The New Supply Chain Agenda Blog

May 15 2010

Supply Chain Collaboration with Suppliers and Customers

Collaboration with suppliers and customers is the fourth pillar along the pathway to building a strategy to deliver supply chain excellence. Senior executives and their supply chain staffs should pay special attention to the best practices for collaboration outlined in this chapter to ensure collaboration success. Unfortunately, as one executive sadly told us when describing the failed efforts at collaboration in his firm, “When all was said and done, there was far more said than done.” His firm made some fundamental mistakes in their collaboration initiatives. But other companies have shown that success is possible. In the examples below we show how the hard work of collaboration can produce outstanding results.

What Does External Collaboration Mean?

External collaboration consists of a supplier and a customer working together to achieve mutual improvement. That’s easy to say, but very difficult to do. In this chapter, we present several examples of successful collaborations that achieved impressive results. Unfortunately, in our work with hundreds of firms, we see far more examples of adversarial relationships than collaborative partnerships. For the minority of firms that do collaborate successfully, we see three stages in their evolving relationships:

Stage One: This stage starts with recognition by both parties of the potential power of collaboration, which requires some supply chain sophistication on both sides. Senior executive support and encouragement also is a common factor in early collaborative relationships. And finally, success in getting started depends on the acknowledgement by both parties that it will involve a lot of time and effort.

 

Stage Two: The companies in this stage now have a supply chain strategy with collaboration being one of the core elements of that strategy. The partners have worked together enough to develop the trust to openly share data and strategies with their partner. And they have a mutual plan to sustain the effort as people inevitably change jobs over time.

Stage Three: The case studies later in the chapter have strong elements of Stage Three. In this stage, the parties mutually develop key performance indicators, and they jointly measure success as a common group. In the final level of maturity, they agree to equitably share the savings from their joint improvement efforts.  In our experience, companies who reach stage three drive better fill rates, lower inventories, and lower cost, and thus higher economic profit.

 

The Role of the CEO in Achieving the Breakthrough Benefits of Collaboration

Firms like Lowes, OfficeMax, Avery Dennison, Michelin, and West Marine described in the cases below see huge benefits of collaboration, both inside their firm, and with their outside partners  They often see improvement in all economic profit drivers such as improved fill rates, reduced lead times, lower inventories, and lower cost. No matter how good your supply chain strategy is or how talented your supply chain leader is, this rarely happens unless the CEO sets the right tone; and  almost always, he needs guidance from his supply chain staff to know what to emphasize to most effectively support supplier collaboration efforts. Without visible support, the CEO may be crippling the efforts that will enable the firm meet and surpass competition. Functional alignment, discussed in the last chapter, is a critical precursor to developing the ability to collaborate externally; and as we discussed, the CEO, with the advice of the supply chain leadership, can facilitate this by aligning objectives across major functional areas. The CEO must create an environment for collaboration with suppliers and customers to flourish.

Do CEO’s understand their role in this regard? One CEO of a multi-billion dollar consumer goods manufacturer said he liked to see the friction and tension between functions, and encouraged intense debate in his meetings. He further demanded a “tough-guy” approach with suppliers, encouraging aggressive demands without sharing any information or strategy insights. In our experience, this approach virtually eliminates suggestions for improvements from suppliers, leading to delivery problems, long lead times, and quality issues, all destroyers of economic profit. But a still small, but growing number of CEOs we talk with now see the advantage of cooperation with partners due in large part because they hear from their supply chain organizations about the major benefits being achieved in other firms, benefits like those described in the cases below. This chapter in effect contains a road map for how senior executives and supply chain leaders can move their organizations toward breakthrough performance by setting the foundation for external collaboration.

Does Collaboration Pay Off?

As part of the revival of the Whirlpool Corporation supply chain that we participated in and which we’ll examine in detail in Chapter 8, [i] one of the corner stones involved developing collaborative forecasts with its three biggest customers, including its largest customer, Sears. (At that time Sears represented nearly a third of Whirlpool’s revenue in North America.) Whirlpool approached Sears and proposed that a joint forecast be developed. The new process consisted of three elements:

  1. Each firm developed the best four-month forecast possible for the business.
  2. They compared forecasts at the SKU level, and limited their focus to areas where differences between the SKU forecasts for the two companies exceeded 10 percent to keep the time commitment reasonable.
  3. A weekly meeting occurred with Whirlpool and Sears’ teams together discussing the reason for the differences.

 

For example, in one situation, Sears believed that a certain washing machine model would sell 15,000 units in March. The Whirlpool forecast for the same model was only 3,000 units, a 400 percent difference! When the teams discussed the reasons for such an extreme gap they discovered that Sears was planning a promotion for March that Whirlpool did not know about yet. Interchanges like this, occurring on a weekly basis, caused an immediate breakthrough in forecast accuracy. Accuracy at the SKU level improved by nearly 50 percent within a few months!

The Sears/Whirlpool supply chain relationship blossomed over time. The headquarters of both Whirlpool and Sears were separated only by the waters of Lake Michigan, and rested on a long history with no formal contract in place. We often heard executives from both companies joking that “The relationship is like a handshake across Lake Michigan … with the trigger finger drawn.” But over time, as we participated in many monthly face to face meetings, each side grew to trust the other, and together we launched a number of mutually beneficial supply chain projects. 


[i] Slone, Reuben, “Leading a Supply Chain Turnaround”, Harvard Business Review, October, 2004.

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