advantages of partnering well

8/13/2019 Advantages of Partnering Well

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The Advantages of Partnering Well

By Robert A. Rudzki -- 3/1/2004

Over the years, there has been considerable discussion about the working

arrangements that are possible between suppliers and their customers. Bothsuppliers and their customers use the term "partnership" often and casually todescribe a wide range of working relationships. But are all relationships trulypartnerships? And, more fundamentally, is a true partnership the appropriateform of relationship for every situation?

The short answers are "no" and "no." f had a dollar for every time asupplier!s salesperson came through the door and began talking about "ourpartnership," could have retired a long time ago. n the past, might attenda doen meetings and hear the term used in a doen different ways. n manycases, "partnership" is applied to a transaction or a series of transactions#the

regular purchase of copier paper, perhaps, or the one$off sale of a suite ofsoftware. %arketing impulses have e&panded the term beyond reasonablescope, distorting the significance of minor relationships and devaluing theword where it has true strategic importance.

As a result, resources can be misapplied. 'upply chain partnerships that,properly managed, could add significant value may be shortchanged onfunding, staff, and time. These relationships may re(uire additionalmeasurement processes or new liaisons between senior managers on eachside, for e&ample. )onversely, relationships that now or in the future are less

critical may be oversubscribed.

%ost large corporations are well aware of the differences between truepartnerships and more transactional relationships, of course. They haveelaborate and proven mechanisms to drive procurement, supplier relations,sales, marketing, and customer relations. And they sometimes havesophisticated operations to drive alliances and other *oint ventures.

But business pressures today are so great#and are rising so rapidly#thateven the most sophisticated businesses may be failing to realie the fullpotential of their current relationships and missing opportunities to build new

ones. And even if they are ma&imiing e&isting arrangements now, they maynot be re$evaluating their ob*ectives and achievements with enough rigor toensure continued optimal performance. +or companies that lack the e&pertiseand resources to focus on relationship potential, the dangers are evengreater.

ith the competitive success of both the supplier and the customer at stake,


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there is value in stepping beyond casual and traditional approaches torelationships. At best, a traditional method gives you traditional, incrementalresults. At worst, it can be counterproductive. )ompanies at either end of thesupply chain can sharply differentiate themselves if they apply a disciplined

structural approach to their relationships with each other and with otherparticipants in what call a "value network." n other words, there is greatbenefit in developing and managing the right kinds of relationships. n somecases, those newly designed and implemented relationships can become thenucleus of an "e&tended enterprise" involving a network of businesses. Thatenterprise can offer enormous competitive advantages.

A Practitioner's Perspective

Before go much further, let me e&plain my personal perspective. !ve beendeeply involved with procurement and supplier relations for - years, and fora long time it has concerned me that businesses essentially leave real moneyon the table when they do not "partner right." )urrently, !m a senior vicepresident and chief procurement officer at Bayer )orp., the /orth Americanarm of 0erman health care and chemicals giant Bayer A0. n /orth America,our annual purchasing budget is about 12 billion, covering thousands ofsupplier relationships in virtually every industry#from chemicals and raw bulkmaterials to professional services. e are well aware of the value of adisciplined and structured approach to supplier relationships, and weconstantly refine our approach to make sure we are getting the best out ofeach of those relationships.

3arlier in my career, worked directly on e&tended customer relationships andon a wide range of linkages with suppliers. %y role has also involvednegotiations with prospective buyers of businesses being divested and withprospective partners in corporate business development ventures.Additionally, helped establish and manage relationships with commercialbanks and other financial institutions.

n this article, want to provide a detailed look at a structural framework thatcan address the shortcomings in the historical and casual methods ofpartnering. will begin by reviewing the e&ternal and internal factors drivingthe need for a new approach to customer4supplier dealings. Then will lay outa basic framework for defining and developing different types of workingrelationships between suppliers and customers. As a rule, will not includepurely transactional activities because they do not fit with a rigorous definitionof partnerships. 'o my descriptions will span a range of relationships fromwhat refer to as "basic partnerships" 5which have value and are easier toachieve6, through "strategic partnerships" 5which have greater value and are


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more challenging to achieve6.

Momentum Behind Partnerships

hat!s really driving the need for a new approach to dealings betweencustomers and suppliers?

/o one debates the fact that businesses everywhere are facing increasingcompetitive pressures. )apital moves immediately and massively around theworld. 7roduct cycles get shorter every year. Average product developmenttime today#-2 months from concept to launch#is -8 percent less than in8, according to a recent survey by consultancy 9eloitte. Businesses areinnovating faster than ever. The 9eloitte research finds that by 82, :;

percent of manufacturers! revenues will come from products introduced duringthe three preceding years, up from 8- percent in -


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many airlines. 'ometimes a deeper relationship has served as a pilot run for,or a precursor to, an outright merger or ac(uisition. 53&hibit - shows themany forms that partnership structures can take.6

'purring on the e&tension of relationships is a factor unknown to businessuntil the -


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factors related to "partner selection" and "partnership implementation."

n almost all situations, difficulties are rooted in very human factors fear,mistrust, culture, and power. 'uppliers typically cite the following concerns

+ear of overdependence on the customer.

9ifferent company cultures.

ne(uitable power in the relationship.

+ear that the customer!s emphasis will be on price and margins.

'imilarly, customers often have sufficient reason to hesitate. They cite lack oftrust in suppliers, concern that there will be more risk than benefit 5or

inade(uate grounds for sharing benefits and risks6, and fears that forming arelationship will mean relin(uishing control.

Other internal factors play out too. 7oor leadership often gets the blame forfailed partnership implementations. 3&ternal factors, such as changingbusiness climates, also are cited as reasons for failures attributed to partnerselection.

This means that those eager to establish and nourish the rightsupplier4customer relationships must attend to an array of soft issues. 7ut

another way, it is crucial for each side to occupy the other!s shoes for theduration of a partnership.

A Foundation Framework

ith this understanding, let!s turn now to a framework for thinking about,designing, and implementing relationships. As !ve noted, relationshipstructures can take many forms the challenge is to select and develop theappropriate structure. hat you see in 3&hibit - are the dimensions ofcommitment level and involvement and a spectrum of supplier4companyarrangements#from a simple purchase order to the highest level of

commitment and involvement 5full ownership of the supplier6.

n fact, you can classify relationship structures into four ma*or categories,with the level of commitment increasing from - to C

Transactional relationship:/oncritical low value. +ocuses on the efficiency


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of the transaction

Basic partnership:/oncritical but high value. nvolves areas that are not a

core capability.

Strategic partnership:mportant high value. nvolves an e&change oftechnology or other core capability, for e&ample. Daluable when ac(uisition isnot possible or desirable #such as in cross$border situations or when thereare financial limitations.

Acquisition!quit" stake:)ritical very high value.

As you might e&pect, the level of comple&ity#both negotiationcomple&ity andimplementationcomple&ity#increases the more strategic the relationship./egotiations in a straightforward transactional relationship typically revolvearound price, terms, delivery, and order$processing issues. But in a strategicpartnership, they will e&tend to include factors such as levels of risk andreward sharing, managerial structure and team make$up, levels ofcontribution, ways to balance cultural differences, and methods of conflict


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resolution.

t!s much the same with implementation comple&ity. hereas a simpletransactional relationship may have a single point of contact#the traditionalbuyer4salesperson interface#a strategic partnership will involve many moredisciplines and points of contact, at all levels. At the highest levels, it willsometimes bring in the chief e&ecutive. Eou might think this seems intuitive,but it!s often not how relationships play out in practice. !ve certainly seentransactional relationships where a whole team from the supplier will show up.On the other end with more strategic relationships, !ve far too often seen

situations where a single representative from the supplier#a mid$levelmanager, or at worst, a sales representative#attempts to carry the ball forthe whole organiation. t *ust doesn!t work.hat is needed is an ob*ective,value$driven framework. The framework can help identify the rightrelationship structure for the re(uired ob*ectives and the applicableconstraints. )onventionally, purchases might have been analyed alongsimple 7areto lines, focusing on the 8 percent of transactions that comprise= percent of spending. But newer methods of thinking are focused on a


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spending "portfolio" to be arrayed in a matri& that has value 5or spending6 onone a&is and market comple&ity on the other. 53&hibit 8 depicts that matri&.6

)ommodities 5a term use very broadly6 located in the top right (uadrant are

characteried by few supply options and thus a more comple& market fromtheprocurement perspective. They involve significant spending and are oftencritical to your company!s competitiveness. +rom the buyer!s point of viewonly, commodities in this (uadrant should be managed using *oint ventures,strategic alliances, and value$added arrangements.

At the other end of the matri&, the "noncritical" (uadrant represents thosetypes of spending characteried by multiple supply options and relativelysmall spending, such as office supplies. n this (uadrant, the buyer!s goal is tosimplify and automate as many of these functions as possible. 7rocurementcards 5or 7$cards6 can be an ideal solution for buys in this (uadrant.

n the upper left, the "leverage" block, as the name implies, representsrelatively siable types of spending and fairly uncomplicated markets. e!retalking about a buyer!s market. ere, the buyer believes it!s best to e&pandthe use of minimum specifications for opportunity purchases, to increaseconcentration with the right suppliers 5sourced globally6, and to make onlyshort$term commitments.

")ritical" are relatively low$spend items that can often become bottlenecks.3&amples might include motors, bearings, and power transmission units. 5+or

many customers, each of these item might fit the concept of a criticalcommodity#assemblies of comparable performance and (uality that can besourced from a few suppliers.6 One way to deal with that market comple&ity isto rely on distributors, which can provide value$added services#matchingmotors and transmissions, for e&ample#and broader buying efficiencies.Buyers also might manage critical commodities using tactics such as buyingconsortia, longer$term agreements, hedging, and lumping purchases togetherfor leverage.

Fitting #iewpoints to the Framework

To properly assess the right form of relationship between a customer and asupplier, it is necessary to evaluate bothperspectives. ithin each (uadrant,the buyer and the supplier has its own uni(ue viewpoints, which become thedrivers#or in some cases#the constraints in developing the partnerships.53&hibit : summaries the two viewpoints.6

n 3&hibit :, !ve layered in the supplier!s considerations when viewing the


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relationship with the customer. The supplier would look at market competitionon the F$a&is, and the value of the customer!s business along the E$a&is. Thedata or insights to populate the chart could come from multiple internalmeetings at the supplier organiation. A designated team leader would be

responsible for gathering and portraying the data after all parties agree ondefinitions of terms 5that is, strategic, leverage, noncritical, and critical6.

7roperly used, the grid can (uickly e&pose significant similarities ordifferences in the viewpoints of the prospective partners. Get!s look at onee&ample 5rail transportation6 where there!s plenty of room for differences ofopinion.

n 3&hibit C, the buying organiation, denoted by "B," may view railtransportation as a commodity of relatively high market comple&ity.Accordingly, its view would be reflected on the far right on the matri&. But thesupplier 5the railroad6# denoted by "'"#may well see this as a low$competition situation, especially if it is the only rail supplier serving thatcustomer. Thus, the supplier view would show up on the far left. 'imilare&ercises with other customer4supplier pairings can highlight convergence ofviewpoints. The chart clearly pinpoints the closeness or distance between the


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viewpoints of the prospective partners and thus is valuable to help determinethe type of relationship that will work best.

A word on how it works. t would be ideal if both sides could, in an orderly

fashion, meet to work out chart placements like this. n practice, it is ofenormous value if even one side#it does not matter which#goes through thee&ercise. The resulting framework then becomes an ideal discussiondocument. t can accelerate a productive discussion about definitions ofterms, generate clarity about the future plans and e&pectations of each side,and (uickly pin down key areas of agreement and disagreement. n mye&perience at Bethlehem 'teel and now at Bayer, the e&ercise, and theframework it produces, saves a great deal of time, debate, and downrightaggravation. +rankly, it would be wonderful if more of the salespeople whovisit us had gone through a version of the e&ercise before arriving on ourdoorstep.

Agreement over the degree of overall alignment of the supplier and buyerviewpoints can help select the right relationship framework. t is not enoughto look at the relationship in your own terms when you e&amine bothviewpoints, you can more ably assess the likely value of partnering and atwhat level. ndeed, the very act of sitting down with the other party to workthrough the framework bolsters the relationship.


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>ntil now, !ve been showing you a 8 & 8 matri& to match suppliers! andcustomers! viewpoints. That!s useful as far as it goes because it can help withthe more obvious choices of relationship. owever, it falls short of helping youfigure out the ne&t best alternative in the many cases where the relationshipis less clear$cut. 'o it is helpful to develop a more detailed breakdown, bycreating a -2$element grid that plots supplier perspective against customer


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perspective and then groups the -2 elements into three broad relationshipones 5'ee 3&hibit ;6. 5+or simplicity, it makes sense to group ac(uisitions inwith other strategic relationships.6

ere!s a glimpse of how this grid can be applied in interactions with the otherside

$one %:f market forces are driving the relationship toward beingtransactional, it makes sense to acknowledge there is little incentive for apartnership and to focus instead on more effective and efficient transactions.The oned approach instantly clarifies things for those supplier salesrepresentatives whose offering is low value and noncritical to us. t helps tomake their sales process much more efficient, enabling the salesrepresentatives to spend their time more productively with us. t certainlyhelps crystallie discussions (uickly without damaging relationships.


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$one &:here a basic partnership is suggested, the focus should be on *ointprocess improvement. 5'ee section that follows "Bayer!s 3&perience."6

$one :here a strategic partnership is warranted, the focus is on a much

more comprehensive integration. Agreement on definitions and positions inthe ones makes for faster and more certain resolution of the details of astrategic partnership. 7lus, it makes it much easier to reconcile divergentviewpoints because it (uickly unearths reasons for divergence.

f you relate this framework to the earlier illustration on rail, you will see thatconditions e&ist only for a basic partnership, not a strategic linkage. Thissuggests that efforts would be best focused on *oint efforts at processimprovements. 5'ee 3&hibit 2.6

Ba"er's !(perience

'o how does this all work in practice? !ll draw on our e&periences at Bayer tosay what works and what doesn!t.

+irst, a (uick backgrounder. Bayer )orp. today comprises four groups Bayer)rop'cience for a range of agricultural products Bayer ealth)are forconsumer medicines, diagnostics e(uipment, and biological materials Bayer)hemicals, for a wide range of chemical products and Bayer %aterial'cience5formerly Bayer 7olymers6 for polymers. e have more than : productionfacilities in /orth America. Of the roughly 12 billion in procurement spend,

about half goes to raw materials 5such as ethylenes, benene, and toluene6and energy 5such as natural gas, coal, and electricity6. The remainder buyscapital e(uipment, professional and logistics services, and indirect purchases,including T products and services and maintenance, repair, and operations5%HO6 products and services.

e can point to successes in each spend category. But first we need to beclear about our terminology. To us, not every buying relationship isconsidered a partnership it may simply be a transaction, or a series oftransactions, or even a transactional relationship. /ot long ago, Bayer, likemany organiations, could have fielded a range of definitions for the term

"partnership." 'o our procurement council held a meeting to nail down whatwe meant. t was not a long and elaborate e&ercise, but it was a vital one thatled us to develop a discipline for framing relationships with our suppliers.Today, our procurement council reserves the term "partnership" for thosespecial relationships where 5-6 the supplier maintains a leadership position intechnology, service, and cost, and Bayer is receptive to the supplier!s ideasand 586 there is an appropriate consideration for the amount of business


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Bayer directs to the supplier.

Bayer!s basicpartnerships are long$term, mutually responsible businessrelationships that are the result of tangible effort and attention to activities

such as these

Iointly committing to information e&change, planning, continuousimprovement, and cost reduction.

3ncouraging a more interactive and trusting environment.

Agreeing on measures of key performance factors.

'haring of risk to achieve mutual benefits.

orking to prevent problems from initially occurring, solving problems as theyoccur, and preventing their reoccurrence.

>sing the series of frameworks, we have successfully implemented severalbasic partnerships with significant results including reductions in total cost ofownership and inventory savings to bring about more effective use of workingcapital. 'ome of these basic partnerships are in the %HO arena, where we usesingle$source suppliers for a wide range of products and services. The supplierprovides, among other things, professional and technical e&pertise, inventorymanagement, and continuous improvement. The benefits from these

arrangements have been significant over the years#literally in the millions ofdollars in some cases.

n another recent negotiation, our approach allowed us to streamlinedramatically the development of a basic partnership with a ma*or logisticssupplier. The supplier!s president recently headed a delegation comprisingchiefs of strategy, sales, marketing, and others. e laid out a strawmanframework for an alliance backed by our definition of "partnership," and thedelegation (uickly gave us a high$level authoriation for the structure of abasic partnership.

Gater, the supplier!s chairman stopped by for what was supposed to be only afew minutes to see e&actly how the partnership could work. The framework,however, led him to stay for several hours to solidify his company!scommitment to the deal. ithout our frameworks, the discussions could easilyhave favored emotion over rational results. t certainly would have takenmany more cycles to arrive at the same outcome#perhaps with less certainty


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of what we were doing.

e also have implemented a few relationships that truly meet the toughdefinition !ve offered for "strategic partnerships." These relationships meet all

of the standards applied to basic partnerships while also being characteriedby long$term supply4purchase commitments#as much as - years #and bysignificant sharing of risks and benefits.

Our strategic alliances typically feature innovative pricing4cost approaches,such as gainsharing, or mutual cost$reduction programs. +or e&ample, we arecollaborating with distributors on the indirect$purchase side to cut total costsover a multi$year period. The cuts can come from product substitutions,vendor cost savings, or from gains in transaction efficiencies. These strategicpartnerships oblige the distributor to devise new ways to trim costs whilere(uiring that we be receptive to those ideas.

'trategic partnerships often are steered by *oint operational integration teamsand are sub*ect to rigorous ongoing performance measurement. t goeswithout saying that they have been screened for a close cultural4philosophicalfit. n some cases, Bayer has actually taken an e(uity position in thearrangement.

One of those strategic relationships#involving a key raw material used inBayer plants that supply chemicals and polymers#meant that the supplier didmore than simply monitor our inventory and truck or pipe in fresh supplies

according to our demand signals. The company set up a production facility atone of our plants. The partnership evolved during almost -8 months ofdiscussions and negotiations. e e&plored strategic, cultural, and operationalaspects. 5'ee sidebar on "The mportance of %easuring 7erformance."6 ethrashed out relative competencies, risk sharing, and shared investment. Andof course, we wrestled over prices and delivery. This was no (uick series ofmeetings. n fact, it can often take a year or more to put a strategicpartnership into practice.

Because strong supplier relationships are critical to Bayer!s long$termcompetitiveness, we are always willing to invest in designing andimplementing frameworks that make those relationships as effective aspossible. That policy goes right to the top office. n 8:, the host of the two$day event to recognie our premier suppliers was Attila %olnar, Bayer )orp.!schief e&ecutive.

Stakes Are )igh


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Businesses can no longer afford notto partner where it makes sense, andthey cannot afford to partner poorly. At best, the companies that put onlyminimal effort into their customer and supplier relationships will missopportunities that their more committed competitors will seie. At worst,

partnership laggards will find it harder and harder to turn in satisfactoryfinancial performance.

The stakes are already too high for substandard partnering initiatives, andthey are getting higher as cost pressures intensify and innovation cyclesaccelerate. e are entering an interconnected era in which the globalcorporation will be eclipsed by the more massive and comple& "globalenterprise"#an ever$changing mesh of business entities and the relationshipsbetween them. The global enterprise will be a natural evolution from today!snetwork of strategic linkages.

)onse(uently, supply chain leaders will need to take into account not onlytheir own companies! core competencies but also those of current andpotential supply chain partners. They must be able to look well beyondinvestments in their own facilities, infrastructure, and resources to includethose of their key partners. This calls for a much broader vision of whatconstitutes as supply chain value. 'upply chain managers must rapidly movefrom a transactional orientation to a strategic orientation to help develop thecompany!s competitive value$added supplier networks.

This article has laid out a case for more thoughtful relationship evaluation and

design and has presented a practical and disciplined framework forreconfiguring relationships according to their strategic value to both parties. do not pretend that the framework is a fi& for more fundamental supply chainchallenges. /or is it planned or implemented overnight. But if properly done,it should help companies respond better to current and future partnershipopportunities and challenges.

A structured analysis can help select the appropriate partnership frameworkand minimie the potential for failures. But the analysis and the frameworkare only the earliest steps. 'upply chain managers must use those tools#tailoring them to their own needs#to wholeheartedly rethink their approach tosupply chain value. As such, they must rework business processes,performance tracking and measurement systems, and incentives.

t will not be easy, but it will be well worth it.

advantages of partnering well

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