Alinchpin of effective supply chain management is the ability to pick the right channel partners and then to establish the right relationships with them. In the sporting world, the ingredient that separates the great team from the merely good team is chemistry—an attribute that encompasses a common vision, an understanding of individual roles, an ability to work together, and a willingness to adjust and adapt to create superior value. Perhaps the closest parallel to chemistry in the business world is trust, which recognizes vulnerability while promoting collaboration, flexibility, risk taking, shared information, and shared resources.¹ Trust enables members of the supply chain team to rely on each other.² Equally important, a lack of trust is the greatest obstacle to advanced supply chain collaboration.³

Trust is an intangible attribute that is widely recognized as a prerequisite to supply chain success. Many independent studies have shown the long-term economic value of trust-based collaboration up and down the supply chain. For example, exemplary companies like Land's End (now part of Sears) and Toyota leverage trust to facilitate the unique collaboration, shared resources, and risk taking that deliver superior levels of customer satisfaction and profitability. Yet trust is not well understood by many managers. The word is frequently heard whenever the talk turns to supply chain alliances. Yet as an actionable and measurable concept, trust is difficult to define. As a result, the word is bandied about as if its frequent use could adequately fill the void in relationships where distrust is actually a better descriptor of reality.

As a consequence, many managers are on guard whenever they hear the word "trust." That's especially true at smaller companies where managers often feel whipsawed by larger supply chain participants who style themselves as "partners." Contemporary magazine articles sum up the feelings of many disenchanted managers with headlines such as "Supply-Chain Squeeze: Big Clients Demand Cost Cuts—Now" and "Slowdown Lets Big Tech Buyers Squeeze Suppliers."⁴ The disparity between the gratuitous use of the word "trust" and the hard-nosed nature of many buyer-supplier relationships has led some managers to promote the cynic's definition of trust: "Lip service paid to all 'valued relationships' incorporating shallow commitments, hollow promises, and some dandy clichés about win-win philosophies, shared risks and rewards, and long-term partnerships."

Dispelling that definition is a challenge for the modern supply chain manager. As competitive pressures increase worldwide, the need for real trust and more effective supply chain collaboration becomes imperative. To succeed, managers must first understand the nature of supply chain trust and then work to build a culture of trust. Only then can opportunities for supply chain chemistry emerge.

The authors set out to learn what typical supply chain managers understood about trust and what they thought about its relevance to their regular activities. Knowing that we had to tap into the experiences of managers in diverse functional roles across the supply chain, we designed an empirical approach involving both surveys and case studies. Our researchers polled purchasers, logistics professionals, and manufacturing managers. To capture sentiments driven by channel power, the researchers conducted interviews with supply chain leaders up and down the supply chain. (See sidebar, "Methodology Used to Assess Trust," below.)

The survey probed for answers to questions such as these:

• What levels of trust have been achieved in buyer/supplier relationships?
• What value-added resources are shared among supply chain members?
• Do supply chain alliances operate under principles of shared rewards and risks?
• What does your business do to help suppliers improve performance?

The interviews complemented the polls by gathering insights about factors such as the most important keys to alliance success, the most important requirements for successful supply chain integration, and the barriers that managers have encountered in their integration efforts.

While the research turned up much that was discouraging, there were many hopeful findings. Managers mentioned an array of factors needed to build strong alliances, including patience and perseverance, a willingness to be flexible, a mutual commitment to the relationship, collaborative continuous improvement and creativity, innovation, and idea generation. But the theme that surfaced more often than anything else was trust. Respondents noted that an alliance's ability to create unique capabilities depends on trust. Without trust, neither partner is willing to step out of traditional comfort zones to take on new roles and responsibilities.

As managers discussed other necessary elements of strong alliances, the importance of trust was magnified. Measuring the "collaborative," "mutual," "shared," or "willing" aspects of key attributes is an elusive challenge, placing great emphasis on trust. Trust is needed to bring the two sides of an alliance together to help each achieve greater success than they could alone.

Respondents underscored their recognition of trust's importance when asked about the three or four most important requirements for successful supply chain integration. The need for high levels of trust was cited as the sixth most important requirement, behind only information systems, performance measurement, senior management commitment, a visible need for change, and a common supply chain vision.

That recognition of the importance of trust, however, is not matched by supply chain realities. Roughly one in four of the interview participants took pains to point out that real trust is rare in supplier-customer relationships. Others placed trust on their "wish lists." Many managers said that the word "trust" is overused, misused, and frequently abused. The survey results supported those sentiments. Fewer than half of all respondents (49.6 percent; mean=4.37 where 7=strongly agree) felt that trust characterized supply alliances. Worse: Only about one in three managers reports that value-added resources are shared among supply chain partners (36 percent; 3.95). Similar percentages said that their alliances operate under principles of shared rewards and risks (32 percent; 3.74) and that their companies dedicate resources to help suppliers improve their own capabilities (29.6 percent; 3.67). The manifest lack of trust explains why companies place so much emphasis on complex contracts, detailed confidentiality agreements, and specific continuous improvement clauses. Without trust, companies try to legislate cooperation.

Interestingly, many managers noted that trust is also absent within their own organizations, suggesting that trust is an attitudinal or cultural phenomenon. The interviewers heard many stories that highlight the lack of a trusting culture, such as the following:

• One manager talked about his company's enlightened approach to supplier management. But when asked what happens when a supplier runs into a problem or cannot meet cost targets, he snapped his fingers and said, "They're gone, just like that."
• Another manager told of a recent occurrence where his company was bidding on a contract. The longtime customer invited several suppliers to a hotel's conference center for negotiations. Each supplier was assigned to a room where the negotiations would take place. The customer's staff then went from room to room sharing details of the concessions extracted from the other suppliers until they met their "target cost."
• One supplier showed a form letter it had just received—a note of thanks for the supplier's dedication with a notice of the buyer's need to reduce costs. The second paragraph noted that the buyer expected the price of its purchased parts to drop to levels offered by Asian suppliers—retroactive to the first of the year. A quick look at the attached price list revealed that the organization was seeking an across-the-board price cut of 10 percent.
• A manager proudly related the experience of being selected as the "Supplier of the Year" by a major Japanese company. He told about the wonderful evening at a downtown hotel with a banquet to honor the supplier's performance. He then said, "That was a year ago. About a month ago we received a letter informing us that we are no longer an approved supplier because someone else beat our price by two cents per part."

The underlying theme from both the interviews and the surveys is that trust is far easier to talk about than to establish. Many companies fail to recognize a need to cultivate a culture of trust. They are not convinced that trust can deliver competitive capability. Old practices and old priorities still hold sway.

Our research established that one reason for the gap between the rhetoric and the reality is the conflict that occurs between trust's intuitive appeal and the hard work required to build a trust-enabled culture. Indeed, managers repeatedly described the challenges encountered in establishing trusting supply chain relationships. As the interviews proceeded, certain themes began to appear as antecedents to trust. Dissecting the descriptions, we identified five distinct dimensions that were either barriers or bridges to trust, depending on how companies approached their implementation. Each of these dimensions, discussed below, allows a fresh examination of the business behavior that influences supply chain relationships. Together, the five dimensions offer supply chain managers the beginnings of a blueprint for true trust-based collaboration.

The Performance Dimension

Strong and productive supply chain relationships can exist only when there is mutual dependence, when goals are congruent, and when all parties know the others' competencies. Numerous respondents echoed the idea that supply chain alliances thrive when they lead to superior performance. More than one respondent pointed out that there is no such thing as trust without performance. In today's marketplace, managers are aware that their businesses are "only as good as their last performance." However, that emphasis on performance creates a paradox: Trust dies without performance, yet a "what have you done for me lately" mindset injures trust and teamwork.

Trust depends on consistently doing what you say you are going to do. One of the great frustrations expressed by respondents is the tendency of companies to overpromise and underdeliver. Such behavior—particularly prevalent among consultants and service providers—creates uncertainty and drives up supply chain costs. One manager noted that his company consistently devalues promises made by technology providers by 30 percent before deciding whether to proceed. Another joked about a 90/10 rule in effect at her company: "You reduce the promise by 90 percent and then make the decision," she said. Of course, suppliers argue that they have to overpromise simply to stay in the game. In a world where realism may not always be valued but where failed promises destroy trust, companies need to adopt the mantra, "Do what you say you are going to do the first time, every time, all the time!" As one manager explained of a favored supply chain partner, "I never lose sleep when I work with Jim because I know that he will deliver as promised even if he has to lose sleep." Performance is the bedrock on which lasting trust is built.

The Information-Sharing Dimension

Trust requires open communication—not just selective information exchange. Managers must learn to share all the information that affects a relationship's competitiveness. While supply chain partners have been willing to share forecasts, most have been unwilling to disclose other tactical and strategic information.

However, leading companies now routinely swap extensive historical sales data and long-term forecasts. Some provide rolling 18-month production plans to their suppliers. A few companies actively open up about new product, market entry, and technology plans and put extra effort into enhancing joint problem solving, brainstorming, and other continuous improvement communication techniques.

Other supply chain exemplars employ quarterly business reviews to revisit information-sharing practices and processes. Real feedback is shared in both directions, and real improvement is expected. Such open forums become the basis for strong and dynamic relationships that can more easily lead to new ideas and unique products and services. Trust can only thrive in a setting of frequent, open, and honest communication.

The reverse is true too: Open communication requires trust. Many companies have yet to learn that lesson; they have invested heavily in computer systems in a bid to improve information exchange, but they have found that reluctance to share information is a far greater barrier to communication than is poor systems connectivity. Managers share information only when they are confident that the information will be used appropriately. If they sense opportunistic behavior on the part of supply chain partners, they are much more likely to hoard information instead.

The Behavioral Dimension

Perhaps the best indicator of trust-based behavior is the true sharing of risks and rewards. Several managers at buying organizations explained that they work diligently to treat suppliers well and that the benefits of joint initiatives are shared 50-50 for the first year.

That is leading-edge practice. However, companies with more channel power generally hold on to a higher share of mutually generated benefits. When asked how his company shares rewards, one manager simply said, "We don't do that." A manager at a first-tier supplier shared the same perception from the other side of the power fence. He noted with disgust that a key customer was "very good at sharing risks and rewards. They keep all of the rewards and pass all of the risks on to us."

By contrast, truly trusting relationships invoke no such sentiments. These two anecdotes exemplify the nature of such relationships:

• A customer told a key service provider, "We've carefully examined the service that you provide as well as what you charge for your service. We value what you do for us and really think you need to charge us more. We want you to raise your rates because we want you to be successful over the long term. We can't rely on your service if you're not in business."
• A proactive retailer expects suppliers to hold four weeks of inventory at their facilities. Shared demand forecasts supported by supplier-held inventory allow the buyer to meet unexpected demand surges. In return, the retailer promises to buy up to four weeks of inventory if sales fail to materialize. When a forecast proves optimistic, the retailer assumes the risk of the inaccurate forecast.

Another behavior that both manifests and builds trust is investment in a supply chain partner's capabilities. Recipients get the signal that they are valued team members. Leading practitioners know that they can gain competitive competencies by investing in their critical suppliers. Yet that behavioral dimension of trust creates a tension for companies that still want to get the best out of the supplier relationships that are not critical. In other words, many of those relationships are still very much price-based. Can such companies practice that "split-level" approach without undermining a culture of trust? Marshall Fisher pointed out that trying to keep one foot in each world is a stretch that few companies master: "Too often, companies reason that there can never be too many ways to make money, and they decide to play the cooperative and competitive games at the same time. But that tactic doesn't work, because the two approaches require diametrically different behavior. "⁵

The Personal Dimension

Honda's Teruyuki Maruo has emphasized personal relationships: "Suppliers don't trust purchasing because purchasing means cost, but they must trust you," he said. "Suppliers must develop confidence in you. They may not trust purchasing, but you want them to trust you."⁶

While organizations develop reputations for the way they conduct business, trust is personal. At one retailer, a senior manager visited a key supplier to establish a closer relationship. Several months after successful negotiations had produced a collaborative relationship, competitive pressures led the manager's boss to ask him to go back to the supplier to obtain cost concessions. The manager hesitated and replied, "You sent me down to change the nature of our relationship with this supplier. Now you want me to go back and beat them up for lower prices. You'll have to find someone else. I won't do it." After serious consideration, the company decided not to jeopardize the long-term relationship for a short-term price cut.

Several survey respondents highlighted the need to increase one-on-one time with their supply chain partners even though they were in the midst of making significant investments in information technology. At some companies, senior executives are charged with spending a significant amount of their time—often more than 20 percent—meeting counterparts at key customers and suppliers. Customer and supplier visits made by cross-functional teams also help achieve harmonious relationships while providing insights into real needs and real opportunities to work together in innovative ways.

Leading companies are adopting dedicated account management teams to provide a consistent interface with their best customers. Looking upstream, more companies are conducting supplier conferences to improve relationships, share expectations, and share best practices. And perceptive managers establish interorganizational teams and advisory councils to assure more cohesive and meaningful interaction up and down the supply chain. Trust building is always best done face-to-face.

The "Two Worlds" Dimension

Channel position and power affect trust significantly. In the interviews, suppliers and service providers cited a lack of trust as a barrier to good alliance relationships twice as often as did retailers and finished-goods assemblers. The pivot point is power: As a rule, buyers have it; suppliers do not. A typical comment is that customers always have "the upper hand," and they use this advantage to extract lower prices or other concessions. The feeling was borne out by sentiments expressed among the customer-supplier relationships included in the interviews. In each instance, the manager at the buying organization expressed the opinion that a highly trusting relationship had been established. By contrast, the supplier's manager consistently expressed the sense of being at the customer's mercy.

Exhibit 1 highlights these and other realities that create divergent views and emotional distance between supply chain partners. Many fundamental objectives pull in seemingly different directions; buying organizations seek to reduce costs, while suppliers work to protect margins. Despite many academic studies that preach that both are simultaneously possible through cooperation, suppliers feel that when "push comes to shove, it is almost always at our expense."

Press reports regularly confirm this belief. A classic example surfaced in the Wall Street Journal in 2000: "Chrysler yesterday demanded that its suppliers cough up 5 percent price cuts by Jan. 1 and another 10 percent by 2003."⁷ A similar report in Business Week described a supplier's plight this way: "The ultimatum came in January: Cut your prices 30 percent or the deal is off. But with margins already razor-thin, another cut was impossible." More recently, the Wall Street Journal headlined the challenge for suppliers in a world where excess capacity characterizes many industries: "Even in the best relationships, managers must work to see the world through the other participant's eyes. One manager commented, 'When I worked as a buyer, I really felt that I was treating my suppliers fairly. Now that I'm on the other side of the relationship, I feel tremendous pressure when buyers ask me to do the same things I use to expect from my suppliers.'"⁸

The two-world view suggests that when the buyer says, "We need to squeeze costs out of the process," the supplier is likely to hear, "They plan to squeeze the margin out of us." Trust is hard to build when the power relationship is asymmetrical. It only exists when both sides feel it does.

There is much in our research to suggest that trust, like charity, must begin at home. Until businesses more successfully embed trust attitudes in their everyday internal activities, it is probably unrealistic to expect their behavior toward suppliers to change. Instead harsh comments such as the following, heard during the research, will still emerge: "Sure we trust our customers; we trust them to screw us every time."

Roger Blackwell summarized the fallout when trust is missing. His assessment highlights the necessity for trust to be highly developed internally: "If entrepreneurs and senior managers do not trust frontline employees, a firm cannot act with speed and efficiency. If a supplier does not trust a customer, then the supplier hesitates to suggest productivity changes. If customers don't trust suppliers, they cannot readily shift functions such as inventory replenishment to their supply chain partners. If employees do not trust management, they will not suggest changes that lead to better execution. Trust is the catalyst of progress in improved performance."⁹

Although few managers cultivate environments where goals are aligned and where the need to collaborate is felt throughout the organization, there is a much stronger likelihood that trust can be regained internally. To summarize, our study found that there are five key behaviors that will cultivate a culture of trust and promote collaborative improvement:

1. Day-to-day promises met.
2. Open rather than selective information sharing.
3. Behavior that communicates that the other party is a valued team member.
4. Personal relationships that bridge organizational boundaries.
5. Relationships that are mutually viewed as fair and beneficial.

Anything short of those behaviors is seen as pretense and eventually is viewed as manipulative. Promotion of the right behaviors can begin with an assessment of the company's internal culture of trust (see Exhibit 2). An effective assessment should include both a series of evaluations of specific functions as well as an overall assessment performed by an objective task force. A thorough assessment then extends to external evaluations by both suppliers and customers. To facilitate such an assessment, the company might want to develop a diagnostic tool that asks questions regarding each of the five dimensions of trust discussed above.

Comparing the internal and external assessments identifies gaps in perceptions and behaviors. Each gap represents an opportunity to improve organizational trustworthiness. Managers must then prioritize initiatives and take action. Education is often needed. Equally important, individuals responsible for building and maintaining relationships must be evaluated and rewarded based on the establishment of adequate levels of trust.

It has long been understood that trust is a prerequisite for advanced supply chain collaboration. In fact, the concept is so well understood that the term "trust" is overused to the extent that it has become debased. The gap between rhetoric and reality remains wide.

The authors' comprehensive research breaks new ground in defining the importance of trust to key supply chain relationships and in exploring the breadth of the rhetoric-reality gap. Although the research uncovers embedded cynicism—particularly from managers on the weak side of any relationship—it also found much cause for optimism.

Most importantly, though, the study identifies five crucial dimensions of trust—from aspects of performance and sharing of information to behavior and a "two worlds" perspective. Taken together, the dimensions form stepping-stones to establishing and extending supply chain alliances that can yield lasting value for the participants. Already, supply chain exemplars such as Honda and Wal-Mart see real economic value in building more trust into their relationships with critical suppliers, and they are working hard to do so (see sidebar, "Wal-Mart's Trust Initiative" on page 24). The tightening vise of global competition makes it mandatory for others to follow their lead.