Payam Parsa at CELDi forwarded me a link to a fascinating article over the weekend. It talks about the challenges in establishing successful supply chain collaborations with your key business partners.
Here's a sobering statistic: 80% of all supply chain collaborations in the consumer packaged goods industry fail. This is true despite the best efforts of these companies who know that they are in a hypercompetitive environment where pennies can literally make the difference between survival and bankruptcy. Even with that backdrop, there is still the promise of huge potential payouts for those organizations that can transform these initiatives into success.
I thought there were three key lesson that we ought to incorporate into any future activity:
- Turn win-lose into win-win with the right benefit sharing model
- Select partners based on capability, strategic goals, and value potential
- Establish a robust, joint performance-management system
For the first point, there are going to be times when the benefits are not equal for both parties. Creative solutions could help overcome that obstacle:
Here's one real-life example: a retailer and a manufacturer were able to reduce overall logistics costs between factory and store by cutting out the manufacturer's distribution centers and treating the retailer's distribution network as one integrated supply chain, from manufacturing plant to store shelf. However, the retailer's supply chain executives struggled to gain acceptance for the idea from their leadership because it resulted in the retailer carrying a far larger fraction of the logistics cost.
Rather than shying away from such asymmetric collaborations, smart companies can make them work by agreeing on more sophisticated benefit-sharing models. These can come in the form of discounts or price increases to more fairly share increased margins or cost reductions, or they can involve compensation in other parts of the relationship. For example, when one retailer collaborated with a manufacturer on a co-branded product line, the manufacturer agreed to absorb the upfront product-development costs in return for an expanded share of the retailer's product offerings across a wider set of categories.
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Similarly, in the product-flow improvement case described in the sidebar ("Opportunities for collaboration," below), the manufacturer provided the upfront investment in new retail-ready packaging, while its retail partner reaped most of the benefits in terms of increased availability and reduced labor costs. The two companies established a joint benefits pool and agreed to use a percentage of the savings to fund future cost-reduction efforts and a sales-improvement program.
The second point is also easily overlooked in the rush to collaborate:
The biggest potential partner might not be the best one. Many companies aim to collaborate with their largest suppliers or customers because they assume that the greatest value is to be found there. In many cases, however, this turns out not to be true. Collaboration may be of more interest to a smaller partner, which might invest more time and effort in the program than a very large one that is already juggling dozens of similar initiatives.
Finally, creating the right key performance indicators are an absolute necessity:
....By building common metrics and targets—and jointly monitoring progress—companies avoid the misaligned incentives that damage so many collaboration efforts.
Picking the right metrics can be challenging, however, and it will inevitably involve trade-offs. In a collaboration to reduce logistics costs, for example, the partners may have to choose between a pallet configuration that's optimized to suit a retailer's restocking processes, which will reduce in-store labor costs, and one that optimizes truck fill, which will reduce transportation costs from distribution center to retail store.
How to overcome these potential conflicts? The trick is to keep things simple by picking the smallest possible number of metrics required to give a picture of the collaboration's overall performance, and then to manage those metrics closely, with regular joint reviews and problem-solving sessions to address trade-offs. The real power of any performance-management system comes from this frequent, robust dialogue between partners, yet this is also the element most commonly ignored or underemphasized by collaborating companies.
Here is the link to the original source article: Six steps to successful supply chain collaboration – Strategy – CSCMP's Supply Chain Quarterly
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