There is a confusing collection of words used to describe the relationships between economic entities in the supply chain. They range from alliance and partnership to customer/client, prime vendor, and beyond. Any discussion of the supply chain these days seems to be long on words and short on definitions. It is not our purpose here to define the various terms in play. This is a heroic undertaking, best left to writers with more space and energy. Our purpose is to review some of the operational requirements for a successful supply chain relationship.

These observations draw upon contract research in the legal field as well as the work of some of my colleagues. It is important to recognize that relationships in the distribution channel are not new phenomena. Throughout history, there have been contracts between partners embarking on economic ventures or seeking mutual objectives. These relationships have taken various forms. In the United States food industry during the rise of the chain stores, for example, many independent grocers either formed their own association (AG) or joined a wholesaler-led group known as IGA.

The bottom line is that alliances, partnerships, and joint ventures in the channel have been around for a long time. And they continue to evolve to this day. Consider how Michael Dell within a very short time has built a new business model that threatens the market share of the established brand names. He has done this by pursuing different relationships both upstream with his suppliers and downstream with his customers. Dell currently books $6 million worth of orders a day over the Internet.

As we enter the 21st century, we will see some new wrinkles in how relationships will be built and sustained. In my view, one of the most important developments will center on information technology. My research of the past few years strongly suggests that logistics/supply chain executives are attempting to globally manage inventory they can't see and don't own. Further, they want the option of selectively fine tuning the inventory in motion. IT is enabling this, creating a sea change in the relationship between supplier, manufacturer, customer, and third party. Information sharing has become a foundation strategy for buyer-seller and third-party relationships. If an executive can manage a supplier's inventory and a customer's inventory, then typically less total inventory (safety stock) is required to support service to the customer. This concept of information visibility or transparency is a primary component in JIT, QR, VMI, and CRP.

In designing or reinforcing their supply chains for the next millennium, companies should keep in mind the five building blocks that characterize a solid supply chain relationship. These are (1) sharing of information, (2) sharing of benefits and burdens, (3) multiple contacts between the economic entities, (4) cross-functional management processes, and (5) future-oriented collaborative processes. In certain relationships, there could be additional important building blocks such as shared proprietary manufacturing technology or joint marketing agreements. But these five are the bedrock.

On-time—or close to on-time—information sharing between supply chain partners can reduce or eliminate dependence on forecasting. And with greater demand predictability, safety-stock levels can be reduced throughout the supply chain and customer response time improved. There is little argument that information is a key prerequisite for supply chain integration and implementation. The degree of integration might be argued (and there are issues as to who shares what data with whom as well as the firewall necessary to protect proprietary data), but certainly not the direction.

A partner in the supply chain is a partner through good times and bad. The relationship does not follow the fortunes of an economic cycle. The operational flows, value-added prices, and cost/benefit profiles might change with an upturn or downturn in the economy. But the relationship is steady.

A related issue revolves around how the partners share the benefits and burdens of the supply chain process. If two partners together can compress the order cycle from 16 days to 4 days, who benefits from reduced inventory—the supplier or the customer? If the customer enjoys all the benefits, it might be called a relationship, but the supplier is really picking up the tab.

In a traditional supply chain, the relationship between supplier-customer and customer's customer is mediated by the sales person. In an integrated supply chain, the relationship is multi-faceted. The buyer, seller, and third party communicate directly at the executive level as well as at the operating areas of quality assurance, forecasting, IT, and so forth. These multiple points of contact ensure timely conflict resolution and a more robust communications network at all points in the chain.

Linkages across supply chains require rapid relay of demand signals throughout the chain and true customer focus. Many firms are finding that the most effective way to provide this rapid response and customer focus is through a cross-functional team that maps an integrated process. Customers, suppliers, and third parties can play important roles as team members. No organization has yet come up with the magic formula for developing highly effective cross-functional teams. Questions remain as to customer focus vs. channel focus, team composition, compensation, leadership, and so forth. But none of these unanswered questions has prevented a number of leading firms from experimenting with cross-functional management processes.

A supply chain functions in a business environment that requires operational, tactical, and strategic planning. In addition to streamlining the operations to eliminate waste and redundancy, the partners need to agree on strategic direction that will provide the basis for longer-term product development, asset deployment, global development, and so on. Developing this strategic direction, in turn, requires a shared vision among the partners. True collaboration inside or outside a firm can be difficult to develop and sustain. The existing organizational structure and culture are two of the biggest obstacles.

These five building blocks form the foundation for all relationships in the supply chain. If any one of them is missing, the relationship is at risk for long-term sustainability.