How should switching costs affect the Supply Chain Decision

timer Asked: Mar 6th, 2013

Question Description

Supply Chain Management

Read the below document and answer the following questions:

Keep the answer separate.

  1. Should Starwood maintain a cooperative orientation or a competitive orientation with its suppliers for the kind of items described here?
  2. Should we consider both strategies? Why or why not?
  3. Do we have enough information to make a determination?
  4. Would Starwood be destroying the cooperative orientation they have established by breaking a contract with linens and terrycloth items to source with a new supplier at lower cost?
  5. How should switching costs affect the decision?

Sourcing Strategy at Starwood

Bath towels. Televisions. Fresh Produce. Uniforms. On the surface, these items may not appear to have any relationship to each other. Sure, they exist in most households, even though they were probably bought independently of one another. Yet to the supply chain manager employed in the hospitality industry, they not only have a relationship, but their purchase can be critical to gaining a competitive advantage.

Just ask Paul Davis, vice president of strategic sourcing for Starwood’s North American operations. With hundreds of hotels and resorts in the US, Canada, and the Caribbean, Davis’s goal is to create the hospitality industry’s best supply chain organization. The items procured within his organization not only include replenishable goods such as fresh produce and food items, but also extend to the sourcing of national contracts for nonperishable goods such as bath towels, electronics, staff apparel, energy, and contract services.

It is easy to confuse supply chain processes with the routine procurement of goods and services. Starwood’s supply chain certainly does include contracting, but it is much more: It consists of the customer relationship, order fulfillment, and supplier relationship process. Strong linkages exist among the company’s upstream suppliers of services, materials, and information, and the customers of Starwood’s hotels and resorts. If the upstream relationships are not carefully managed, downstream delivery of consistency, quality, and value to Starwood’s guests may suffer. As a result, significant effort is placed on the nested processes within the supplier relationship process such as design collaboration, sourcing, negotiation, contracting, and information exchange.

Any number of events will trigger the involvement of Paul Davis’s supply chain team:

· Existing contracts expire.

· Individual hotel brands seek new products.

· Hotel property design teams generate ideas.

· New categories of products emerge and need evaluation.

· A particular hotel needs help with a local service contract.

When a product or service needs to be sourced, the specifications are driven by internal customers such as restaurant chefs, housekeeping, and maintenance. If the product or service does not already exist, domestic and international suppliers that might be able to create the item are researched, as are regional and local vendors. Sometimes, sourcing an existing item simply means renewing an agreement with a current supplier. Still other situations demand creating a new category that has not been sourced before or using a third party to help locate sources.

Due diligence is always performed by sending potential suppliers a “request for information” in either paper or electronic form. The responses returned by suppliers are entered into a database and help Starwood to prequalify the suppliers. A good match is sought, requiring the suppliers to meet minimum requirements for financial viability, quality, scope of operations, references, and legal risk avoidance. With a suitable potential supplier candidate pool, Starwood then takes one of two paths. The first one is to conduct a reverse auction where preselected vendors bid against each other. This method is used with shorter-term contracts on commodity items that have low external customer visibility. Kitchen uniforms, hotel door room keys, and paint are sourced this way. The second option is to send out a request for proposal (RFP), which requires the vendor to put its best terms forward at the outset for consideration.

After review by the supply chain team, the vendor winning the auction or emerging from the RFP review activity as the best fit its engaged in negotiations. Throughout the supplier relationship building process, Starwood gets to know vendors, but it becomes much more personal at this point as both parties move toward concluding their contract negotiations.

Starwood maintains a cooperative orientation toward its supplier relationships, building a partnership to maximize value for each party to ensure that each side is comfortable with the price, quality, and delivery requirements it has agreed upon in the contract negotiation process. When contract negotiations are complete, the different brands are notified and the buying and information exchange processes begin.

At this point, you might think the job of the supply chain team is done. Yet managing the existing supplier relationship after the contract ink dries is perhaps the most challenging task of all. The contract involving sourcing of bed linens and terrycloth items is a perfect example. Not long after the contract was finalized, an alternate supplier approached Starwood with an offer to supply comparable quality goods at a much lower cost. Supply chain managers had a choice to make: continue to work with the existing supplier or buy out the current supplier’s contract and begin sourcing with the new one. 

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