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Firms have flogged the product differentiator approach for a very long time. As time passes, products converge in terms of their features. And the ability to create value by product differentiation diminishes. Firms are now focusing on unlocking the value in their supplier relationships. Instead of merely reducing costs, firms are trying to build a differentiated relationship with a few suppliers, to create a sustainable advantage. The move to sustainable collaboration is on. Collaboration has many faces. At the basic level, collaboration can mean signing a contract with a supplier, stating the delivery schedule, quality and numbers. The interaction between the buyer and supplier is restricted to either e-mails or phone calls, with an odd meeting thrown in. Meetings are called only as a last resort – when there is a serious disruption.This works well in business as usual cases. But to capture the value of these relationships, firms need to look at full-fledged collaboration – where the supplier becomes a part of the product development effort and develops a vested interest in the success of the product. This means sharing the response to market volatility and complexity.
Collaboration in sourcing has three key areas –governance, commercial model and delivery. As firms start their collaboration, the first key area will be the alignment of the supply chain objectives of the firm and its suppliers. The governance model should contain a clearly defined SOP, with roles, responsibilities and outcomes clearly defined. For alignment to really work, the firm has to develop a set of SMART metrics that it can share with the supplier. The supplier can now operate within these parameters and monitor these metrics for mutual benefit.
Supplier collaboration is easier said than done. We are taught that the supply chain surplus – the difference between the revenue and the expenses involved in delivering the product has to be apportioned among all the players in the chain. This means that the commercial model should be based on a transparent policy, with the members of the chain deriving their share of the benefits derived by their efforts. This is important, as the supplier will commit capital upfront, and will get paid only on delivery.
The second key to success is leadership and ownership of the collaboration. The leaders of both the teams should be able to work together as a unit, with the sole objective of delivering the expected customer experience. This means trust, transparent reporting and a tight integration of the information flows in the chain. This leads to shared responsibility. No collaboration project can takeoff unless all parties concerned discuss, plan and agree to the contours of the relationship. This helps create shared responsibility and unity of purpose. Such ownership also brings in closer collaboration and increased stakeholder engagement, driving savings.
Quite often, the goals of collaboration need not be savings – it could be a business need – like enhanced customer service capability. For example, Tata Motors have a policy of hand delivery of emergency spares – born out of a need to ensure customer delight. A collaborative sourcing model will factor in these aspects, ensuring the ultimate objective of the supply chain.
This does not mean collaboration means ignoring savings. In a true collaborative scenario, savings are not measured on a forecast, but at the P&L level. The vendor has to track and report savings to a business unit, division and product level, ensuring a highly visible savings track.
A third factor for the success of collaboration is improved compliance. Unlike the traditional model, where the supplier ties into a contract, and nothing else, collaboration provides a fertile soil for the parties to pursue initiatives that will increase compliance for the duration of the contract. Any savings will be subject to equitable sharing and hence the supplier need not spend time worrying about gain share. This means that all entities in the chain need to be able to track the savings to their P&L.
Supplier collaboration also entails joint spend analysis and budget management. True collaboration among partners enables the entities to work together and validate spend analysis data using a common platform – which the buyer extends to the partner - this gives both the buyer and supplier accurate and actionable data to identify savings targets, efficiency initiatives, track compliance and enable better planning.
Yet another key to successful collaboration is knowledge transfer – a two way transfer of knowledge between the buyer and the supplier. The buyer brings intimate knowledge on customer preferences, buying behavior, market dynamics, while the suppliers bring in their expert knowledge on the part or product. This free exchange enables all partners to focus on their core strengths, while retaining their competitive advantage.
For supplier collaboration to work, there should be a high degree of transparency in the data flows in the entire chain. Current supply chain visibility is most often restricted to one node forward and backward. For the supply chain to benefit from collaboration, the entities should have visibility across the entire chain. Gaps in information or differing quality of information across the chain is anathema to collaboration. Remember, supplier collaboration is not a bilateral affair – it is a multi –lateral project. A sourcing team has to take a call on both long term and short term issues. These are not restricted to savings, but deal with product features, innovation and business compulsions. For this to work, we need to close the information gaps.
Today, with the convergence of social media, mobility, analytics and cloud, there is an explosion of unstructured data – popularly called Big Data. Supply chains need to harness big data – data that resides in the individual systems with all partners in the chain.
These requirements call for an enhanced emphasis on information technology, data visualization, analytics and information delivery systems.
Collaboration is the emerging paradigm for supply chains. If undertaken in the right spirit, it unlocks value for all partners. However, collaboration is neither quick nor easy. But is it worthwhile at this stage of supply chain evolution? Experiences of firms in developed nations prove that collaboration does deliver returns- one study shows that collaboration delivers a profit uplift of five percent to 11 percent through both increased sales and reduced costs. Collaboration will take time and effort to overcome the inertia. All partners need to recognize this and build an appropriately long-term perspective into their goals and expectations for the collaboration.