Effects of Supplier Development on Organization Performance
University Of Affiliation
Purpose – Today Supply chain management has grown to be an extremely important part of the organization since it greatly influences organizations overall performance. However, little studies have been done on the effects of supplier development on the performance of an organization. The main objective of this research therefore is to identify the effects of supplier development on an organizations performance.
Design/methodology/approach – In this research an explanatory research and descriptive design was applied. This explanatory kind of research uses hypothesis and theories to explain how certain phenomenon happened. While the descriptive design uses variables both independent and dependent as they try to explain the relationship between the two. The target population was the manufacturing companies in states. The sample population used was mainly the top managers, functional managers and each firm’s procurement officers. Primary data was mainly gathered through observation while the secondary data was each company’s datasheet.
Findings – the research paper found positive effects and interrelations between suppliers and buyers and their overall impact on the performance of the organization. It also indicated supplier development implementations practices which led to organizations performance.
Practical implications – the research focused on some of the supplier development practices and the benefits that are associated with it such as organizations being able to deal with competent suppliers. The findings can be used to insight managers to make better sourcing decisions thus achieve their purchasing goals.
Value – the study is basically to fill the literature gap about supplier development.
Today the success of any company does not only lie on their relationship with their customers but with the critical relationship with their suppliers. Supply chain has grown to be an area of concern in the organization. Several studies have been done on supplier development by different researchers. Supplier development is the most influential way of meeting customer satisfaction and product quality. Wagner 2006 stated that working through suppliers enables cost saving. Some of the problems a firm may face with the lack of supplier development are suppliers not being able to meet the product demand and also the expected performance.
Studies done in the past years did not consider supplier performance important until in the recent when competition became stiff. Niraj (2001) discovered that building relationship with suppliers enhances better profitability, value creation and even cost reduction in the supply chain.
Suppliers have helped in the creation of competitive advantage and also performed some strategic role thus their involvement is important to the organization. Inability of suppliers to better their performance is a common problem faced by many organizations. Different authors have established different supplier development strategies on the improvement of supplier capabilities and performance. Some of the strategies that can be used to help improve supplier performance include supplier training, offering financial support, supplier evaluation and earlier suppler involvement (Monczka, 1993). Many firms have found it more effective to work closely with their suppliers since it will enable the smooth running of the firm thus meet the customer service level. Some o f the benefits earned from those relationships include, on time delivery, profits, customer satisfaction, improved responsiveness, reduced inventory and product development.
A number of theories, related to the concept of supplier development and its influence on organization effectiveness have been developed. They include the Transaction Cost Theory, Resource Dependency Theory and Goal- setting Theory.
Resource dependency theory
The theory is concerned with how organizational behavior is affected by external resources that the firm utilizes (Pfeffer & Salancik, 2013). Specifically, the theory explains how external resources of organizations are utilized to ensure effective procurement of those resources as well how they contribute to performance of the organization. It argues that a firm’s ability to assemble, transform and exploit resources e.g. raw materials faster than competitors bears significant strategic implications. Notably, resources are often controlled by organizations, e.g. key suppliers, not in the control of the firm needing them, meaning that strategies like supplier development must be carefully considered in order to maintain open access to resources. Resource Dependency Theory thus validates supplier development practices such as supplier partnership that are aimed at leveraging suppliers’ specialized competencies for greater innovativeness and the ability to offer high quality products.
Goal setting theory
The goal- setting theory is a modern theory of motivation that was first advanced by American psychologist Edwin Locke in his journal article “Toward a theory of task motivation and incentives” published in the Organizational Behavior and Human Performance journal in 1968. According to Locke (2008), specific and difficult goals, with feedback, lead to higher performance. This is because guides employees on what needs to be done and how much effort is needed thus making intentions to work toward a goal, a major source of motivation. Instructively, two independent examinations of empirical evidence indicate that specific goals increase performance; that difficult goals, when accepted, result in higher performance than do easy goals and that feedback leads to higher performance than non-feedback. Furthermore specific goals tend to produce a higher level of output than the generalized goal because specificity acts as an internal motivation. In addition to its original application at the individual level, goal-setting theory can also be used on an aggregated level of analysis e.g. groups, teams or inter-organizational relationships. Thus, according to Wagner (2010) the theory underpins the supplier development practice that calls for setting of goals, measurement of goal attainment, as well as feedback of goal attainment to the suppliers
Transaction cost theory
Transaction cost theory is based on three strategies which firms may choose to address a supplier’s performance deficiencies. The first one is to switch the supplier and only source products from more capable supplier. This strategy is however dependent on the existence of capable alternative suppliers and reasonably low supplier-switching costs. The second strategy is to bring the needed product in-house i.e. Firms may decide to directly involve in the making of products therefore do not need to be supplied for by suppliers. The third strategy is assisting the deficient supplier so as to upgrade supplier’s capabilities to the desired level. According to Coase (2008), the theory delineates the actual cost of outsourcing production including transaction costs, contracting costs, coordination costs, and search costs; and inspects how business partners who collaborate with each other shield one another from harmful subsidiary. The theory supports the inclusion of all costs and not just the market prices when making a sourcing decision, opting for the make against buy decisions for firms.
According to Cox (2010), the Transaction Cost Theory allows collaborative relationships between buying firms and suppliers such as partnerships and strategic alliances. Notably, all of these setups involve various supplier development practices, ranging from supplier rating and accreditation to knowledge-sharing (in the case of the network sourcing and partnerships arrangements). Thus, according to the Transaction Cost Theory, supplier development entails a buying firm making specific investments in terms of human or capital resources in a buyer-supplier relationship on behalf of the supplier mainly to add value or reduce cost (Wagner, 2010; Wagner, 2008).
According to Krause and Elram (1997), Supplier development is basically a firm’s effort to better the capabilities and performance of their suppliers in order to achieve the objectives of the firms. Better buyer supplier performance results from supplier development program that enables the buyer to improve the capabilities of the supplier therefore more chance to earn competitive advantage in market leading to better performance. Buyers increase their outsourcing level to suppliers based on their capabilities to match the firm’s expectation. Leenders 1996 was one of the 1st authors who considered supplier development to be an extremely effective purchasing tool.
Different companies uses different approaches of supplier development .some of the approaches according to Krause 1997 supplier development practices include, direct firm involvement that involves (feedback, use of same suppliers) and incentive (that involves the promise of future benefits if they improve their performance). He narrowly focused on supplier development unlike other researchers that view supplier development as further way of deepening buyer supplier relationship.
Many firms do not view supplier development as a long term process. Most firms have short term objectives that they focus on rather than long term objectives. Watt and Hann, (1993) found out that supplier development program focused on short term objectives thus limiting successful interaction from taking place.
Many firms view supplier development as an operational tool rather than a strategic tool. If supplier development is used as a strategic tool then one is able to know how a firm uses its resources efficiently. Some of the prerequisite for supplier development are information sharing and better communication (Gatt and Dale 1991, lamming 1993). Commitment, relationship, continuity and communication are some of the antecedents of supplier development. Efficient information sharing between actors in the supplier development program is important for easier interaction at different firm levels as it adds value. Hann et al 1990 has made a scheme of different supplier development activities. It is presented in the table below.
Related area of capability
Introduction of new product
Process capability and design
Automation and configuration
The use of MRP, JIT, CAD, CAM.
Incoming materials control
Equipment testing and workmanship
Quality program and circles
Product mix and material lead time
Capacity level process flexibility
Set up times
Order entry system
Cost reduction programs
efficiency of process
investment in capital
Elements of supplier development
Early supplier involvement in new product development
Earlier supplier involvement in new product development decisions and continuous improvement enables manufactures to share knowledge and increase learning so as to achieve organization set goals (Tracey and Vonderembse 2000). Moreover involving suppliers in the production enables the buying firm to utilize the talents of those suppliers since all of them are focusing on meeting customer service (Leenders et al 2002). It is easier for the buying firms to invest in the suppliers, involve them in decisions of new product, new process, thus, reduction in the creation of a wrong strategy that is to be used. Partnership between suppliers and buyers encourages supplier efficiency which enhances buyer satisfaction. This strategy also enhances just in time production especially in situations where the buyer does not revise the suppliers schedule to meet delivery dates.
Some firms focus on firm’s short term objectives while others focus on the long term objectives depending on their objectives constituting why firms set different programs for their suppliers. Setting of supplier training programs normally depends on the perspective of the suppliers from the past studies on the particular supplier (Ambrose et al 2008). Identification of the relevant supplier training program will lead to increase in the buyer supported training program since buyers are able to select a training program that will be suitable for particular group of suppliers. The buyer may invite a group of suppliers that are experiencing the same type of problem for training in his firm.
Analyzing environment that buyer supplier training program is to take place helps identify some of the factors that even suppliers don’t know is important for improving their capabilities. Therefore it is important to identify type of training that the suppliers themselves prefer. As much as buyers have the idea and knowledge of the kind of training that supplier’s need, they are not able to be advanced with the new technology that is coming. Suppliers should be able to have access to the type of training that they think is able to improve their capabilities even if it is not offered by the buyer. Suppliers that have the access to buyer supplier training might have a change in their training needs since they are able to develop their capabilities (Nadia et al 2011)
Firms normally offer financial assistance and rewards to their suppliers. By investing in their suppliers they are able to provide human and capital resources to them so as to develop their performance of the suppliers. Some of those capital resources include direct investment in equipment and tools, technical support at supplier site (Li et al 2007). They receive incentives when they perform well or improve their performance and this is normally a way of motivating them.
Supplier evaluation is a term used in business and refers to the process of evaluating and approving potential suppliers by quantitative assessment. The purpose of supplier evaluation is to ensure a portfolio of best in class suppliers is available for use. Supplier evaluation is also a process applied to current suppliers in order to measure and monitor their performance for the purposes of reducing costs, mitigating risk and driving continuous improvement (Sherry R. Gordon, 2008).
Generally, when a supplier selection decision needs to be made, the enterprise establishes a set of evaluation criteria that can be used to compare potential sources. More recently, with emergence of the concept of supplier selection, more and more scholars and practitioners have realized that supplier selection and management was a vehicle that can be used to increase the competitiveness of the entire supply chain.
The methods used in supplier selection are intending the effectiveness of the purchasing decisions. The supplier selection approach consists two parts: measure supplier performance and supplier selection criteria the researchers demonstrated that, quality was perceived to be most important, followed by Delivery and Cost.
Supplier selection strategy is the strategy adopted by the manufacturer, to evaluate and select suppliers, which fulfills the requirements of the manufacturer. To build more effective relationship with suppliers, organizations are using supplier selection criteria to strengthen the evaluation process. The following are the steps to selection of the right supplier
1. Identifying a Supplier
before selecting your supplier, it is important to gather the opinions of stakeholders and define the criteria for the selection process. During this time, it is important to identify a few suppliers to assess their capabilities and compare pricing. The supplier selection team should work with the potential suppliers to establish specifications. For example, they should explain how the supplier’s materials would be used in your products and within the manufacturing process. Keep in mind that the ultimate goal is a win-win situation for the supplier and manufacturer; therefore, an open and transparent communication is extremely important. A key criterion in selecting the right supplier is value. Cost should not be the lone driver; you should instead look at the total cost of ownership, which looks at the supplier’s reliability and responsiveness.
2. Measuring Supply Performance
Another important step of the supplier management process is developing an audit and assessment program. Best-in-class supplier programs conduct audits throughout multiple stages of the manufacturer/supplier relationship. You should always conduct an audit before the contract is signed to confirm that the supplier does not have any significant compliance or quality system failures that could affect your ability to produce top-quality products. Another reason to conduct the audit beforehand is to understand the supplier’s strengths and weaknesses before the relationship becomes official.
3. Gaining Supplier Feedback
Another tool you can utilize with suppliers is a self-assessment questionnaire. The supplier self-assessment can be used to identify performance gaps, as well as discover how the supplier understands their own operation. In addition to audits and assessments, it also is beneficial to monitor informative metrics that direct value to the business. You should discuss and select the appropriate metrics with suppliers to receive their input and understanding of purposeful measurements. Examples of these metrics include rejected lots, perfect shipments and documentation errors. The metrics selected should measure the total cost of ownership, as well as improve performance toward the maximum finished product performance.
4. Achieving Certification
As your supplier relationship grows stronger, and both parties feel they are receiving positive performances, the supplier may be able to achieve a certified tatus. This occurs when you establish a set of selected criteria to be met by your suppliers. Certification must be obtained with sustained successful performance and can be lost with poor performance or a negative compliance outcome from an audit.
5. Developing Partnerships
Ultimately, the manufacturer/supplier relationship is at its best when a strategic partnership is formed, allowing full knowledge of the source of materials and ensuring high quality.
With a stronger business partnership, a supplier is more likely to: Anticipate what is needed from the manufacturer and begin to take the leadership role in communication. Notify the manufacturer if problems occur that limit production availability, or a quality issue is identified. Communicate production delays when downtime or maintenance is required. This type of partnership allows for an increased understanding and mutual benefits for both parties. It cultivates stronger commitments and encourages a greater interest in success for the material and finished goods. This type of relationship is your ultimate goal.
6. Ensuring Quality for Consumers
Depending on the number of materials and ingredients needed, developing a supplier quality management program can be a complex. However, once you choose to build strong relationships with reliable suppliers, you will have peace of mind, knowing you’re delivering high quality to your consumer.
Organization performance is the ability of the buying company to leverage it resource to earn quality, increased sales and productivity, reduced lead times and remain competitive like other firms. (Scannell, Vickery & Droge, 2000). In order to improve an organizations performance, firms leverage their supplier’s capabilities like involvement in direct investment such as provision of assets both physical and human. A firm may decide to provide their suppliers with customized tools that they may need (Krause, 1999). Also firms should strive so hard to remain competitive in the market so as to be associated with the best suppliers. Ensuring constant quality production is one way of remaining competitive in the market. When firms operate with competent suppliers they are able to meet customer needs thus profitability of the organization.
Supplier development and organization performance
Krause (1997), Krauseet al (2000) established that supplier development practice is a way of improving supplier performance therefore, customer satisfaction and overall organization performance. Hemsworth andSa´nchez-Rodrı´guez (2003) recently developed three structural models for supplier development; basic, moderate and advanced on the purchasing performance and found a positive effect and satisfaction of customers, they also deduced that companies should involve more in moderate supplier development. Qualifications of suppliers affect the overall performance of a buyer as seen in the empirical research therefore; evaluation of supplier can help improve the capabilities of the suppliers as they are able to identify those of low performance. Also recognition of the efforts of the supplier through offering of rewards has also helped to improve their performance which increases the buyers overall performance. Earlier involvement with suppliers benefits the both parties as they are able to know the new venture of each party like for the buyer they are able to know suppliers new designs. High performing companies are involved in supplier certification programs.
Statement of the problem
Competition and strive for survival in the global markets have mandated many organizations to build relationships with capable and competent suppliers hence engaging in supplier development programs. Companies are faced with problems such as the constantly increasing global competition, changing business models and price violations among others. Another issue is the cost fluctuations. Companies therefore, engage in supplier development so they can manage the problems they are experiencing with their supplier networks.
So many researches have been done on supplier development mainly on the buyer’s perspective and few have majored on the supplier’s perspective. Also many reaches majoring on small business enterprises do not consider supplier development as a method of continuous business improvement. Another issue is that most researches look at supplier development as an operational tool rather than a strategic tool. Therefore this research paper has tried to bridge the above gaps like it has specifically considered supplier development a strategic management tool rather than operational tool.
How does earlier supplier involvement influence supplier development effect on the performance of an organization?
How does supplier training influence supplier development effect on the performance of an organization?
How does financial support influence supplier development effect on the performance of an organization?
How does a supplier evaluation influence supplier development effect on the performance of an organization?
The main purpose of this research was to identify supplier development practices and their influence on organization performance. It was established that significant relationship between suppliers and buyers is necessary for the performance of the organization as many firms directly involve with their clients for example, they pay them visits. The organization suppliers are also carefully selected and evaluated. The research concludes that supplier development is indeed a crucial way of improving the performance of suppliers. Earlier supplier involvement, financial supports and rewards have a mutual relationship in their process of improving the performance of the organization. This study deduced that earlier supplier involvement is very important strategy of improving the performance of the organization. Moreover, offering rewards to suppliers will always make them more loyal despite the competitive market effects and also makes them feel motivated to work even better. Training is also important because when suppliers are trained, their performance will be definitely improved. Market globalization has put so much pressure on organization to work extremely had to remain more competitive in the markets; they struggle to hire only capable suppliers. Therefore, manufacturing companies ought to involve in activities that will improve supplier’s way of operation so as to reduce production cost and increase profit to them. This study can be used by researchers and practitioners in understanding more about supplier development. It can also be used by managers to who are involved in the whole process of implementation to insight them in their effort to improve their suppliers performance. Finally, the justification of this research promotes effects of supplier development to be implemented by many companies.
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