The Many Benefits of Supply Chain Collaboration
Supply Chain Management Review introduces a new series called “Back to Basics.” It’s a look into how excellence in the core logistics and supply chain activities leads to overall business success. The articles in this seven-part series are written by educators from the University of Tennessee. Pictured: Matthew B. Myers, the Nestlé Professor and head of the Department of Marketing and Logistics at the University of Tennessee-Knoxville
Since 2008, a number of analysts have forecasted the demise of long-term supply chain relationships because of increased competition within the supply chains for thinner slices of the margin pie.
Their premise: As markets become tighter, energy and raw materials prices increase, and as working capital becomes harder to procure, supply chain collaboration will suffer in a Darwinian struggle for profitability scraps. Yet two reassuring developments are undermining that premise.
First, most supply chains are finding enormous amounts of waste, which they are c trimming away to keep working margins. Second, supply chain partners are finding innovative ways to make collaboration work for mutual benefit in previously unexplored ways. As a result, while a number of supply chain partnerships have deteriorated over the past eight business quarters or so, most have survived. In fact, many companies credit their own survival largely to their working relationships with buyers and suppliers.
Why is this the case? Because successful supply chain relationships mean much more than cost efficiencies and economic conveniences. As we discuss below, they bring with them other important advantages that are not always apparent to the folks in the organization with the “sharp pencils.”
At the University of Tennessee, our research shows that world class supply chains benefit in many ways from collaboration - even in times of severe economic stress. These benefits extend beyond improved efficiency and effectiveness to include helping all the supply chain members meet customer demands, grow markets, and increase competitive market share.
These advantages are achieved in a number of innovative ways over the life of the collaborative relationship—for example, by increasing sales volume from downstream buyers, lowering operational costs within the relationship, word-of-mouth referrals, and new product and process innovations borne from the working relationship between trusting partners.
Collaboration Increases Share of Wallet
In a tight economy, new accounts can be increasingly difficult to secure, even in emerging markets. As a result, suppliers are increasingly targeting their sales efforts to existing customers and can only succeed if they add value above and beyond their competitors. While price is important, competing on price alone often leads to fickle customers who, a year after of doing business with you, will leave to find cheaper pastures.
The best supply chains have buyer-supplier relationships that are based on value and consistent delivery of this value. That value can be based on services, quality, on-time deliveries, returns management, or some combination of these. It’s what makes buyers increase their percentage of purchases from individual suppliers for the long run. This provides a double-edged benefit for suppliers: when a buyer increases its purchase of a needed material from 45 percent to 60 percent, this not only enhances the chosen supplier’s bottom line, but also negatively impacts the competition. Further, this increased collaboration between supply chain buyer and seller leads to another valuable outcome: increased efficiencies.
The Longer the Collaboration, the Lower the Costs
One of the greatest benefits from long-term supply chain collaboration (and one that consistently delights operationally oriented managers) are the cost savings that result from routinized procedures over the life of the relationship. When buyers and suppliers begin a relationship, there interactions often are fraught with inefficiencies and expensive organizational idiosyncrasies, adding to the cost of doing business in year one. In year two, however, procedures typically become more streamlined, kinks in IT are worked through, and interpersonal relationships between organizations become more efficient.
The longer the relationship, the more indirect costs—operational and otherwise— are reduced. These cost savings are shared by both buyers and sellers, increasing the benefits to both. They can also be passed on to customers in the form of lower prices, thereby increasing the supply chain’s position in the competitive landscape.
The Power of Word of Mouth
Much has been written recently about the “Post-Crisis Consumer” and her propensity to rely on referrals from other buyers rather than trust promotions directly from the company. There are a variety of reasons for this change in perspective. But many point to the average consumer’s increasing lack of trust in advertising as well as the incessant “noise” coming from the traditional promotional outlets.
In supply chains, we are seeing a similar move toward referrals, albeit for different reasons. Largely, these word of mouth referrals come from supply chain members who stand to benefit from partner firms buying—or supplying—other organizations in their extended network. This is becoming especially prevalent as the number of joint venture arrangements increases worldwide. So a buyer that purchases wiring from a supplier in the U.S. will refer the supplier to its joint venture partner in Mumbai in order to meet market demands there.
Furthermore, horizontal buying networks across multiple markets (often in the form of multiple joint ventures or strategic alliances) often are consolidating suppliers in order to service all points of operation from a single source. This means that the longer the relationship a company has with one supply chain partner, the better the chance of picking up that partner’s joint venture collaborators. This form of “global account management” is often one of the major benefits for members of expanding global supply chains and offers an excellent way to enter otherwise very difficult marketplaces.
Innovation through Long-Term Collaboration
It is common knowledge that reduced product life cycles increase the pressure on firms to develop new products, which often creates considerable stress on the organization’s R&D function and its budgetary constraints. Similarly, increasingly competitive global supply chains place enormous pressures on supply chain managers to develop new processes that enhance both cost efficiencies and customer services. Like new product development, new process development can be extraordinarily expensive…and risky. Yet time and time again, we see long-term collaborative partnerships as the most innovative way to develop processes that both reduce costs and add value for the partners.
In their book The New Supply Chain Agenda, Rueben Slone, Paul Dittmann, and Tom Mentzer give numerous examples of how long-term supply chain relationships create an environment for developing innovative solutions to problems and challenges. These innovations aren’t necessarily the big breakthroughs of highly advanced new processes; more often they are innovative combinations of existing tactics that are well suited for volatile markets. This is consistent with the premise that most successful innovations don’t come from the lab, they come from customers and suppliers. A corollary is that firms experiencing significant turnover in their customer or supplier bases rarely benefit from such practical innovation as their competitors with long-term collaborative relationships.
Absolute vs. Relative Gains
As supply chain relationships extend in time, it is critical to remember that, while both partners’ share of the benefit pie will grow, each share will not necessarily grow at the same rate. Too often, a lack of understanding around this point, has caused acrimony between the supply chain partners. And because of the unrealistic expectations of both parties, otherwise profitable relationships have deteriorated.
We call this the problem of absolute vs. relative gains, with too many firms focusing on the latter. In reality, supply chain partners should concentrate on the relationship’s absolute benefits to their firm—and whether those benefits would be realized if the partnership did not exist. These benefits may not accrue in equal portions to the participants. But as long as the partnership is mutually beneficial and strengthens the competitive position of the supply chain at large, all parties should gain significantly in absolute terms. The longer the collaborative relationship, the more firms from raw material providers to retailers will see benefits— not just in traditional cost-saving terms but also through increased share of wallet, word of mouth referrals, and enhanced innovation capabilities.
Matthew B. Myers and Mee Shew Cheung (2008), “Sharing Global Supply Chain Knowledge” Sloan Management Review, 49 (Summer), 67-73.
Slone, Reuben E., J. Paul Dittmann, and John T. Mentzer (2010), The New Supply Chain Agenda. Cambridge: Harvard Business Press.
In examining the basics, our experts from the University of Tennessee will explain how mastery in the following areas leads to success on the bigger supply chain stage:
This concludes our 7 part series on “Back to Supply Chain Basics” - Click Here to view a Table of Contents of all 7 parts.
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