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TraiT 4 Selective Collaboration with Trusted Business Partners

In their Harvard Business Review article, “Which Kind of Collaboration Is Right for You?” Harvard Professor Gary Pisano and Professor Roberto Verganti of the Politecnico di Milano wrote: “The new leaders in innovation will be those who figure out the best way to leverage a network of outsiders. In an era when great ideas can sprout from any corner of the world and IT has dramatically reduced the cost of accessing them, it’s now conventional wisdom that virtually no company should innovate on its own” (Pisano and Verganti 2008). The professors argue strongly for approaching the business environment with a focus on collaborative innovation. They note just as forcefully, though, that collaboration comes in a variety of forms and care should be taken before proceeding on that path.

Pisano and Verganti argue that the collaborative approach chosen must be right for the organization and its business circumstances. They offer a framework for making such a decision that includes four modes:

1. Elite circle: One company selects the participants, defines the prob- lem, and chooses the solutions

2. Innovation mall: One company posts a problem, everyone can pro- pose solutions, and the company posting the problem chooses the solutions it likes best

3. Innovation community: Anybody can propose problems, offer solu- tions, and decide which solutions to use

4. Consortium: This operates like a private club where participants jointly select problems, decide how to conduct work, and choose solutions

Poirier, C., Quinn, F., & Swink, M. (2009). Diagnosing greatness : Ten traits of the best supply chains. ProQuest Ebook Central <a onclick=window.open('http://ebookcentral.proquest.com','_blank') href='http://ebookcentral.proquest.com' target='_blank' style='cursor: pointer;'>http://ebookcentral.proquest.com</a> Created from apus on 2021-09-11 06:45:50.

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100 Diagnosing Greatness: Ten Traits of the Best Supply Chains

Pisano and Verganti offer solid advice on collaborating successfully, bringing fresh ideas to the forefront in their presentation of the four collaboration modes. They call attention to what is happening around the world as companies increasingly find it necessary to collaborate internally and then to extend that effort to external business partners. As supply chains become more extended and complex, the need to collaborate effectively becomes all the more critical. Going it alone makes less and less sense; collaborating with others enlarges the possibility of reaching the best solutions.

SuPPly Chain CollaBoraTion haS BeCome imPeraTive for SuCCeSS

What is driving the need for collaboration? In short, it is the growing complexity of global markets and extended supply chains. Professor Joseph Carter at Arizona State University and his associates have described supply chain collaboration spe- cifically as a “Brave New World of customer-driven supply chain complexity that will require new, externally focused technology combined with relationship-based management processes for companies to compete.” Among the ingredients of suc- cess in this new world: “Collaboration will become more important to manage complexity, internally and externally” (Carter, Slaight, and Blascovich 2007).

Their reasoning is basic. “As companies have reduced their number of suppli- ers, they have also reduced potential alternative sources of supply,” wrote Carter and co-authors Thomas H. Slaight and John D. Blascovich in an October 2007 Supply Chain Management Review article. “Self-created duopolies or oligopolies are more difficult to engage in competition. Alternatively, suppliers have choices about which customers they will give new technology to first. They have choices regard- ing scarce or newly planned resources. Consequently, it has become more impor- tant to become a ‘preferred customer’ for a large supplier.”

In today’s highly competitive global business environment, if a firm wants to significantly improve performance, it has no other choice but to work diligently with key business partners. That’s the message emerging not just from our research and survey data, but also the general consensus among the experts. “In the future, companies will need to use collaboration to keep their innovation pipeline filled,” says Carter et al. Collaboration is part and parcel of the global arena for business competition. In this arena, the leaders have already moved beyond internal-only improvement and knowledge sharing; they have established deep collaboration and open communications with carefully selected trading partners.

Collaboration must be a serious part of any supply chain effort— albeit approached with caution. To maximize the returns from collaboration while minimizing the risks, firms need to be good at certain things. First, they need to

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be good at identifying when to collaborate and when to keep things close to the vest. While collaboration can provide faster and better solutions, greater market access, and shared risk, it also creates interdependence between the collaborating firms and opens the door to possible leaks of proprietary information. Firms need to carefully determine what information can and will be exchanged to ensure maximum value for all participants.

Second, good collaborators are good at picking partners. They have well established criteria and procedures for evaluating the worthiness of potential part- ners. Their selection criteria go well beyond financial and technical concerns to address the compatibility of business processes, strategies, and corporate cultures, as well as the trustworthiness and collaborative abilities of partners. Finally, good collaborators have a mature understanding of how to manage relationships and how to eliminate communication barriers. We will discuss this competency in more detail later in the chapter.

Recall one of the hypotheses from our early surveys: Inter-enterprise collabo- ration will be a mark of the advanced firms. The data verify this hypothesis, indi- cating that the ability to collaborate effectively with a select group of trusted business partners is indeed an important differentiating trait of leaders. Figure 6.1 shows that the leaders among our survey respondents were much more likely than followers and laggards to report a high degree of collaboration with suppliers and customers. Further, they were much more likely to have established procedures and roles for collaboration. Overall, they had moved collaboration well beyond improving only transactions management to the point of addressing more strate- gic concerns.

Collaboration is a key factor— perhaps the most important factor— in achiev- ing supply chain excellence. For true collaboration to take hold, the first step must be to change the relationship among the members of the supply chain. How important is that step? An illustration from the automotive industry may shed some light. A May 2005 survey conducted by Planning Perspectives of Birmingham, Michigan, showed ratings of automotive manufacturers by their key suppliers (Tierney 2005). In order of most to least preferred, the manufacturers were:

• Toyota • Honda • Nissan • DaimlerChrysler • Ford • General Motors

On August 30, 2005, the Detroit Free Press reported on a study by Harbour Consulting of Troy, Michigan, on per-vehicle profitability by automaker. The results are shown in Figure 6.2 below. It’s not a coincidence that the most profitable

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102 Diagnosing Greatness: Ten Traits of the Best Supply Chains

automakers also had the best supplier ratings; conversely, those with the poorest ratings had the lowest profit performance.

This strong correlation between collaborative capability and profits confirms the premise that in today’s connected business world collaboration is a key dif- ferentiator. As a supplier you will bring your best talent, your most creative ideas, and your most innovative approaches to partners whom you can trust and will value your inputs. This does not mean that successful companies won’t continue to ask for low prices and high value. Of course they will. What’s important is how they go about reducing costs and partnering with suppliers. Toyota is famed for its keiretsu, the Japanese notion of working with a close-knit cadre of business allies. Both Toyota and Honda have gained significant pricing advantages from the same

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We pursue customer relationships and involvement that go beyond sales

transactions

We are constantly exploring new working relationships with customers

We pursue supplier relationships and involvement that go beyond

operational transactions

We are constantly exploring new working relationships with suppliers

Percent responding agree or strongly agree

Leaders Followers Laggards

Figure 6.1 Differences in collaborative activities

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Trait 4: Selective Collaboration with Trusted Business Partners 103

suppliers employed by the firms listed at the bottom of Figure 6.2. In fact, all three of the most profitable companies have extensive North American operations, work with the same suppliers as U.S. automakers, and yet achieve remarkably different results.

You can’t approach optimized conditions and differentiate yourself in the eyes of key customers and consumer groups in a vacuum. Beyond enhancing your internal processes, you need to extend innovation and improvements to key sup- pliers, distributors, and customers. Collaboration with network partners becomes a crucial element in this enterprise optimization and, as such, needs to be driven by necessary process changes. Figure 6.3 illustrates the crucial transition necessary to effect those changes. The figure illustrates the so-called N-1 Advantage, devel- oped by Supply Chain Innovations, which involves consolidating multiple pro- cesses into one enterprise process for greatest competitive advantage.

The N-1 Advantage holds that, to be successful, a business must leverage the many processes that exist across the full enterprise— from suppliers to customers. A key part of that effort is to examine which member of the enterprise has the best process techniques at each link in the system and to share those practices widely. This means consolidating many suboptimized efforts into single enterprise pro- cesses where possible, leveraging the best business partner for each key process,

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Suppliers’ preferences for partnership 1= best

Figure 6.2 Profits of selected automakers

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104 Diagnosing Greatness: Ten Traits of the Best Supply Chains

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and thereby constantly exhibiting best practices across the network. So if one com- pany has developed the absolutely best method of transacting purchase orders, that technique should be made common practice across the enterprise. Similarly, there should be one order management system that contains the most effective error-free processing.

The question now becomes: What is the most effective way to accomplish this set of optimized conditions and better satisfy the customer? In a broad sense, there are two ways to build effective collaborative enterprises. One uses the tightly coupled approach based on the keiretsu concept but with an internal focus that views col- laboration as a means to gain benefits within a firm’s four walls. Through this approach, the firm seeks to adopt collaboration (or move the organizational culture more favorably toward collaboration with external parties) via internal supply chain practices and processing that trusted business partners can favorably impact.

We advocate instead a broader approach. Rather than viewing collaboration mainly as a means to gain benefits for a focal firm, the collaboration initiative should incorporate a network of businesses that have stakes in one another as a means of mutual success and security.

Again, let’s look at Toyota’s example. Toyota is one of the most successful manufacturing firms in existence. Over many decades, the company has devel- oped its tightly oriented collaborative network into a fine-tuned business mecha- nism. Though Toyota’s successful approach is widely know, it remains difficult for others to emulate. A key reason has to do with the deep-rooted relationships Toyota has developed with its suppliers. These relationships are due at least in part to the automaker’s willingness to take ownership positions with suppliers (a char- acteristic of Japanese keiretsu). Most organizations are either unwilling or unable to form such deep relationships and are averse to holding any ownership stake in the supply base.

Instead of the strict Toyota model, then, let’s consider another type of business arrangement that fits the collaborative framework we are espousing. We refer to this new approach as a loosely coupled or federated keiretsu. This approach does not encompass all the advantages of traditional keiretsu, but it does bring two distinct benefits: It can be implemented relatively quickly, and it costs less to implement than a Toyota-type of keiretsu effort. These benefits flow from the fact that most of the physical infrastructure for a federated keiretsu is already in place in most supply chain networks. It’s just not being utilized properly.

In developing a federated keiretsu program, we recommend following this five-point plan:

1. Agree on principles of collaboration. First and foremost, companies linked in an enterprise effort need to agree on the core operating princi- ples. That means addressing, for example, profit improvement objectives,

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106 Diagnosing Greatness: Ten Traits of the Best Supply Chains

sharing of savings, means of identifying and solving problems, revenue recognition, participant responsibilities, allocation of resources, and so forth. Essentially, the partners need to create a joint framework that resembles an individual company’s business model. The agreement may not dictate specific levels of compensation or benefits but rather outlines an environment that will allow the parties engaged in the collaborative endeavor to better understand expectations and responsibilities.

2. Establish a governance model. The governance model that is developed must clearly articulate and define the parameters of intercompany col- laboration and resource allocation. That is, it must spell out exactly what data will be shared (or not shared) among the members, what steps will be taken to ensure security of any nonshared data, and how best practices will be extended across the enterprise.

Many so-called collaborative endeavors have failed to deliver on their promise primarily because they did not rationalize the multiple business processes involved. For example, collaborative innovation efforts often fail to significantly reduce the time it takes to develop, produce, and support new products and services. The problem lies in repetition or duplication of process steps throughout the supply chain. After a collab- orative effort is established, each company continues to use its own inter- nal development processes, many of which are not shared. Thus, making changes to the design of a product usually means that multiple processes must be sequentially applied before the changed design is accepted by all parties. Instead of applying multiple uncoordinated processes, the feder- ated keiretsu approach first gets all parties to agree to use one designated best process. While it may require trial and error to determine the best process, this exercise is more than justified by the time and costs savings that come from rationalizing unnecessary steps down the road.

3. Validate optimal internal processes. The rationalization of nonvalue- adding or redundant processes cannot be accomplished if a company has multiple sacrosanct processes in place. A necessary step, therefore, is for each collaborating partner to justify and validate its internal processes and make certain they are consistent and well understood across the network. Don’t think that because you have adopted a quality process such as Six Sigma that it is necessarily best in all cases. The idea is to search through the processes and functions represented in the network to find the single best way to do things.

For example, if an engineering team, a manufacturing team, and a sup- port team all have different processes and tools designed to execute a prod- uct design change, then the translations and handoffs required will slow

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everything down. If, on the other hand, all parties use a single, common process, then the collaborative enterprise can move more quickly toward optimized conditions.

4. Consolidate processes into the hands of the most capable enterprise member company. Deploy the best processes across the enterprise, follow- ing the principles of collaboration and the inter-enterprise governance model. A good rule here is to observe organizational neutrality. The best process has to be chosen based on accepted business metrics— cycle time, total cost, customer satisfaction, and so forth— not based on what organi- zation owns the process. Again, this evaluation will probably require test- ing and comparison of various approaches. Note that where no enterprise member has the best practice at a key process step, the partners should search externally for that knowledge.

Here is a short case in point: During the development of a new propulsion unit, several aerospace and defense companies decided to col- laborate in order to meet tight schedule demands. They quickly determined that using the old methodology would make it impossible to meet these demands. The project team decided to look at each other’s core strengths in these key areas— product design, program management, metallurgy, and information technology. An honest appraisal showed which company was best in each area, and responsibilities were allocated accordingly. Thus, in each case the tools and processes of the best constituent became the de facto tools and processes for the collaborative consortium. The result: they met the schedule.

5. Transform single constituents into an enterprise. Transforming the enterprise to better operating conditions is the culminating step. The linked companies become collaborating entities in the network improve- ment effort. The simplest way to achieve this position is to carefully choose your business partners and then select the market in which you will pursue your initiatives. You will not be successful without business allies. Thus, choosing ones you can trust and work with collaboratively becomes a defining characteristic of success.

Membership in multiple networks will make sense, so long as there is an understanding of what is being shared in each entity. That means suppliers may very well participate in multiple value chains with different products and services. The enterprise must, however, clearly define what distinguishing characteristics are featured in its offerings. (More informa- tion on the formation and governance of such an enterprise effort can be found in Wall Street Diet: Making Your Business Lean and Healthy by Charles Poirier, William F. Houser, and Michal J. Bauer.)

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108 Diagnosing Greatness: Ten Traits of the Best Supply Chains

reSulTS aPPear on The ProfiT STaTemenT

Developing an extended enterprise supply chain improvement effort is a daunting task, but the benefits to be gained can make it all worthwhile. This observation speaks to a modern business paradox that has been brewing for some time now. The mantra for companies during the 1990s was cost reduction above all else. In spite of the substantial gains many companies made under this edict, a myopic focus on cost reduction over time leads to diminishing returns. Firms find that they can squeeze suppliers and streamline processes only so much. Over time, in fact, they often lose the earlier gains as the cost-cutting momentum loses steam. When this happens, they can reach a higher plateau of improvement only through breakthrough technology or heavy capital investments. We want firms to achieve higher levels of performance and sustain the new positions without the need to resort to heavy capital investments.

Improving conditions and responding to this paradox call for two clear actions. First, the business must work diligently at improving enterprise processes, as any weak link in a supply chain can doom the final results. One company can- not drive toward optimized conditions while key suppliers, distributors, and cus- tomers remain inefficient. The proper course of action requires a concerted and uniform effort— with continuous focus on process improvement— that is applied across the total value network. Among the industry leaders there is a growing reli- ance on carefully selected and trusted business partners to attain this objective.

Second, the companies must embrace technology as the means of providing the knowledge transfer and enabling the improved processing that separates the preferred networks from the wannabes. In this regard, technology must be viewed as a necessary enabler to collaboration, not a “silver-bullet” solution. Our research shows that companies too often emphasize technology in lieu of governance and process improvement. This is understandable given that technology has common standards and is easier to implement than a uniform governance model with the right processes. Yet while technology implementation may be easier, the benefits are minuscule compared to what is possible through optimized processing. Technology should be at the center of knowledge sharing among the enterprise participants.

When these conditions are met, the enterprise can improve both the bottom line, through sustained productivity growth and cost containment, and the top line, by leveraging enterprise solutions to differentiate the network in the eyes of the most valued customers and end consumers. This dual capability has eluded most businesses for some time, as the constant pressure to reduce costs has shifted the business focus away from the customer— a fatal mistake. Indeed, our recent research shows that in spite of all the rhetoric surrounding the importance of the customer as a business driver, most businesses have not instituted the metrics and

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Trait 4: Selective Collaboration with Trusted Business Partners 109

resources necessary to support that theme. Our conclusion: Control of the best customers is still up for grabs!

Again, the status of the U.S. automobile industry makes our point. The market in both North America and Europe continues to grow and the new products com- ing from Asia are exploding in these markets. Yet the old paradigms of the U.S. auto industry still prevail. Until very recently, U.S. automakers continued to build plant capacity and force unwarranted cost reductions on an already compliant supplier base. In the process, they relegated customer focus to a back burner. Again, we point to the research cited earlier in this chapter showing that suppliers prefer to work with Japanese auto manufacturers because they have a more col- laborative and less confrontational style.

Our research reveals that, when considering all parts of the supply chain, the return from collaborative efforts can yield five to eight points of new profit for a typical firm and its business allies. Consider first the return on the manufacturing side. Lean concepts will work to eliminate all waste, reduce delay times, and raise productivity. Quality will eliminate the root problems in processing, reduce costs, and increase efficiency. Backsliding will be a thing of the past as the right process- ing takes place all the time. Systems won’t fail because they have been permanently fixed. Selective outsourcing will bring the lowest possible costs and highest effi- ciency to all process steps. The collaborative partners achieve the highest levels of productivity by finding best practices at each process step across the supply chain. Waste and shrinkage reach industry-best levels, with inventories becoming more visible and operating at the lowest possible levels to meet demand. In all, these manufacturing improvements typically add three to five points of new profit, as documented in numerous case studies.

Now consider the rest of the business. Supplier management groups collabo- rate to assure the best supply services. Product development moves ahead with the help of trusted business partners. At the same time, a like effort is expended on the customer side, as customer relationship management positively affects sales auto- mation, multi-channel customer service, and marketing efforts— all through the use of superior customer intelligence. The new capability means out-of-stocks are eliminated. Because only the products in demand are produced, obsolescence also ceases. Revenue lifts are seen for sales events and special promotions. New reve- nues are generated from existing and new customers responding to the unaccus- tomed superior service now offered— and often these gains come from non- traditional markets.

The collaborative network becomes the leader in analyzing and recognizing market trends. New product and service introductions are completed in industry best times— and with a higher rate of success. Pricing is matched with customer needs and a willingness to pay for value. Sales and service expenses are reduced and matched to the customer segmentation needs. The network partner firms add

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110 Diagnosing Greatness: Ten Traits of the Best Supply Chains

another two to three points of new profit. In total, they find the path to a doubling of earnings per share for the stakeholders.

WhaT DoeS iT Take To BeCome an exCellenT CollaBoraTor?

Collaboration is one of the primary means by which leaders in our survey have achieved nearly double the profit improvements of lagging companies. To gain such levels of new profit, companies embarking down the path of collaboration typically need to make significant changes to overcome persistent barriers and inhibitors. As Table 6.1 shows, becoming an excellent collaborator usually requires changes that are cultural and organizational, as well as technological.

Barrier Barrier Breakers

Relational and cultural barriers • Long term values and orientation

• Common, explicit, high-level goals

• Focus on the customer or opportunity

• Training in various social and cultural norms

• Shared desire to develop trust

Organizational and hierarchical barriers • Cross-functional team structures

• Permeable organizational boundaries

• Peer to peer access

Physical and temporal barriers • Co-location

• Communications technologies

Knowledge, information, and data management systems related barriers

• Standardized knowledge codification

• Identification and location of experts in

partnering firms

• Compatible information systems

Table 6.1 Barriers to effective collaboration

A big barrier to collaboration is the deep-seated reluctance of organizations to share knowledge and turn to outsiders for help. Often, this reluctance stems either from an unwillingness to trust supply chain partners or from the not invented here syndrome, which discounts the value of ideas that are not home grown. It can take time to shift this ingrained perspective away from short-term gains and win-lose thinking.

At the same time, the firm at the center of the business network— often called the channel master— must not force its culture and perspectives on its business

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partners. The value of collaboration comes from diversity in culture and perspec- tives, not from similarities. There must be a blending of what constitutes the right ingredients in the supply chain action plan and an execution scheme for each constituent. Training programs often can help members of both firms to appreci- ate their differences, especially when constituents represent different national cultures, languages, and work norms.

Focusing on the mutual achievement of high-level cost and revenue goals can help firms overcome barriers due to cultural differences. At the same time, busi- ness partners should reorient their focus to customer service and satisfaction. They should then build backward to create a supply chain that delivers on opera- tional excellence and superior customer response.

These observations should not be taken as high-minded rhetoric. The idea is to accept external advice and adopt innovative techniques that can be harmonized with supply chain concepts and yield a stronger commitment to the customer. Such an open approach runs counter to most business cultures, which typically are far more oriented around internal operational excellence than on customer inti- macy. The journey toward the improved financial conditions requires a clear vision of the key customer and consumer groups and an unrelenting drive toward differentiating the network from their perspective.

virTually inTegraTeD ParTnerS overCome CommuniCaTion BarrierS

Organizational boundaries sometimes prevent collaborative efforts from being as effective as they could be. Even if partners trust each other and are culturally com- patible, stiff hierarchies and long lines of communication can prevent the collabo- ration from being successful. Consider the following example. A supplier to appliance manufacturers recently came up with a radical new plan to improve the cost, robustness, and quality of a critical subassembly used in many different types of washing machines. The initiative involved a number of technical challenges requiring close collaboration between the supplier and its largest customer.

Unfortunately, almost all of the communications between the two partners were channeled through sales representatives and purchasing personnel. Both companies had strict guidelines regarding who could talk to whom, guidelines that were put in place to ensure that secrets were kept and that organizational hierar- chies were respected. While these may sound like legitimate concerns, the unfor- tunate consequence was that many details were lost in translation, and the development effort never reached its full potential. Both sides made too many mistakes and assumptions, leading to many redesigns, lost investments, and severe project delays.

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112 Diagnosing Greatness: Ten Traits of the Best Supply Chains

Traditional relationship • Communication funneled through representatives • Strict hierarchies maintained

Collaborative relationship • Broad lines of communication • Many peer to peer relationships spanning functional boundaries

Firm A Firm B Firm A Firm B

Figure 6.4 Traditional versus collaborative organizational relationships

To become adept at collaboration, firms need to reassess the ways their orga- nizations interact with their partners. They need to develop permeable organiza- tional boundaries and to establish working contacts at all levels, including marketing, product engineering, manufacturing, procurement, and so on. Figure 6.4 illustrates the difference between traditional and collaborative relationships among business partners. The traditional approach tightly controls information flows by channeling them through limited contacts— usually sales reps talking to purchasing agents. In a collaborative relationship the two partners are virtually integrated, meaning that personal interactions extend up and down and across the respective organizational structures.

overComing TeChniCal BarrierS iS a CruCial STeP

Given the global nature of supply chains today, physical and temporal boundaries can pose difficulties in managing collaborative efforts. The potential for 24/7 operations (where one group works while the other sleeps) has enticed firms to pick partners located in distant locations. However, few firms have developed the systems for passing work back and forth in a way that turns this potential into a reality for anything beyond simple transactions.

Even more problematic are the barriers created by incompatible information and knowledge management systems. The partners need to assess and remedy these incompatibilities even before the collaborative effort begins. Information technologies have come a long way in establishing systems to enable secure knowl- edge transfer. ERP-to-ERP becomes the new channel of communication accom- plished with excellent process management skills— something mastered primarily by the leaders at this point. In addition, the leaders make sure that their partners are aware of the sources of knowledge and expertise in the leader firms, and vice versa. Making sure that information systems talk to each other and that everyone

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knows where to go to get questions answered are central components of any suc- cessful collaborative endeavor.

ShareD riSk BeComeS an elemenT of SuCCeSS

As a firm extends its attention to an end-to-end supply chain and collaborates with willing and trusted business partners to find added value, it needs to consider many factors. We have covered most of the important ones in this chapter, and others will be described later. But we want to end this chapter with a point we’ve found to be critical to any collaborative effort— shared risk as an element of success.

Risk sharing begins with an acknowledgement on all sides that the typical emphasis on cost-cutting and price reduction must be set aside in the search for mutual benefits. Along the way, collaborating parties will develop improvement ideas that benefit the total business. They will also develop the means and proce- dures for sharing the documented savings and enhancements. Suppliers, for example, will be given a chance to not only offer improvement ideas in the way of new materials or new methodologies but also receive a compensation for actual savings through price rebates. At the same time, the involved parties will agree on how to share the risks they encounter. In Chapter 11, we cover risk management as a greatness trait. Here we simply want to draw attention to some of the main risk-related questions that need to be addressed upfront:

• How many resources will be applied from both sides to the collabo- ration?

• What action plans will guide the execution and bring results on time and at expected targets, with assigned responsibilities?

• Which party will fund the expenses associated with these actions? • How will the actual savings be divided among the participants? • How will the advantages be kept proprietary for the parties involved?

As an indication of good faith, we have seen suppliers offer to incur some of the upfront costs at the beginning of the collaboration effort and wait until actual sav- ings are realized before taking a share. At other times, the supplier will hold back some of its billings until documentation of the actual savings is received. In still other instances, the supplier is willing to take lower fees for its part of the improve- ment effort in exchange for a percentage of the actual savings. In any event, it comes down to putting some skin in the game to show good faith and a commit- ment to finding improvements that truly benefit both parties.

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114 Diagnosing Greatness: Ten Traits of the Best Supply Chains

aCTion STuDy: Winning CollaBoraTion

How does a consumer products company build a long-term relationship with the largest retailer in the world? How do you structure the relationship so both firms derive benefits? These were among the questions faced by Tom Muccio, vice president of Customer Business Development at Procter & Gamble (P&G) Worldwide, when he and his team developed a winning collaboration effort with mega-retailer Wal-Mart (Poirier 2003). Both firms, by the way, are on our list of leaders.

The success of partnering between these firms led P&G to launch its leading- edge customer business development strategy, which centered on multifunctional teaming practices. This concept, now developed globally with nearly 80 teams, is considered a core competency at P&G and defines the working relationship with its most strategic customers. It involved the transition from national to global teams, as well as changes that support multifunctional customer relationships.

Back in 1987, the P&G team characterized its relationships with retailers as being based on a military model, with an absolute hierarchy that had to be observed. P&G had a silo approach that dictated how sales went through each product division, no matter how many different sales representatives called on the retailer. Sales approaches were tactical in nature, and interdivision competition was fierce. The company realized that it needed to approach its customers in a different manner. The requirement that emerged from the team’s initial assessment of the situation: There had to be a more holistic approach with a focus on both quality and an end-to-end total system of response.

The driving hypothesis became: If the P&G team focused its powerful internal management principles toward customers, it could expect better alignment, rela- tionships, profit, and sales for both parties. The joint mission statement, which secured senior management acceptance, stated: “The mission of the Wal-Mart/ P&G Business Team is to achieve the long-term business objectives of both com- panies by building a total system partnership that leads our respective companies and industries to better serve our mutual customer— the consumer.”

When the team mapped the P&G competencies against practices desired by Wal-Mart, it found that most of the competencies (product data analysis, floor and display planning, etc.) never came into play in the relationship. The best results came from what the team called little clusters of overlap where competencies enhanced the overall supply chain process steps— on-time delivery from the sup- plier, for example, matched with fast turnaround at the retailer’s dock.

Next came the operating principles for the emerging relationship:

• Apply performance-based reward and recognition • Take a positive approach

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• Win as a team • Treat everyone as an individual • Communicate openly • Be honest • Be an owner • Respect confidentiality

With these sensible but business-difficult objectives as their guide, joint teams set forth to develop the relationship strategy. Consumer research from both firms was shared. Product categories were studied to determine where the best results were being achieved. The teams addressed stock-keeping unit proliferation to rational- ize store offerings to those that made sense for both firms. Both parties shared common analytical tools in order to glean the meanings from each other’s infor- mation. Logistics and systems coordination took on high value, and activity-based costing and joint business planning went to the heart of the structuring of what would become the relationship process.

To guide the effort, a set of expected results was developed:

• Increase sales, profit, and shares of market • Reduce costs • Increase capacity and capability • Develop precision service • Introduce speed and innovation • Demonstrate better customer insight

Some of the key findings that emerged during the relationship-building exercise have meaning to all firms pursuing collaboration. In spite of a high self-perception of its products and capabilities, the P&G team found that customer satisfaction was not as good they thought it was. In spite of offering well-known branded products, some consumers were not happy with what they received. Responding to those problems led to higher customer satisfaction ratings, which turned out to be an important prerequisite to growing share.

The team also found that the capabilities of account leaders were crucial. Constructive, forward-thinking, effectiveness-oriented, and collaborative attitude were not the characteristics typically associated with P&G’s national account sales representatives. That had to change. The sales structure at P&G subsequently went from high silos of product capability to integration within a new format focused on customers. Emphasis is now placed on the “customer experience” as a guide to enhancing the relationship.

The P&G– Wal-Mart collaboration has blossomed ever since its inception. More than 160 multifunctional teams have been involved in the effort. Working together on joint goals, a strategic partnership emerged. The focus is on the end

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116 Diagnosing Greatness: Ten Traits of the Best Supply Chains

consumer and what P&G products make the most sense. Shared consumer data led to focused selling and merchandising. P&G instituted a supplier-managed inventory system through which it replenishes the racks and floors of Wal-Mart and Sam’s Club outlets. Data on what to stock come from daily cash register receipts so replenishment is based on consumption and not sales forecast. It is truly a state-of-the-art relationship practiced by two supply chain leaders. (This story was reproduced with permission from Poirier 2003.)

ConCluSionS

Collaboration does not come easy for most organizations, even on an internal basis. Our research shows that the best supply chains overcome this challenge by initially collaborating with a small number of suppliers and customers, possibly using a distributor or a third-party facilitator. During the ensuing improvement effort, we find that innovation becomes a valuable network procedure, as the par- ties try to introduce new techniques and methodologies that competing networks have overlooked. The ultimate goal, of course, becomes achieving optimized pro- cessing across the enterprise.

This chapter outlined the ground rules for establishing a solid collaborative effort. Collaboration begins with the careful selection of network allies and extends to setting ground rules that make sense to all parties. We suggest first looking internally to find best practices for important process steps, such as devel- oping the perfect order management system. The effort can then be extended with the help of one key supplier or customer, guided by a joint process map that pin- points areas where both parties could benefit from improved processing. Following the rules outlined leads to collaborative development of best industry practices and a leading edge position. It’s a trait the leaders know how to apply— and others had better quickly learn.

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