this, a Sector Procurement Framework is proposed, of which the theoretical structural soundness from a causality standpoint is to be evaluated by means of correlation the strength or weakness of the supplier and supply chain alliance's ability to nurture and develop a change in velocity of transactions over time at a statistically significant level. Specifically, elements in the Framework include such factors as trust, efficiency, consistency and predictability, as well as knowledge sharing issues and how these collaborate within the supplier and customer relationship.

The figures obtained can then be interpreted from inventory turns at suppliers and transactions completed by Sector Procurement Collaborative Networks. Inter-supplier and intra-supplier communication will be measured by evaluating the on-boarding process of new suppliers. In this way, foundational elements are defined and relative levels of performance can be the next focus of assessment.

The methodology will also include the creation of a series of econometric models. Several studies have indicated the merits of this method in terms of the accurate analysis of award-based supplier management for statistical relevance (Chen, 2008). Some of these include the Buyer Survey Model by Nyage, Whipple and Lynch (2009, p. 108), the conceptual model by Kwon and Suh (2004), and the Relationship Strength Performance Spiral proposed by Autry and Colicic (2009, p. 90).