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4. The adversarial relationship: Probably the most significant issue here is the adversarial relationship which the approach fosters. Trust has been stated many times to be a very significant driver of supply chain
performance (e.g. Kwon and Suh, 2004; Beccerra and Gupta, 1999). The adversarial relationship implied in the transactional model destroys trust. In this model neither supplier nor customer has any obligation to the other party beyond the contract; in fact the very existence of a contract (by definition enforceable in law) implies a lack of trust. Consequently supply is guaranteed only in so far as it meets the contract.
Requests for help from a supplier (where, for example the customer has accidentally damaged a delivery of components or a sudden surge in demand) are likely to be met with requests for extra payment, or polite refusal. In fact, during the tendering process it is likely that suppliers will seek out areas of poor definition in the specification in order to regain the margin lost in the bidding process. Any mis-specification or elements missing can be charged as extras, or used as a pretext for re-negotiating the contract. It is unlikely that any specification is gap-free as the supplier is much more expert in the product or service specified than the customer (why else do you go to them?). As the supplier has no confidence in the long term relationship, why should they spurn any chance of a short-term profit? And what happens if a better or bigger customer comes along?
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Overall, the traditional approach can be seen as short-termist, divisive and, ironically, not even very cost-efficient.
10.3 The Supplier Partnership Model
Poirier (1999) and Christopher (1998), amongst others, suggest that the historical model of competition between individual companies is defunct; competition is now between supply chains. If your supplier has quality or delivery problems they will either disrupt your production or affect your customer satisfaction. If your car breaks down on the way to a job interview, it is likely to be the assembler who is the focus of your irritation rather than the second tier supplier who manufactured the component which failed.
We therefore need to view our suppliers in a different way: as partners in delivering superior customer value than competing supply chains. The characteristics of a partnership are suggested below (modified from Slack et al, 2006):
• Strategic: Partnerships need to be undertaken in a strategic manner; in particular the cultural and business
‘fit’ of the organizations needs to be clearly understood.
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• Long term: Partnerships are designed to be lasting; the effort that goes into building up strong relationships is only repaid over time. Decisions need to be made with long term benefits in mind, rather than short term ones. The security of the long term partnership frees up much effort which would have usually gone into looking for the next business opportunity to be focused on improving processes and products.
• Collaborative: They are voluntary and focused on working together; contracts are either not required, or minimal. The focus is on seeing the supply chain as a whole and delivering customer value by working together.
• Trust based: The most important element, assumptions are that all parties will work for mutual benefit rather than trying to take advantage at the expense of other partners. Trust is difficult to establish and maintain, but is the heart of a partnership.
• Transparent: This helps to build trust. Sharing information allows the partnership to work more effectively.
The principle is to share as much as possible, as early as possible to support effective joint decision making.
• Gain sharing: Part of the collaborative nature of the relationship is to share gains, no matter where they are made. This facilitates the effective assignment of resources to wherever in the partnership they can do most good, rather than where they will help an individual partner.
• Joint problem solving and learning: In a partnership all problems are mutual; this is supported by the gain-sharing mentality. The long term approach allied to trust allows for gain-sharing of learning from experience within the partnership.
• A small number of partners: Usually a one-to-one relationship in a given area – so multiple suppliers for a component would not be envisaged.
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10.3.1 Benefits of Partnerships
The benefits of partnering are really the polar opposites of the problems with the traditional approach. The partnering approach allows for ‘constancy of purpose’, fostering collaboration, systemic thinking and through supply-chain improvement to deliver sustainable customer value. The risks are few if the partnering is done effectively, but clearly the safeguards which exist in the traditional approach are missing. If the will to partner does not exist then all partners are exposed to much more risk. But, of course, that is all the more reason for everyone involved to make it work.
10.4 Partnering Beyond the Supply Chain
Arguably, partnering in the supply chain is a relatively obvious thing to do. The commonality of interest is clear, despite being obscured by inappropriate practices such as competitive tendering for many years. This is, however, only part of the partnering story. Organizations are partnering with educational establishments, community groups and other organizations from outside their supply chain; but perhaps the most counter-intuitive partnering activities are those that are occurring between competitors.
Surely you cannot, by definition, partner with competitors? But many companies now recognise that choosing at what point in the product lifecycle you compete, and at what point you collaborate it is possible to generate industry-wide efficiencies without harming the commercial interests of the individual business. This concept is perhaps best illustrated by an example (see box below):
In country A the 10 top semiconductor companies identify the need for a ‘super chip’ that would help to create a smart domestic robot. Instead of pooling their resources to co-develop this chip, they compete, each investing $1 billion in research and development activities. Assuming that each company creates a successful chip, the total cost of developing this chip in country A is$10 billion. Suppose that the global market for such a robot is 1 billion, the development cost per unit is $10.
Let us now consider country B, which may be in another continent. In this country the 4 top semiconductor companies realise the same need for a smart chip. Instead of competing, they work together. They each invest
$250 m to develop the chip and, therefore, the total cost of developing this chip in country B is £1 billion.
Now all 14 companies will compete ferociously with each other in production to gain as much share in the potential market as possible. Unfortunately for the companies in country A, the cost of producing each chip is virtually negligible. The companies in country B could sell the chip for $1.25 each and make a healthy return on their investment, whereas the selling price of the companies in country A has to be $10 per chip just to break even. They cannot compete with the country B companies and in their frustration accuse country B of dumping cheap products.
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Not only has co-operation in development provided country B companies with market leadership, it is possible that by pooling intellectual as well as financial capital, their product may be superior in aspects other than price alone. Of course, this is just a theoretical example, but real examples are becoming more and more common. The Blu-Ray DVD is a very good example (Christ and Slowak, 2009). Back in the 1980’s the fight between VHS and Betamax cost companies a lot of money and created a number of losers on the Betamax side as well as some big winners on the VHS team. Loathe to repeat the same mistakes around 15 companies banded together to do the basic research for the Blu-Ray DVD system and then competed on the specifics of their players and recorders in the market. The market is not any less competitive, it is just that they chose to compete at a point in the lifecycle where the huge development costs are not all sunk into one organization.
10.5 Resources
Organizations need to use resources effectively. There is a need to control the financial resources used. In this section we have seen how a partnership approach makes for more effective use of the resources associated with the supply chain.
Further links to ideas on cost of quality, process improvement and strategic approaches to customer satisfaction are the ways in which resource utilization can be optimised in a given company. It is not proposed to add more detail in this section to supplement those contained in other sections.
10.6 Summary and Impact
This section has shown how partnerships come in a range of types and demonstrated the potential for benefit of employing them in an organization’s supply chain and beyond. The focus on long term relationships, quality and improvement replaces the traditional lack of trust and focus on cost alone.
As Ruskin says:
“There is scarcely anything in the world that some man cannot make a little worse, and sell a little more cheaply. The person who buys on price alone is this man’s lawful prey.” (attrib).
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People in Quality Management