Supplier behaviour, trust, and opportunism in procurement management

Procurement and Supplier Management: Potential Behavior and Trust of Suppliers

The objective of this study is to examine procurement and supplier management and the potential behavior and trust of suppliers and to discuss this in light of current academic debates and provide practical illustrations to support the answer. The work of Chen, Paulraj and Lado (2004) entitled "Strategic Purchasing, Supply Management and Firm Performance" states of purchasing that it has "increasingly assumed a pivotal strategic role in supply-chain management." (p.505) There has been a great deal of discussion about the level of trust needed in the relationship between suppliers and purchasers and authors writing in this area of study began noting in the 1990s that a shift in paradigm was taking place in the area of procurement pushing strategic purchasing to the forefront of academic research. Now more than ever purchasing strategies are critical in the organization's bottom line. Trust among suppliers and purchasers will be examined in depth in this study.

Background

It has been documented by researchers how "strategic purchasing actively participates in corporate planning process, facilitates beneficial organization-environment alignment, and fosters cross-functional integration among supply-chain activities, among other things. Moreover, purchasing plays a key liaison role between external suppliers and internal organizational customers in creating and delivering value to external customers." (Chen, Paulraj, and Lado, 2004, p.505) Sheth, and Sharma reported in 1997 that the increasingly "turbulence in the marketplace" had made it clear that firms would be required to make a transition from "transaction oriented marketing strategies and move toward relationship-oriented marketing strategies for enhanced performance." (p.91) In fact, it was predicted that the source of competitive advantage in the next generation would be "the type of relationships that firms have with their suppliers" citing four reasons for this: (1) This change is being driven by marketers or sellers since firms have started customer-specific identification and needs and are catering to those needs meaning that a relationship with suppliers assists the firm to receive higher grade service and to be more efficient in the area of procurement; (2) secondly, firms will begin to recognize that relationships with suppliers will enable them in a higher level of effectiveness making it easier to implement strategies including quality platforms where the firm has relationships with their suppliers; (3) Third stated is that there are enabling technologies that assists the firms in selection of the best suppliers and customers enabled by computer programs that give firms the capability of calculating profitability of specific customers and suppliers; and (4) Fourth stated is that the "competition and growth of alliances will force firms to develop better supplier relationships to maintain a competitive edge." (Sheth, and Sharma, 1997, p.92)

The work of Spekman, Kamauff, and Myhr (1998) reported that a new era had been entered in the "understanding of the dynamics of competitive advantage and the role played by procurement," stating that suppliers and customers are no longer "managed in isolation, each treated as an independent entity." (p.630) Likewise in 1997 the work of Dyer and Chu reported that the issue of trust "in economic exchanges has recently received considerable attention in the academic literature. Trust in exchange relationships have been hypothesized to be a valuable economic asset because it has been described as an important antecedent to effective interorganizational collaboration." (p.1)

Trust is stated to: (1) result in lower transactions costs and enable greater flexibility in the response to changing market conditions; and (2) result in higher levels of information sharing which will serve to bring about improvement in coordination and joint efforts resulting in inefficiencies being minimized. Dyer and Chu, 1997, paraphrased)

I. Supplier Selection

The work of Beil (2009) states that supplier selection "is the process by which ?rms identify, evaluate, and contract with suppliers. The supplier selection process deploys a tremendous amount of a ?rm's financial resources. In return, ?rms expect signi-can't bene-ts from contracting with suppliers o-ering high value." (p.1) The U.S. manufacturer is reported to spend "roughly half its revenue to purchase goods and services. This makes a company's success dependent on their interactions with suppliers." (Beil, 2009, p.1) The role of procurement managers within the organization has grown in importance and according to Beil "often involving staggering dollar values: A recent cross-industry survey of companies -- in areas ranging from aerospace to semiconductors -- placed companies' average total spend per procurement employee at $115 million." (Beil, 2009, p.1) Buyers are required to define and measure what it is that "best value means for the buying organizations, and execute procurement decisions accordingly.' (Beil, 2009, p.2) The buyer is required to "interface with technical, legal and operations experts within the buyer's company and act as an expert negotiator and coordinator across many internal and external parties." (Beil, 2009, p.2)

II. New Suppliers Importance

There are reported to be several reasons that new suppliers are important. Stated first is that there may be new suppliers that are in some way "superior…to a firm's existing suppliers." (Beil, 2009, p.3) A new supplier might have developed a "novel production technology or streamlined process which allows it to significantly reduce its production costs relative to predominate production technology or processes. Or, a new supplier may have a structural cost advantage over existing suppliers, for example, due to low labor costs or favorable import/export regulations in its home country. Second, existing suppliers may go out of business, or their costs may be increasing. Third, the buyer may need additional suppliers simply to drive competition, reduce supply disruption risks, or meet other business objectives such as supplier diversity." (Beil, 2009, p.3)

III. Reasons for Screening Suppliers

Beil (2009) states that it is challenging to find a new supplier primarily because of the "need to verify the suppliers ability to meet the buyer's myriad requirements." (p.4) Beil states that supplier non-performance "on even the most basic level and for the most simple commodity; can have dire consequences for the buyer…" (2009, p.4) Beil (2009) states to emphasize this point to consider the buyer in the following nursery rhyme:

For want of a nail, the shoe was lost. For want of a shoe, the horse was lost.

For want of a horse, the rider was lost. For want of a rider, the battle was lost.

For want of a battle, the kingdom was lost. And all for the want of a horseshoe nail. (Beil, 2009, p.4)

This nursery rhyme 'for want of a nail' is a message stated by Beil to be such that "holds a surprising degree of relevance for today's complex, global supply chains. Boeing's 787 Dreamliner production schedule was signi-cantly a-ected by shortages of fasteners, essentially bolts that secure sections of the fuselage together. (2009, p.4) Included in the screening of new suppliers are such as: (1) reference checks; (2) financial status checks; (3) surge capacity availability; (4) indications of supplier quality; (5) ability to meet specifications; and (6) buy-in from internal customers. (Beil, 2009, p.5) However, the qualification processes for suppliers are "costly and can be time-consuming." (Beil, 2009, p.6) Qualification times can be weeks or even months and this includes for commodity-type parts such as printed circuit boards. (Beil, 2009, p.6) After identifying potential suppliers, the buyer makes information requests to the suppliers, which may include the following:

(1) Request For Information (RFI) is issued when the buyer seeks to gain market intelligence regarding what alternatives and possibilities are available to meet the buyer's needs buyer will eventually issue an RFP or RFQ,

(2) Request For Proposal (RFP) is issued when the buyer has a sense of the marketplace and has a statement of work which contains a set of "performance" requirements which it needs ful-lled.

(3) Request For Quote (RFQ) is issued when the buyer can develop a statement of work that states the exact speci-cations of the good or service needed. (Beil, 2009, p.6)

IV. Avoiding Fraud and Corruption

Deloitte reports on the prevention of fraud and corruption on procurement practices and states the following are red flags to watch out for: (1) record keeping is poor or non-existent; (2) higher price and lower quality goods; (3) excessive entertaining of procurement staff by suppliers; (4) deviations in communications between procurement staff and suppliers such as calls or text-messaging to mobile phones; (6) procurement staff requiring extended periods of notice prior to an audit taking place; and (7) inexperienced buyers dealing with overbearing suppliers. (nd, p.1) Also necessary to monitor for fraud and corruption are: (1) 'Out of hours' transactions; (2) Matching employee and vendor details; (3) Short-term changes to employee or supplier accounts; (4) Inappropriate authority to transact deals; (5) Conflicts of interest; and (6) EFT Transactions conducted without the appropriate approval. (Deliotte, nd, p.1)

In order to avoid fraud and corruption in procurement it is necessary that the organization develop the right culture and this makes the understanding of "country-specific codes of conduct and ethics policies" particularly important. Secondly, hiring the right people will enable the organization to avoid fraud and corruption in procurement as well assessing the organization's internal controls and actively monitoring those controls. The organization should develop a fraud response plan and should carefully check out any potential suppliers to ensure that their manufacturers are adhering to all pertinent laws and regulations. It is important to make sure the supplier has the capacity required as well.

V. E-Procurement

E-procurement or B2B (business-to-business) is "grounded in the strategic leveraging of both tangible/intangible assets for successful implementation and execution of electronic trade, resulting in significant financial benefits for firms." (Smith and Flanegin, 2004, p.176) Phillips and Piotrowicz (2006) reports that the procurement process "has traditionally involved slow manual procedures and even slower systematic processes for handling procurement transactions. E-procurement has had an increasingly important role in business-to-business commerce." (p.4) Web-enabled B2B e-commerce is reported to be such that "enhances inter-organizational coordination resulting in transaction cost savings and competitive sourcing opportunities for the buyer organization." (Phillips and Piotrowicz, 2006, p.4)

It is important that supply managers understands the effect of technology and that they gain in their competencies toward business e-procurement. (Phillips and Piotrowicz, 2006. paraphrased) Inter-organizational systems including electronic data interchange (EDI) and internet-based extranets serve to enable "new types of collaborative alliances between separate trading partners. These new relationship could change from hierarchical to market. Understanding how to best leverage the benefits from these IT-enabled alliances may mean the difference between industry dominance and industry exit." (Phillips and Piotrowicz, 2006, p.5) The use of e-commerce solutions and their effect on procurement-related processes are reported by companies to result in the benefits shown in the following table labeled Figure 1.

Figure 1 - Benefits from E-Procurement Processes

Cost Reduction

Croom and Johnston (2003); Davila et al. (2003); Lin and Hseih (2000), Radovilsky and Hedge (2004) Subramaniam and Shaw (2002)

Reduction in Purchasing Cycle/Order Time

Davila et al. 2003, Lin and Hsieh 2000,

Radovilsky and Hedge (2004)

Reduction in Number of Suppliers

Davila, et al. (2003)

Increase in the number of products supplied by main suppliers

Muffatto and Payaro (2004)

Inventory savings

Subramaniam and Shaw 2002

Reduction of purchasing prices

Davila et al. (2003)

Source: Phillips and Piotrowicz (2006)

Smith and Flanegin report that strategic leveraging of e-procurement and Enterprise Resource Planning (ERP) has "…become a major target for such productivity gains, if properly integrated into existing systems. In 2001, North America occupied 66% of the ERP market, Europe took 22%, and the whole of Asia was 9%. As more and more companies strive to gain a competitive advantage, e-procurement and ERP implementation are the strategies of choice. (2004, p. 178) The primary elements of an automatic identification system in e-procurement technologies include: (1) the physical object; (2) code; (3) reader; (4) computer hardware; (5) software; (6) display or printer; and (7) personnel. (Smith and Flanegin, 2004, p.179) This type of technology makes the processes of procurement transparent and reduces the possibility of fraud and increases the level of trust between suppliers and buyers.

The work of Kwon (2004) reports on factors that affect the level of trust and commitment in supply chain relationships and states Trust is a critical factor fostering commitment among supply chain partners. The presence of trust improves measurably the chance of successful supply chain performance. A lack of trust among supply chain partners often results in inefficient and ineffective performance as the transaction costs (verification, inspections and certifications of their trading partners) mount." (p. 4) Kwon additionally states "Successful supply chain performance is based on a high level of trust and a strong commitment among supply chain partners. Effective supply chain planning based on shared information and trust among partners is an essential requirement for successful supply chain management." (2004, p.5) According to Kwon (2004), "A lack of trust among trading partners often creates a condition where every transaction has to be scrutinized and verified, thereby increasing the transaction costs to an unacceptably high level. Productivity is lost and efficiency and effectiveness, cornerstones of supply chain goals, will be compromised. Creating value-added activities with such partners becomes almost impossible and the supply chain tools used to improve efficiency, effectiveness and productivity (such as vendor managed inventory (VMI), cross-docking (CD), and collaborative forecasting, planning and replenishment (CFPR)) eventually become ineffective." (p.5) The outcome of trust is the belief of the firm that the other company will "perform actions that will result in positive outcomes for the firm as well as not take unexpected actions that result in negative outcomes." (Kwon, 2004, p.6) The work of Kwon relates the factors affecting the level of trust and commitment in supply chain relationships and states that they include those shown in the following illustration in figure 4.