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Developing Supply Chain Alliances 

Traditionally, the relationship between suppliers and manufacturers has focussed mainly on promoting competition between suppliers. The usual outcome is that stock holdings, quality controls and other non value-adding activities are duplicated, designs are not optimised, and there is an absence of co-operation. This tends to make the end product expensive, poorly designed and lacking innovation. Today, many organisations, especially in the public sector, still use this approach. Is it any wonder, therefore, that we frequently hear complaints about service delivery?

Traditional Supplier Relationships

The traditional supplier relationship is characterised by the following features:

• Negotiations are adversarial.

• Competing suppliers are pitted against one another.

• Buying decisions are made on price alone.

• Both "sides" release as little information as possible.

• The vendor supplies what is ordered rather than what is needed.

• Buyers use as many suppliers as possible, so that the purchases from any one supplier are relatively small. Suppliers regard such buyers as unimportant.

There is a strong mutual distrust between buyer and supplier, who regard each other as adversaries.

The Japanese Approach

In the 1960s and 70s, Japanese manufacturers saw the weaknesses in the traditional method and changed their approach. They learned to develop long-term relationships with their key suppliers, and these partnerships achieved significant improvements in product quality, design, delivery, flexibility and cost. Both parties benefited from this as they both became more competitive.

Where a strong positive relationship was built up with a supplier, they would automatically be awarded repeat business. When new business was developed this was then given to the preferred supplier.

Buyers played "open cards" with the supplier, particularly regarding forecasts, schedules and target pricing. It was seen that key suppliers should be involved in the design process, and should stay involved in continuously improving the product and its manufacturing process.

Strategic Alliances

The relationship with a preferred supplier can be considered to be an alliance of equal partners who are dedicated to producing a competitive product for mutual profit. This relationship is characterised by the following features:

• The relationship is long-term and ongoing.

• There is mutual trust.

• Information is shared.

• Technology and expertise are shared.

• The buyer reduces (or eliminates) the non value-adding activities of checking and monitoring.

• The buyer relies on the supplier to deliver on time, thereby reducing safety stock.

• The supplier participates in end-product design.

• The supplier depends on the buyer for future business.

Where both parties have a mutual self-interest, this binds them and their continued association strengthens the partnership.

Developing a Strategic Alliance

Developing supplier partnerships requires a structured approach that can be measured and monitored as the relationship matures. Alliances should be developed on the basis that the buyer foresees a relatively long relationship with the partner, and that the partner will not be competing with other companies.

The first step is to review the supplier base for potential allies. Alliances should not be sought with every supplier, only with key suppliers. Do not try to develop new suppliers without first trying hard to develop existing suppliers. An ABC analysis of purchases will identify the A items which should be the subject of partnership agreements.

The management of the supplier company must be known for its management strengths. This will include integrity, flexibility, openness, delivery, technical capability and financial strength. To avoid a conflict of interest, there should be only one supplier for each type of product or service, although there usually are exceptions. Not every supplier can or should become an alliance partner.

Once the buying company has gone through the selection process, the next step is to establish the alliance agreement. To ensure the commitment of both parties, this must be negotiated at the highest level, with input from all disciplines. This process represents change, so expect opposition from within both companies. The agreement should document:

• Objectives - mutual benefits,

• Policies and procedures,

• Roles and responsibilities of supplier and buyer,

• Performance measurements monitoring the performance of the partnership through:

• Customer Service.

• Product benchmarking,

• Delivery performance,

• Quality audits,

• Product cost and cost reduction,

• Flexibility,

• Value analysis and continuous improvements,

• Regular, formal performance reviews.

The last step is to reduce non value-added activities. Once confidence in quality at source is established, the supplier will be able to take responsibility for quality at all stages, in particular material leaving the company. There should be a plan to move progressively from inspection at the buying company to inspection at the supplier's company, to quality at source.

Confidence in the supplier's reliability and integrity will lead to simplification of goods receiving procedures where the products of alliance partners are accepted directly on production lines without counting or double handling. Safety stocks of purchased items can be gradually reduced to zero as the supplier's delivery performance increases.

The next step, Supply Chain Alliances

Traditional multi-supplier competition tends to optimise the cost of each step in the supply chain, from raw material to finished goods, which may not be the optimal solution for the entire supply chain. It follows that a strategic alliance represents an optimisation intended to minimise the total cost and maximise the total value of the transactions between just two of the parties in a supply chain. Taking this concept to its conclusion, it is possible to optimise the entire supply chain through a network of alliances encompassing every participant. This is the challenge that all businesses participating in supply chains must accept in order to survive in today's markets.

Colin Seftel BSc(Eng) CFPIM CSCP

Sources and References:

Manufacturing for Survival, Blair Williams
The Strategic Partnership Philosophy, Danfoss
Purchasing Success, Colin Seftel