collaboration performance s g o s t a ges partnering advan… · partnering additionally, i helped...

The Advantages of

PARTNERING By Robert A. Rudzki

Robert A. Rudzki is Senior Vice President of MaterialsManagement and Chief Procurement Officer at Bayer Corp.,the North American subsidiary of Bayer AG. Prior to joiningBayer, Rudzki was an executive at Bethlehem Steel Corp.

Over the years, there has been considerable dis-cussion about the working arrangements thatare possible between suppliers and their cus-tomers. Both suppliers and their customers usethe term “partnership” often and casually todescribe a wide range of working relationships.But are all relationships truly partnerships?And, more fundamentally, is a true partnership

the appropriate form of relationship for every situation?The short answers are “no” and “no.” If I had a dollar for

every time a supplier’s salesperson came through the doorand began talking about “our partnership,” I could haveretired a long time ago. In the past, I might attend a dozenmeetings and hear the term used in a dozen different ways.In many cases, “partnership” is applied to a transaction or aseries of transactions—the regular purchase of copierpaper, perhaps, or the one-off sale of a suite of software.Marketing impulses have expanded the term beyond rea-sonable scope, distorting the significance of minor rela-tionships and devaluing the word where it has true strate-gic importance.

As a result, resources can be misapplied. Supply chainpartnerships that, properly managed, could add significantvalue may be shortchanged on funding, staff, and time.

How can companies form the right kinds of partnerships with their suppliers and

customers? The framework suggested here by one veteran practitioner can help

supply chain professionals answer that question. It offers a practical and struc-

tured approach for reconfiguring relationships according to their strategic value

for both parties—and then executing on that plan.

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COLLABORATION PERFORMANCE STRATEGY EXECUTION BASICS

These relationships may require additional measurementprocesses or new liaisons between senior managers on eachside, for example. Conversely, relationships that now or inthe future are less critical may be oversubscribed.

Most large corporations are well aware of the differencesbetween true partnerships and more transactional relation-ships, of course. They have elaborate and proven mechanismsto drive procurement, supplier relations, sales, marketing,and customer relations. And they sometimes have sophisti-cated operations to drive alliances and other joint ventures.

But business pressures today are so great—and are risingso rapidly—that even the most sophisticated businesses maybe failing to realize the full potential of their current relation-ships and missing opportunities to build new ones. And evenif they are maximizing existing arrangements now, they maynot be re-evaluating their objectives and achievements withenough rigor to ensure continued optimal performance. Forcompanies that lack the expertise and resources to focus onrelationship potential, the dangers are even greater.

With the competitive suc-cess of both the supplier andthe customer at stake, there isvalue in stepping beyond casu-al and traditional approachesto relationships. At best, a tra-ditional method gives you tra-ditional, incremental results.At worst, it can be counterpro-ductive. Companies at eitherend of the supply chain cansharply differentiate them-selves if they apply a disci-plined structural approach totheir relationships with eachother and with other partici-pants in what I call a “valuenetwork.” In other words,there is great benefit in devel-oping and managing the rightkinds of relationships. In somecases, those newly designedand implemented relation-ships can become the nucleusof an “extended enterprise”involving a network of busi-nesses. That enterprise canoffer enormous competitiveadvantages.

A Practitioner’sPerspective Before I go much further, letme explain my personal per-

spective. I’ve been deeply involved with procurement andsupplier relations for 10 years, and for a long time it has con-cerned me that businesses essentially leave real money on thetable when they do not “partner right.” Currently, I’m a seniorvice president and chief procurement officer at Bayer Corp.,the North American arm of German health care and chemi-cals giant Bayer AG. In North America, our annual purchas-ing budget is about $6 billion, covering thousands of supplierrelationships in virtually every industry—from chemicals andraw bulk materials to professional services. We are well awareof the value of a disciplined and structured approach to sup-plier relationships, and we constantly refine our approach tomake sure we are getting the best out of each of those rela-tionships.

Earlier in my career, I worked directly on extended cus-tomer relationships and on a wide range of linkages with sup-pliers. My role has also involved negotiations with prospectivebuyers of businesses being divested and with prospective part-ners in corporate business development ventures.

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WELLWELL


Partnering

Additionally, I helped estab-lish and manage relationshipswith commercial banks andother financial institutions.

In this article, I want toprovide a detailed look at a structural framework that canaddress the shortcomings in the historical and casual meth-ods of partnering. I will begin by reviewing the external andinternal factors driving the need for a new approach to cus-tomer/supplier dealings. Then I will lay out a basic frame-work for defining and developing different types of workingrelationships between suppliers and customers. As a rule, Iwill not include purely transactional activities because theydo not fit with a rigorous definition of partnerships. So mydescriptions will span a range of relationships from what Irefer to as “basic partnerships” (which havevalue and are easier to achieve), through “strate-gic partnerships” (which have greater value andare more challenging to achieve).

Momentum Behind Partnerships What ’s really driving the need for a newapproach to dealings between customers andsuppliers?

No one debates the fact that businesseseverywhere are facing increasing competitivepressures. Capital moves immediately and mas-sively around the world. Product cycles get short-er every year. Average product development timetoday—16 months from concept to launch—is12 percent less than in 2000, according to arecent survey by consultancy Deloitte.Businesses are innovating faster than ever. TheDeloitte research finds that by 2006, 35 percentof manufacturers’ revenues will come from products intro-duced during the three preceding years, up from 21 percent in1998.

Increasingly, markets, sources of supply, and sources ofcompetition are global in span. Another Deloitte study findsthat more than 30 percent of European manufacturers saythey’ll locate or expand factories in China over the next threeyears. Additionally many U.S. and European manufacturersare locating product engineering far afield. Communicationsare denser and faster all the time. Sales grow more complexas customer expectations rise around the world.

Companies should not overlook the role that suppliers andsupply chain partners can play in helping to respond to thesemarket pressures. We are a long way from the vertical industrybusiness models that prevailed in Henry Ford’s day—whenFord Motor actually owned the rubber plantations that sup-plied the raw materials for the tires that its own factoriesmade. For many businesses, the biggest component of theircost structure is purchased goods and services. In the steel,oil, and chemicals industries, as much of 70 percent of rev-enues goes to the cost of goods and services. In automobile

manufacturing, it can reach 60 percent; in retail, it’s at least30 percent.

Many organizations learned long ago about the transactionand coordination costs of managing long lists of suppliers.Many companies have worked hard to rationalize their sup-plier rosters so they can focus limited internal resources onfewer suppliers. At the same time, the last few decades hasseen much more attention to other forms of relationships:joint research and development projects or co-branding initia-tives; partial equity investments; and long-term strategicalliances, such as the code-sharing initiatives run by manyairlines. Sometimes a deeper relationship has served as apilot run for, or a precursor to, an outright merger or acquisi-tion. (Exhibit 1 shows the many forms that partnership struc-tures can take.)

Spurring on the extension of relationships is a factorunknown to business until the 1990s: the Internet. Althoughtelecommunications and computer networks have progres-sively extended and accelerated collaborative activity, theInternet has led to an explosion of commercial interactions ofevery type worldwide—and will continue to do so.

Partnership PitfallsAll is not perfect when it comes to partnering. I have seenfailures and disappointments with business relationships thatI believed had great value, and no doubt you have too.Information from a mid-1990s report by The ConferenceBoard points out that as many as 40 percent of partnershipshave failed or not realized their true potential. Failures areoften attributed to factors related to “partner selection” and“partnership implementation.”

In almost all situations, difficulties are rooted in veryhuman factors: fear, mistrust, culture, and power. Supplierstypically cite the following concerns:

! Fear of overdependence on the customer.! Different company cultures.

EXHIBIT 1

The Range of Relationships

Involvement

Com

mit

men

tLo

wH

igh

Low

No Linkage SharedResources

SharedFunding

Cross-Equity

SharedEquity

Increasing

Complexity

• CrossPurchase

Order

• Annual orMulti-YearPurchase

Agreement

• SourcingRelationship

• CrossLicensing

• Program-maticR&D

Partnership

• CrossLicensing

• CollaborativeAdvertising• Alliance

• SupplierNetwork &

PartialOwner-

ship

• IntegratedOperations

• FullOwnership

• SharedEquity

High


! Inequitable power in the relationship.! Fear that the customer’s emphasis will be on price and

margins.Similarly, customers often have sufficient reason to hesi-

tate. They cite lack of trust in suppliers, concern that therewill be more risk than benefit (or inadequate grounds forsharing benefits and risks), and fears that forming a relation-ship will mean relinquishing control.

Other internal factors play out too. Poor leadership oftengets the blame for failed partnership implementations.External factors, such as changing business climates, also arecited as reasons for failures attributed to partner selection.

This means that those eager to establish and nourish theright supplier/customer relationships must attend to an arrayof soft issues. Put another way, it is crucial for each side tooccupy the other’s shoes for the duration of a partnership.

A Foundation Framework With this understanding, let’s turn now to a framework forthinking about, designing, and implementing relationships.As I’ve noted, relationship structures can take many forms;the challenge is to select and develop the appropriate struc-ture. What you see in Exhibit 1 are the dimensions of com-mitment leve l and involvement and a spectrum ofsupplier/company arrangements—from a simple purchaseorder to the highest level of commitment and involvement(full ownership of the supplier).

In fact, you can classify relationship structures into fourmajor categories, with the level of commitment increasingfrom 1 to 4:

11.. TTrraannssaaccttiioonnaall rreellaattiioonnsshhiipp:: Noncritical; low value.Focuses on the efficiency of the transaction

22.. BBaassiicc ppaarrttnneerrsshhiipp:: Noncritical but high value. Involvesareas that are not a core capability.

33.. SSttrraatteeggiicc ppaarrttnneerrsshhiipp:: Important; high value. Involvesan exchange of technology or other core capability, for exam-ple. Valuable when acquisition is not possible or desirable —such as in cross-border situations or when there are financiallimitations.

44.. AAccqquuiissiittiioonn//EEqquuiittyy ssttaakkee:: Critical; very high value. As you might expect, the level of complexity—both negoti-

ation complexity and implementation complexity—increasesthe more strategic the relationship. Negotiations in a straight-forward transactional relationship typically revolve aroundprice, terms, delivery, and order-processing issues. But in astrategic partnership, they will extend to include factors suchas levels of risk and reward sharing, managerial structure andteam make-up, levels of contribution, ways to balance cultur-al differences, and methods of conflict resolution.

It’s much the same with implementation complexity.Whereas a simple transactional relationship may have a sin-gle point of contact—the traditional buyer/salesperson inter-face—a strategic partnership will involve many more disci-plines and points of contact, at all levels. At the highestlevels, it will sometimes bring in the chief executive. You

might think this seems intu-itive, but it’s often not howrelat ionships p lay out inpractice. I’ve certainly seentransactional relationshipswhere a whole team from the supplier will show up. On theother end with more strategic relationships, I’ve far too oftenseen situations where a single representative from the suppli-er—a mid-level manager, or at worst, a sales representative—attempts to carry the ball for the whole organization. It justdoesn’t work.

What is needed is an objective, value-driven framework.The framework can help identify the right relationship struc-ture for the required objectives and the applicable constraints.Conventionally, purchases might have been analyzed alongsimple Pareto lines, focusing on the 20 percent of transactionsthat comprise 80 percent of spending. But newer methods ofthinking are focused on a spending “portfolio” to be arrayed ina matrix that has value (or spending) on one axis and marketcomplexity on the other. (Exhibit 2 depicts that matrix.)

Commodities (a term I use very broadly) located in the topright quadrant are characterized by few supply options andthus a more complex market from the procurement perspec-tive. They involve significant spending and are often criticalto your company’s competitiveness. From the buyer’s point ofview only, commodities in this quadrant should be managedusing joint ventures, strategic alliances, and value-addedarrangements.

At the other end of the matrix, the “noncritical” quadrantrepresents those types of spending characterized by multiplesupply options and relatively small spending, such as officesupplies. In this quadrant, the buyer’s goal is to simplify and

EXHIBIT 2

Partnership Development Framework

Incr

easi

ng V

alue

Increasing MarketComplexity

Leverage

Leverage Commodities

• Multiple Supply Options•Small to Large Purchases

• Not Critical toCore Competitiveness

Strategic

Noncritical Critical

Strategic Commodities

• Few Supply Options• Medium to Large Purchases

• Critical Component ofCometitiveness/Product

Differentiation

Noncritical Commodities

• Multiple Supply Options• Small Purchases• Noncritical Items

Critical Commodities

• Few Supply Options• Oligopolistic Supply Mkt

• Few/No Substitutes• Low to MediumPurchase Value


Partnering

automate as many of thesefunctions as possible.Procurement cards (or P-cards) can be an ideal solu-tion for buys in this quadrant.

In the upper left, the “leverage” block, as the nameimplies, represents relatively sizable types of spending andfairly uncomplicated markets. We’re talking about a buyer’smarket. Here, the buyer believes it’s best to expand the use ofminimum specifications for opportunity purchases, toincrease concentration with the right suppliers (sourced glob-ally), and to make only short-term commitments.

“Critical” are relatively low-spend items that can often becomebottlenecks. Examples might include motors, bearings, and powertransmission units. (For many customers, each of these itemmight fit the concept of a critical commodity—assemblies of com-parable performance and quality that can be sourced from a fewsuppliers.) One way to deal with that market complexity is to relyon distributors, which can provide value-added services—match-ing motors and transmissions, for example—and broader buyingefficiencies. Buyers also might manage critical commodities usingtactics such as buying consortia, longer-term agreements, hedging,and lumping purchases together for leverage.

Fitting Viewpoints to the FrameworkTo properly assess the right form of relationship between acustomer and a supplier, it is necessary to evaluate both per-spectives. Within each quadrant, the buyer and the supplierhas its own unique viewpoints, which become the drivers—orin some cases—the constraints in developing the partner-ships. (Exhibit 3 summarizes the two viewpoints.)

In Exhibit 3, I’ve layered in the supplier’s considerations

when viewing the relationship with the customer. The suppli-er would look at market competition on the X-axis, and thevalue of the customer’s business along the Y-axis. The data orinsights to populate the chart could come from multipleinternal meetings at the supplier organization. A designatedteam leader would be responsible for gathering and portray-ing the data after all parties agree on definitions of terms(that is, strategic, leverage, noncritical, and critical).

Properly used, the grid can quickly expose significant simi-larities or differences in the viewpoints of the prospectivepartners. Let’s look at one example (rail transportation) wherethere’s plenty of room for differences of opinion.

In Exhibit 4, the buying organization, denoted by “B,” mayview rail transportation as a commodity of relatively high mar-ket complexity. Accordingly, its view would be reflected onthe far right on the matrix. But the supplier (the railroad)—denoted by “S”—may well see this as a low-competition situa-tion, especially if it is the only rail supplier serving that cus-tomer. Thus, the supplier view would show up on the far left.Similar exercises with other customer/supplier pairings canhighlight convergence of viewpoints. The chart clearly pin-points the closeness or distance between the viewpoints ofthe prospective partners and thus is valuable to help deter-mine the type of relationship that will work best.

A word on how it works. It would be ideal if both sidescould, in an orderly fashion, meet to work out chart placementslike this. In practice, it is of enormous value if even one side—itdoes not matter which—goes through the exercise. The result-ing framework then becomes an ideal discussion document. It

EXHIBIT 3

The Supplier and Buyer Viewpoints

Val

ueH

L

Complexity/Competition

L H

Leverage

Market Competition

• New/Mature Market• Commodity/Specialty Product

• Regional/National Competitors• Supply/Demand Imbalance

Strategic

Noncritical Critical

Market Complexity

Supplier Viewpoint Buyer Viewpoint

• Monopoly/Many Suppliers• National/Global• Supply/Demand• New Entrants

• Substitutes

Value of Customer's Business

• % Share of Revenues• Base/Variable Volume

• Impact on CapacityUtilization

Commodity Value

• Cost Relative to Total Spend• Critical to Competitiveness

• Complex Commodity

EXHIBIT 4

Rail Transportation ExampleV

alue

HL

Complexity/Competition

L H

Leverage

Market Competition

• Captive Consumer• Regional Market

• High Barriers to Entry• Few Substitutes

Strategic

Noncritical

= Supplier View

Critical

Market Complexity

Complexity = Low Complexity = High

Value = Mid-High Value = Mid-High

Supplier Viewpoint Buyer Viewpoint

• Few Alternatives• More Expensive Substitute

(Truck)• No New Entrants

Customer Value

• High Revenues• Base Volume

• Significant Impact onCapacity Utilization

Commodity Value

• High Cost• Critical to

Cost Competitiveness

S = Buyer ViewB

BS


can accelerate a productive discussion about definitions ofterms, generate clarity about the future plans and expectationsof each side, and quickly pin down key areas of agreement anddisagreement. In my experience at Bethlehem Steel and now at

Bayer, the exercise, and theframework it produces, saves agreat deal of time, debate, anddownright aggravation.Frankly, it would be wonder-ful if more of the salespeople who visit us had gone through aversion of the exercise before arriving on our doorstep.

Agreement over the degree of overall alignment of the sup-plier and buyer viewpoints can help select the right relation-ship framework. It is not enough to look at the relationship inyour own terms; when you examine both viewpoints, you canmore ably assess the likely value of partnering and at whatlevel. Indeed, the very act of sitting down with the other partyto work through the framework bolsters the relationship.

Until now, I’ve been showing you a 2 x 2 matrix to matchsuppliers’ and customers’ viewpoints. That’s useful as far as itgoes because it can help with the more obvious choices ofrelationship. However, it falls short of helping you figure outthe next best alternative in the many cases where the rela-tionship is less clear-cut. So it is helpful to develop a moredetailed breakdown, by creating a 16-element grid that plotssupplier perspective against customer perspective and thengroups the 16 elements into three broad relationship zones(See Exhibit 5). (For simplicity, it makes sense to groupacquisitions in with other strategic relationships.)

Here’s a glimpse of how this grid can be applied in inter-actions with the other side:

ZZoonnee 11:: If market forces are driving the relationshiptoward being transactional, it makes sense to acknowledgethere is little incentive for a partnership and to focus insteadon more effective and efficient transactions. The zoned

The Importance ofMeasuring Performance

You’re familiar with the saying: “ You get what you measure. ”The corollary is: “ Measure what you want to achieve. ” Unlessyou and your supply chain partners apply detailed and sustainedperformance monitoring and measurement, you will have no wayof knowing for sure if your partnerships are effective. You maynot even know if they’re a net posi t ive or negative on yourresources. I f you don’t have a scoreboard, you certainly won’thave a way of tracking trends.

Three interdependent dimensions determine success in suppli-er partnerships. There is an operational dimension common toall forms of partnership; a cultural dimension that is also perva-sive; and a strategic dimension that applies to deeper enduringrelationships of high value to both parties.

In terms of operations, you want to find ways to gauge thef low of informat ion and the compat ibi l i ty of the par tners ’processes. Typically, you’ll have checklists to identify and elimi-nate duplicate activities and to improve transparency of informa-tion. You’ll assemble joint teams for implementing improvementprograms and resolving problems, and you’ll have mechanismsfor periodic joint performance reviews. Ideally, one team mem-ber will be designated to lead the measurement effort and todevise effective ways of not only continually gathering the rightdata but also conveying it to supply chain decision makers.

On the strategic level, the metrics will focus on the degree ofbusiness integration necessary for a continued strategic fit andon the characterist ics vital for a long-term partnership. Keydimensions to monitor include: linked business goals with specif-ic targe ts, joint ly de f ined per formance standards, pay thatrelates to performance, and cost transparency.

However, I ’ve found that the area most likely to contribute tothe success or failure of partnerships is cultural. That’s the areathat’s most difficult to change. I f the supplier and customer startfar apart culturally, you have to question whether partner selec-tion was done properly. To test for cultural affinity, the “dash-board” has to indicate commitment, compatibility, and coopera-tion toward continuous improvement and growth. For example,one gauge may measure mutual assistance in problem resolutionwhile another tracks continuous improvement processes. Stillanother might weigh compatibility of management styles. Thislast measure is especially important when there are significantmanagement changes at one partner, or if one comes under newownership.

It is crucial to get a sense of the cultural fit as soon as possi-ble. Ideally, it should be fully assessed before there is any mutualcommitment in the first place. I f the ratings are low, the successof the partnership is in serious doubt.

EXHIBIT 5

Aligning Customer and Supplier Viewpoints

StrategicCriticalLeverageNoncritical

Transactional• No Drivers for Partnership• Focus on More E ffective Transactions

Stra

tegi

cCr

itica

lLe

vera

geN

oncr

itica

l

Supp

lier

Per

spec

tive

Customer Perspective

1

1

Basic• Basic Drivers For Partnership• Operational, Functional• Focus on Joint Process Improvement

2

2

Strategic/Acquisition• Strategic Drivers For Partnership• Focus on More Comprehensive Integration• Strategic and Operational

3

3


Partnering

approach instantly clarifiesthings for those supp liersales representatives whoseoffering is low value and non-crit ical to us. It helps to

make their sales process much more efficient, enabling thesales representatives to spend their time more productivelywith us. It certainly helps crystallize discussions quickly with-out damaging relationships.

ZZoonnee 22:: Where a basic partnership is suggested, the focusshould be on joint process improvement. (See section thatfollows: “Bayer’s Experience.”)

ZZoonnee 33:: Where a strategic partnership is warranted, thefocus is on a much more comprehensive integration.Agreement on definitions and positions in the zones makesfor faster and more certain resolution of the details of astrategic partnership. Plus, it makes it much easier to recon-cile divergent viewpoints because it quickly unearths reasonsfor divergence.

If you relate this framework to the earlier illustration onrail, you will see that conditions exist only for a basic part-nership, not a strategic linkage. This suggests that effortswould be best focused on joint efforts at process improve-ments. (See Exhibit 6.)

Bayer’s Experience So how does this all work in practice? I’ll draw on our experi-ences at Bayer to say what works and what doesn’t.

First, a quick backgrounder. Bayer Corp. today comprisesfour groups: Bayer CropScience for a range of agriculturalproducts; Bayer HealthCare for consumer medicines, diag-nost ics equipment , and b iological materials; Bayer

Chemicals, for a wide range of chemical products; and BayerMaterialScience (formerly Bayer Polymers) for polymers. Wehave more than 30 production facilities in North America. Ofthe roughly $6 billion in procurement spend, about half goesto raw materials (such as ethylenes, benzene, and toluene)and energy (such as natural gas, coal, and electricity). Theremainder buys capital equipment, professional and logisticsservices, and indirect purchases, including IT products andservices and maintenance, repair, and operations (MRO)products and services.

We can point to successes in each spend category. Butfirst we need to be clear about our terminology. To us, notevery buying relationship is considered a partnership; it maysimply be a transaction, or a series of transactions, or even atransactional relationship. Not long ago, Bayer, like manyorganizations, could have fielded a range of definitions for theterm “partnership.” So our procurement council held a meet-ing to nail down what we meant. It was not a long and elabo-rate exercise, but it was a vital one that led us to develop adiscipline for framing relationships with our suppliers. Today,our procurement council reserves the term “partnership” forthose special relationships where (1) the supplier maintains aleadership position in technology, service, and cost, andBayer is receptive to the supplier’s ideas; and (2) there is anappropriate consideration for the amount of business Bayerdirects to the supplier.

Bayer’s basic partnerships are long-term, mutually respon-sible business relationships that are the result of tangibleeffort and attention to activities such as these:

! Jointly committing to information exchange, planning,continuous improvement, and cost reduction.

! Encouraging a more interactive and trusting environment.! Agreeing on measures of key performance factors.! Sharing of risk to achieve mutual benefits.! Working to prevent problems from initially occurring, solv-

ing problems as they occur, and preventing their reoccurrence.Using the series of frameworks, we have successfully

implemented several basic partnerships with significantresults including reductions in total cost of ownership andinventory savings to bring about more effective use of work-ing capital. Some of these basic partnerships are in the MROarena, where we use single-source suppliers for a wide rangeof products and services. The supplier provides, among otherthings, professional and technical expertise, inventory man-agement, and continuous improvement. The benefits fromthese arrangements have been significant over the years—lit-erally in the millions of dollars in some cases.

In another recent negotiation, our approach allowed us tostreamline dramatically the development of a basic partner-ship with a major logistics supplier. The supplier’s presidentrecently headed a delegation comprising chiefs of strategy,sales, marketing, and others. We laid out a strawman frame-work for an alliance backed by our definition of “partnership,”and the delegation quickly gave us a high-level authorizationfor the structure of a basic partnership.

EXHIBIT 6

Viewpoint Alignment in Practice: Rail Example

StrategicCritical

• Rail Transportation Service Provider and Customer/Buyer Typically Have Divergent Viewpoints• Framework Indicates that Market Conditions for a Basic Partnership Exist• A Basic Partnership Structure Can Improve E fficiency at Operational Level

LeverageNoncritical

Stra

tegi

cCr

itica

lLe

vera

geN

oncr

itica

l

Supp

lier

Per

spec

tive

Company Perspective (Buyer)

1

2

Partnership Characteristics

3

Railroad

Com

pany

BasicPartnership


Later, the supplier’s chairman stopped by for what wassupposed to be only a few minutes to see exactly how thepartnership could work. The framework, however, led him tostay for several hours to solidify his company’s commitmentto the deal. Without our frameworks, the discussions couldeasily have favored emotion over rational results. It certainlywould have taken many more cycles to arrive at the same out-come—perhaps with less certainty of what we were doing.

We also have implemented a few relationships that trulymeet the tough definition I’ve offered for “strategic partner-ships.” These relationships meet all of the standards appliedto basic partnerships while also being characterized by long-term supply/purchase commitments—as much as 10 years —and by significant sharing of risks and benefits.

Our strategic alliances typically feature innovativepricing/cost approaches, such as gainsharing, or mutual cost-reduction programs. For example, we are collaboratingwith distributors on the indirect-purchase side to cuttotal costs over a multi-year period. The cuts can comefrom product substitutions, vendor cost savings, or fromgains in transaction efficiencies. These strategic part-nerships oblige the distributor to devise new ways totrim costs while requiring that we be receptive to thoseideas.

Strategic partnerships often are steered by jointoperational integration teams and are subject to rigor-ous ongoing performance measurement. It goes without say-ing that they have been screened for a close cultural/philo-sophical fit. In some cases, Bayer has actually taken an equityposition in the arrangement.

One of those strategic relationships—involving a key rawmaterial used in Bayer plants that supply chemicals and poly-mers—meant that the supplier did more than simply monitorour inventory and truck or pipe in fresh supplies according toour demand signals. The company set up a production facilityat one of our plants. The partnership evolved during almost 12months of discussions and negotiations. We explored strate-gic, cultural, and operational aspects. (See sidebar on “TheImportance of Measuring Performance.”) We thrashed outrelative competencies, risk sharing, and shared investment.And of course, we wrestled over prices and delivery. This wasno quick series of meetings. In fact, it can often take a year ormore to put a strategic partnership into practice.

Because strong supplier relationships are critical to Bayer’slong-term competitiveness, we are always willing to invest indesigning and implementing frameworks that make thoserelationships as effective as possible. That policy goes right tothe top office. In 2003, the host of the two-day event to rec-ognize our premier suppliers was Attila Molnar, Bayer Corp.’schief executive.

Stakes Are HighBusinesses can no longer afford not to partner where itmakes sense, and they cannot afford to partner poorly. Atbest, the companies that put only minimal effort into their

customer and supplier rela-tionships will miss opportu-nities that their more com-m itted compet itors willseize. At worst, partnershiplaggards will find it harder and harder to turn in satisfactoryfinancial performance.

The stakes are already too high for substandard part-nering initiatives, and they are getting higher as cost pres-sures intensify and innovation cycles accelerate. We areentering an interconnected era in which the global corpo-ration will be eclipsed by the more massive and complex“global enterprise”—an ever-changing mesh of businessentities and the relationships between them. The globalenterprise will be a natural evolution from today’s net-work of strategic linkages.

Consequently, supply chain leaders will need to takeinto account not only their own companies’ core compe-tencies but also those of current and potential supplychain partners. They must be able to look well beyondinvestments in their own facilities, infrastructure, andresources to include those of their key partners. This callsfor a much broader vision of what constitutes as supplychain value. Supply chain managers must rapidly movefrom a transactional orientation to a strategic orientationto help develop the company’s competitive value-addedsupplier networks.

This article has laid out a case for more thoughtful rela-tionship evaluation and design and has presented a practicaland disciplined framework for reconfiguring relationshipsaccording to their strategic value to both parties. I do not pre-tend that the framework is a fix for more fundamental supplychain challenges. Nor is it p lanned or imp lementedovernight. But if properly done, it should help companiesrespond better to current and future partnership opportuni-ties and challenges.

A structured analysis can help select the appropriate part-nership framework and minimize the potential for failures.But the analysis and the framework are only the earlieststeps. Supply chain managers must use those tools—tailoringthem to their own needs—to wholeheartedly rethink theirapproach to supply chain value. As such, they must reworkbusiness processes, performance tracking and measurementsystems, and incentives.

It will not be easy, but it will be well worth it. """"""

Businesses can no longer afford not to partner where it makes sense, and they cannot afford to partner poorly.

collaboration performance s g o s t a ges partnering advan… · partnering additionally, i helped...

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