Managing supplier relationships to improve public procurement performance

African Journal of Business Management Vol. 6(1), pp. 306-312,11 January, 2012 Available online at http://www.academicjournals.org/AJBM DOI: 10.5897/A...
Author: Judith Thornton
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African Journal of Business Management Vol. 6(1), pp. 306-312,11 January, 2012 Available online at http://www.academicjournals.org/AJBM DOI: 10.5897/AJBM11.2197 ISSN 1993-8233 ©2012 Academic Journals

Full Length Research Paper

Managing supplier relationships to improve public procurement performance Redges Mandiyambira Central Services Department, Great Zimbabwe University, Box 1235 Masvingo, Zimbabwe. E-mail: [email protected]. Tel: +263773 906 642. Accepted 19 October, 2011

The study sought to determine the strategies of managing supplier relationships that engender value for money in public procurement. An extensive literature study was conducted to examine the key converging and diverging views of different authors in terms of supplier relationship management strategies and trends in public procurement. The study revealed that long term relationships with few suppliers are the best way of managing supplier relationships as there are more benefits to be gained in long term relationships than adversarial approach. Nine State Universities in Zimbabwe were sampled out for the study, with the sample size being 180. Policy implications and recommendations for future study were highlighted. Key words: Adversarial relationships, long term relationships, public procurement.

INTRODUCTION A lot has been written in the relationship management literature about the paradigm shift from adversarial relationships to mutually beneficial relationships. Public procurement is one area that lags behind in terms of change especially in least developed nations. Most public sectors in least developed nations uses a traditional procurement system which is purely based on adversarial relationships with many suppliers. Bid and bash approach (Welch, 2003) is used in the tendering process which focuses on the lowest bid and arms‟ length relationships with many suppliers. The contracts awarded to suppliers have a fixed expiry date, which means that their relationships end on the expiry date of the contract and a new tendering process will be triggered where potential suppliers are prompted to compete between them again (Christopher and Juttner, 2000). There is no attempt to engage into mutually beneficial long term relationship with a selected number of suppliers. This increases procurement costs such as multiple contracts administration, monitoring many suppliers‟ performance, continuous education of suppliers on an institution‟s processes and requirements. More time is consumed in the continuous solicitation of potential suppliers each time the same need to be fulfilled arises. There is limited utilization of supplier‟s total resources as suppliers are kept at arms‟

length. Suppliers are seen as vendors and not as external resources that the public sector can benefit more from besides the procured products and services. Cannon and Perreault (1999) argued that, transactional relationships do not provide best-value solutions as they do not make full use of supplier‟s total resources. Wynstra et al. (2001) argued that suppliers are sources of ideas, technologies, and savings in time and money. Ellram (1990) argues that when dealing with multiple suppliers, it is costly to coordinate the procurement process and to monitor the quality consistency of many different suppliers. Erridge and Nondi (1994) found that „the extreme form of competitive bidding is, on the whole, incompatible with successful achievement of value for money. Erridge and Nondi (1994) further argues that extreme forms of competitive bidding are detrimental. These forms involve: rigid application of tendering procedures for low value items regardless of on-costs; too many suppliers; shortterm contracts and the absence of cooperation from suppliers. The adversarial approach to supplier relationship management does not engender value for money, the core principle governing public procurement (Commonwealth Procurement Guidelines, 2005). Officials buying goods and services need to be satisfied that the

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best possible outcome has been achieved taking into account all relevant costs and benefits over the whole of the procurement cycle (Commonwealth Procurement Guidelines, 2005). The challenges posed by the use of traditional procurement system in the Public sector procurement calls for a re-evaluation of the approach to come up with best strategy for managing supplier relationships that engender value for money. Public procurement is an area that is rich for reforms and cost savings opportunities, increase product and service quality (NASPO, 2010). Should the Public sector continue to play the market considering the challenges of such an approach? How can supplier relationship be managed in order to engender value for money in Public sector procurement? What benefits can the public sector gain from long term relationships with few suppliers? The study sought to answer the above research questions. LITERATURE REVIEW Supplier relationship management strategies Lindgreen and Wynstra (2005) suggested that two widely differing supplier management models have emerged from both practice as well as academic research on the issue of how to optimally manage suppliers. Literature generally distinguishes between two basic purchasing strategies: competitive and collaborative, or in other words, adversarial and partnership strategies posits Lindgreen and Wynstra (2005). However, Bensaou (2000) suggests a hybrid of the competitive model and a partnership model as another supplier relationship strategy. Adversarial approach Porter (1985) argues that traditional purchasing view, advocates minimizing dependency on suppliers and maximizing bargaining power. Porter (1985) suggests that in order to maintain bargaining power, the buyer should source from many suppliers, commit short term contracts with the suppliers; share no information with suppliers regarding sales, cost, product design; and make (or receive) no improvement suggestions to (or from) suppliers. Porter (1985) describes this view of supplier management as follows “In purchasing, then, the goal is to find mechanisms to offset or surmount these sources of suppliers‟ power…..purchases of an item can be spread among alternative suppliers in such a way as to improve the firm‟s bargaining power”. Porter (1985) further argues that the key implication of this model for purchasing strategy is for buyers to deliberately keep suppliers at an arm‟s length and to avoid any form of commitment. Williamson (1975), Harrigan (1985),

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Shapiro (1994) also concurs with adversarial view citing that transactional relationships are commonly used in public procurement settings, where supplier relationships basically serve to facilitate the exchange process and fulfill the contract requirements, relationships cannot be used to intervene with a procurement process that is supposed to be open and fair to all bidders. Kaufmann and Stern (1988) commented that in economic theory, dependence is traditionally regarded as something negative, inhibiting market forces to act in the most efficient manner, companies should optimize and preserve bargaining power by being independent. An independent actor tries to optimize every transaction, and by definition would not get involved in a long-term relationship (Kaufmann and Stern, 1988; Donalson and Toole, 2000). Sarkis and Talluri (2002), comments that to prevent opportunistic behavior, the conventional sourcing approach (multiple sourcing) endeavors to establish a wide supplier base, because constant competition among suppliers should minimize the purchasing price so that the organization can purchase goods at their real market value. According to a study conducted by Helper (1991), as quoted in Axelsson and Wynstra (2002), adversarial relationships were common practice within the US in the early 1980's. The arms length model was widely accepted as the most effective way to manage supplier relationship in the US until the success of Japanese firms who did not use this model formed a re-evaluation of the model‟s basic tenants. Long term supplier relationships In Contrasting the adversarial approach, Hill (1995) and Sheard (1996) cites that in this highly competitive market, the best strategy for winning and retaining business is for buyers and suppliers to work together, that is, to partner. Sheard (1996) further comments that essentially, the concept means using the resources of a supplier to the maximum benefit possible. Weitz and Bradford (1999) supports the partnership approach arguing that it looks at a supplier as an extension of the buying organization specifically an extension of the purchaser‟s research capabilities, storage, potentials, financial backing and manufacturing and quality control needs. Lajara and Lillo (2004) highlights that the practice consists of selecting the „best‟ suppliers working closely with them and entering into long term relationships based on mutual needs and trust. This trend was also observed by Hunt and Morgan (1995) who noticed a tendency among customers to move from an arm‟s length relationship (a number of competing suppliers) towards closer collaborative arrangements. In support of long term relationships, Burt et al. (2003) commented that a survey of purchasing managers found general agreement in the fact that supplier partnering

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reduced the number of suppliers. Burt et al. (2003) further added that the following reasons were cited for these reductions; supplier development is expensive and cannot become cost effective unless limited to the supplier with which they do sizeable business with; close working relationships requires restricting the number of suppliers; and a small supplier base ensures that the supplier who commits to partnering and quality improvements receives rewards of substantial business. Xerox reduced the number of suppliers from 5000 to 400 and AT and T reduced its number of suppliers from 300 to 75 according to Razzouk (1996). Partnerships in public procurement: Researchers such as Lawther and Martin (2005) questioned the traditional way of public procurement and suggested moving towards public procurement partnerships, the complexity of procuring information technology, software and IT-services being one of the reasons for such a move. Lawther and Martin (2005)‟s analysis contrast the assertion made by Harrigan (1985) and Porter (1985) stating that, adversarial relationships are effective in public procurement settings, where supplier relationships basically serve to facilitate the exchange process and fulfill the contract requirements, relationships cannot be used to intervene with a procurement process that is supposed to be open and fair to all bidders. Lawther and Martin (2005) further explains that the relational approach, based on the advantages of cooperation, centers on shared resources, joint product development, and process redesign, which improve efficiency (in production and value creation) for both the buyer and the seller. In public procurement, networking with private sector organizations is posited to be more efficient than traditional governance structures according to Kamarck (2002). In the same vein, Kelman (1990) posits that Governmental agencies and suppliers are now advocating partnerships between governmental buyers and business sellers to facilitate the implementation of contracts. Thus, public sector solutions to dealing with turbulent environments have been to shift policy towards greater competitiveness in the public sector and to apply private-sector style management practice to the public domain (Hood, 2000). In support of this view, Palaneeswaran and Kumaraswamy (2000), argued that public sector agencies need to incorporate most of the modern management tools and technologies to cope with the procurement industry, to remain competitive and make maximum use of scare resources. Laurent (2000) concurs with the above mentioned views citing that with the increasing procurement of hightech systems and services, collaborative and relational exchanges will be required to realize the strategic goals for both government agencies and private business. Laurent (2000) further stresses that, facing downsizing

and declining budgets, federal agencies are strongly motivated to find new ways of doing business focused on “faster, better, cheaper”. Linscott (1999) highlights that growing interests in the facilitator role of government/ business relationships, agencies are reforming their pure transaction-based purchasing and attempting to explore the benefits of partnering with commercial entities. Burman (1999) comments that government agencies are changing their traditional uncooperative attitudes and developing partnerships with contractors. Major General Robert Armbruster, the USA Army‟s deputy head, said “we (the armed forces) need to start working in a more synergistic manner with industry” according to Book (2001). Linscott (1999) calls it “civil-military integration.” “21st Century governance is a non-competitive form of cooperative interaction between government and the private sector designed to combine and harness the collective energies and expertise of all the sectors (Salamon, 2002). Resource based view of the firm and resource dependency theory: Resource-Based View of the Firm and the Industrial Marketing and Purchasing approach supports relationship building unlike adversarial approach. The resourcebased view defines resources as “the tangible and intangible entities available that enable a firm to produce a market offering that has value for some market segment(s)” (Hunt, 1997). Resource dependency and competence theory stress that, one of the main reasons for a firm to form relationships with other firms is to gain access to the resources that the firm does not possess contends (Stern and Reve, 1980; Prahalad and Hamel, 1990; Heide, 1994; Sousa, 2003). The survival and growth of organizations largely depend on the ability to secure critical resources from the external environment according to Casciaro and Piskorski (2005). Lawther and Martin (2005) stated that, the collaboration across public procurement functions provides opportunities for better utilisation of procurement skills and resources; (thereby providing value for money); maximising benefits; and the spread of best practice. Barney (2000) concurs with cooperation approach positing that firms are no longer able to develop major product or service innovations alone because of the dispersion of knowledge and technological resources driven by organisational specialisation. In addition, Barney (2000) further notes that the growing need for greater effectiveness in their operation has forced more companies to engage in partnerships leading to increased dependence on each other's resources and capabilities. According to Arino and de la Torre (1998), the increasing complexity of markets makes it difficult for firms to possess all the resources to compete effectively, and exchange leads to relational interdependency. Storey et al. (2006) argues that the performance and the internal efficiency of a

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business is viewed as dependent on its ability to develop resources through relationships rather than its ability to exploit resources in isolation from other companies, and resource development is seen as taking place between companies rather than just within companies. However, Sanchez et al. (1996) warn that organisations should collaborate to achieve these benefits where it makes logical and commercial sense to do so. IMP Project Group (1982), Hakansson and Snehota (1995) and Gummesson (2006), comments that in the IMP literature, relationships are seen as a company‟s most important assets, because without them it cannot gain access to the resources of others, acquire the supplies that it needs, or solve its problems and thus generate revenue. Ford et al. (2003) adds that relationships are in many ways the assets that bind together all of the other assets of a company and convert them into something of economic value. In the same vein, Hunt and Morgan (1995) classified the types of resources that a firm can access in this manner through relationships. These resource types are: financial, legal, physical, human, organizational, relational, and informational resources as suggested by Hunt and Morgan (1995). Hayes et al. (2005) in support of Hunt and Morgan (1995) defines resources that can be shared as tangible and intangible inputs into the value creation process and include, but are not limited to, equipment, skills of employees, and technology. Hakansson and Prenkert (2004) also supported the idea of resource sharing citing that the reason why parties cooperate is that they are dependent on each other‟s resources and the resources can only be utilized through cooperation. Supply partnerships are also supported by the market orientation and organizational learning views (Jaworski and Kohli, 1993; Slater and Narver, 1995) that resources are heterogeneous rather than homogeneous. Slater and Narver (1995), argues that as companies possess heterogeneous resources, it makes a difference with whom you interact and how you interact. Interacting with the partner with the resources that are most valuable and doing it in the most sensible way makes sense. Slater and Narver (1995) further explains that no single resource is of any value if you cannot make use of it, interacting with the right partner and being able to use the partners´ resources in a meaningful way becomes the key issue. A Portfolio approach management:

to

supplier

relationship

In contrasting the adversarial and partnership view, Kraljic (1983) and Bensaou (2000) stressed that no single approach to relationship management is inherently superior, successful supply chain management requires the efficient management of a portfolio of relationships. Bensaou (2000) even goes further with his analysis saying that every company, when deciding which

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relationship style to adopt, should consider three factors: the product exchanged and its technology, the competitive conditions in the upstream market, and the capabilities of the suppliers available. In this regard Webster‟s (1992) notes that each company needs to assess each of their suppliers and decide if a supply alliance would be appropriate or not. Smart and Harrison (2003) cites that the best purchasing strategy depends on the circumstances, such that a competitive strategy of playing suppliers against one another in one situation will achieve the lowest price, whereas another situation calls for a collaborative strategy that emphasizes partnership relations to guarantee the same outcome. According to Dwyer et al. (1987) the buyer-seller relationship portfolio is situated on the axis between two extremes, namely, discrete transaction and vertical integration, such that the strength of a relationship depends on environmental effects and competitive market. Dwyer et al. (1987) further notes that supply alliances, today seem to be the best way to do business, they are not suitable for every company and its market place. An article by Zineldin and Philipson (2007) provides a research of marketing practices in the contemporary environment which was done in 1997 by Brodie et al. (1997) in the University of Auckland in New Zealand. The results did not support the concept of a total “paradigm shift” that is the movement away from adversarial approach to collaborations with suppliers. Instead, the findings in several companies confirmed that the transaction marketing is still relevant and currently used with some types of relationship marketing. Brodie et al. (1997) quoted in Zineldin and Philipson (2007), concluded that the importance of transactional marketing should be recognized and estimated, their study‟s results contradict the trend of academics and practitioners of the so-called relationship marketing “paradigm shift”.

RESEARCH METHODOLOGY Survey design, sample and response According to Burns and Bush (2001), it is common that researchers utilize multiple research designs and in this case the researcher used exploratory and descriptive research designs. Exploratory research was conducted to develop initial insights and to provide direction for any further research needed (Malhotra, 1999). Public procurement is a complex area with a set of processes, procedures, regulations and objectives that are different from the private sector procurement. Interviews and semi-structured questionnaires were used as the research instruments to gather the research data. The total population for the nine State Universities in Zimbabwe is 180 and it encompasses all members who are involved in the State Universities‟ procurement function. A total of 180 questionnaires were mailed to procurement officers of the nine state universities with a requested return date and a stamped return envelope. This was based on the total design method (TDM) recommended by Dillman (1978) that guidelines for mail survey structure, cover letter, pre-survey notification, initial survey mailing and post-survey reminder are to be followed. Only 97 questionnaires were

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arm's length Arm’s length relationship relationship

Long term relationship

Both bothstrategies strategies

Figure 1. Responses of the best strategies for managing supplier relationships.

completed and returned, all were usable because they were complete. 54% response rate was achieved. A total of twelve telephone interviews were successfully conducted with the Central Buyers of the nine State Universities under the study using a check list to guide interviewees during the interview process so that uniformity and consistency could be assured. The average lengths of interviews were 12 min.

Validity and reliability of findings Content of this research was validated by determining the variables which have been defined and used previously in the literature (Churchill and Iacobucci, 2004). In this study, the dimensions of variables were identified from the Marketing, Purchasing and Supply Chain Management literature. Prior to pre-testing of the research instruments three purchasing lecturers were asked to review the questions and give their opinions in the quest for content validity. Some overlapping questions were detected and corrected. A pilot study was contacted before full scale data collection to check the feasibility of questions and to ensure that the questions elicited the responses required, uncover ambiguous wording or errors before the survey was full scale launch (Burns and Bush, 2001). Great Zimbabwe University was selected for the pilot study. All the nine State universities in Zimbabwe were sampled in order to gain triangulation of results, findings from different sources increases external validity and reliability of the results. All the respondents in the nine State universities were sampled out for the study in order to ensure that sampling errors were avoided thus increasing reliability of the results.

RESULTS AND DISCUSSION Best strategy for managing supplier relationship The research findings indicates that long term relationships with few suppliers came up to be the best way of managing supplier relationships for both long term and short term contracts for highly complex products and lowly complex products as supported by 55% of the responses (Figure 1). The responses cited that relationships with suppliers must continue even after the completion of a transaction an indication of the movement way from adversarial relationships. They cited

that after sales services and support in terms of technical products was needed even after the completion of transaction. This view is supported by modern day political arena where unit governments are being formed moving from "Counterparties" to Collaboration for instance Britain and Zimbabwe, where opposing governments merged to form one unit government an indication of the importance of collaboration unlike adversarial relationships. Forty percent of the responses on the contrary favored a mix of both long term and adversarial relationships (Figure 1). The responses cited that the two strategies‟ strength and weaknesses can offset each other, thereby coming up with a best strategy for managing supplier relationships. The difference between the majority‟s responses and minority‟s responses is minor, an indication that the use of both strategies should not be underestimated even though the majority favoured the use of long term relationships. There were very few responses (5%) that mentioned use of adversarial relationships as a strategy to solely rely upon in all cases whether in procuring highly complex or lowly complex products and services (Figure 1). Their argument was that that ending of relationships after the completion of a task was a better way of encouraging competition among suppliers so that they will keep on reducing prices in order to gain business, a traditional view which was put forward by Porter (1985) who argued that the best purchasing strategy is for buyers to deliberately keep suppliers at an arm‟s length and to avoid any form of commitment. Most responses saw relationships as vehicles for cost reduction such as reduction of time spent and costs of searching for new suppliers. They also highlighted that quality could be achieved as a result of increased supplier involvement and joint problem solving. The respondents also cited that limited number of suppliers improves decentralization of purchasing activities to other departments as they will be obliged to deal with already evaluated and selected few suppliers. However few responses contradicted citing that costs of safeguarding

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the relationships could also sky rocket. They highlighted that knowledge transfer is a function of whether the supplier is interested or not, some suppliers may lack the motive to do so and may resist use of their resources for the benefit of the buying organization. Conclusions Engaging into long term relationships with few suppliers is the best strategy of managing supply side rather than playing off many suppliers against each other as there are more benefits to be gained when in a long term relationships with few suppliers than being on the contrary. Public procurement officials should come up with an approved supplier list of best suppliers who the institutions can do business with unlike doing business with the whole world. This improves the decentralization of procurement function to other departments. The purchasing officers can concentrate on other crucial procurement activities such as supplier development and continuous supplier monitoring. The approved supplier list will also reduce corruption as in coming up with the list of preferred suppliers a number of stakeholders and cross functional teams will be involved. Limitations and future research The study investigated the management of supplier relationships within the context of State Universities in Zimbabwe, future research needs also to include a broader population of government institutions. The study also focused on the management of supplier relationships as the factor that could improve public procurement system further research is should look into other factors that need to be managed in order to improve Public procurement performance. REFERENCES Arino A, de la Torre J (1998). "Learning from failure: towards an evolutionary model of collaborative ventures", J.Organ. Sci. 9: 306325. Axelsson B, Wynstra F (2002). Buying Business Services, John Wiley and Sons, London. Barney J (1991). Firm resources and sustained competitive advantage. J. Manage., 17(1): 99–120. Bensaou BM. (2000). “Portfolios of buyer-supplier relationships”, Sloan Manage. Rev., 40(4):35-44. Book EG (2001). “Top Military Leaders Unhappy with Pace of Acquisition Reform,” national Defense, 55. Burman AV (1999). “New Contracting Takes Talent and Skill,” Gov. Exec., 1(12): 76-77. Burns AC, Bush RF (2001). Marketing Research 3rd Edition. Upper Saddle River, NJ: Prentice Hall Burt DN, Dobler DW, Starling SL (2003). World Class Supply Management: The Key to Supply Chain Management, 7th ed., McGraw-Hill, New York, NY. Cannon JP, Perreault WD (1999). “Buyer-Seller Relationships in Business Markets”. J. Mark. Res. 36: 439-460.

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