Building Relationships for Better Supply Chain Management

Supply Cost Reduction Advantages:

1.      Lower production costs of the supplies
2.      Improve conformance quality
3.      Material/location substitution
4.      Lower transaction costs, including the costs of incoming material inspections

Unfortunately, many cost-reduction initiatives, especially those aimed at the first three steps, fail to yield sustainable competitive advantages. These advantages quickly erode as competitors adopt similar customer-response practices. After all, best practices can easily be implemented by any company competing in a market. Best practices are not the intellectual property of a few but are available for all. Locating supply sources with low factor costs provides short-lived cost reduction that can be quickly duplicated by others.

In contrast, some specific cost advantages can be sustained. Capability in managing suppliers and using specialized, dedicated inter-firm resources can greatly reduce transaction costs. Such capabilities are more difficult to mimic. When you establish strong relationships with your suppliers (or vice-versa), establishing strong “proximity” in all aspects, even at an organization culture level, a lock-in effect can occur. It is up to us to realize when it can be to our benefit and put together a strategy to accomplish it.

The authors present us with other strategic and sustainable advantages: transaction-cost reduction approaches. These also come from establishing close relationships with suppliers or customers. A good supplier relationship may determine whether the firm gets to share in its supplier’s cost reductions.

Supply-based Technology Advantages

Having proprietary access to a supplier’s critical technological innovation can add customer value and improve competitive positioning. Firms continue to identify improved knowledge depth and organizational learning as core competencies.

Technology outsourcing may help leverage resources, which is valuable in the short-term to reduce costs, but what about the long-term? There is great risk in relying on an outside source for critical inputs. You should carefully follow your supplier’s R&D efforts: the growing field of competitive technical intelligence can help you track future technologies that may have a major impact on your suppliers (opportunity or threat.)

It is important to keep in mind that "…supplier relations will be disrupted as new technology alliances are formed with emerging suppliers, while some existing suppliers are dropped." Again, Supply Chain is a very dynamic entity and we must always act with that in mind.

It is essential for a firm to understand its primary objectives for different types of supplier relationships. The firm must understand primary objectives for different types of input. It can then develop distinctive and suitable supplier relationships.

It is also important to understand that not all suppliers are ready for the type of relationship you might have in mind. Sometimes a supplier’s leverage might be reduced if it also does business with your competitors. Other times a supplier might need your help to bring it to the point where the relationship can be implemented. Following are details about the three types of relationships that can be established.

Competitive Tension Relationships

¨ When seeking suppliers primarily for supply cost reductions.

¨ Use one single supplier – sole outsourcing – for each item. Typically allocates all demand for a particular component over the product’s life cycle to an individual supplier but concurrently ensures that similar parts are sourced from that supplier’s competitors.

¨ If the need arises to switch suppliers, costs are highly reduced (safety net).

¨ This relationship ideally suits the supply cost reduction objective. The firm can exploit its market power to achieve the advantages of inter-supplier competition while avoiding the problems of adversarial relationships.

Strategic Alliance Relationships

¨ This relationship happens when there is a mutual objective to use complementary assets to gain long-term competitive advantage.

¨ Appropriate for securing technology advantages.

¨ These alliances seek to secure not only specified inputs but also the technical expertise surrounding them.

¨ These relationships are to be nurtured and built up over time and should be based on something other than ironclad contracts.

¨ This effort absorbs considerable time and resources and may involve significant risks.

Cooperative Partnership

¨ Helping suppliers improve rather than locate, qualify and switch to alternates.

¨ Often called supplier development.

¨ Involves working closely with a supplier on problems the firms jointly face, especially over delivery and conformance quality.

¨ The relationship will eventually evolve to one of the other two presented. Also critical to the strategy implemented is what form of relationship (competitive tension or strategic alliance) you want to evolve to.

The authors also present some ideas regarding the relationship/strategy match: suppliers need to be segmented according to the strategic objectives. Supplier selection and segmentation is called the “next best practice” in supply chain management.

Relationship Enablers: Trust and Information Flows

1. The types of information that flow between the firms must match the desired relationship.

2. Each firm demands that the two parties develop and maintain a particular level of trust.

Competency trust and goodwill trust are identified. Competency trust relies on the confidence that a supplier can maintain delivery and quality standards without constant reminders and monitoring. Goodwill trust is one party’s belief that the other party will always act in the first one’s best interest, even when one of them could take advantage of the situation.

Competitive Tension Enablers

All these relationships require competency trust. Superior transaction cost-reduction practices require buyer-based goodwill trust. Along with the appropriate level of trust, cost reduction objectives also need appropriate information flows. At a minimum, suppliers need clear performance specifications combined with a current and accurate demand forecast.

Cooperative Partnership Enablers

Information flows that facilitate joint problem solving enable the cooperative partnership approach. Typical activities include training and education on problem identification and problem-solving techniques.

The authors defend the long-term advantages of "transferring broad management capabilities to the supplier and creating a philosophy of continual organizational learning." This is a valuable statement.

Strategic Alliance Enablers

When a firm needs continued access to supplier technology and expertise to develop new processes and products, it seeks some technological integration between itself and allied suppliers while managing the risks of its dependence on them. Both sides rely on a high level of reciprocal goodwill trust to maximize each party’s benefits from the collaboration. Developing goodwill trust is a process that takes time, effort and risks.

Information Flows—How They Differ in the Three Relationships

Strategic alliances thrive on two-way communication. The firm can provide partners with channel market, production planning and technical information; in turn, it expects to receive technical advice, product design, and integration assistance. The other two types of relationships are primarily one-way.

The paper ends with a quick look into the problems you may face while trying to implement these new relationships such as overcoming past history where the relationship could have been rather adversarial.

Finally, one last key message and an important one to note is how crucial technology forecasting is in this whole process, especially regarding outsourcing technological competencies. “Without rigorous technological forecasts, strategic outsourcing will be filled with many blind avenues and deeply regretted decisions.”

According to the authors, “…in all our visits, the firms with successful outsourcing strategies, complete with associated relationship-building strategies and implementation plans, began with a well-developed and rigorous technological forecast.”

Successful technology forecasting is quickly becoming an important factor for success. There has been a rebirth of interest in technology forecasting during the nineties. Nevertheless, it is no longer just technology forecasting that we should care about. It is the field of Competitive Technical Intelligence, revolutionizing how we plan and do R&D. Bradford Ashton and Richard Klavans’ book, Keeping Abreast of Science and Technology (Battelle Press, 1997), is a thorough and pleasant introduction to Technical Intelligence.

If you are interested in Technology Forecasting, A Manager's Guide to Technology Forecasting and Strategy Analysis Methods by Stephen Millett and Edward Honton (Battelle Press, 1991) is a good place to start.

Note: All content presented in this critique was obtained in F. Ian Stuart and David McCutcheon’s article, “The Manager’s Guide to Supply Chain Management" 2000.