4 C H A P T E R Core Discipline 4: Build the Right Collaborative Model C ollaboration is the cornerstone of effective supply chain management. As companies continue to narrow their strategic focus to a smaller number of core competencies, the skills and talents of outside partners become more critical. This creates a growing reliance on resources that you may not con- trol directly and on strategies that you may have no hand in developing. A recent survey of more than 100 international business leaders found that as companies migrate toward more extended supply chains, col- laboration becomes their most strategic activity.1 Despite its importance, there is little consensus about what collaboration means.
If you asked 100 supply chain executives for a definition, you’d likely get 100 different answers. Certainly most would agree that collaboration is important, that technology and relationship building are critical components, and that companies with effective collaboration skills are likely to have a competi- tive edge. However, few executives would be able to offer a clear, unam- biguous definition. Why is it so hard to define collaboration? Because it can be many things and involve many types of partners.
It can refer to a wide range of joint activities, from information sharing among business units to complex, long-term product development and marketing projects. We define collabo- ration as “the means by which companies within the supply chain work 139 Copyright © 2005 by The McGraw-Hill Companies, Inc. Click here for terms of use. 140 Strategic Supply Chain Management together toward mutual objectives through the sharing of ideas, information, knowledge, risks, and rewards.” Why collaborate? Very simply, an effective collaborative relation- ship can have major strategic and financial benefits.
It can accelerate entry into a new market, increase flexibility, and provide access to expertise not available within your own company. It can deliver cost savings or increased revenues—or a combination of both. Collaboration is a business arrangement that changes the overall dynamics between two or more part- ners. Drivers of collaboration include the desire to access ◆ A technology owned by another company ◆ A technology that is too capital-intensive for one company to invest in alone ◆ A competency that is too costly to acquire, develop, or maintain ◆ A new market effectively closed off by high entry costs or pre- conditions (trade barriers, legislation, etc.) Collaboration changes the most fundamental of all economic models— the relationship among cost, volume, and profit (C/V/P).
For example, a company that needs specialized, capital-intensive equipment for produc- tion of a key component might have a C/V/P model with high fixed costs and low per-unit variable costs, as shown in Figure 4-1. This company needs a high volume of sales to be price-competitive and profitable. If an economic recession cuts into volume, the company could soon be operat- ing at a loss. F I G U R E 4–1 C/V/P model with high fixed costs.
15,000 $ (000) 10,000 point 5,000 0 Volume x Var. Cost Fixed Cost Total Cost Revenue CHAPTER 4 Core Discipline 4: Build the Right Collaborative Model 141 Collaborating with a partner that focuses on the production of spe- cialized materials similar to the component might allow this company to offload some of its fixed costs, as shown in Figure 4-2, but with an accom- panying increase in variable costs associated with the increase in the level of external sourcing. To make this approach pay off, the company must be willing to share any proprietary technology needed to manufacture the component, and its collaboration partner must be willing to invest in developing the additional capabilities needed to produce it. Since break- even volume is lower, the company can compete across a wider range of volumes—albeit at the expense of gross margin at high volume.
Ongoing collaboration on product designs and production planning can make the company even more agile while continuing to add volume to the specialized manufacturer’s business. Both collaboration partners will benefit economically. As you can see, collaboration is not an altruistic activity. While it may seem a best True collaboration is practice to provide “seamless integration” very difficult, and and “extended visibility” to your supply chain partners, the fact is that true collabora- there’s no point in tion is very difficult, and there’s no point in doing it unless you doing it unless you can achieve financial or strategic gain.
For collaboration to be truly can achieve financial successful, therefore, it must deliver quan- or strategic gain. tifiable economic benefit to all partners. F I G U R E 4–2 C/V/P model after outsourcing some fixed costs. 15,000 $ (000) 10,000 point 5,000 0 Volume x Var.
Cost Fixed Cost Total Cost Revenue 142 Strategic Supply Chain Management Despite the highly touted benefits shown in Figure 4-3, supply chain collaboration has the dubious distinction of being one of the most sought after but disappointing aspects of supply chain strategy. What’s going on? To start with, the promise of effective, efficient collaboration is based on Internet technology and its ability to provide new levels of visibility and information sharing. The Internet bubble of the late 1990s gave rise to hundreds of software products that promised seamless interaction and endless visibility among supply chain partners. Do these tools work? Some do, and some don’t.
Technology doesn’t ultimately determine the success or failure of a collaborative relationship. Nor do the underlying processes that govern the use of technology—at least not on their own. Successful collaboration requires two additional components: sharing information and sharing benefits. Information is at the heart of any collaborative relationship.
To col- laborate effectively, all partners must provide timely, accurate, and com- plete information—whatever is needed to achieve their mutual objectives. And each partner must respect the confidentiality and security requirements of the other. Mutual trust is key to a successful collabora- tion. Just as important, each partner must commit to a joint sharing of benefits—not necessarily an equal sharing but an equitable sharing.
The success or failure of a collaborative relationship depends on clearly iden- tified mutual gain. F I G U R E 4–3 Commonly cited benefits of collaboration. Customers Material Suppliers Service Suppliers • Reduced inventory • Reduced inventory • Lower freight costs • Increased revenue • Lower warehousing • Faster and more • Lower order costs reliable delivery management costs • Lower material • Lower capital costs • Higher gross margin acquisition costs • Reduced • Better forecast • Fewer stockouts depreciation accuracy • Lower fixed costs • Better allocation of promotional budgets • Improved customer service • More efficient use of human resources CHAPTER 4 Core Discipline 4: Build the Right Collaborative Model 143 COLLABORATION IS A SPECTRUM Potential collaboration partners in supply chain management can be clas- sified in three broad groups—customers, materials suppliers, and suppli- ers of services that support supply chain operations, such as manufacturing and logistics. Although each group requires a slightly different manage- ment approach, the relationships are established and maintained in simi- lar ways.
Not all collaborations are created equal. Relationships between supply chain partners can have very different characteristics and still be considered collaborative in nature. And the results of collaborative relationships may vary widely from one set of partners to another. Figure 4-4 offers a frame- work for differentiating the various types of collaborative relationships and defining the basic characteristics of each.
The horizontal axis plots the rela- tive number of relationships, whereas the vertical axis measures the relative depth of collaboration. Within this framework, we define four levels of collaboration:2 transactional, cooperative, coordinated, and synchronized. Note that the boundaries between the different levels of collabora- tion are blurred. This is so because collaboration is a continuum, not a set of clearly delineated management practices.
Note, too, that the dimen- sions of the two axes are inherently subjective and are used simply to F I G U R E 4–4 The collaboration spectrum. Extensive Not Viable Synchronized Collaboration Collaboration Coordinated Collaboration Cooperative Collaboration Limited Transactional Low Collaboration Collaboration Return Many Few Relationships Relationships 144 Strategic Supply Chain Management provide a clear graphic view of the collaboration spectrum. Other mod- els use different criteria, such as level of investment or dependence on technology, to describe the depth and breadth of collaborative relation- ships. It’s possible to create a matrix using any combination of these criteria or even to apply a multidimensional approach.3 The point is not to worry about picking the right labels for your collaborative relationships but to examine the various characteristics that differentiate each partnership.
First, choose the degree to which each characteristic contributes to the likely success of the collaborative relationship, and then put a plan in place to achieve it. Every customer- supplier relationship can involve some level of collaboration. The fact that you’re buying from a specific supplier or selling to a specific cus- tomer implies a relationship between your two companies, but it doesn’t necessarily mean that you are collaborating. And just as not all rela- tionships are created equal, not all collaborations are created equal.
Before setting off to systematically establish collaborative relation- ships with your supply chain partners, take the time to understand the degrees of collaboration along the spectrum and your company’s specific needs. Often, a small number of deeply collaborative relationships is preferable to multiple relationships with a wide range of partners. Later in this chapter we’ll discuss how to decide which degree of collaboration to set up with each supply chain partner. Transactional Collaboration Transactional collaboration aims for the efficient and effective execution of transactions between partners.
This isn’t to say that transactional rela- tionships between supply chain partners offer no strategic value. However, partners in a transactional relationship rarely focus on reducing supply chain management costs or increasing revenues. The focus is usually on improving the ease at which transactions are conducted—for example, by eliminating the need for constant renegotiation. Transactional collabora- tion usually applies to customer-supplier relationships in which common or maintenance, repair, and overhaul (MRO) materials are purchased, and the decision to deal with a supplier is based mainly on price.
With less strategically important supply chain partners, companies tend to focus on minimizing the effort associated with day-to-day transactions rather than on developing long-term relationships. Transactional relationships rarely require sophisticated informa- tion systems. Indeed, many companies involved in this type of rela- tionship lack the systems and infrastructure needed to provide and CHAPTER 4 Core Discipline 4: Build the Right Collaborative Model 145 respond to information electronically. Because of this, many transactions are manual.
An example of a transactional relationship is any time a customer and a supplier agree to a set price for a specific product over a set period of time or until a certain purchase volume is reached. The buyer gets a fixed price over the life of the agreement in exchange for purchasing a minimum quantity of products; this also helps the seller’s production plan- ning. Transactional collaboration is the most basic and by far the most widely used collaboration model. Cooperative Collaboration Cooperative relationships have a higher level of information sharing.
Supply chain Cooperative partners may provide automatic commit- relationships have a ments and confirmations or share informa- tion on forecasts, inventory availability, higher level of purchase orders, or order and delivery sta- information sharing. Usually, one partner posts information that the other partner reviews and acts on— a one-way communication in which data are sent either manually or elec- tronically (“pushed”) from one partner to the other or published in a manner that’s accessible by the recipient (“pulled”). In a cooperative collaboration, the type and format of data provided usually are standardized. While more sophisticated technologies are avail- able, electronic data interchange (EDI) is the primary method of commu- nication used today, through either a proprietary EDI network or the Internet.
For companies without an EDI capability, Internet-based supplier portals or extranets are an excellent alternative.