Supply Chain: Dangerous Liaisons
By Timothy L. Mould and C. Edwin Starr
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PDF Help The benefits of good relationships with suppliers
are now clear. But some partnerships are a waste of time and money, others are
actually dangerous, and only a few will justify taking the risks that fully
integrated collaboration demands.
Recent press on supply chain management in the
business-to-business sector of the eEconomy leaves the impression that
collaborating with suppliers is a little like participating in a 1960s love-in:
The more partners, the better.
It's easy to understand why. Transaction and communication
costs, which previously limited the extent of inter-company relationships, have
fallen dramatically. Thanks to some well-publicized success stories, such as
Dell Computer Corporation and Cisco Systems Inc., the business benefits of good
relationships are now clear to all.
The risks associated with bad relationships are only
beginning to be discovered, however. In fact, Accenture's work with high-tech
companies and our research on organizations in other industries show that
indiscriminate collaboration is as unhealthy a practice in business as it is in
other facets of life. Some relationships are dangerous, others waste time and
money, and only a few justify taking the risks demanded by fully integrated
collaboration.
What risks? Collaboration demands not only a commitment of
resources but also the sharing of proprietary information. In some cases, the
information exchanged during collaboration may be the most valuable investment
a company makes in the relationship.
Leveraging Relationships
But, of
course, it will not be the only investment. Time must be invested in defining
business objectives for the collaboration, people must be dedicated to the
effort, and measurement systems must be in place to monitor progress. It may
also be necessary to integrate and align processes and organizations. All of
these elements constitute investments at risk in a collaborative effort.
So the decision to collaborate with suppliers should not be
taken lightly. But how does one decide whether a collaborative relationship is
worth the investment and the work? Collaborative relationships are suitable
only under certain conditions. When these conditions are not present,
collaboration is not only inappropriate, it may also be counterproductive. Some
of these conditions relate to the nature of the market, others to the nature of
the product itself.
For example, consider the personal computer. Each one is an
aggregation of components-boards, chips, wires, screws, switches, disks and
software. Each component exists in a distinct market. The people who supply
chips do not supply software, the people who supply screws and nuts are a
different group from those who supply hard disks, and so forth.
Each component flows through a different set of market
channels, and each of these component markets has a distinctive character. Some
of the markets are monopolistic, oligopolistic or very brand-sensitive (think
of "Intel Inside!"); in these cases, the suppliers have a great deal of
leverage in relationships with their customers. Other markets are open-more
commodity-oriented-with numerous highly competitive suppliers and low barriers
to entry; here the leverage in a relationship rests more with the customer than
the supplier.
 Collaboration may
be more or less desirable, depending on these market characteristics. We use
the term market sophistication to describe all of the
factors that influence how a component is bought and sold.
Turning our attention from the product supply market to the
product supply chain, we see that some components are more complex than others.
Just as the components in a personal computer may be positioned on a spectrum
of market sophistication, they may also be positioned on a spectrum of
operational complexity.
Operational complexity describes the intricacy of the supply
chain of any particular component. Manufacturing cycle times, production
capacity, length of the product life cycle, unit volume and the like all
contribute to operational complexity. Screws, cables and the plastic housing of
a personal computer can all be procured relatively easily and either stored
inexpensively (because of their low unit cost) or delivered in just-in-time
fashion by a local supplier. Memory and semiconductors, on the other hand, are
typically produced in Asia and are often shipped to markets by air because of
their short life cycles and higher costs.
Interaction
Using these basic
notions of market sophistication and operational complexity, we have developed
a framework for analyzing relationships. Market sophistication and operational
complexity interact to shape four basic types of supply chain relationships.
Transactional. Transactional relationships occur when there are many suppliers of a similar component and one supplier is as good as another. Think, for example, of the nuts, bolts and plastic clips-all essentially commodities-in a computer. In these cases, cost is the main criterion for selecting a supplier. It is pointless to invest significant time or effort in forming a fully integrated collaborative relationship, especially when there are Internet-based commodity exchanges that make it easy to identify low-cost suppliers (For a related article, see "2B or not 2B").
Unique. Unique relationships are
something like marriages of convenience: They may be necessary, but they aren't
deep. For example, almost all personal computer makers need a relationship with
Microsoft because most end users demand Windows-compatible software. There's no
doubt who dominates the relationship between Microsoft and a computer
manufacturer. With the capability to "transport" software electronically, there
are relatively fewer demands on Microsoft and computer manufacturers than on
other suppliers.
Operational. These relationships blossom when a component
is so critical that any interruption of supply will be costly to the user, but
where, at the same time, the market is unsophisticated, with most end users
indifferent to the brand of component used. Take personal computer monitors.
Companies must coordinate operations with one or a very few suppliers to ensure
reliable, smooth and uninterrupted supply, but they are free to choose their
collaborators from a number of prospective suppliers. Operational relationships
are among the most suitable for collaboration.
Integrated. Integrated relationships,
like good marriages, make one working unit out of two. Collaborators in these
relationships share risks, costs, profits and information almost without
restriction because the market is sophisticated and the nature of the product
demands the close coordination of operations and constant communication.
Clearly, there are certain circumstances under which
collaboration with a supplier has the potential to cut costs, increase revenues
or lower risk. Under some market and operating conditions, suppliers deserve a
great deal of attention and consideration. Under other circumstances, suppliers
will provide their goods and services without any expectation of commitment or
cooperation beyond timely payment of the invoice. There is no point in
investing more than is necessary in any supplier relationship-or, conversely,
less than enough.
Paths of Least Resistance
Instead
of subjecting the decision of whether to collaborate to a careful analysis of
market and operating conditions, many companies opt for an easier course and
decide to collaborate with the suppliers of whatever product they use the most
of, or pay the most for. In extreme cases, they may not bother to make a
decision at all and instead just accept a supplier-proposed arrangement. This
can be a costly mistake.
The framework of transactional, unique, operational and
integrated collaborative relationships can be used to analyze every link in the
supply chain. Relationships with suppliers ought to be dictated by operating
and market conditions; this framework can define the appropriate
relationship-the bounds of intimacy, if you will-for each component supplier.
Setting these bounds is the critical first step in any human relationship, but
where supply chain collaboration is concerned, this is only the first step.
Next, to increase the likelihood of success, it is
necessary to define the details of how the collaboration will work. The details
may be grouped into four main categories: business objectives and strategies,
technology infrastructure, process integration and organization.
How much to Share?
The alignment
of business objectives defines the nature of any collaboration. For the
collaboration to be successful, both organizations must share strategic
objectives and the values associated with risk and reward. There must be
agreement about how progress and success will be measured against the
collaboration's objectives. Only after reaching an agreed-upon set of
objectives and a way of measuring them can information, often proprietary in
nature, be shared.
Information sharing is fundamental to achieving the
business objectives of supply chain relationships. But how much information,
and what kind, should be shared? Even transactional relationships, the most
casual and easily replaced in the framework, demand some level of information
sharing, even if it's only about purchase orders and product specifications.
In deeper, operational relationships, it may be useful and
appropriate to share planning and forecasting data. Integrated collaborative
relationships typically involve even more information sharing-about capacity,
production schedules, marketing plans, costs and actual on-hand inventory, for
example. This degree of sharing will deepen the collaboration and can build
such a high degree of trust that competitors will find it very difficult to
threaten the relationship by cutting in.
Information exchange must take
place across an infrastructure. This may require investments in new electronic
communications technology, such as the meta-data system language XML, EDI
(Electronic Data Interchange) and supply chain software. Fortunately, industry
standards are emerging through consortiums, such as Rosetta-Net for high-tech,
that will accelerate the speed of this information exchange.
Process integration can take a number of forms, depending on
the objectives of the relationship. The degree of integration should be clearly
defined so that everyone involved in the collaboration knows which are joint
processes and which are separate. It must be clear where the links begin and
end.
A collaboration always presents an organizational challenge.
There is not a single governance model that will do justice to the myriad
effective combinations. Nonetheless, decisions have to be made and
responsibility must be assigned.
Consider these examples of successful supply chain
collaboration.
One of the better-known examples can be found at Toyota. The
auto-maker wanted to achieve best-in-class quality while also reducing costs.
To that end it built competitive supply chain relationships both with and among
its suppliers. Detailed competitive information was shared with parts suppliers
about customer orders and forecasts, lead times, capacity utilization and
inventory levels, design specifications, delivery performance, component and
product costs, and ideas for improving operations.
How? Electronic communication is an important part of
Toyota's collaboration infrastructure. The company works with suppliers to keep
its plants and theirs close together-sometimes literally. Electronic
communication and physical proximity are useful for scheduling just-in-time
component shipments, reducing inventory carrying costs and keeping the supply
chain flexible.
Organizationally, Toyota and its suppliers exchange
employees and build cross-functional teams to smooth process flows, decrease
lead times and further reduce inventories. This allows a number of processes to
be integrated, including order fulfillment, materials management, operational
planning, product design, and feedback on quality and performance.
Direct Links
In a second example,
Adaptec, a Milpitas, California, company specializing in communications
connectivity devices, invested in eCommerce technology that would enable the
company to collaborate over the Internet directly with its Asian suppliers.
Adaptec focused on the business objective of reducing
manufacturing cycle times. It initially chose its three suppliers with the
longest lead times. After agreeing on the objectives at all levels with the
involved suppliers, the teams set to work. By the time they were finished, the
cross-company, cross-functional teams had built direct links between Adaptec's
SAP purchasing system and the suppliers' order management function.
In addition, the design and manufacturing processes were
linked using an Internet document control system that allows engineers and
buyers to resolve design problems quickly. Adaptec and its semiconductor
supplier, Taiwan Semiconductor Manufacturing Company, electronically linked
their supply chains so that Adaptec would see, in real time, changes in TSMC's
capacity commitments, and TSMC would have total access to information about
demand downstream from Adaptec.
By focusing its limited resources on collaboration with the
right suppliers, Adaptec was able to reduce cycle times by half, increase
customer satisfaction and slash inventory costs. Other benefits included
increasing flexibility to respond to market demand, improved business
relationships and more competitive strategic positioning for the future.
Are you ready?
The collaboration
framework outlines how and with whom to collaborate, but a final question must
be answered before a successful collaboration can begin. Are you and your
potential collaborator ready for such a relationship? Three factors are
indispensable in the effort to forge more effective collaboration: capability,
commitment and trust.
Both parties to the collaborative relationship must have the
required capabilities to deliver their part of the agreed-upon business
objectives. Imagine a components supplier who guarantees just-in-time daily
deliveries but cannot even meet monthly delivery schedules.
If the capabilities exist, the commitment of management and
resources is required to weather the inevitable disagreements over details and
procedures. Without sustained executive support and resources (both money and
people), the benefits of the collaborative relationship will lose visibility,
and eventually the psychological and physical boundaries that separate
companies will overcome the virtual links.
The fruit of capability and commitment will be a strong bond
of trust-the strongest possible defense against all threats to a productive
collaboration. This trust is based on the healthy interactions of individuals
over time and cannot be forced or rushed. As the trust grows, so will the
rewards of the collaborative efforts.
Supply Chain versus Supply Chain
Throughout the 1980s and 1990s, under pressure from shareholders,
customers and competitors, most companies were aggressive about improving
internal efficiency. Now, with the emergence of the eEconomy and the drastic
reduction in transaction and communication costs, it is time to look beyond the
corporate boundaries.
In more and more industries, it is becoming apparent that
the competitive field is no longer limited to company A versus company B. The
game is now supply chain network versus supply chain network, with an
increasing reliance on collaborative relationships to create links of value. It
is a high-stakes game that requires caution when there is a significant
investment of resources, proprietary information and time.
It is still neither feasible nor desirable to collaborate
with all upstream and downstream supply chain participants. There is a way, as
we have outlined in our analysis of collaboration, to improve the chance of
success: Understand the factors that drive the depth and breadth of your
relationships, identify the key components to structure each collaborative
relationship and evaluate your readiness to collaborate.
When approached in this way, collaboration can be a story
that ends with "happily ever after."
Timothy Mould is a Boston-based senior
manager in the Accenture Strategic Services practice. His work focuses on
developing and implementing integrated value-chain strategies through eCommerce
capabilities. Mr. Mould has led engagements in areas including B2B integration
and collaboration, eProcurement, value-chain planning andcustomer relationship
management strategy.
Edwin Starr, a partner in
the Accenture Supply Chain Strategy practice, leads the firm's eProcurement and
Strategic Sourcing practice. Mr. Starr has helped numerous clients develop new
marketplace strategies that redefine the traditional customer/supplier
buyingrelationship. He is based in Chicago.
For more information,
please contact us.
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