A Framework For Supplier Partnerships In Mexico
Daniel A. Glaser Segura, CPIM
Daniel A. Glaser Segura, CPIM, University of North Texas, Denton, TX 76203, (817) 565-3140.
Richard E. White, PhD
Richard E. White, PhD, Assistant Professor, University of North Texas, Denton, TX 76203, (817) 565-3140.
79th Annual International Conference Proceedings - 1994 - Atlanta, GA
Since the early 1980s, many industrial organizations in developed countries have been striving to secure a larger portion of the global marketplace. To improve their competitiveness, many firms have adopted supplier partnerships as a strategic response. The notion of supplier partnerships as a strategic response emerged recently as an integral component of Japanese manufacturing practices. Japanese manufacturing practices have served as a model for organizations to emulate because Japanese manufacturers have demonstrated superiority in many global markets. Principal of the Japanese practices was the role that the purchasing function assumed in the Japanese organization, as buyers and suppliers work synergistically to increase their competitiveness. The adversarial approach found in traditional purchasing practices was not evident in the way that Japanese organizations sourced from a reduced base of suppliers and sought long-term relationships. The Japanese model of cooperative purchasing practices has worked with success in many industrialized nations and should also improve organizational competitiveness in developing nations, such as Mexico. Thus, this paper presents a framework for supplier partnerships and explores their adaptation in Mexico.
ELEMENTS OF A SUPPLIER PARTNERSHIP
Japanese manufacturing practices have many names (Just-in-Time, world class manufacturing, lean production, stockless production, etc.) Just-in-time (JIT) is perhaps the name most commonly recognized and will be used here to reference Japanese manufacturing practices. Early writers of JIT described close supplier partnerships as an integral part of JIT. For JIT to realize reductions in inventory, and thus eliminate waste, would require that suppliers practice the same lean production practices as the buying organization and plan for much closer and long term relations. Later, as Total Quality Management (TQM) emerged in the late 1980s, other writers viewed supplier partnerships as a supporting function for organizations which were improving their competitive position through higher quality. As with JIT, a reliable source of quality inputs became a necessary component of TQM. Thus, supplier partnerships enhance an organization's competitiveness and function as a prerequisite to JIT and TQM. Many organizations have adapted supplier partnerships as a stand alone practice.
The elements of a supplier partnership are based on the writings of Ansaii (1986), Bhote (Bhote, 1987a; 1987b), Burt (Dobler et al. ; Burt, 1984) Ellram (Hendrick & Ellram, 1993; Ellram, 1991 a, 1991 b, & 1990), Giunipero (Giunipero & Brewer, 1993; Heinritz et al., 1991; and Giunipero & Law, 1990), Hahn (Watts et al., 1992; and Hahn et al., 1986), Hutchins (1992), Lascelles and Dale (1989) and Leenders (Leenders, Leenders and Fearon, ). These writers represent various approaches to supplier partnerships. Bhote and Hutchins describe supplier partnerships from a consultant's viewpoint while the others have approached supplier partnerships from an academic orientation. From another approach, Ansari, Bhote, and Giunipero refer to supplier partnerships as JIT purchasing, while Hutchins and Lascelles and Dale refer to them as a prerequisite to total quality management (TQM). Ellram describes supplier partnerships in their own right as a stand alone or independent practice.
The main elements of a supplier partnership framework center around the strategic orientation of the organization, the role management plays in their implementation, and the specific practices to implement the partnership and are described in the following section.
STRATEGIC ORIENTATION OF SUPPLIER PARTNERSHIPS
Strategic Orientation of Supplier Partnerships. The strategic orientation of a supplier partnership differs markedly from the traditional adversarial purchasing relationship. The relationship must be based on, "trust, loyalty, and mutual responsibility" (Bhote, 1987). Ellram (1991) states that a "partnership will work only if it is beneficial to both parties." The partnership must be a win-win relationship, as relationships based on trust encourage both parties to work closer and save resources to provide synergic benefits. These relationships, however, develop over time.
Supplier partnerships work best on a long-term, continuous improvement basis. According to Burt (Dobler et al., 1990), long-term partnerships encourage suppliers to invest more in research and development, and to suggest "technologically current, cost effective, and high-quality solutions to the buying firm's needs." The advantages associated with working on a long-term time frame accrue to organizations submitting themselves to long-term supplier partnerships. In addition, suppliers who participate in supplier partnerships will increase their short-term start-up costs associated with the acquisition of better technology and must spread costs over a longer time frame (Leenders & Fearon, 1993).
Total costs, as opposed to product cost, should be the major cost focus in a partnership. Hahn et al. (1986) contrast the costs of adversarial purchasing to partnerships. The adversarial model structures costs as factory overhead, direct labor, and direct materials, and the buyer might play one supplier off of another in an effort to extract lower prices. In a supplier partnership, however, lower prices are a result of cooperative cost management. The supplier partnership model includes factory overhead, direct labor, and direct materials costs as well as selling and administrative costs, and is referred to as total cost. The inclusion of selling and administrative costs demonstrates the level of trust, sharing, and cooperation required between the supplier and the buyer organizations. In addition, the traditional product cost paradigm does not include failure in the field, service, competition, and other costs, nor does it approach costs from a systems approach (Ellram, 1993). The total cost approach considers all factors driving costs, and arrives at a win-win situation for both the supplier and the buyer.
The materials management function assumes a greater role under a supplier partnership than under traditional purchasing. Under supplier partnerships an increased materials management presence is not an option, it is a requirement. Bhote (1987) states that the materials management function should be elevated to the same level as sales and engineering. According to the supplier partnership model, materials management should lead the partnering movement. Watts et al. (1992) refer to the strategic role purchasing should assume if partnerships are to be successful. The focus of a strategic purchasing/materials management function should plan for the strategic acquisition of materials and to coordinate the flow of materials within the firm more so than found in traditional purchasing practices.
The adoption of supplier partnerships causes the buying firm to undergo various organizational changes. Giunipero (1990) refers to the changes in the responsibilities of various positions in the purchasing organization. The most common organizational changes include: the buyer role assumes more planning responsibilities and quality assurance takes a larger role in the materials function. From a behavioral aspect, the organization undergoes a "cultural change" in which top management accepts the partnering philosophy and is committed to the new paradigm (Hendrick and Ellram, 1993). Hutchins (1992) states that an organization's structure will change if authoritarianism, internal group conflict for resources, and poor internal communication and direction is present. Thus, organizations must make structural and behavioral changes as they implement supplier partnerships.
Lastly, the venture requires that both organizations share the risks and rewards. Cooperation and the sharing of complementary abilities make both organizations more flexible (Hutchins, 1992). Sharing risks and rewards is the strategic objective of partnering. This is the evidence of synergy. Cooperation between the two organizations creates a unified organization that is competitive in the long-term. In reality, the two organizations operate as one. Hendrick and Ellram (1993) refer to the "marriage" that develops when the organizations share the rewards and risks of strategic purchasing and materials management.
MANAGERIAL ROLE IN SUPPLIER RELATIONSHIPS
The managerial role is crucial to the implementation of supplier partnerships. Just as with JIT and TQM, organizations must have a top management commitment. The implementation of these new operational programs requires a reorientation of managerial thinking and behavior, not just an adoption of specific procedures or tactics. The transition to supplier partnerships requires top management commitment as only management can coordinate and communicate the philosophical change with employees (Hutchins, 1992). Bhote (1987) echoes these points when he states that "only senior management can build an infrastructure that will enhance the effectiveness of materials management." Ellram (1990) continues by applying a contingency approach to the management of partnerships. That is, partnerships work well when management, at various levels of the organization, communicates effectively. This brings up a related aspect of management in the strategic partnership: management through teamwork.
Partnerships should be managed not only as part of the materials management function but also as a multidisciplinary function. A multidisciplinary team approach involving design and production engineers, accountants, materials managers, and others improves the decision making process. Team management decreases the opportunities for poor decision making. In addition, the team approach assists to make the supplier partnership more systems oriented. Team management can also "distill" the many voices attempting to communicate with the supplier to give one coherent voice (Hutchins, 1992). Team management should not only occur within the supplier and buyer organizations, it should occur between the two firms. Early supplier involvement (ESI) and supplier evaluations are examples of the team approach between the two organizations (Bhote, 1987).
As the purchasing function assumes new roles and works more effectively with other organizational members, purchasing personnel will require more training and experience. The key to successful partnerships is laid squarely on the role of "professional purchasing staff" (Leenders and Fearon, 1993). In a study of organizational changes associated with JIT implementation, Giunipero and Law (1990) find that the purchasing role tends to expand to include more planning and quality assurance roles, and purchasing personnel interacts more with design engineering staff.
In summary, supplier partnerships require top management to commit itself and undergo a leadership transformation to support this new paradigm. As top management sets the tone for the partnerships, teams from within and between the supplier and buyer organizations will create synergic benefits. To support an increased role within the team concept, purchasing personnel will require breadth in their job preparation to encompass non-traditional study areas.
IMPLEMENTATION OF SUPPLIER PARTNERSHIPS
The implementation of supplier partnerships requires a reduced supplier base, increased communication within and between the supplier and buyer organization, supplier management, and measurement and evaluation systems.
First, the move to a smaller supplier base is required to implement supplier partnerships. To capitalize on higher incoming quality from loyal suppliers, buyers will need to depend more on fewer suppliers. Balancing the risks of single sources with the benefits of lower administrative costs and risks should determine an appropriate supplier base (Hutchins, 1992). Reducing the supplier base begins with an evaluation of current suppliers and selecting the appropriate alternative. The literature has many examples of how suppliers can be chosen, certified, and/or developed if they are lacking in a specific area (Hahn, 1993). Ellram (1991b) presents a five phase model dedicated largely to the selection and evaluation of preferred suppliers.
A second requirement to implement supplier partnerships is the need for increased communication. Failure to communicate with suppliers can foster mistrust, fear, and dishonest acts on both sides of the partnership. A supplier may not be aware of a problem if there is no communication (Lascelles & Dale, 1989). In a traditional adversarial relationship, communication is sporadic and is usually on a non-recurring basis and involves only purchasing and selling personnel. Early Supplier Involvement (ESI) is a very specialized and technical form of communication. With ESI, suppliers provide technical knowledge and participate at an early stage to help design a product. The advantages are lower design costs, shorter cycle time, and access to the supplier's latest technology (Dobler, et al.). ESI is one of the most important benefits resulting from supplier partnerships. Sharing technical and production information increases the risk for both organizations. ESI tends to be found in the more mature and stable partnerships.
A third part of supplier partnerships is the ongoing management of the relationship. Burt (1984, p. 185) views supplier management as the process to "ensure timely delivery of the right quality" . The basic process is to administer the supplier contract by comparing actual to planned progress. Leenders (Leenders and Fearon, 1993) states that the team approach is the preferred method to manage the supplier relationship. The management team should consist of personnel from engineering, purchasing, quality assurance, and the supplier organization.
Fourth, supplier partnerships require a process to measure and evaluate performance. The process is required to maintain the long-term orientation of supplier partnerships. Some of the reasons to initiate an assessment might be to evaluate a new product or market, to modify a product or process, or to initiate a new contract (Hutchins, 1992). The strategic evaluation of suppliers on a periodic basis may also alert the buyer to future capacity in relation to design, quality, production, and financial stability (Dobler, et al.)
INDUSTRY IN MEXICO
With a degree of maturity, many U.S. and European organizations have adapted the basic principles of supplier partnerships to their organizational needs. The adaptation requires a recognition of the industrial environment and business system in which the buyer and supplier operate. The adaptation of supplier partnerships has contributed to a higher level of competitiveness. The issue of competitiveness, however, is not reserved solely for the developed nations. Many less developed countries (LDCs) view their future of development tied to the principles of open markets and competitiveness, also. On a lesser scale, industrial firms in some LDCs are employing supplier partnerships and other competitiveness enhancing managerial techniques in increasing numbers. Recent research demonstrates that supplier partnerships in the U.S. and other nations have differing procedures (Hendrick & Ellram, 1993). However, little research has been conducted in the application of supplier partnerships in a less developed country, such as Mexico.
Mexico is fast becoming an industrial model in Latin America and for other less developed countries (LDCs). Mexico has opened its markets to imports, restructured the participation of foreign firms in the productive sector, privatized state firms, and implemented other political, economic, and social reforms. Mexico has seen the maquiladora (In Bond/Twin Plant) industry boost the economy and become a sizeable revenue generator. It has been through the maquiladora program that Mexico has been able to provide more industrial jobs, stabilize the balance of payments on its foreign debt, and introduce new technology. Mexico has as a major long-term objective to continue the trend of increased economic development through openness to foreign participation. For Mexico to compete on a global basis will require the use of closer supplier partnerships. With global competition, competitive advantages do not last long (Sherman, 1993) and Mexico can not rely on low wage labor to compete for long in the global economy. Supplier partnerships will necessarily become a strategy of Mexican industrialists.
Implementing supplier partnerships in Mexico requires addressing the two economic issues associated with LDCS. Principally, 1) are supplier partnerships an optimal and adaptable managerial technology to improve productivity in LDC organizations, and, more specifically, 2) is Mexican industry structured appropriately to use supplier partnerships effectively?
The first issue concerns whether supplier partnerships are an appropriate technology or are there more appropriate technologies to enhance Mexico's productivity. In short, are supplier partnerships a transferable technology? Given the lack of research on supplier partnerships in a less developed country in the literature base, the experiences of other technology and operations management practices may give an indication of transferability. Schmenner (1991), in a study of the application of a broad spectrum of technologies in U.S. and Canadian, European, and Korean organizations, finds that location-related factors (e.g. culture, governmental factors) do not affect a firm's productivity. Korea, as an example of a developing country, demonstrates a non-significant impact of the national environment to using an array of new technologies. Developing countries may adopt new technologies faster than that of developed countries. The learning curve, in this sense, applies on a global level. Gerschenkron (1962) refers to the advantage of "backwardness". Developing countries having backward practices learn from the experiences of developed countries in a relatively quick period. The learning process is the essence of technology transfer. In his research, Blomsträm (1988) finds that foreign companies operating in Mexico have higher productivity levels than Mexican owned and managed companies. He attributes this to increased training by multinational organizations. This is not to say that Mexican firms lack the ability to generate new technologies. Rather, the benefits of "backwardness" principle should allow Mexico to pick the best practices from around the globe and adapt them to Mexican needs, much as U.S. and European firms have adapted Japanese practices. The concept of supplier partnerships as used in the industrialized nations qualifies as a prime candidate for adaptation.
Mexico has also shown that hard technology and capital investment have had positive effects on its development. Truett and Truett (1987), in a longitudinal study of Mexican industrial census data, state that Mexican firms have achieved increased gains in productivity through capital investment. Experiences from Mexico and other developing countries show that hard and soft manufacturing technologies are transferable and can be accelerated through increased training. Ebrahimpour and Schonberger (1984) make the case that technology transfer may be more important than the transfer of capital in a country's development. Their research shows that the transfer of just-in-time and total quality management, which are closely related to supplier relationships, is not prevented by social and cultural values. They suggest that these technologies are adaptable to LDCS. The evidence supports the notion that supplier partnerships should be an appropriate and adaptable technology to improve Mexican industrial productivity.
The second issue concerns the structure of the Mexican economy. Is the industrial base sufficiently large to use supplier partnerships to improve productivity? The location, character, and intensity of the Mexican industrial sector is addressed in this issue. Mexican industry has been evolving from an emphasis on primary production to secondary goods. Mexico's industrial centers are located in three principal metropolitan areas: Mexico City metropolitan area, Monterrey-Saltillo corridor, and Guadalajara. Manufacturing has spread in the past decades to other secondary centers, thus alleviating the burden on the infrastructure in the major industrial centers. It is expected to spread to other secondary centers in the coming years.
Mexico has become a sizeable producer in several industries, of which chemicals and products derived from petroleum, carbon, rubber, and plastic; and metal products, machinery and equipment, including surgical and precision instruments) represent the two largest industrial sectors. Dilmus (1991) identifies the Mexican capital goods industry as the major user of subcontracting. The presence of subcontractors leads to what he terms "learning linkages." Learning linkages promote information sharing to improve quality and productivity. However, when compared to Argentina and Brazil, Mexico has a smaller capital goods industry. Dilmus attributes this to Mexico's industrial structure, among other reasons. He posits that Mexico's economy is too broad and does not take advantage of economies of scale. To compound this problem, Mexican producers of capital goods subcontract less and make in-house more so than at international levels. This assessment concurs with Truett and Truett (1987) who state, Mexico has "opportunities to benefit from further economies of scale."
To address the second assumption, Mexico's industries are concentrated in several very large industrial centers. The capital goods industry, as found in the Mexico City metropolitan area and in the Monterrey-Saltillo corridor, appears to have a sufficient presence to support supplier industries. Although the structure of Mexican industry could benefit from more economies of scale production and greater use of subcontracting, some backward linkage industries have fertile environments for supplier partnerships.
CULTURAL COMPONENT OF SUPPLIER PARTNERSHIPS
Although various writers have mentioned that culture is not a barrier to technology transfer (Ebrahimpour and Schonberger, 1994; Schmenner, 1991), supplier partnerships require special mention. The managerial orientation of supplier partnerships requires horizontal, as opposed to vertical, managerial relationships. The orientation is manifested through interorganizational ties and team management required to make a supplier partnership work. The Mexican manager, on the other hand, operates in vertically structured management systems and generally does not use participative management practices. However, when working in a horizontal or peer environment, Mexican managers tend to be very collegial and cooperate highly with fellow team members (Simonsen de Kras, 1990). In summary, the transfer of JIT and TQM is not prevented by social and cultural values, and in the case of supplier partnerships, Mexican culture will probably have a mediating effect.
SPECIFIC BARRIERS TO SUPPLIER PARTNERSHIPS IN MEXICO
In a study of JIT implementation in Mexico, Lawrence and Lewis (1993) find that multinational corporations (MNCs) face several obstacles which have a direct influence on supplier partnerships. They find that MNCs source from foreign sources rather than from Mexican suppliers, transportation and infrastructure systems in Mexico do not support interrregional relationships very well, communication systems such as telephone and mail are poor, high rates of attrition exist among suppliers, low labor rates mask deficiencies in productivity, and educational systems have not provided training and associated materials to transfer soft technologies.
Supplier partnerships offer Mexican organizations an opportunity to improve their competitiveness as they have for firms in developed countries. As with most technologies, a process of adaptation will occur as they are used in Mexico. It is unknown what form supplier partnerships will have in the Mexican business environment. The authors suggest further exploratory empirical research is needed to determine if supplier partnerships are present in Mexico and, if so, what are their characteristics.
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