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BH044

The Manager’s Guide to Supply


Chain Management
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F. Ian Stuart and David M. McCutcheon
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“Competition makes the world go around. The cepts have been touted as be-
only way to guarantee a supplier’s attention to ing universally applicable,
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cost, service, and innovation is the ever-present sometimes with government
threat of losing us as a customer.” encouragement, as with the The complexities
—Vice President of Purchasing for U.K.’s Department of Trade and of strategic
a major steel company in Pennsylvania Industry’s championing of
“partnership sourcing.” Overall, outsourcing can
despite the occasional caution-
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“It’s many times more advantageous to work with
suppliers than to pitch them off and get new ones.” ary advice, the received wis-
be managed
—David Nelson, former Senior Vice President dom—which many practitio- successfully only
of Purchasing for Honda of America ners are rigidly following—
assumes that competitiveness in through rigorous
“They [suppliers] are in on the engineering meet- a global economy requires technological
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ings. They can drop in on the research guys. They companies to:
know more about our requirements than some of 1. focus on core competen- forecasting.
our own people do and are instrumental for con- cies;
current engineering of new products.” 2. reduce their number of
—Lance Dixon, former Director of Purchasing suppliers; and
and Logistics for Bose Corporation 3. develop strong partnership relationships
built on shared information and trust with the
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S upply management, the function of select-
ing sources for purchased goods and ser-
vices and managing the flows of these
inputs, has been growing in importance in North
American firms. This trend stems from the steadily
remaining suppliers.
Our interviews with leading practitioners
indicate that following this three-step approach,
particularly blind adherence to the last step,
trivializes the issue and may simply be bad medi-
increasing reliance on outsourcing as a means to cine. As firms move toward even greater reliance
create added value. At the same time supply on outsourcing, managers need clear guidelines
management comes into focus as a critical area, for their outsourcing strategies and choosing the
its practices are rapidly changing as companies appropriate type of relationship with each sup-
experiment with different forms of supplier rela- plier. In outlining three categories of supplier
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tionships. relationships, each of which makes sense for
Supply managers are to be forgiven if they particular outsourcing needs, we provide a
are disappointed with the results of efforts to simple guideline for choosing the appropriate
manage their supplier relationships better. Most relationship for each supplier (see Figure 1).
efforts have failed to meet expectations. As with
the above-quoted practitioners’ advice, the aca- SUPPLY MANAGEMENT OBJECTIVES:
demic and consulting communities have been THE SIMPLE REALITY Business Horizons
Copyright © 2000
equally inconsistent. Some have advised manag-

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by Indiana University
ers to be extremely cautious in forming supplier he strategic objectives in outsourcing an Kelley School of
partnerships and alliances, and to continue to input are relatively straightforward. Basi- Business. For reprints,
rely on competitive markets for their outsourcing cally, firms are interested in how they call HBS Publishing
needs. Conversely, partnership and alliance con- can either significantly reduce product costs or at (800) 545-7685.

The Manager’s Guide to Supply Chain Management 35


3. material/location sub-
Figure 1 stitution; and
The Manager’s Guide to Supply Management Objectives, 4. lower transaction
Relationship Choice, and Supporting Practices costs, including the costs
of incoming material in-
Fundamental Relationship Critical Benefits and spections, vendor searches
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Objectives Form Enablers Outcomes and evaluations, corrected
supplier problems, and
Cost reduction Competitive Competence trust Reduced cost communications with sup-
tension • Vendor certification to avoid Reduced transaction costs pliers.
evaluations Unfortunately, many
• Commodity managers and
cost reduction initiatives,
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supplier representatives
• Direct-to-line shipment especially those aimed at
• Online demand information the first three mechanisms,
suffer from diminishing
Cooperative • Problem-solving teams Problem elimination returns or fail to yield sus-
partnership • Planning information Consistency tainable competitive ad-
• Consulting advice Dependability vantages. Most can be
quickly imitated by com-
Value-added Strategic Reciprocal goodwill trust New products and processes petitors. Wal-Mart’s initial
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benefits/ alliance • Proprietary information Competitive advantage cost-based competitive
Technology • Technology forecasts
advantages were largely
advancement • Engineering and technical
exchanges built on its supply chain’s
efficient performance (in-
ventory management and
control, direct-to-shelf
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add to what customers perceive as value-added delivery, on-line data access). But these advan-
benefits. Naturally, firms hope that the value- tages have gradually eroded as competitors have
added benefits can be achieved at lower cost, but adopted similar customer-response practices.
in such cases the cost role is subordinate. Value- Astute competitors can seek out the same best-
added benefits might include improved delivery performing suppliers and attempt to duplicate
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speed, additional design features and options, or their methods. Locating supply sources with low
the ability to be customized. Some of these ben- factor costs (such as selecting a Mexican supplier
efits are best achieved by using in-house product for a labor-intensive process) provides a cost
design and process management capabilities. reduction that may be short-lived (as exchange
For most companies, however, the greatest rates adjust) or rapidly duplicated by competitors.
opportunities for cutting costs and increasing Likewise, cost reductions from material substitu-
value-added benefits lie with sourced materials, tion, such as those developed using value-analy-
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services, components, and technologies. Success- sis practices, can be readily copied through re-
ful firms recognize and value their supply bases verse-engineering techniques. Even such prac-
as critical sources of innovation and leverage. tices as using active hedging to cut cost variabil-
However, a firm can enhance any supplier’s ity or “locking in” a reliable supply source are
value by focusing the supplier’s efforts on spe- easily replicated and hardly represent a propri-
cific outcomes. The firm must choose and then etary strategy.
communicate its fundamental objective for an In contrast, some transaction cost advantages
input—whether it is primarily concerned with can be sustained. Capability in managing suppli-
cost reduction or value-added benefits. Obviously, ers and using specialized, dedicated inter-firm
this choice has implications for the affected sup- resources can greatly reduce transaction costs.
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plier and the firm’s relationship with it. Such a capability is more difficult to mimic be-
cause success depends heavily on how the buy-
Supply Cost Reduction Advantages ing firm interrelates with and manages a particu-
lar supplier. Biemans and Brand (1995) noted a
Typically, low cost is the primary requirement for significant difference in administrative costs be-
most of a firm’s purchased goods and services, tween world-class supply management firms and
with the strategic objective for the supplier rela- the average firm. The difference amounted to
tionship being cost reduction. This can be sustained profit margin improvements of about
achieved by four primary mechanisms: 2.5 percent—a clear differentiating advantage.
1. lower production costs of the supplies; Transaction-cost reduction approaches,
2. improved conformance quality (consis- whether tactical and readily duplicated or strate-
tently meeting specifications); gic and sustainable, encompass both supplier

36 Business Horizons / March-April 2000


selection decisions and supply management prac- The Economist recently documented the
tices. Some gains result from securing the best technological barriers facing the magnetic-storage
suppliers—those that continue to innovate, strive (computer disk) industry (“A Byte of the Action”
for high quality levels, and routinely drive out 1998). Forecasts predict that this technology,
waste. Others come from the way the firm inter- which detects the polarity of a magnetized spot
relates with the supplier and how the two com- on a disk, will be dominated within five years by
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panies interact. For example, a good supplier laser optics (although IBM researchers believe
relationship may determine whether the firm gets that the current technology will survive longer
to share in its supplier’s cost reductions; one auto and ultimately be replaced by holographic
industry supplier confessed it had shown such cubes). Regardless of which new technology
preferential cost sharing with Ford and Chrysler emerges, one thing is certain: Many new storage
but not with General Motors because of GM’s technologies are being advanced by firms that are
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history of adversarial supply management tactics. new to the industry. Companies that source stor-
age devices may face a radical supply-base up-
Supply-Based Technology Advantages heaval as these emerging technologies force
product design changes and render existing key
The second strategic objective relates to technol- processes obsolete. Supplier relations will be
ogy. In most companies, this should apply to a disrupted as new technology alliances are formed
limited segment of suppliers—those that provide with emerging suppliers while some existing
critical inputs. Having proprietary access to a suppliers are dropped.
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supplier’s critical technological innovations can Even in industries in which discontinuities
add customer value and improve competitive are unlikely, securing access to critical current
positioning, as well as cut costs. Now, more than technology remains a vital supply management
ever, companies are relying on outsourcing rather role. Although the technology advantage objec-
than in-house development to secure their inno- tive has a much narrower focus than that of sup-
vations. ply cost reduction, it may have a bigger impact
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Firms continue to identify core competencies, on the firm.
seeking the inherent benefits—such as improved
knowledge depth and organizational learning—of RELATIONSHIPS TO MATCH OBJECTIVES:
greater focus. Other specific technologies may be BEYOND THE RHETORIC
essential for competitiveness but it may not be

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practical to maintain expertise for them in-house. learly, fulfilling these two distinct strate-
The science base may be changing too rapidly, gic objectives requires quite different
making it risky to be a player in that field. Or it forms of supplier relationships. Once a
may be too expensive to maintain technological firm understands its primary objectives for differ-
competence. Or the product may be too complex ent types of inputs, it can develop distinctive and
for any firm to manage all aspects internally. In suitable supplier relationships. We classify the
each case, outsourcing the technology becomes two basic types as competitive tension and strate-
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an alternative—but one that entails risks, espe- gic alliance. However, not every supplier tar-
cially if suppliers provide critical proprietary ca- geted for either type is necessarily prepared for
pabilities and technology integration skills. “Most it, necessitating a special kind of transition rela-
companies I interact with,” says Bob Drennan, tionship—the cooperative partnership—designed
Director of Corporate Materials at Tektronix, “are to prepare them. Each type has advantages in
facing a fundamental issue as to the best use of meeting specific objectives.
money—invest in resources to design and manu-
facture products or invest in ways to grow faster Competitive Tension Relationships
without adding infrastructure.”
Technology outsourcing leverages resources. When seeking suppliers primarily for supply cost
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To use it, however, firms must manage supplier reductions, North American firms traditionally
relationships effectively to fully exploit suppliers’ split purchases for a particular item among two
process and product design expertise while at the or more competing suppliers—in effect, playing
same time controlling the risk of relying on an one off against the other(s). But such an approach
outside source for critical inputs. For long-term reduces scale economies, drives up transaction
advantage, a firm must not only manage its cur- costs, and tends to build suppliers’ resentment
rent critical technology suppliers but also look to rather than loyalty.
future technology needs and possible impacts on In contrast, competitive tension relationships
current suppliers. Just as a firm might have an use a single supplier—called “sole-sourcing”—for
evolving R&D portfolio, it should also plan its each item. Developed in the Japanese auto indus-
technology sourcing portfolio with an eye to the try, this approach typically allocates all demand
future. for a particular component over the product’s life

The Manager’s Guide to Supply Chain Management 37


cycle to an individual supplier but concurrently circuit boards. But Supra needed responsiveness;
ensures that similar parts are sourced from that its products often required rapid modifications,
supplier’s competitors. This maintains the essence and the company was expanding into new mar-
of competition yet provides the advantages of kets. So the supply management team was at-
scale economies. Having potential alternative tempting to develop an alliance relationship with
sources available ensures competitiveness and a small, local circuit board design firm that could
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security of supply. Moreover, if the need arises to handle its unique technical requirements.
switch suppliers, the switching costs are lower. Because these relationships must be devel-
The higher-volume, stable market encourages the oped for specific requirements, a firm’s different
suppliers’ investment in R&D and special services divisions may maintain distinctly different rela-
for the firm. Sole-sourcing also limits supply vari- tionships with the same supplier. We saw this
ance. Meanwhile, suppliers know that the busi- with Applied Materials (AM), the semiconductor
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ness is not guaranteed. This competitive tension chip process equipment manufacturer, and CDS
relationship ideally suits the supply cost reduction Leopold, a precision aluminum machining sup-
objective, because the firm can exploit its market plier. The Santa Clara, California facilities of both
power to achieve the advantages of inter-supplier CDS Leopold and AM’s product and process de-
competition while avoiding the problems of velopment division operated a technology alli-
adversarial relationships. ance. Developing prototypes for new chip pro-
cessing equipment requires considerable design
Strategic Alliance Relationships latitude as well as an informal, rich exchange of
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critical information through guest engineers and
Companies may form a strategic alliance when frequent face-to-face meetings. However, the
the mutual objective is to use their complemen- relationship stands in stark contrast to that devel-
tary assets to gain long-term competitive advan- oped between the two companies’ commercial
tage. In the supply context, alliances with suppli- plants located in Austin, Texas, which we will
ers are appropriate for securing technology ad- describe a little later.
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vantages. A special relationship with a supplier Establishing a strategic supplier alliance rela-
can help ensure access to a critical technology tionship absorbs considerable time and resources
that the firm must outsource. Bose Corporation, and may involve significant risks. It should be
the high-performance audio manufacturer, has a reserved for situations where it is warranted, such
strategic alliance for its integrated circuit design as one in which difficult-to-specify expertise is
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technology. Circuitry design is critical for the needed in conjunction with the purchased item,
performance of Bose’s high-end car stereo sys- or the supplier provides unique, vital inputs.
tems, but it is a competency that Bose has no
long-term interest in developing internally. Cooperative Partnership (Supplier
Strategic supplier alliances seek to secure not Development)—An Interim Relationship
just specified inputs but the technical expertise
surrounding them. A firm may provide its allied Recently, many companies have preferred to help
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supplier with only performance specifications their existing suppliers improve rather than locate,
(indicating what the input must do, rather than qualify, and switch to alternates. Often called sup-
how it is to be designed). It may even rely on the plier development, the merits of such a coopera-
supplier to provide the complete design, plus tive partnership as a long-term supply manage-
help in integrating it into the firm’s products or ment approach may have been oversold. A co-
processes, plus technical advice and technology operative partnership involves working closely
forecasts. Defining such a broad relationship by with a supplier on problems the firms jointly
contract is very difficult, especially when re- face, principally over delivery and conformance
source requirements and questions about the quality. Such problems are often attacked through
legal ownership of jointly developed ideas are joint problem-solving teams that identify root
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hard to predict. For this reason, the strategic sup- causes, experiment to determine sources of vari-
plier alliance relationship needs to be nurtured ance, and implement incremental improvements.
and built up over time to be based on something Benefits are shared equitably, consistent with the
other than ironclad contracts. “partnership” terminology.
Supra Products, the leading U.S. manufac- Companies choose this option for a variety of
turer of real estate lock boxes, had seen its tradi- reasons. They may wish to avoid onerous switch-
tional technology, based on mechanical key locks, ing costs, or they may see an underlying supply
quickly give way to electronic-based systems. advantage masked by a supplier’s current prob-
The firm had developed internal competency in lems with delivery or quality conformance. How-
the design, assembly, and logic programming for ever, the development effort should have a finite
these electronic locking systems and had no de- lifespan and the relationship should be targeted
sire to build expertise in manufacturing printed to assume another form eventually.

38 Business Horizons / March-April 2000


Applied Materials used this approach for shore, Motorola chose to “micro-manage” the AM
supply contracts for its high-volume production relationship continually over a two-year period to
components. Its Austin facilities source precision establish it as a reliable supplier. During this
aluminum machined parts from CDS Leopold’s time, AM reduced its product cycle times from 16
local plant. When those plants were established to 12 weeks and conformance quality rose dra-
in the early 1990s, the initial buyer-seller relation- matically. Once it became a reliable supplier, the
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ship resembled a cooperative partnership as the joint problem-solving teams were abandoned and
two firms worked together to overcome produc- the relationship between the two firms drifted
tion startup problems. Once those problems were toward competitive tension.
resolved, the relationship evolved into one of These situations were typical of the outcomes
competitive tension. CDS Leopold representatives we saw with supplier development efforts. Al-
have privileged access to AM’s plant and produc- though it wasn’t always recognized, the strategic
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tion information, but AM maintains a competitive objectives usually reverted to either cost reduc-
source for the items it buys from this supplier. tion or strategic technology development once
The differences between the two divisions of the supplier had achieved a certain performance
AM and CDS Leopold—the Santa Clara facilities level. Improvements from the cooperative ap-
that operate in the technology alliance realm and proach gradually diminished until they eventually
the Austin facilities that have evolved from co- ceased to warrant the
operative partnerships to competitive tension— associated high man-
stem from the very different supply management agement and transac-
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objectives for each division. Managing such di- tion costs. Our field “Once it became a
verse relationships between different divisions or interviews found that
for products at different stages of the life cycle most reported partner-
reliable supplier, the joint
adds to the supplier management challenges. ships and much-touted problem-solving teams
Allen Bradley Canada’s supply management “close” supplier rela- were abandoned and
tactics in recent years provide another example. tions arose from less-
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In the early 1990s, Allen Bradley (AB) was con- than-acceptable sup- the relationship between
cerned about its suppliers’ conformance quality plier performance, the two firms drifted
problems. To communicate its dissatisfaction, the which typically sur-
company introduced supplier evaluation reports faced as the buying toward competitive
and a “cost of nonconformance” assessment sys- companies adopted tension.”
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tem. The suppliers’ heightened awareness of lean production or just-
these issues, coupled with AB’s cooperative assis- in-time philosophies.
tance to major suppliers, led to noticeable im- Corrective action had to be taken to improve
provements. Within five years, the company’s those suppliers seen as “weak links” in the value
efforts helped reduce the nonconformance costs chain. Once those issues were resolved, the ob-
from $70 to $12 per $1,000 of material purchases. jective usually reverted to cost reduction.
Subsequently, conformance issues largely disap- Interestingly, in the technology-intensive
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peared and improvements became marginal. AB’s computer chip manufacturing sector, we saw
concerns have since shifted to other issues. As several cases in which the supplier development
the suppliers improved their own performance, approach was the forerunner to the alternate
the relationships, though cordial, ceased to re- strategic objective: the technology-based supplier
semble cooperative partnerships and drifted to- alliance. Certain suppliers, despite their quality
ward competitive tension. AB continues to sole- and delivery problems, were targeted for their
source from these suppliers but maintains ready valuable technological expertise. The manufactur-
access to alternative sources, and has in fact ers chose to assist them in overcoming these
dropped at least one problematic supplier. short-term performance weaknesses, viewing the
Competitive tension requires a pool of viable costs of supplier development (much higher in
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alternative sources for similar purchases; supplier the short term than simply switching suppliers) to
development can be used to create the necessary be small compared to the benefits of maintaining
alternative suppliers. John Goldberg, Procure- the technology linkage. Once the problems had
ment and Contracts Manager at Applied Materials, been overcome, the chip manufacturers could
tells how in the 1980s Motorola complained bit- concentrate on exploiting the supplier’s techno-
terly that AM’s products often failed to meet logical capabilities. In a similar vein, Bell Canada,
specifications or delivery times. However, there the Canadian telecommunications service firm,
was considerable interest, both politically and has established alliance-like technology relation-
from a general supply risk perspective, for ships, not only with its primary switching equip-
Motorola to help develop a domestic semicon- ment supplier, Nortel, but also a host of small,
ductor equipment supplier. Rather than seek specialized technology suppliers that offer the
alternative suppliers, most of which were off- promise of future technological expertise.

The Manager’s Guide to Supply Chain Management 39


The Relationship/Strategy Match could take advantage of it. Ideally, goodwill trust
is reciprocal: the buyer must trust the supplier
To use a firm’s supply management resources and vice versa. Either party can only verify that it
most effectively, suppliers need to be segmented has gained the other’s trust by exposing itself to
according to the strategic objectives they are to the other’s possible opportunistic behavior and
serve. Supplier selection and segmentation has determining whether its trust was warranted.
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even been called the “next best practice” in sup- Mutual goodwill trust permits firms to share con-
ply management. ICL, the U.K.-based computer fidential and proprietary information and collabo-
company, learned of the need for segmentation rate on new product and process designs without
the hard way. Initially, it treated all suppliers fear of opportunism. This reciprocal goodwill
equally, attempting to form strategic alliances trust is viewed as a critical element in realizing
with each of them. But the transaction costs technology-based competitive advantages.
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proved overwhelming. Interestingly, most of its
suppliers did not feel that special relationships Competitive Tension Enablers
were warranted and complained about the exces-
sive time and effort required. ICL has since seg- Competitive tension relationships emphasize
mented its supply base relationships for consis- simplicity and transaction cost reduction, building
tency with its different strategic objectives. Now, on competency trust that enables streamlined
only 2 to 3 percent of its suppliers fall into the communications and improved supplier response
strategic alliance category, with the balance in the to deficiencies. As a first step, the firm must make
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cost reduction category. a detailed assessment of each supplier’s reliabil-
Thus, firms need to distinguish among the ity, determined either through its track record in
suppliers that are truly of strategic importance, supplying the firm or through independent certi-
those that are best managed for cost reduction, fication (such as ISO 9000). Next, it permits those
and those that require the special attention of suppliers with demonstrated reliability to ship
supplier development. In this last category, the products directly to the required point of use
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firm’s supply managers should have a clear idea without inspection, providing an important signal
of which category the developed supplier is des- that the buyer trusts the suppliers to conform
tined to fit—either as a strategic partner or as a consistently to specifications.
low-cost supplier. Ultimately, the firm may have some suppliers
undertake activities traditionally managed in-
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RELATIONSHIP ENABLERS: TRUST house: self-monitoring their orders through elec-
AND INFORMATION FLOWS tronic data interchange; administering their own
accounts through automatic debit/payment sys-

H aving identified the strategic objectives


and the appropriate matching relation-
ship, the manager’s task is to “make it
so.” Clearly, these different relationship types
tems; even supervising their use through in-plant
supplier representatives. Key representatives may
assume responsibility for a range of items, man-
aging inventory and resolving any quality prob-
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need to be implemented and managed using lems on behalf of the firm. Essentially, the sup-
distinctly different practices. Although the ap- plier representative system can be used to out-
proaches must differ in many ways, two aspects source the entire part procurement responsibility.
are of particular significance. First, the desired Bose (with what it terms “JIT II”), Allen Bradley
relationship must be matched by the types of Canada (through its commodity managers), and
information that flow between the firms. Second, Applied Materials have all successfully imple-
each form demands that the two parties develop mented variants of the in-plant supplier represen-
and maintain a particular level of trust. tative approach.
Sako (1992) offers relevant definitions of Although all competitive tension relationships
competency trust and goodwill trust. Competency require competency trust, superior transaction
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trust relies on confidence that a supplier can cost reduction practices require buyer-based
maintain delivery and quality standards without goodwill trust. Given sufficient goodwill trust in
constant reminders or monitoring. A firm feels the supplier, the buyer might employ other cost-
confident that it can curtail supplier scanning, saving practices, such as the use of Kaiser pur-
competitive benchmarking, supplier evaluations, chase order drafts, whereby the payment process
and audits, as well as reduce or eliminate inspec- is handled on delivery by the supplier itself. (Yes,
tions of incoming material. In short, competency the supplier writes its own check!) This elimi-
trust is a critical enabler for reducing supply- nates the need for duplicate accounting and veri-
related transaction costs. fication activities. As another step made possible
In contrast, goodwill trust is one party’s be- by buyer-based goodwill trust, some firms have
lief that the other party will always act in the first implemented pricing models based on the sup-
one’s best interests, even when the second one plier’s direct-cost estimates—in essence, a “cost

40 Business Horizons / March-April 2000


plus” pricing system based on the supplier’s esti- a contract to handle all possible contingencies for
mate of job processing time. The firm needs suffi- a supplier alliance relationship would be diffi-
cient goodwill trust in these suppliers to be con- cult—and possibly counterproductive, since oner-
vinced that they won’t take advantage of the ous contract terms could stifle both parties’ cre-
arrangement. In return, the firm can eliminate the ativity and commitment. If the relationship’s pur-
time and cost of bargaining and resolving dis- pose is joint technology development, it may be
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putes about contract pricing. futile to specify precisely each party’s required
Along with the appropriate level of trust, cost technological contribution, especially at the early
reduction objectives also need appropriate infor- stages. It may also be difficult to determine what
mation flows. At minimum, suppliers need clear each party’s contribution has been throughout a
performance specifications combined with a cur- close collaborative development, or to “fairly”
rent and accurate demand forecast. Buyers need allocate the resulting benefits. In place of con-
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ways to advise suppliers of perceived problems tracts to cover these contingencies, both sides
and their priorities. A supplier evaluation and must rely on a high level of reciprocal goodwill
performance feedback system is critical. A “cost trust to maximize each party’s benefits from tech-
of supplier nonconformance” accounting report, nological collaborations. The supplier’s propri-
like that used by Allen Bradley, can prove ex- etary technology must be safeguarded, and the
tremely valuable. Allen Bradley, Honda, and supplier must be compensated appropriately for
Warn Industries are just a few examples of firms its contributions. Reciprocal goodwill trust allows
that routinely provide suppliers with delivery and cooperative ventures not completely governed by
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conformance quality feedback, highlighting areas contracts to be undertaken, since each party has
of concern. little concern about the other’s opportunistic
behavior.
Cooperative Partnership Enablers Developing goodwill trust takes time and
management effort as well as risk. Firms can
Information flows that facilitate joint problem- generate trust by exchanging critical technical
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solving enable the cooperative partnership ap- resources, sharing confidential technology fore-
proach. Typical activities include training and casts and drawings, collaborating on strategic
education on problem identification and prob- plans and long-term product forecasts, or ex-
lem-solving techniques, as well as developing changing sensitive financial information. Both
expertise in designing quality-related experiments. buying firms and suppliers must expose them-
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Like Toyota does as part of its supplier outreach selves to situations in which the other party
program, the buyer can provide operations and might act opportunistically, thereby allowing the
quality consultants, free of charge, to help the other party to demonstrate its trustworthiness by
supplier solve problems. Some firms, such as not taking advantage of such situations. For its
B.C. Tel, a regional telecommunications provider, part, the supplier can instill trust by, say, suggest-
use supplier benchmarking to inform the weaker ing alternative sources that might better serve the
suppliers about their comparative shortcomings. buyer’s needs, or voluntarily divulging cost sav-
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The most effective cooperative partnerships
we’ve seen have specific learning objectives for
suppliers. They realize that, although they could A Note About Our Study
intervene directly in a supplier’s problem for fast
results, there are long-term advantages in trans- We draw upon both previous supply management research and, perhaps
ferring broad management capabilities to the more important, our ten years of field investigations of both successful and
supplier and creating a philosophy of continual unsuccessful supplier partnerships and strategic alliances. We were particu-
organizational learning—which does not neces- larly influenced by our assessment of what “best practice” companies—
sarily occur when solutions are imposed. those frequently held out as exemplars of supply management practice—
had done and where they appeared to be headed. In some cases, there
were dramatic differences between reported practice and what we ob-
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Strategic Alliance Enablers
served, underscoring the need for clarifying the situation. We are grateful
to those managers who spared valuable time and shared their learning
The strategic alliance relationship requires a very experiences.
different set of enablers. A firm needs continued For simplicity, we focus on the product level and the companies’
access to supplier technology and expertise to relationships with their suppliers of component parts and materials. Our
develop new processes and products. By relying advice about supply management objectives and relationship choices are
heavily on key suppliers beyond their direct con- equally valid for purchased services, such as those for marketing consult-
trol, it seeks some technological integration be- ing, information technology, financial auditing, and tax services. Finally, in
tween itself and allied suppliers while managing our discussion, we assume that the firm has already decided to outsource
the risks of its dependence on them. the particular input rather than produce it in-house (recognizing that this
Usually, risk in inter-firm relationships is decision to outsource may have to be revisited if purchasing proves inca-
pable of meeting the strategic objective for the input).
managed through contracts. However, developing

The Manager’s Guide to Supply Chain Management 41


ings it would be willing to share with the buyer, Management Caveats
especially if the savings could otherwise be kept
hidden. Both actions can add confidence that the Some might argue that our assessment is too
supplier has the buyer’s best interests at heart. simplistic, claiming, for example, that the coop-
With sufficient mutual trust, firms have a host erative partnership offers much longer-lasting,
of actions available to them. They may use in- sustainable gains. Our field interviews suggest
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plant supplier representatives, as with the trans- otherwise, however. They provide considerable
action cost reduction approach. Here, however, insight about these relationships, including how
the buyer may choose to expand the representa- and why they formed, how they developed over
tive’s responsibilities and plant access, to include time, and where they were headed. Going be-
access to sensitive technical departments. These yond the business press rhetoric, we found that
enablers ensure that, despite the inherent high many reported “partnerships” turned out to be
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risks of a strategic supplier alliance, the perceived little more than civil relations between firms—
probability of proprietary losses is extremely low certainly an improvement over previous adver-
and, hence, the overall expected value of such an sarial conditions but falling well short of being
event is maintained at acceptable levels. strategic alliances. Other relationships displayed
While information flows with the other sup- alliance-type characteristics, but on closer inspec-
plier relationship approaches are primarily one- tion they were predominantly supplier develop-
way (from the firm to its suppliers), strategic ment efforts initiated to correct supplier perfor-
supplier alliances thrive on two-way flows. The mance weaknesses. Most of them offered limited
N
firm can provide its partners with channel mar- long-term strategic benefits beyond achieving
ket, production planning, and technical informa- cost reductions. Moreover, when pressed, the
tion; in turn, it should expect to receive technical managers admitted that the future prospects for
advice, product design, and integration assistance expanded interactions seemed limited.
and information from the supplier’s environmen- We do not pretend that our guide covers all
tal scanning. The firm must build multiple chan- contingencies. In particular, we point out three
O
nels to capture the maximum benefit from these fundamental caveats to using this guide blindly.
suppliers. Channels might include staff exchanges, To make the manager’s decision-making just a
regular forums to discuss areas of mutual con- little less complicated, we incorporate these cave-
cern, and relaxed procedures that encourage the ats into a contingency model, shown in Figure 2.
easy flow of communication between the em- First, we have used the buyer’s perspective in
T
ployees of the two partners. evaluating a relationship’s value. Clearly, the

Figure 2
The Contingency Model for Supply Management Decisions
CO
Technology
Forecast
No

Core No Make Buy Technology


Yes Supplier Yes Supplier No
competency? or objective development
objective necessary
buy? match?

Make No Yes
PY
Yes Supplier
No Supplier Yes development
development to build
necessary competency trust
Maintain/develop
internal
capability Supplier
Establish development Develop goodwill
competitive to build trust and share
tension competency and proprietary
goodwill trust information

42 Business Horizons / March-April 2000


supplier’s perspective may be somewhat differ- technology architecture is based on electronic
ent. Suppliers have their own technology strate- imaging rather than on chemical photographic
gies and different views about the merits of a systems.
potential relationship. Quite rightly, the supplier Some key technologies, especially rapidly
may not want the buyer’s envisioned relationship, changing ones, should be retained in-house even
or may even want to form an alliance with a if they are not currently viewed as vital. Core
D
different customer that demonstrates greater po- competencies and technologies will change over
tential for long-term benefits. To offset this lack time. A non-strategic technology may become
of supplier enthusiasm, a firm may have to adopt critical to the firm’s order-winning criteria in the
other tactics to secure access to the critical tech- future, perhaps forcing the firm to reacquire pre-
nology. We could easily see the case for taking viously outsourced knowledge, a potentially ex-
more risks and making greater effort to establish pensive and difficult process. The converse is
O
goodwill trust in such circumstances. also true. The supply manager may develop a
Second, using any of these approaches will strong alliance relationship with a supplier offer-
impose cultural adjustments and implementation ing a critical technology only to find that radically
difficulties, depending on how they differ from different, alternative technologies are emerging
the firm’s past supply management practices. from other sources. The buying firm may have to
GM’s attempts to adopt modern supply manage- extract itself somehow from the alliance relation-
ment practices continue to be hindered by a long ship, a potentially difficult action that may affect
history and established culture of adversarial other supplier relationships.
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relationships with its supply community. If GM
intended to adopt competitive tension in place of
the traditional multisourcing adversarial approach,
implementation would probably be more difficult
than it would be for other firms without such a
history. Once again, a firm may have to go to
W ithout a rigorous technological fore-
cast, strategic outsourcing will be
filled with many blind avenues and
deeply regretted decisions. In all our visits, the
firms with successful outsourcing strategies, com-
O
greater lengths over a longer period of time to plete with associated relationship-building strate-
overcome a similar historical legacy. Although we gies and implementation plans, began with well-
do not formally include this contingency in Fig- developed and rigorous technological forecasts.
ure 2, overcoming a prior history of adversarial Top management must understand the future
relations should temper managers’ expectations technological requirements as an essential first
T
for implementing this three-approach system. step in the strategic outsourcing process and one
Third, our guide assumes that managers that all but a select few of the “best practice”
know where the company’s products are headed firms have yet to appreciate. ❒
technologically. Managers have to recognize what
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44 Business Horizons / March-April 2000

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