Chapter 6

Management of Relationships Within the Supply Chain

Chapter 6

Management of Relationships Within the Supply Chain

1 Introduction

Chapter 5 described the supply chain – the network linking suppliers, the organisation and its customers. This chapter looks at how the flows and relationships within that chain are managed: lean synchronisation, the spectrum of supplier relationships, the planning systems that coordinate materials and manufacturing, and statistical process control. It ends with the finance interface and the KPIs used to manage supply chain performance.

This lecture was recorded under the previous syllabus. The content remains a good foundation, but note: the Dell build-to-order story is told as recent – treat it as a historical example; supply-chain resilience and the just-in-time vs just-in-case rebalancing are new – see the resilience discussion under 'Lean synchronisation'; ERP as the modern backbone is not mentioned – see 'Enterprise resource planning (ERP)'; and the finance interface and supply-chain KPIs (OTIF, inventory days, cash-to-cash) are new closing sections.

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2 Lean synchronisation

Lean synchronisation means that products and services are always delivered to exactly match what customers want, in exact quantities, at the required time and place of delivery. Lean synchronisation should achieve these objectives at the lowest possible cost, with items flowing rapidly and smoothly through manufacturing processes and supply networks. It is a pull system (Chapter 5): the customer's order triggers production, which triggers the ordering of materials – with no buffer inventories in between. This is the thinking behind just-in-time (JIT) manufacturing.

In a traditional manufacturing approach, each stage in the process places its output in an inventory that buffers it from the next stage downstream. The next stage takes from that inventory, processes the items, and passes more complete items into the next buffer inventory, and so on. The intermediate inventories insulate each stage from its neighbours, making each stage relatively independent, and the system is resilient: if one stage has a problem, buffer inventory keeps subsequent stages going. However, this safety and flexibility must be paid for in terms of:

inventory holding costs
relatively slow throughput times
possibly less flexibility to change production quickly, because buffer inventories of each product have to be worked through first.

Build-to-order in practice. Dell became famous for lean, build-to-order computer manufacturing. Customers configured their machines online; the factory consolidated the incoming orders every hour and sent parts orders to suppliers, who were located close by and had to deliver within the hour, straight onto the production line. Dell held virtually no raw materials inventory and no finished goods – just a small amount of work-in-progress. The benefits: minimal cash tied up in inventory, no unsold stock, and complete flexibility to build whatever customers ordered. The vulnerability: with no buffers, a single supplier failure stops the whole factory.

Lean's vulnerability became world news when the pandemic and the 2021–22 semiconductor shortage halted car production lines around the world for want of small, cheap chips. Many organisations have since rebalanced from pure 'just-in-time' towards 'just-in-case' for critical items: holding strategic buffer inventories, qualifying second sources of supply, and buying from suppliers closer to home ('nearshoring'). This is the Kraljic bottleneck logic from Chapter 5 applied in practice – the right amount of leanness depends on the supply risk of each item.

3 Supplier relationship management (SRM)

SRM is concerned with managing the interfaces between an organisation and the suppliers of the goods and services it buys, with the aim of maximising the value obtained from each relationship. Not every supplier should be managed the same way: relationships range from distant and price-driven to close and strategic. They are often classified into five types:

Relationship	Characteristics
Transactional	An exchange of products or services for a price, within an agreed timescale, and little more. Some transactional relationships are sustained over long periods, but there is little trust: the relationship is essentially adversarial, with the buyer pressing for the lowest price and inspecting deliveries closely.
Contractual	Similar to transactional, but built around delivering the terms of a contract. The supplier delivers neither more nor less than the contract requires, and the customer uses the contract to manage the supplier. Still little trust – a defensive relationship on both sides.
Value added	The supplier moves to a strategy of retaining customers by developing customised solutions to meet the customer's needs – tailoring products or services for the buyer. This mutual investment starts to lock supplier and customer together.
Collaborative	Close working between supplier and customer that delivers value and benefit to both – for example joint development of new products. Responsibility, accountability, resources and rewards are shared: the parties cooperate for the good of each.
Partnership	The closest form: a long-term strategic alliance with mutual dependency, where skills and resources are shared to achieve benefits neither could achieve alone – possibly even a joint venture with shared ownership. Problems are treated as shared problems ('how do we stop this happening again?') rather than grounds for a claim.

Think of the five types as a spectrum of increasing trust, closeness and mutual dependence: transactional → contractual → value added → collaborative → partnership. In the exam, classify a relationship from clues about trust, time horizon and what is shared. The Kraljic matrix (Chapter 5) tells you which end of the spectrum fits: non-critical items suit transactional buying; strategic items justify collaboration or partnership.

4 Materials and manufacturing planning systems

4.1 Materials requirements planning (MRP I)

A materials requirements planning system uses sales orders and sales forecasts to schedule raw material orders, deliveries and quantities. For example, if an order is received for 100 units of a product, the system explodes this into the parts needed, checks inventory, and works out what orders must be placed with suppliers – and by when – to fulfil the sales order. Many systems place the purchase orders automatically.

4.2 Manufacturing resource planning (MRP II)

Materials requirements planning is sometimes called MRP I to distinguish it from MRP II – manufacturing resource planning – where not only materials but also labour and machine resources are integrated into the production plan: people, machines and materials are scheduled and coordinated together so the factory can respond quickly to orders.

4.3 Enterprise resource planning (ERP)

The modern descendant of MRP is the enterprise resource planning (ERP) system: one integrated (now usually cloud-based) system covering sales, purchasing, inventory, production, distribution, HR and accounting, all sharing a single database. When a customer order is entered, the same system schedules production, orders materials, tracks despatch – and posts the accounting entries. For finance this is transformational: the figures come from the same system that runs operations, in real time, rather than being re-keyed and reconciled afterwards. ERP systems also connect outwards, exchanging orders, invoices and inventory data electronically with customers' and suppliers' systems – the technology backbone of the supply chain collaboration described in Chapter 5. Chapter 11 (Finance and IT) returns to ERP from the finance side: the finance function's own dependence on it, and how the relationship with IT is managed.

5 Statistical process control (SPC)

Statistical process control is a method of measuring and controlling quality during the manufacturing process. Quality data – for example, the measured sizes or weights of components – is collected in real time during manufacturing. Sometimes every component is measured, sometimes only a sample. The data is plotted on a control chart with pre-determined control limits, set from the natural variability of the process and the customer's requirements:

Data that falls within the control limits indicates that everything is operating as expected: the small variations are the natural 'noise' of the process. A point outside the control limits – or a persistent drift towards one of them – indicates that a specific, assignable cause is at work: for example, a machine setting has slipped or a tool has worn. The process should be stopped or adjusted and the cause corrected.

SPC is the day-to-day statistical face of quality control; Chapter 7 sets it in the wider context of quality management, the cost of quality and continuous improvement. Modern lines increasingly automate SPC: IoT sensors measure every unit and software flags out-of-control conditions instantly.

6 The supply chain and finance: areas of interface

Managing supply chain relationships is not only an operational matter. Finance is involved at every stage:

Supplier evaluation and selection – assessing potential suppliers' financial stability and cost structures before the organisation depends on them; a financially fragile single-source supplier is a supply risk.
Negotiation and contracts – providing cost analyses to support price negotiations, and evaluating the full cost of ownership (price, delivery, quality, risk) rather than just the quoted price.
Working capital – payment terms to suppliers directly affect cash flow; finance balances the benefit of longer credit against the damage late payment does to relationships (and against early-settlement discounts).
Inventory investment – lean programmes release cash from inventory; resilience programmes deliberately invest cash in buffer inventory. Finance quantifies both sides so the trade-off is a conscious decision.
Investment appraisal – evaluating spending on ERP systems, supplier integration and warehouse automation.
Performance measurement – producing and validating the supply chain KPIs below, and using them in supplier reviews.

7 Key performance indicators for the supply chain

Typical KPIs used to manage supply chain performance – most of them shared between procurement, operations and finance:

KPI	What it measures	Why it matters to finance
On-time-in-full (OTIF) supplier delivery	The percentage of supplier deliveries arriving complete and on time.	Late or short deliveries stop production and force buffer inventories – both cost cash.
Supplier quality / acceptance rate	The proportion of delivered items passing inspection.	Rejects create rework, delay and failure costs (Chapter 7).
Supplier lead time	Time from placing an order to receiving the goods, and how variable it is.	Longer, less reliable lead times require more safety inventory – more cash tied up.
Inventory days / turnover	How long materials and goods sit in inventory.	A core working capital measure; the direct financial test of how lean the chain really is.
Cash-to-cash cycle	Days from paying suppliers for inputs to collecting cash from customers.	Summarises the whole chain's effect on cash flow in one figure.
Procurement cost savings	Savings negotiated against prior prices or budget.	Measures procurement's direct contribution to margins – but must be validated by finance and weighed against quality and risk.
Cost of quality in the chain	Inspection, rework, returns and failure costs traced to suppliers.	Reveals whether a 'cheap' supplier is actually expensive.

As with operations KPIs, alignment matters: if procurement is rewarded purely on price savings while operations suffers late deliveries and finance carries the inventory, each function's KPI looks good while the organisation's performance deteriorates. Shared, balanced KPIs – price and delivery and quality and cash – keep the chain honest.

Lean synchronisation delivers exactly what customers want, when they want it, with no buffer inventories – cheap on working capital but fragile, which is why many chains now blend just-in-time with just-in-case. Supplier relationships run along a spectrum – transactional, contractual, value added, collaborative, partnership – matched to the importance and risk of what is bought. MRP I schedules materials from sales orders; MRP II adds labour and machines; ERP integrates the whole business, including the accounts, in one system. SPC charts keep processes inside control limits. Finance interfaces through supplier evaluation, negotiations, working capital, inventory investment and systems appraisal, and shares KPIs such as OTIF, supplier quality, lead times, inventory days and the cash-to-cash cycle.

8 Test your knowledge

Two quick checks before you move on: work through the flashcards to fix this chapter’s key terms and definitions, then sit the objective questions for exam-style practice. Both mark themselves and explain the answers as you go.

Answer the questions one at a time. Your progress is saved so you can leave and come back.

Open chapter practice