Manage suppliers

Learner Guide: TLIR5014

Manage suppliers

TLIR5014 LEARNER GUIDE 2 | P a g e Version 2.5

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Version No. Date Dept. Change

1.0 06/06/2016 Training Original

2.0 06/06/2016 Training Updated content

2.5 18/11/2016 Training Updated content

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© Copyright National Training

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Contents

TLIR5014 Unit Description ...................................................................................................................... 5

Application of Unit .................................................................................................................................. 5

Element and Performance Criteria ......................................................................................................... 5

Performance Evidence ............................................................................................................................ 6

Knowledge Evidence ............................................................................................................................... 6

Manage Suppliers Introduction .............................................................................................................. 7

Role of Supply or Contract Manager....................................................................................................... 7

Contract Management Plan .................................................................................................................... 8

Probity Check.......................................................................................................................................... 8

Section 1 Assess Suppliers and Build Productive Relationship ..............................................................9

Be Trustworthy with Suppliers ............................................................................................................... 9

Care about the Other Person .................................................................................................................. 9

Commit to Excellence in Your Process .................................................................................................. 10

Use Adventure to Grow a Relationship ................................................................................................ 10

Be Honest and Trustworthy in All Discussions ...................................................................................... 10

Financial Viability Must Be Considered ................................................................................................. 11

Terms and Conditions of Supply ........................................................................................................... 11

Policy and Procedures Review .............................................................................................................. 11

Have a Firm Knowledge of Your Suppliers ............................................................................................ 11

What is ‘KEIRETSU’?.............................................................................................................................. 12

Section 2 Evaluate Delivery of Goods and/or Services against Agreements ........................................ 13

Establish Performance Indicators ......................................................................................................... 13

Possible Numeric Ranking System ........................................................................................................ 14

Classify Multiple Suppliers and Vendors ............................................................................................... 15

Develop an Evaluation Method ............................................................................................................ 15

Maintain Good Relationships ............................................................................................................... 16

Decide When to Issue a Warning or Red Flag ....................................................................................... 16

Remove Poor Suppliers......................................................................................................................... 17

Monitoring by Customers a Good Process ........................................................................................... 17

Independent 3rd Party Monitoring....................................................................................................... 17

Section 3 – Negotiate Arrangements with Suppliers .......................................................................... 18

Manage Your Time in Negotiation ........................................................................................................ 18

Prepare Open Questions ...................................................................................................................... 18

Design a Strategy Route Map ............................................................................................................... 19

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Consider Style & Personality ................................................................................................................. 19

Define Your Targets .............................................................................................................................. 19

List Your Tactics .................................................................................................................................... 20

Rehearse Your Opening Statement ...................................................................................................... 20

Section 4 Resolve Disagreements or Conflict with Suppliers .............................................................. 21

Move from ‘Arm’s length’ deals to Alliance Relationships ................................................................... 21

Trust in the Relationship ....................................................................................................................... 22

Fail to Supply ........................................................................................................................................ 22

Model of Buyer Supplier Conflict .......................................................................................................... 23

Government Legislation ....................................................................................................................... 24

Competition and Consumer Act ........................................................................................................... 24

Fair Trading Laws in Your State or Territory ......................................................................................... 24

Laws Affecting International Contracts ................................................................................................ 24

Code of Practice.................................................................................................................................... 25

Section 5 – Review Performance of Suppliers .................................................................................... 26

The Auto Industry Comments ............................................................................................................... 26

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TLIR5014 Unit Description

Application of Unit

This unit involves the skills and knowledge required to manage suppliers in various contexts within the transport and logistics industry.

It includes assessing and building productive relationships with suppliers, and evaluating the delivery of goods/services against agreements. It also includes negotiating arrangements, resolving disagreements with suppliers and reviewing supplier performance.

The unit generally applies to those who lead individuals or teams.

No licensing, legislative or certification requirements apply to this unit at the time of publication.

Element and Performance Criteria

1. Assess suppliers and build productive relationships

1.1 Criteria to effectively evaluate supplier services are developed and documented

1.2 Existing suppliers are assessed against criteria 1.3 Availability and suitability of alternate suppliers who can meet the service

support requirements within legislative requirements are identified 1.4 Terms and conditions of suppliers to achieve service requirements are

established and communicated 1.5 Cooperative relationships are developed with suppliers in accordance with

organisational policies and procedures

2. Evaluate delivery of goods and/or services against agreements

2.1 Quality of goods and services supplied is assessed against criteria 2.2 Non-compliance is identified, documented and corrective action is

implemented within the terms of contractual arrangements 2.3 Contingency plans are developed should suppliers fail to deliver 2.4 Relationships with suppliers are managed to support effective delivery

3. Negotiate arrangements with suppliers

3.1 Arrangements with suppliers are negotiated and implemented in accordance with organisational policies and procedures

3.2 Market factors that may affect the supply of goods and services are identified and communicated to relevant personnel

3.3 Immediate corrective action is taken in consultation with suppliers where potential or actual problems are indicated

4. Resolve disagreements with suppliers

4.1 Disagreements with suppliers are investigated to identify validity and causes 4.2 Disagreements are negotiated and resolved 4.3 Amendments to agreements, as a consequence of the resolution of

disagreements, are documented 4.4 Approval is sought and obtained for amendments 4.5 Approved amendments are communicated to suppliers and relevant

personnel 5. Review performance of suppliers

5.1 Suppliers are continuously reviewed for quality, profitability, service, delivery status and other relevant performance indicators

5.2 Supplier performance is evaluated against purchasing agreement requirements

5.3 Suppliers are informed of evaluation outcomes as required 5.4 Recommendations about future use of suppliers are made to relevant

personnel 5.5 Suppliers are deleted from supplier shortlist according to criteria

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Performance Evidence

Evidence of the ability to:

 applying relevant legislation and workplace procedures  communicating and working effectively with others when managing suppliers  completing documentation related to work activities  implementing contingency plans  modifying activities depending on operational contingencies, risk situations and environments  monitoring and prioritising work activities in terms of planned schedule  operating electronic communications equipment to required protocol  reading and interpreting instructions, procedures, information and signs relevant to managing

suppliers  reporting and/or rectifying identified problems, faults or malfunctions promptly, in accordance

with regulatory requirements and workplace procedures  sourcing, managing, evaluating and reviewing suppliers.

Knowledge Evidence

To complete the unit requirements safely and effectively, the individual must:

 code of practice for working collaboratively with others  common use arrangements  contract performance and dispute policies and procedures  financial accountability requirements  operation of recording, reporting and statistical analysis systems and resources  organisational policies, procedures, plans, guidelines and code of conduct relevant to

procurement and supply contracts  organisational procedures for monitoring the performance of suppliers  probity requirements and ethical issues  procedures for operating electronic communications equipment  procedures for receipt and payment of goods and services  procurement approval procedures  relevant sections of national and state/territory regulatory requirements and codes of practice

related to procurement  requirements for completing relevant documentation  steps involved in planning the work activities  suppliers in the marketplace.

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Manage Suppliers Introduction

It makes no difference what business you are in, suppliers and vendors play a key role in a company’s success. Having a formalised system in place to track and evaluate supplier and vendor performance is essential to the smooth operation and profitability of the company.

Successful companies embrace their suppliers and vendors, viewing them as partners in helping to grow the business. Making sure that this is a mutually beneficial partnership will impact the price you are negotiating today and the quality of service you get in future. If a supplier/vendor is a key part or service to your operation invite that supplier or vendor to strategic meetings that involve the product they sell. A common mistake companies make is to have a combative relationship with their suppliers and vendors.

Who manages suppliers in the organisation?

In a small company the owner of the business will probably manage and negotiate with all suppliers in both a formal and informal manner. In a medium sized business, a nominated person or group of persons will be responsible for managing all purchasing and supplier relationships.

In government at all levels, the process could be handled at multiple levels by multiple departments. Managers of government departments will have government credit cards to allow a purchased up to $25,000 while a government Ministers may have a level of $50,000 or similar credit card authority levels. All government departments will have a group of persons responsible for purchasing and tendering or contracting purposes. These persons may be referred to as a purchasing officer, procurement analyst, and supply officer, item clerk, buying manager, supply manager or contract manager.

Large mining companies may have a procurement department or supply department that covers a large region such as the Asia Pacific basin. With the internet and reliable communication and lower labour cost in third level countries, this is becoming a common occurrence.

Role of Supply or Contract Manager

The supply or contract manager is responsible for ensuring that the contracted goods and/or services are delivered in accordance with the specification and the terms of the contract, that all associated risks are identified and managed and that effective communication is maintained between all parties. The supply or contract manager is also required to make arrangements for the routine contract with the supplier, administration functions, such as processing requests for variation to the contract, handling bank guarantees and security deposits and processing claims for payment supported by invoices and receiving documents. Processes will vary with different organisations.

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Contract Management Plan

A contract management plan contains all of the key information about how the contract should be managed. A contract management plan is an essential tool in the proper management of contracts. The contract manager should regularly refer to the contract management plan and should ensure that the plan is amended if the circumstances change. Like all plans, it should be a living document that changes to reflect any changes in circumstances during the operation of the contract.

The contract management plan should initially be developed during the procurement or project planning phase. It is usually further developed and refined during contract formation activities and may continue to be modified throughout the period of the contract to reflect changes of circumstances. Contracts may be for short, medium and long term timeframes.

Probity Check

The buyer of goods or services should perform a probity check that investigates the background of an organisation (company or other corporate body) or individual to determine their fitness to undertake a specified activity for which authorisation is required.

Probity checks investigate the previous history and activities of organisations and individuals, especially but not only in respect of financial records and legal involvements. The nature and detail of information required for probity checks varies according to legislative requirements and the type of activity for which authorisation is required.

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Section 1 Assess Suppliers and Build Productive Relationship Most work environments require interacting with others. Some people view these interactions as separate events while others view them as enriching, ongoing relationships. The truth is you get out of your work relationships what you put into them.

There are four key behavior traits that contribute to building strong relationships. You need to be trustworthy, care about the other person, be committed to excellence in your performance, bond through adventure and be trustworthy.

Let’s look at each of these in more detail.

Be Trustworthy with Suppliers

It is important for you to do what you say. When you commit to something others listen and then watch. They want to know if you can be trusted to deliver on your commitment or will you dismiss it. When delivering something will you deliver it as requested and on time or will it be incomplete or late.

Others also want to know if you are going to attempt personal gain at their expense. They will watch how you go about getting things you want, looking for methods or actions that take advantage of others. Even if they are not involved, it will be a tell-tale sign that they need to watch their back when working with you.

Care about the Other Person

People want to know if you care about them as a person or see them as an object or a means to an end. No one wants to be viewed as a resource for someone else’s consumption. They want to be known as a unique individual with life experiences, emotions, and a choice in their work demands. Showing someone you care about them requires showing respect regardless of their position in the company and gaining general knowledge of who they are and what they like and dislike.

In practice, this means scheduling a meeting or conversation instead of just dropping in or calling. Schedule in advance so you do not interrupt an ongoing conversation or politely wait and then ask if it is a good time to chat. Before you discuss any business discussions ask them about their personal life.

When you are first building the relationship, ask general questions about their past and current experiences. Topics could include family, hobbies, vacations, pets, past jobs, etc. As time goes on, you can ask more specifics questions, but wait until you sense trust developing between the two of you.

Another way to show you care is to reflect back the information you receive. If Sally tells you she has a big holiday starting tomorrow, then make sure you ask her about it the next time you see her. If Bill tells you his dog died, don’t forget about it and then ask him if he took his dog to the park a few weeks later. This is all part of caring for the other person.

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Commit to Excellence in Your Process

Very few people like to work with low performers. You can’t help but get a little upset from someone else’s deficiencies and poor results. Working with a person who is a low performer requires twice the effort and time of a competent worker.

This is why your work attitude and quality of work affects your work relationships. Committing to excellence means showing initiative and not waiting for someone else to point work out to you.

Having a can-do attitude signals you are not afraid of a challenge and that you will carry your weight when times get tough. Remember to be thorough and complete when you declare something finished. This will not only make you pleasant to work with, but it will also inspire others to follow your commitment to excellence.

Use Adventure to Grow a Relationship

Adventures are not all good or all bad; they are a mixture of both. In a work environment, they are always experienced with a group of people and have a general beginning and end. Adventures never kill us nor take us to nirvana and they usually have a central theme. In our personal lives, adventures may be vacations, kid’s sports teams, neighborhoods, community efforts, etc.

In work environments, they may be projects, departments in transition, recessions, building moves, working with a very difficult person, etc. Adventures almost always develop deeper bonds because they are shared experiences that we get to survive together, laugh and cry about, reminisce about, and to some extent relive the emotions again.

Be Honest and Trustworthy in All Discussions

This sounds basic, but it goes beyond not lying to your customers and employees. It’s about owning a mistake when you make a mistake or mess up and admitting when you’re wrong. It’s also about refusing to pretend that you’re something you’re not. It requires acknowledging the state of the business to your employees and to customers.

It requires selling only what you can deliver effectively and always living up to your word. Done properly, this kind of honesty begets a tremendous amount of loyalty from both customers and employees. Both groups know they can trust you and more importantly, that you value the integrity of the relationship.

Asking who benefits from business honesty can explain why virtue is also important. Examining the negative effects of dishonest business practices provides insight into the importance of honesty. In fact, it is as helpful as looking at the benefits of business honesty. Doing what is ethical because it is the right thing to do is as essential as practicing ethical behaviour for the positive consequences

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Financial Viability Must Be Considered

Big companies can get into financial difficulties as quickly as small companies. When selecting a supplier for the organisation you need to determine if the supplier will be in business in both the short and long terms of the supply arrangements. With some commodities, there may be a number of alternative suppliers that can fill in the supply gap. It the product is a specialised product or one that is a specialised manufacturer or supplier, financial viability is a key decision to make. The process may be to have an accountant’s opinion or and external credit agency provide an opinion on their financial viability.

Terms and Conditions of Supply

As a Purchasing person, you will need to determine the required terms and conditions of purchase. These organisation’s trading terms are usually printed on the back of a purchase order and covers most legal aspects of supply.

In contracts for major works the tender documents will set the terms and conditions that the buyer organisation requires. These conditions are used if there is a dispute for a delivery problem or issue.

Payment terms are mostly 30 or 60 days from date of purchase while delivery timeframes will usually set a date such as 25 November or seven (7) days from date of purchase. For purchased overseas the lead time or delivery time will be longer compared to a local supply and delivery.

Policy and Procedures Review

As part of selecting a supplier the purchasing officer should ensure that the supplier has policy and procedures to cover their business operations. This should include legislation requirements, insurances, customer service, quality control and other processes covering their operations.

Have a Firm Knowledge of Your Suppliers

Do you have good knowledge of your suppliers? It is important to have a wide range of knowledge and skills to be involved in purchasing and be aware of your business environment. Some suppliers’ operate under different business names but are all owned by a single parent company. An example is where there may be three suppliers of personal protective equipment (PPE) all trading under different names and addresses. When further investigation is done they are all owned by the same head office company.

If you are working on a larger or global purchasing environment such as a mining company, the purchasing department needs to be aware of the global structures of the supplier. The information about “keiretsu” in Japan is most interesting.

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What is ‘KEIRETSU’?

This is a Japanese term describing a loose conglomeration of firms sharing one or more common denominators. The companies don’t necessarily need to own equity in each other’s organisations.

Copyright © 1996 Zona Research Inc.

This term has been in the business news every now and then, especially when they talk about Silicon Valley. One example would be the close relationship between AOL (America on Line) and Sun Micro. The two firms don’t have ownership in each other, but they work closely on various projects.

Japan’s corporate governance system known as a “keiretsu’ dates back to the 1600s, but was propelled by the Japanese government’s newly formed Meiji Restoration in 1866 as the world entered the industrial revolution. These early corporate formations were termed “zaibatsu,” translated to English as monopoly.

Zaibatsu’s began as small, family-owned enterprises that formed in various Prefectures across Japan to specialize in the separate business needs of the nation. As Japan’s economy grew, zaibatsu grew to later form into holding companies.

When the U.S. rewrote the Japanese constitution after World War II, the United States and the Allies eliminated zaibatsu holding companies because of their undemocratic nature as monopolies, and Japanese governmental policies that perpetuated their existence.

Under a zaibatsu, the largest industrial groups allowed banks and trading companies to be the most powerful aspects of each of the cartels and sit at the top of an organizational chart. Banks and trading companies controlled all financial operations and the distribution of goods. The original founding families were in full control of all “Cartel” operations.

Typical of a Japanese horizontal keiretsu is Mitsubishi where the Bank of Tokyo-Mitsubishi sits at the top of the keiretsu. Also part of the core group is Mitsubishi Motors and Mitsubishi Trust and Banking followed by Meiji Mutual Life Insurance Company which provides insurance to all members of the keiretsu. Mitsubishi Shoji is the trading company for the Mitsubishi keiretsu. Their purpose of this structure is to manage the distribution of goods around the world.

As a person responsible for managing suppliers you need to understand relationship of your potential or current suppliers and who they may be linked to or not linked to. You may find that your current PPE

Physical

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Broadcast

Info Keiretsu Structure

Sofware and Hardware

Passive

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Content Delivery Consumption

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supplier will be linked to another PPE supplier although trading under different names. Within the hotel chains there are five hotel groups all in competition with each other and who trade under different trading names. The parent company is the Accor group. Their names are Mercure, Pullman, Formula 1 and others in their chain.

Section 2 Evaluate Delivery of Goods and/or Services against Agreements A lot of companies will actually have an adversarial relationship where they hire purchasing people who have on brass knuckles and try to beat up on suppliers or vendors to get better prices or trading terms. This is a very short sighted way to do business.

Instead of getting stuck on price, focus on quality of service or value adding. A supplier can have the lowest price and the lowest quality of work too. Your goal is understand what value-adding the supplier is bringing to the company. Your business should have a system in place for evaluating, selecting and benchmarking all suppliers. Here are some methods to effectively rate your suppliers and vendors, track their performance, and ultimately increase the company’s overall productivity.

Establish Performance Indicators

At the onset of the supplier relationship you have to determine what characteristics a vendor needs to have, demonstrate, or maintain to continue doing business with the company. Create specific performance criteria for tracking and evaluating your suppliers and vendors on a regular basis.

Considerations include the:

 size of the company  range of products provided  quality assured company  response time from initial

enquiry  trading terms and

conditions  financial stability  engineering or technical

advice  quality management

systems  transportation systems  technology including online ordering and payments  service / delivery  delivery in full on time

Your own processes and needs will dictate what criteria you apply. For a business owner who is looking for a shipping or transport company, the biggest concerns might revolve around what is that supplier’s on time delivery track record, how many trucks they own, how many accidents have their drivers reported, and what insurances do they hold.

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Possible Numeric Ranking System

The supplier with the highest points is better for the company compared to a supplier with a low number.

Range of products provided by supplier

A – Large company with 2500 products

B – Medium company with 1000 products

C – Small company with less than 200 products

Quality assured management system

10 point has ISO QA

8 points for Australian Standards QA

5. Has in house quality standards

0. Has no quality control systems

Suppliers response time from initial or other enquiry

10 points if response is in 4 hours

7 points if response is in 8 hours

5 points if response is in 24 hours

2 points if response is in 5 days

0 points if no response received

Trading terms and conditions 30 days credit – 10 points

14 days credit – 5 points

7 days credit – 2 points

Financial stability supported by financial reports

20 points for a financial report

10 points supported by a credit rating agency

5 points based on past trading history

0 points for no financial information

Engineering or technical advise

Depends on the industry requirements.

Manufacturing will have a different requirement compares to a café.

Delivery in full on time 10 points – delivery to requested timeframe

5 points is 4 hours late regularly

2 points if delivery is late consistently

Transportation systems and technology systems

10 points – trucks well maintained and fully equipped

8 points – trucks well maintained but not fully equipped

2 points – trucks not reliable or fully equipped

Drivers are trained 5 points for trained drivers

3 points for partially trained drivers

1 point for some training provided

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Online ordering and payment systems

5 points for payment and online ordering system

3 points for some systems

1 point for payment gateways

Transport availability 5 points for transport available on request

3 points for transport in 24 hours

1 point for transport in 48 plus hours

Product delivered damaged 1 point for 20% of deliveries have damage

5 points for 5% of deliveries have damage

10 points for 2% or less damage

A basic consideration for every business owner should be whether the supplier has management system in place. This doesn’t just apply to a particular industry but all industries.

Classify Multiple Suppliers and Vendors

If you have a huge number of suppliers and vendors and you intend to develop a survey to evaluate all of them, it will be cumbersome to apply the same survey to each and every one.

It is better to separate suppliers into levels (1, 2, and 3) based on how critical they are to the business. Decide the classification that is best for you and evaluate suppliers according to the effect they have on your product or service in order of importance. If you apply the Pareto principle 80% of your purchasing needs will come from 20% of your suppliers. Some will be critical to the business while others will not be critical.

An example of classification

Company Level of service Trained Staff Hourly rate

Plumber 1 Good history of service All staff qualified $70.00

Plumber 2 Poor level of service Some qualified and some in training

$65.00

Plumber 3 No knowledge of service provided. New company

Master plumber with trained staff $50.00 with a $15.00 call out fee.

From the information in the table the purchasing officer will need make an informed decision as to which plumber bests suits the organisations need.

Develop an Evaluation Method

There are common techniques for rating a supplier’s performance including evaluation forms, surveys, benchmarks, system metrics, and software applications.

Accounting systems can quickly provide reports of purchases from one or many suppliers in a month, a quarter or year.

 You can develop a survey where you ask your own employees to answer questions and rate suppliers and vendors. You can report to determine;

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 Accuracy with documentation  responsiveness to requested actions  how many products you had to scrap or return due to poor quality  how many products were not to specification  incorrect part or product supplier  how many internal or external customer complaints received  face to face evaluations  other important requirements

Your business may already have an analysis process to rank good from poor suppliers or vendors that works to achieve a desirable outcome.

Determine who is the Decision Maker?

Once you establish the criteria for evaluating suppliers and vendors, who in the company will be responsible for reviewing the data. It will depend on how many resources you have to dedicate to the evaluating process.

You may want to assign one person or a team with the task. For instance, selecting and evaluating level 1 or critical suppliers and vendors, might require the chief financial officer or someone from the finance department with accounting knowledge to do the analysis.

In small companies this may be the owner of the business to decide. With level 2 and 3 suppliers and vendors, it may be the purchasing or procurement officer who approves the supplier and monitors their performance. In both analysis, the end users should have input to the decision making process.

Maintain Good Relationships

Communicate often and openly with your suppliers and vendors as part of the team and treat them as such. Be upfront and transparent with suppliers and vendors and make sure they understand the needs of the business and expectations.

Using technology to communicate is great but don’t overlook the personal touch of a phone conversation or face to face meetings. Try to avoid supplier and vendor conflicts by paying your invoices on time or at least honestly addressing the reasons for a late payment of an invoice.

If your purchasing specification require two layers of bubble wrap or an extra layer of padding between each part in a carton so that there is no scratching and it’s not happening, advice the supplier and request that it happens with the packing process for your business. Discuss the level of detail requested so that your business is not disappointed when parts come in.

Decide When to Issue a Warning or Red Flag

As you monitor a supplier’s performance, you have to decide when to praise them and when to issue a warning or red flag. Show appreciation for a job well done and give a supplier additional business because of excellent performance. A poor or bad supplier will provide you with mediocre or poor

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products and services and could cause a problem with your business and your customers.

You can delete a supplier for poor performance but strategically it is better to retain your supplier or vendors and not to move around all of the time to replace them. By giving a warning, you give the supplier or vendor an opportunity to correct the problem and improve their level of service. Use data that you have collected such as on-time delivery, return rate and number of incorrect prices on invoices or applicable discounts.

The process is not just about reviewing your suppliers and deleting them but helping them to improve their performance and in turn help you.

Remove Poor Suppliers

No business or individual should tolerate poor or ongoing bad or poor service. There may come a time when you have to let go of an underperforming supplier or vendor. The price may be much lower with this suppler compared with a more expensive supplier but often there are some reasons as to why they are so low.

If they are not responsive to phone calls, suggested meetings, written complaints, digital pictures, quality reports or examples on where they are not performing, perhaps the only outcome is to remove them as a supplier.

The relationship with your supplier is a business partnership where both parties are working to make sure that the partnership is a success. It must be a win-win supplier and vendor relationship.

Monitoring by Customers a Good Process

If your business is in retail or you are a distributor of goods, not a consumer, a good approach is to monitor a supplier’s performance by regular feedback or following up of your customers. This approach can be most effective in gaining an accurate perception of the real quality of a supplier’s performance under actual service delivery conditions. However, it can be costly and time-consuming to apply.

Independent 3rd Party Monitoring

Independent third party monitoring can be performed directly, by giving the responsibility over to an external monitoring body, or indirectly through an accreditation process. In an accreditation process, service standards are set, reviewed and monitored normally through an independent body. This approach is often used by the community welfare sector.

Accreditation programs can be expensive for the business or third party to implement but is an effective way to ensure accuracy in a supplier’s performance. Potential costs incurred would need to be weighed against the potential benefits of accreditation to determine if this method of monitoring is the most appropriate for a contract.

The large mining companies in Australia have a supplier accreditation process where a supplier is required to provide a wide range of documentation or accreditation to be considered for a supply contract. The accreditation is revisited every two years to ensure its currency.

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Section 3 – Negotiate Arrangements with Suppliers Without adequately defining your supplier objectives and preparing for the negotiation, your chances of achieving your objectives in a negotiation are minimal. One of the things to stress is if you “fail to plan you will plan to fail”. This is an old cliché, but one with a strong correlation to negotiation results. Putting it another way, those who plan better do better.

Manage Your Time in Negotiation

A staggering two-thirds (62% percent) of the people questioned about preparing for a negotiation spent one hour or less preparing for a negotiation. Sixty-eight per cent admitted that better preparation for their last deal would have produced a better outcome. This information was supplied by Supply Chain Management UK.

Negotiation is a performance; it is during the planning phase that the stage is set and expectations managed. Effective negotiators envisage a far wider range of potential variables, openings and outcomes than the average negotiator.

They also spend more time considering areas of common interest between the parties. Average negotiators discuss item A then B, followed by C and D. If the business is in any other order, they are thrown off balance. Effective negotiators are able to discuss items in any order, enabling flexibility in their approach. When preparing for negotiations remember to:

 Consider the impact on the business.  Consider how attractive this business is to the other

party.  Select the location for the negotiation.  Plan the opening, testing and moving phases of the

negotiation  State assumptions.  List questions to test the assumptions.  Be creative – the longer and more creative the list

of variables, the more flexible your strategy will be.

Prepare Open Questions

Of those surveyed, only 1 per cent would typically prepare 20 ‘open’ questions for a negotiation, with 44 per cent relying on only 0-5 planned questions. Closed questions can be answered with “yes/no” or a short phrase, whereas open questions demand more information – for example, “Will you innovate for us?” versus “How will you innovate for us?”

If we ask open questions, it is difficult for the other party to evade and therefore puts the asker in a position of control. Many people believe that talking gives you control. In fact, it is the person asking the open questions and listening to the responses who will be in control.

If you talk too much and are under-prepared, the other party will put you on the spot with a well-chosen question. If you have planned properly, you will know what information you require and what assumptions you have made concerning you, your business and the other party. Proper use of questions allows you to check out all of this preparation before you move into the next phase of the negotiation.

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Design a Strategy Route Map

A negotiation has clear phases and these must be planned. Avoid entering one without having drawn up a careful map of the direction and destination of the meeting and any subsequent events. The route may not be completely sequential – you may have to backtrack – but at least you will be prepared. Skilled negotiators will be in a better position to manage time more effectively, which will result in delivery of a better deal.

A quarter thought that the other party was more prepared than the buyer, with 48 per cent saying that both parties were equally prepared. Our research, which was based on the responses of 90 delegates on our courses, would suggest that a lack of preparation and planning is putting the buyer’s questions in a weaker negotiation position before they even go in to do the deal.

Consider Style & Personality

Personality type, negotiating styles and interests are all key factors in building rapport and managing behaviour during a negotiation. It is important these areas are considered in the planning stage. The research found 43 percent ‘sometimes’ consider these aspects, and 4 per cent ‘never’ consider it.

It is important to be unpredictable within a negotiation to prevent the other party reading you too well. Maybe they are skilled and they will also be unpredictable. You need to prepare and plan for a plethora of tactics, approaches and questions because not all techniques will work all of the time on every one. So, when you’re planning, consider the responses the other party is likely to give.

Over half the people interviewed in the survey said that ‘mostly to always’ they consider the other party’s response. This will put them in control and help them deal with the unexpected that can sometimes arise during a negotiation.

Define Your Targets

Another part of the strategy should be setting well-defined targets for each issue or variable. The research showed that negotiators often lose sight of their objectives. Keep these in mind and set well- defined goals from the outset. If we don’t know where we are going, how will we know when we’ve arrived?

Setting objectives from ‘ideal’ and ‘realistic’ to ‘walk away’ is paramount.

It will help to control the extent to which you move from your ideal settlement point and to understand the cost implications of any movement.

Skilled negotiators know the specific objectives for each variable: what must they get? What might they achieve in an ideal world? And what is realistic? Make sure that the ideal is a stretching objective and that you have clear targets for each variable.

The longer and more creative your give and take list of variables, the more flexibility you will have in your negotiation. One recent study found 79 per cent either ‘always’ or ‘sometimes’ dedicated preparation time to getting their objectives clear.

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List

Your Tactics

There are more than 75 tactics that are used during negotiations. Some will work on certain personality types, but not on others. Skilled negotiators are unpredictable in their use of different approaches. If you continue to use a pattern of the same tactics in each negotiation, the other party will prepare to counter them next time. It is important, therefore, to list and carefully plan the tactics you will use in each negotiation.

Rehearse Your Opening Statement

A clear, well-defined and well-rehearsed opening statement is crucial. The first thing you say should condition the other party and manage their expectations.

Skilled negotiators rehearse their opening statement several times before entering the negotiating room. Rehearse and then ask yourself: “If I heard this statement would it encourage me to walk towards or away from my ideal objective?” This will help you check you’re managing the expectations of the other party positively towards your ideal.

The study showed that just 2.5 percent of people surveyed ‘always’ rehearsed their opening statement, with a huge 54 per cent ‘rarely’ or ‘never’ rehearsing. Without doubt, what you do or don’t do in preparation and planning will determine the outcome of all negotiations. The more you plan and prepare, the more efficient you will be as a negotiator.

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Section 4 Resolve Disagreements or Conflict with Suppliers In some businesses, a small conflict had ruined a relationship for life between the parties while in others the cost can be very large and very expensive to have conflict. In large construction projects, conflict between contractors can cost millions of dollars to settle or resolve, often through the legal process and possible settlement damages. This is a cost to both parties, the supplier and the receiver.

J. David Alewine of Fluor Corporation in his opening address at a USA conference covering conflict with suppliers and contractors advised the delegates that there are a number of areas where conflict can happen. He then talked about his experiences in Fluor, a multi-national construction company.

Every business or organisation, whether operated for profit or a not for profit business, must purchase goods or services to meet the needs of its customers, clients, and stakeholders.

As a result of the dynamics that occur in this process, the potential for buyer-supplier conflict is extremely high and is in fact a very common occurrence. Proper identification, assessment, and management of buyer-supplier conflict can lower the cost of conflict and improve the efficiency and effectiveness of the relationship or partnership.

The dollar costs associated with buyer and supplier conflict includes lost productivity, strained relationships, poor resource utilization, and unfulfilled potential of the joint business undertaken by the parties.

The model of buyer-supplier conflict presented to delegates at the conference consists of seven (7) distinct types of conflict.

They are;

 issue-specific  relational  task specific  process to be followed  structural  systemic and  environmental

The source for each event, the duration, ease of resolution, and impact on the alliance characterize each conflict type. Identifying and understanding a particular type of conflict is a prerequisite to resolving or managing it. Because each conflict type is different it must be addressed in a manner best suited to its resolution.

Move from ‘Arm’s length’ deals to Alliance Relationships

‘Arm’s length’ transactions are characterized by a minimal amount of interaction between the buyer and supplier. These transactions are generally rights based agreements, which are strictly governed by a document setting forth the rights of all the parties. Occasionally, one party has more power than the other and is in a position to dictate the terms of the agreement.

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The buyer and supplier both have a short-term perspective of the transaction. Both parties are primarily interested in meeting business obligations at the lowest possible cost and with the least amount of interference from the other party. In this type of transaction, only essential information is shared between the parties. The limited amount of communication that does exist between the parties is often used to determine if the other party is in compliance with the purchase order contractual obligations.

Trust in the Relationship

Trust is generally low in arm’s length transactions and there is little interest or incentive by the supplier to invest in specific assets that could serve the needs of both parties. There is little interdependence between the buyer and supplier except that which results from any power imbalance.

Competition among suppliers is seen as the best way to achieve lower prices, which is also the primary aim of buyers in these transactions. Frequent multiple bidding by buyers is the norm in the quest for the lowest price.

Conflict resolution in arm’s length transactions is a combination of rights and power based strategies. The rights stem from the purchase agreement itself, which clearly states the responsibilities and obligations of each party. If there is a breach of the agreement, the other party seeks compliance by coercion, which often takes the form of threats related to future business and adjudication of disputes. There is little incentive in rights based agreements for collaboration. If one supplier fails to perform, another will usually be waiting for the opportunity.

Fail to Supply

If one supplier fails to perform, another will usually be waiting for the opportunity of additional business. In alliance relationships there is more information sharing and communication. The parties are not as independent as before as each sees the other as important and necessary if it is to meet its own strategic and competitive goals.

A longer-term perspective replaces the short term outlook and power becomes less of a factor in dictating the terms of the agreement. All of these factors serve to build the trust and confidence necessary for the development of a cooperative buyer-supplier alliance.

Alliance relationships are characterized by open communication, information sharing, and joint risk taking. Buyers and suppliers are dependent on one another to meet individual and collective goals. Dependence is the result of having made an investment in the working relationship. The buyer and supplier are moving toward a longer-term perspective of their relationship and a strategic perspective regarding the goods being exchanged.

Both parties understand that identifying, assessing, and managing conflicts are long-term interests shared by each party. Success is a product of information sharing, shared expectations, and trust. The key to resolving conflict in an alliance is collaboration according to Patterson (1999).

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Model of Buyer Supplier Conflict

When people work together, conflict is often unavoidable because of differences in work goals and personal styles. Conflict must be understood as an opportunity to improve relationships with the supply community and our internal customers. Moreover it provides the impetus for an examination of policies, procedures and work processes throughout the supply chain.

We must develop organizations and supply chains that are conflict friendly in that they recognize conflict, its affects and how it can be managed.

The goal is to understand conflict and its basis in order to better resolve and manage it to the benefit of the entire supply chain.

Follow these guidelines for handling conflict in the workplace.

1. Talk with the other person o Ask the other person to name a time when it would be convenient to meet. o Arrange to meet in a place where you won’t be interrupted.

2. Focus on behaviour and events, not on personalities o Say “When this happens …” instead of “When you do …” o Describe a specific instance or event instead of generalizing.

3. Listen Carefully o Listen to what the other person is saying instead of getting ready to react. o Avoid interrupting the other person. o After the other person finishes speaking, rephrase what was said to make sure

you understand it. 4. Ask questions to clarify your understanding.

o Identify points of agreement and disagreement o Summarize the areas of agreement and disagreement. o Ask the other person if he or she agrees with your assessment. o Modify your assessment until both of you agree on the areas of conflict.

5. Prioritise the areas of conflict o Discuss which areas of conflict are most important to each of you to resolve.

6. Develop a plan to work on each conflict o Start with the most important conflict. o Focus on the future. o Set up future meeting times to continue your discussions.

7. Follow through on your plan o Stick with the discussions until you’ve worked through each area of conflict. o Maintain a collaborative, “let’s-work-out-a-solution” attitude.

8. Build on your success o Look for opportunities to point out progress. o Compliment the other person’s insights and achievements.

Congratulate each other when you make progress, even if it’s just a small step. Your hard work will pay off when scheduled discussions eventually give way to ongoing, friendly communication.

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Government Legislation

All purchasing officers or managers must comply with federal, state and local government legislation when selecting and negotiation with suppliers. If the item being purchased is an electrical item, then knowledge of the Electricity Act may be of assistance. If buying food stuffs then knowledge of the Foods legislation is a must. I

In all buying processes the buyer must be aware of work health and safety legislation (WHS 2011) to include fatigue, load restraint, chain of responsibility and relevant legislation for their industry.

Competition and Consumer Act

The main federal law covering consumers is the Competition and Consumer Act 2010 (CCA) ensures that all trading is fair for your business and your customers.

The CCA covers most aspects of the marketplace: dealings with suppliers, wholesalers, retailers, competitors and customers. It deals with unfair market practices, industry codes of practice, mergers and acquisitions of companies, product safety, collective bargaining, product labelling, price monitoring, and the regulation of industries such as telecommunications, gas, electricity and airports.

The Australian Competition and Consumer Commission (ACCC) administer the CCA. It promotes good business practices for a fair and efficient marketplace. For further information about federal competition, fair trading and consumer protection laws visit the ACCC website. Each State and Territory has similar or supporting legislation covering consumer protection.

Fair Trading Laws in Your State or Territory

Consumer protection is governed by state and territory laws (in the form of a Fair Trading Act in most cases). Familiarise yourself with the laws in your region.

See your state or territory fair trading offices for advice on business rights and obligations under fair trading laws. If you’re unsure how fair trading laws apply to your situation or job role, think about seeking independent legal advice.

Laws Affecting International Contracts

If your contract is with a hirer based in another country or some of the work will be done in another country, you may be required to comply with the laws of that country. Some international contracts specify which country’s laws will apply in deciding future disputes.

It is a good idea to consider including a clause like this so you don’t waste time and money deciding which court in which country will hear the dispute. You should bear in mind that should a dispute arise in relation to a contract that applies the law of another country, any claim you make in that country is likely to be very expensive for you.

Australia may also be a party to a free trade agreement with the country, which may impact on the

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contract. The law of other countries maybe different from Australian law in areas such as import procedures, taxation, employment practices, currency dealings, property rights, the protection of intellectual property and agency/distributorship arrangements.

It is strongly recommended that the buyer gets advice from a lawyer in the relevant country of purchase or Austrade. The Australian Government’s trade and investment development agency, has a number of overseas offices that can help you find a legal representative.

Code of Practice

Codes of Practice set out industry standards of conduct. They are guidelines for fair dealing between you and your customers, and let your customers know what your business agrees to do when dealing with them.

Codes of Practice can relate to a single business, or represent a whole industry. You can decide to establish your own Code of Practice, or to adopt an industry specific Code of Practice (in some cases this is mandatory).

Usually, Codes of Practice are established through consultation with industry representatives and the community. They can be mandatory or voluntary:

Mandatory codes provide a minimum standard of protection to the consumers. They are prescribed as regulations under fair trading laws and can be enforced. Voluntary codes are a form of industry self- regulation. They can be sponsored by an industry association or can be in partnership with a government agency (membership of an industry association is often a condition of the code). Voluntary industry codes are usually flexible and can be altered quickly in response to changing industry/consumer needs.

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Section 5 – Review Performance of Suppliers This information is a process where the Japanese auto manufacturers check the performance of their suppliers in America. More and more businesses are counting on their suppliers to lower costs, improve quality, and develop innovations faster than their competitors’ suppliers can meet.

The 100 biggest U.S. manufacturers spent 48 cents out of every dollar of sales in 2002 to buy materials, compared with 43 cents in 1996, according to Purchasing magazine’s estimates.

Most suppliers in the auto manufacturing industry believe that Toyota and Honda are their best and toughest customers to deal with. The two companies set high standards and expect their partners to rise to meet them. However, the carmakers help suppliers fulfil those expectations. Clearly, Toyota and Honda want to maximize profits, but not at the expense of their suppliers.

Toyota would help suppliers achieve cost reduction targets by making their manufacturing processes leaner, and because of Toyota’s tough love, they would become more competitive and more profitable in the future.

Honda, for instance, uses a report card to monitor its core suppliers, some of which may be even second- or third-tier vendors. Unlike most Fortune 1,000 companies, which send reports to suppliers annually or biannually, Honda sends reports to its suppliers’ top management every month.

A typical report has six (6) sections:

 Quality and non-conformance delivery  Delivery on time and date  Quantity delivered meets purchase order or delivery document  Performance history – are they consistent  Incident report – damage when delivered or wrong product  Comments about communications between parties.

The incident report section has a subcategory for quality and another for delivery.

The Auto Industry Comments

Honda uses the comments section to communicate how the supplier is doing. We’ve seen comments like “Keep up the good work” and “Please continue the effort; it is greatly appreciated.” Honda also uses this section to highlight problems. For instance, Honda will write, “Label errors recorded on [part description and number]. Countermeasures presented weren’t adequate.”

So how do Toyota and Honda do it? The authors, who have studied the American and Japanese automobile industries for more than 20 years, found that Toyota and Honda have built great supplier relationships by following six steps.

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1. They understand how their suppliers work. 2. They turn supplier rivalry into opportunity 3. Third, they monitor vendors closely 4. Fourth, they develop those vendors’ capabilities 5. They share information intensively but selectively. 6. They help their vendors continually improve their processes.

Some U.S. auto corporations created supply chains that superficially resembled those of their Japanese competitors, but they didn’t alter the nature of their relationships with suppliers. As a result, relations between U.S. auto manufacturers and their suppliers have sunk to the lowest levels in decades.

In the U.S. automobile industry, for instance, Ford uses online reverse auctions to get the lowest prices for components. General Motors writes contracts that allow it to shift to a less expensive supplier at a moment’s notice. Chrysler tried to build a keiretsu model but the process unraveled after Daimler took over the company in 1998.

Not surprisingly, the Big Three US auto manufacturers have been more or less at war with their suppliers. Having witnessed the American automakers’ abject failure to create keiretsu models, most Western companies doubt they can replicate the model outside the culture and society of Japan. While U.S. automakers take two to three years to design new cars, Toyota and Honda have consistently been able to do so in just 12 to 18 months.

Honda expects its core suppliers to meet all their targets on metrics like quality and delivery. If a vendor misses a target, the company reacts immediately. In early 1998, a tier-one supplier didn’t meet an on- time-delivery target. Within hours of missing its deadline, the vendor came under intense scrutiny from Honda. It had to explain to the manufacturer how it would try to find the causes, how long that might take, and the possible measures it would employ to rectify the situation. Until it did that, the supplier had to promise to add extra shifts at its own cost to expedite order delivery.

Both Toyota and Honda teach suppliers to take every problem seriously and to use problem-solving methodologies that uncover root causes. If suppliers aren’t able to identify the causes, the manufacturers immediately send teams to help them. The manufacturers’ engineers will facilitate the troubleshooting process, but the suppliers’ engineers must execute the changes.

In contrast with most American companies, Toyota and Honda expect their suppliers’ senior managers to get involved whenever issues arise. That expectation often causes problems. For example, in 1997, when a North American supplier ran into a design-related quality issue, the vice president of the Toyota Technical Center immediately invited his counterpart for a visit to discuss the matter. When the executive arrived, it became clear that he didn’t understand the problem or its causes. “I don’t get into that kind of detail,” he stated. He was apologetic about the problem, however, and firmly assured his counterpart that he would take care of it.

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Congratulations!

You have now finished the unit ‘Manage suppliers’