Article contributed by OfficeMax Inc., December 2009
Supplier collaboration stands as one of the pillars of the world class supply chain. Yet successful collaborative relationships between a firm and its core suppliers are still rare. For every example like Toyota and its supply base or Procter & Gamble with Wal-Mart, there are far more examples of failure. Successful collaboration between supply chain partners demands a great deal of hard work with mutual trust built slowly over a long period of time.
Toyota pioneered the collaborative supply chain with the keiretsu concept more than fifty years ago. By the 1980’s, the paradigm appeared in other industrial societies, proving it did not depend on Japanese culture. 1 This clearly contrasted with the standard approach of that era taken by most American manufacturers – especially the US automotive manufacturers. The Toyota model suggests that strategic collaboration not only works, but can be sustained over a long period of time.
Today, supply base strategies operate over a wide spectrum. The University of Tennessee interacts with the supply chains of hundreds of companies every year. Most firms report that they are pursuing a combination of three strategies with respect to their supply base:
- Supplier rationalization
- Low cost country outsourcing
- Supplier collaboration
Why are collaborative relationships so difficult to implement? Past studies identify several factors most critical to establishing a successful collaborative framework. 3 The first factor is mutual commitment to the relationship grounded in the strong belief that the process will create breakthrough results for both firms. This generally translates into actions such as longer term contracts generating a higher level of business with stronger mutual dependence. Frequent face to face meetings serve as a foundation for establishing trust over time. Finally, successful joint projects cement the relationship. All of this obviously requires much time and effort.
In 2003, a multi-billion dollar durable goods manufacturer ran into issues with their service model for a rapidly growing national home products retailer. With a trend of not meeting their customer’s expectations, the durable goods manufacturer ventured into strategic collaboration with their client. Under support of both CEOs, a team was created to focus on the bilateral problem of establishing dual expectations and creating a service model that would properly support the needs of their mutual customer. The supply chain strategy was developed from the customer needs back. All metrics were based on outcomes and not the measurement of effort.
Results from the collaborative supplier-customer relationship included a 40 percent increase in purchases and a 50 percent improvement in forecast error at the SKU level. The success caused the retailer and supplier to share even more information and to determine their teams needed to meet more frequently. After 18 months, there were clear and notable savings realized; both companies reinvested those savings to further grow the business.
The success of their effort rests on five principles:
- Senior management support
- Trust painstakingly built from hundreds of hours working together
- A consistent, defined supply chain strategy
- Full sharing of information on a weekly basis
- Agreement to reinvest the savings for a win/win relationship
- Nishiguchi, T. (1989). Strategic Dualism: An Alternative in Industrial Societies. Oxford: Oxford University Press.
- Capgemini, JDA Software Group, Inc., Georgia Southern University, & University of Tennesee. (2009). Drivers of Sustainable Supply Chain Management Practice.
- Rinehart, et.al. (2004). An assessment of Supplier-Customer Relationships. Journal of Business Logistics, 25, 25-62