Financial
Performance of Supplier Alliances - Managing for Mutual
Financial Return
By Larraine Segil (Copyright © 2001-2002 Larraine
Segil Productions. Inc)
December
02, 2002
Many
supply relationships would generate far more value
if they were managed like alliances. A supply alliance
that looks costly in the first stages of development
may create great returns in the last stage of development.
However if the relationship is seen purely as a supply
process, there is little chance of it maturing into
a life-stage where the maximum financial benefit is
realized for all concerned.
Many
supply alliances are all expense in the initial stage
- hiring people to do research and investigation,
putting in capital to support the infrastructure of
pilots, hiring, training and testing, initial launch
of the program then re-mediating and re-launching
it again as new learning is achieved. It may be some
time until the highest margin, lowest cost results
are seen and only then can they be incorporated into
the entire relationship. It may be in the mature level
of the alliance lifecycle that real value is generated,
so if attention is not paid throughout the early cycles
of development, launch and learning, the return on
that investment may be compromised. For example, the
supply relationship could be expanded to include an
online component and this may well be in the middle
stage of the alliance lifecycle. Looking at supply
relationships as if they were alliances with lifecycles
that require different resources at each stage and
even different teams of managers will ensure that
the relationship has the chance of reaching its fullest
potential.
Toys
"R" Us created an on line activity for the
sales of their products - the development process
of the fulfillment of buying and selling and shipping
toys on line. Yet their in-store sales and the effective
way they had of buying, selling, serving their customer
continued to be their core competency. Finally they
realized that the online segment of their business
was not working the way they wanted it to. In fact
it was diluting their brand value. An alliance looked
like the solution to the problem. They found the company
that fulfilled on line orders better than anyone else
- Amazon.com. They began discussion and planning the
integration of facilities and the two brands, with
space on the Amazon real estate, virtual real estate,
and piloted the program before rolling it out in full.
This on line alliance has been highly successful -
and is an example of understanding the various stages
of the alliance. From the development stage through
implementation stages and now as the Toys "R"
Us and Amazon alliance begins to grow and reach its
potential, the alliance is changing as the market
is becoming more comfortable with the joint marketing,
supply and outsourcing relationship. Making it transparent
was the goal and it is working. Now Amazon not only
markets and sells the goods, but they share revenues
as well as payment for the turnkey operation of the
fulfillment process. It has been so successful that
Amazon is now repeating the approach and is moving
into the apparel business.
Supply
chain management is rarely thought of as a strategic
alliance. Yet the characteristics of an alliance will
generate more integrated relationships, which could
leverage benefits for all concerned. Consider the
integration of Proctor and Gamble with their major
customer Wal-Mart, the classic supplier/customer integration
story that shows the cost savings and loyalty that
integrated alliance approaches can generate. Or think
about Starbucks and their integrated relationships
with their partners Safeway and Albertsons. And contrast
the DaimlerChrysler relationship with their Tier One
suppliers now compared to the Chrysler Keiretsu of
the past. Were the Chrysler costs lower before when
they opened their kimono to their suppliers and said,
"work with us to save us all money"? Or
are they better off now that they are driving cost
savings into the structures of their suppliers? Certainly,
Tier Ones are pushing the cost issues to Tier Two
suppliers. But the reality is that Tier Three suppliers
are going out of business.
Managing
these complex relationships like an alliance would
have created a collaborative working together that
would have opened the systems of supplier concerns
and margin issues, to the customer constraints and
investment issues. Together the possibility would
exist for mutual benefit, rather than an unbalanced,
untrusting and competitive relationship. Managing
a supplier relationship as if it were collaboration
rather than a bid gives way to outsourcing and quality
enhancement, rather than suppliers who resentfully
cut corners trying to squeeze profit out of a reluctant
customer. It can be done - it requires a strategy,
a commitment from senior management, transparency
of costs and margins and longer-term contracts.
I
have seen it work. Take Butler Manufacturing Company
Kansas City, Missouri in their delivery of construction
services for multiple-site customers on a collaborative
supplier basis. Examples include Toys R Us Wal-Mart
FedEx Ground, and many more retailers, manufacturers
and distributors. It works-for Butler and for the
customer. Butler looks at the entire enterprise, the
whole construction project or program, and the customer's
needs from building concept to move-in and start-up.
And they share information and value all along the
value chain. Everyone benefits. This 100-year-old
market leader has the most loyal of customers who
come back again and again, rolling out huge chains
of stores and warehouses, returning always to Butler
Manufacturing Company, the company that partners with
them. This process has been proven to deliver unmistakable
benefits over the alternative of consistently relying
on the lowest cost material supplier. Managing a supply
relationship like an alliance can leverage benefits
that in traditional supply relationships seem unimaginable.
Larraine
is a recognized expert on mergers, alliances and the
importance of business relationships. She is co-founder
of The Lared Group, a consultancy that specializes
in Alliances. Her new book is "Dynamic Leader,
Adaptive Organization" Ten Essential Traits for
Managers," (June 2002, Wiley). She is also author
of "FastAlliances" (Wiley, 2001), and "Intelligent
Business Alliances" (Times Books, 1996) and a
novel, "Belonging" (see http://www.lsegil.com
for more information). Called "The Real Internet
Deal" by Fast Company magazine, Larraine has
been featured in Business Week, CIO, CFO, Bloomberg
News, and Internet World. She is a commentator on
CNN, CNBC and Yahoo FinanceVision on alliances and
mergers, and consults worldwide on alliances for domestic
and global companies. Larraine can be reached directly
at (310) 556-1778 or email at lsegil@lsegil.com. More
information can be found on her website at (http://www.lsegil.com)/
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