There are many different types of sourcing that can be looked at when trying to buy a product or service from suppliers. However when an organisation is looking for a long-term involvement with one specific supplier a partnership is often looked to as being a step in the right direction. A partnership can be defined as “A commitment by customers/suppliers, regardless of size, to a long-term relationship based on clear mutually agreed objectives to strive for world-class capability and competitiveness”.
In the case, Alpha Products are looking to set up a partnership with a local company, called O’Connors, to carry out all on-site engineering and maintenance. This report will look at the advantages to both sides of this action and any potential problems or risks.
One of Alpha’s main problems is that they are currently using too many contractors, with a high amount of spend and rising problems with safety and accountability. A partnership with O’Connors would look to solve these problems with the two companies working together. The partnership would look to drive down the cost of ordering, allowing Alpha to make more profit and in turn re-invest in their out-of-date machinery. They are currently processing around 3,000 orders a year, and at Ј60 an order this is a massive strain on their budget. A partnership would allow them to reduce this significantly, possibly allowing them to place monthly or weekly orders and invoices. An idea like this would also make the purchasing process less clerical. This is key if the company wants their Purchasing department to add value to the business, as it would allow them to spend more time on strategic sourcing etc and less time on invoices and order processing. If all of this came into place, it is likely that the company would look at moving some of the 5 buyers that are dealing with all the contractors into different areas, either to working in different functions looking at the purchasing or simply getting rid of them to reduce labour costs.
With the large amount of orders that are currently being placed across a wide range of suppliers, Ruth Turner has already identified that Alpha are not optimising their bargaining power. Working within a partnership however should allow them to do this more effectively, as instead of putting their Ј2 million a year across 50 contractors, it would just be given to one single supplier. This should mean that Alpha would be able to use more leverage buying, and together they and O’Connors would be able to agree lower prices and reduce the total cost of the operation. This action would also hopefully bring any economies of scale that Alpha may be able to achieve to light, also allowing them to drop the cost of this high spend operation.
There are currently problems with the safety and accountability of the contractors that are on site at Alpha, due to the high amount of different people any accidents or incidents are becoming increasing difficult to report and look into. Setting up a partnership with O’Connors would mean that this problem would be virtually eradicated. It would enable them to set up procedures and reports and put them in place, knowing that only O’Connors would be on site. They would probably have a key point of contact to deal with safety issues and would know at any time who exactly was on site. A step further from this would be the possibility of setting up a Total Quality Management (TQM) group with O’Connors involved. This would not only look at the safety issues on site, but also able Alpha to look at improving the processes that are in place in the plants, improving quality and standards right across the plant.
Finally there is the possibility once in a partnership to share ideas or technology between suppliers and customers. This could take the form of ideas such as electronic ordering and invoicing of products or just simply better ways of doing tasks. O’Connors may already have an EDI system in place for their ordering and they could share this with Alpha, allowing them to push the cost of ordering down even further. One of the key ideas within a partnership agreement is that there is more formal and informal communication between the supplier and the organisation, not just contacting them when you need something. Alpha would be able to discuss ideas with O’Connors and get their opinion on matters, hopefully bringing an expert in on matters that Alpha perhaps did not have much knowledge about. O’Connors may also have technology that they use that would be of use to Alpha in their manufacturing lines, and so information could be shared in this way.
If there were to be a partnership between the two companies formed however, Alpha would not be the only ones to possibly benefit from it. O’Connors would also find that there were many advantages to this relationship. Firstly, it would be a guaranteed source of work and most importantly money for the business. At the present moment they are only getting some of the business from Alpha, even though they have been classed as one of the top 3 companies that Alpha spend at. A partnership for O’Connors would mean that they would be able to base their business on the fact that they would be working all the time at the plant; therefore earning the money that would have been agreed without having to wait for any offers. In addition to this, O’Connors would also be able to plan more for the future, as hopefully the partnership would mean that Alpha would communicate to them what their plans were for the coming months. This would mean that O’Connors would have the chance to also plan ahead using the data and information that Alpha gave them as a guideline.
As discussed previously, one of the advantages to both companies is the chance to share information. Not only would O’Connors be able to share information with Alpha, but that could also be returned in the other direction. It is possible that Alpha could pass onto O’Connors some ideas and processes that could better their operation. In that respect, Alpha may also be willing to provide some investment in new equipment, as it would allow O’Connors to work more effectively, thus reducing the total cost of the operation, which would be of benefit to both sides.
However the biggest potential benefit to O’Connors was mentioned when they said that they would look, if a partnership was agreed, to diversify and provide a ‘one-stop shop’ on-site for all of Alpha’s maintenance needs. This would be a massive step for O’Connors and would add, if successful, massive opportunities onto their existing business. They would be taking on new tasks with a company that already knew what needed to be done, therefore there would always be a helping word or advice for them if something wasn’t going quite right. O’Connors would not have to worry about going into unknown waters on their own, as they would have experience and also knowledge behind them every step of the way if the partnership was working correctly. In this respect it is the best time for them to do this, as there is every chance that Alpha would make sure that the diversification was a success, due to not wanting the partnership to fail and things to go back to the way they used to be.
Despite all the advantages that have just been outlined, both sides need to be careful when entering into a partnership for a number of reasons. Each partner needs to be sure that the other is committed to the agreement to the same level that they are. If not, the partnership can become resource consuming and become just another burden upon a budget already under stress.
In the case, the major risks come from either organisation’s reason for wanting to set up a partnership. If Alpha are just using the set up to drive down their costs with leverage buying and economies of scale, then the partnership will not work as they will become non-interested in the other factors that make partnerships successful. From the other side however, there would be a massive problem arising if O’Connors were just looking to gain guaranteed business from the venture. They may just agree that they will look to diversify and offer a ‘one-stop-shop’ for Alpha to gain the contract, but then fall away on that promise and only continue doing the current jobs they are doing. That would leave Alpha having to still get other contractors in but would also leave them in a long term contract with O’Connors, bringing them back to the same situation that they are currently in. Both sides need to make sure that they have clear goal congruence and that they both want to go in the same direction.
Once the partnership is set up, one of the risks for Alpha is that they may find themselves dependant upon O’Connors, especially if they manage to get their ‘one-stop-shop’ set up. Firstly they may find themselves tied by contract, which could mean that they would be unable to look elsewhere and use other contractors if O’Connors were not doing tasks to the desired standard. O’Connors may look at the situation once it is in place and become very aware of the lack of competition. This could lead to complacency, inertia and inefficiency as described by Bailey et all. Also, perhaps after the partnership has come to an end for whatever reason, even if it has just run its course, Alpha may struggle to find another supplier who would be willing to offer the same ‘all-in-one’ service that O’Connors are planning to offer, which may mean reverting back to the old ways of having a number of contractors for the same type of jobs.
A final potential problem of the partnership may arise when both sides try to get the other to adapt to their way of working. Both companies may have set ideas on how they want to work, and if the other does not accept these then both may struggle to agree on terms. O’Connors for example may deal with maintenance issues a certain way and Alpha may have seen them done a better way. This is a key area where communication will help build up a better working relationship and help both sides. However if this does not happen, then the two could become at loggerheads and not agree on anything, causing the partnership to become a failure. On Alpha’s side, there may be a problem with the purchasing commitment venture. The decision to take on O’Connors was Ruth Turners choice and although the senior managers at the site may have a good relationship with them, some of the other purchasing staff may have their own ‘favourite’ and see the choice of O’Connors as a mistake. They may also be worried about their future, as with the contractors being cut down to just one from 52, Ruth may not feel the need to have 5 different buyers working in the department. So Alpha will need to make sure that they have the commitment of all the staff involved as well as the senior management.
From Ruth Turner’s conclusions of the current purchasing issues, we can see that according to Kraljic’s model, the service that Alpha are looking for is stuck between a strategic and leverage area. The total spend on maintenance and engineering is high and it is certainly a critical service for the business, however there are many potential suppliers of this service, as seen in the 52 contractors that Alpha have already been using. Partnerships should happen mostly when there is a high spend from the business and also a high supply risk, of which there is not. Partnerships should only be considered for the right services and personally I do not feel that the area of maintenance and engineering is right for it unless Alpha were to vertically integrate O’Connors work into their own company. O’Connors have never tried some of these services, or indeed their ‘one-stop-shop’ and it is a large risk that Alpha would be taking. They may be better advised to reduce the number of contractors to just a few key ones and develop better working relationships with those, thus gaining some of the benefits of a partnership anyway.
One other mistake that Ruth Turner has made is that she has based the decision of picking O’Connors purely on a price basis. She has just looked at the companies with the biggest spend and taken the cheapest out of those. She really should have done some proper supplier sourcing, as there may be companies that they only spend small amounts with that are far better suited and capable of carrying out the tasks that Alpha need. Although these companies may be more expensive at the moment, the use of leverage buying and the idea that a partnership can bring down total costs of the operation may mean that they would be cheaper and more effective than O’Connors.
On the good side though, O’Connors is obviously a good contender for the partnership. Ruth has seen that they already have a good relationship with many of the senior staff, which is a key issue when trying to get their backing, something that is needed when starting a partnership. They are a local company that seem very willing to grow and make their diversification a bonus not only for them, but also for Alpha.
Ruth Turner’s next actions can be detailed in the approach given by Partnership Sourcing Limited. Once O’Connors have been decided upon, then both sides need to clearly decide what each need from the relationship. Alpha should get agreement from O’Connors that they will look to diversify and it is probably best that this is put in the form of a simple contract, as it is a key reason behind the partnership. They should both look at what cost benefits there are and what improvements in the service can be arranged. This contract should not be too binding however, as this may lead to problems in the future if things do not work out for either side.
After the initial partnership is set up, then constant refinement and development needs to take place. It is likely that the first few projects taken together will act as a learning curve for both sides, and Ruth Turner simply needs to make sure that there are frequent reviews and meetings with O’Connors, alongside the formal and informal communication, to discuss any issues that arise. Over time this should lead to both sides working together without their being major issues as they will have learnt together the best way of doing tasks. This will hopefully lead to a far better engineering service for Alpha, with them being able to re-invest the money saved into better and up-to-date machinery and technology.
