Creating Win-win Partnerships Between Customers and Suppliers

Creating Win-win Customer-
Supplier Partnerships
Professor Tom Vollmann

© 2008 IMD International. Not to be used or reproduced without permission.

The Classic “Lean” Approaches are Necessary
but not Sufficient

Lean Manufacturing Lean Business Unit Lean Corporation

• Factory Focus • Business Unit Focus • Total Organization Focus
• Lower Inventories • Beyond Manufacturing • Inter-Business Unit Synergies
• Faster Throughput Times • Order Entry - Purchasing
• Better Quality • Logistics - Logistics
• Improved Capacity Utilization • After Sales Service - Warehousing (hubs)
• Lower Costs • CRM / SRM • Regional/Global Buying
• Flawless Execution • Customer Segmentation • Regional/Global Selling
• Do it Right the First Time • Cross-functional Integration • Enterprise Metrics
- Accounting • Inter-Business Unit
- Human Resource Management - Planning
- New Product Introduction - Coordination
- Flawless Execution

Basic MPC Systems ERP Systems Extended ERP Systems
(evolution) (transformation)
Measures Measures Measures
Cost Profit
Inventory Customer Market share
PPM Satisfaction Earnings per share
OTIFNE Cash to cash

© IMD 2008 Creating Win-win Customer-Supplier Partnerships 2

The New Game: Win-win Customer-Supplier
Partnerships

Actions Measures Support

• Inter-Company Focus • Overall Supply Chain Cost • Trust / Win-win
• Joint New Process and Speed • Short Implementation
Development • Partnership Capacity Firms
• Supplier Networks Management • E-based B2B
• Third Parties (Logistics) • Project Management Infrastructure
• New Key Account • End Customer Delight
Management • Win-win


The Customer Payoff
Experience of a well-
A benchmark comparison of programs to reduce incoming materials cost regarded U.S.
manufacturing firm
(Ford)
Cumulative U.S.
Producer Price
Index

7.0% 7.56% 7.56% 7.1%
Change in
cost of all
.7% 3.3%
procured
parts* Year 1
1/92 Year 2
1/92 .7% Year 3 -.2%
1/92 Year 4
1/92 Year 5
1/92 Year 6
1/92 Year 7
1/92

-
-3.1%
Results from
Honda of America
-7.9% program

-16%
-19%

•Over 50% of total automobile cost
•Source R. Dave Nelson, former VP Procurement, Honda of America


The Supplier Payoffs are Just as Real!

 Volume
 Guaranteed capacity utilization
 Sweat the Assets
 Reduce uncertainty
 Develop industry best processes
 Sell at high prices to Honda competitors
 And then:
– Manage network of sub-suppliers
– Sweat their assets
– Move up the value chain


It is Not Easy
Procurement Needs to Come out of the Dark Ages

Classic Behavior Today’s Best Practice Tomorrow’s Best Practice

- Focus on price and
- Focus on price (driven - Focus on TCO and
assured supply
by cost) Value/Cost
- Customer is King
- Enlightened thinking - Embedded Attraction
attitude
within senior philosophy
- All suppliers managed
management - Joint (pair) measurement
equally
- Sourcing –not supplier measurement
- Classic cost
becomes strategic - Segments within segments:
performance
- Clear supplier Super Supplier
measurement
segmentation Development
- Sourcing is a
- Advanced supplier - Buying bundles of goods
decentralized tactical
measurement and services, not just
function
- Central supplier commodities
- Traditional buyers
selection & coordination
responsible For
- Strategic buyers
strategic commodities


So Does Sales

Classic Behavior Today’s Best Practice Tomorrow’s Best Practice

- Compete on price
- Segment customer - Customer
- Play commodity
base partnerships
games
- Sell solutions - New approach to key
- Meet periodic targets
- Develop team selling account management
- All customers
- New metrics - Goal of increasing
managed equally
- Senior management selected accounts by 10x
- Make unrealistic
connections - Resource deployment to
promises
match 10x
- Keep colleagues
- Explicit governance
away from
customers


Partnerships are Highly Selective
(Do not Beat Dead Horses!)

Pairs of Aces
Partnership

Combative Collaborative


New Purchasing Realities

 Make clear choices in supplier segments and the ways
in which you will work with them
 Understand the need for big changes and joint work to
achieve win-wins
 Change the objectives, measures and benchmarks
 Change mind sets and perceptions
 Do not be naïve as to “partnerships”
 Do not underestimate the leadership requirements
 Recognize that each partnership is unique


New Sales Realities

Sales / Marketing Must Reflect These New Realities

 Define clear customer segments: Make choices!
 Sell as customers wish to buy
 Leading edge customers will consolidate (¾ x ¾)
 Select key accounts (10X = minimum) and deploy resources
accordingly
 Fewer purchasing agents / fewer sales people (others instead)
 Negotiation more periodic – less continuous
 New systems / logistics linkages
 Make difficult personnel changes


10 Golden Rules of Becoming an Attractive Customer

 Be a demanding customer: challenge your suppliers but do not
crush them
 Determine which suppliers are important
 Recognize – explicitly – that attraction is two edged
 Increase the comfort level of the supplier
 Help the supplier properly evaluate their expected payoffs
 Manage the misalignment
 Manage the perceptions
 Understand and manage how the supplier allocates resources
and ideas
 Help your suppliers leverage the learning
 Sell the opportunities in your company to the supplier


10 Golden Rules for Being an Attractive Supplier

1. Execute flawlessly
2. Tell the truth
3. Select / choose / segment
4. Don’t beat dead horses
5. Encourage selected customers to be interested in more than
prices
6. Work to create joint metrics
7. Create awareness in your company of special customer
relationships
8. Be very open as to intellectual property issues
9. Expect misalignment
10. Be ready to accept all challenges


Classic Barriers to True Partnership

What does your customer do that costs you money?
Are any of these familiar?

 They do not pay invoices according to contractual terms
and this issue is worse near the end of their financial
reporting periods
 They deliberately overestimate demand to be sure that
you will make enough – and to negotiate lower prices
 They specify unnecessarily tight delivery time windows
 They continually revise their plans
 They blame all problems on you


Suppliers Create Problems as well

How about your suppliers?
And – would your customers say these things about you?

 They ship products known to be inferior – especially
when supplies are tight
 They push inventory on me as a customer
 They make promises they know they cannot keep
 They overcharge for services not explicitly in the
contract
 They are not proactive in suggesting improvements


The Joint Focus on Value / Cost

 How can we reduce joint (chain) costs?
 How can we increase joint value creation?
 How can we jointly bring new products to market
sooner?
 How can we rapidly respond to changing market
conditions?
 How can we reduce contractual and other bureaucratic
relationships?
 How can we develop ways to jointly “sweat” the most
capital intensive assets?


The Rubik’s Cube of
Customer-Supplier Partnerships

WIN-WIN TRUST

MISALIGNMENT STRATEGY


Back-up Slides


Connecting the Marketplace to the Infrastructure: Lean
Manufacturing: Marketplace Infrastructure

Marketplace Bundles Working Infrastructure
• Local • Products • Functional • MRP
• Price based • Minimum service • Job shop • SPC
• Minimum loyalty • Credit ? • Cellular • Product /
manufacturing ? Job order costing

Strategy Actions Measures
• Faster • Basic scheduling • OTIFNE
• Better • TQM • PPM
• Cheaper • Head count reduction • Inventory turns
• Cost


Evolving Objectives: Lean Business Unit:
Marketplace Infrastructure

• Regional / global • Products + logistics • Business unit • ERP
• Market segments • Services • Functional integration • CRM
• Solutions selling • NPD • Process focus • Software packages

• Financial • Sales force • Business unit
• Customer lock-on specialization profitability
• Leverage • Supply base • Customer satisfaction
from interaction rationalization • Cash to cash cycle
• Transaction
simplification


Pushing Further: Lean Corporation:
Marketplace Infrastructure

• Global customers • Consolidated / • Cross organizational • Extended ERP ?
• “Local jewels” tailored • Outsourcing • Modular systems
• Key account • Value chain • 3rd party logistics • Middleware linkages
management positioning
• Standardization /
rationalization

• Growth • Regional / local • Market share
• Brand leverage buying • Enterprise profitability
• Concentration • Serving global • Earnings per share
customers
• Redefine logistics /
distribution


The Present Winning Combination: Lean
Partnerships: Marketplace Infrastructure

• Extended focus • Simplicity • Cross company • Modularity
• Partnerships • Complexity • Dyads • E-based systems
• Sourcing units as required • Fast implementation • Flexible integration
vs. selling units • Upstream
orchestration

• Customer / supplier • Joint (we not they) • Overall supply chain
lock-on • Exchange of cost and speed
• Continual prisoners • Partnership capacity
enhancement • Cross company BPR management
• Leverage learning • End customer delight
• Win-win


Partnerships Imply Moving up the Value Chain,
Outsourcing and Changing Infrastructure

CUSTOMER
Move up the value chain New positioning

Original positioning
SUPPLIER

New positioning

Original positioning

TRANSFER OF CAPABILITIES CUSTOMER HAS TO LEARN
WITH WIN-WIN APPROACH

Extend Lean Across Company Boundaries


What is Needed?
Four Stages of Collaboration / Joint Efforts

Strategic Senior Management Senior Management
Alignment Strategic Planning Strategic Planning

Design Marketing
Value/cost Procurement Design

Total Cost Accounting Accounting
Industrial Engineering Industrial Engineering
of Ownership Systems Design Systems Design

Logistics
Sales
Flawless Scheduling
Quality
Execution Manufacturing
Manufacturing
Quality

Supplier Customer


Classic Supply Chain Metrics are Grossly Inferior

The Hierarchy of
Supply Chain Metrics Demand
Forecast
Top Tier Accuracy Assess

Perfect SCM
Order Cost

Mid Tier Cash-to-Cash Diagnose

Accounts Inventory Accounts
Payable Total Receivable

Supplier
Supplier RM Purch Dir Mtl
On-Time
Quality Inventory Costs Costs
Ground Delivery
Correct
Level
Prod Perfect
Cost Plant WIP & FG Order
Sched Order
Detail Utilization Inventory Cycle Time
Variance Detail

Source: AMR Benchmark Analytix
Material reprinted with permission from Supply Chain Management Review (www.scmr.com)

IT Systems are Another Barrier
Customer Supplier
Manufacturing Finance Raw Materials Purchasing Sales Manufacturing Finished Finance
Goods

Plan Stock Outflow Evaluate Projected
Manufacturing Forecast Forecast (X) Balance
(X)

Evaluate Propose Plan
(confirm) Replenishment Manufacturing
Replenishment (X)
(X)

Create
Consignment Pick Ship
Stock Order (VMI)
Receive
Goods

Issue to Create (X) Create
Plan Create (X)
Manufacturing Sales Order Invoice (X)
Manufacturing Purchase Order
Update VMI

Reconcile Reconcile
Inventory Inventory
Pay Invoice


The Joint Efforts Stairstep to Partnership

Industry-Best Virtual
Supplier Organisation
Dominant Competitive
infrastructure advantage
New Bundles
of Goods / True Partnership Joint Value
Services Relationship Creation
Leverage Building Customer
Logistics / new perceived
Transaction competencies value
Cost Joint Cost
Reduction Reduction
Margin Chain cost
maintenance
Economies Projects Consolidated
of Scale Exchange of Prisoners Purchasing
Volume based Purchase price
cost reduction
Traditional Purchasing - Sales


Customer-Supplier Partnerships –
Maxims to Live by
Win-win is not hitting the other guy twice
If you win the rat race you are still a rat!

Partnership is too often proposed to suppliers, when what
results is nonsense.
Never choose stupid partners!
If you own a dog and you wish to own a cat, no amount of kicking
the dog will accomplish your objective.
Putting lipstick on a pig doesn’t improve its looks.

If you are in the commodity business – you deserve it:
Obtaining a contract for a supply chain partnership is about as useful
as a marriage license for achieving a happy married life.
It is better to be approximately right than exactly wrong!


A Case Study of Breakthrough
Partnership Improvements


The Firm used a Structured Approach to Improve Key
Relationships

 The approach needed to go beyond facts - to
perceptions and opinions
 A third party brought “the good, the bad and the ugly”
to the table, through a proven methodology
 The defined process led to sorting out the key issues
and created tangible action plans for improvement
 The intervention approach had a tightly defined time
table


A Structured Process Produced Tangible Results

Analysis Workshop Execution
Interviews & Surveys 2 Day Workshop Implementation
• Understand current •Findings from •Champions & Steering
environment, attitudes, analysis presented committee monitoring
OBJECTIVES

perceptions and discussed dyad development
• Mapping interaction •Identification of •Execution of action
and social networks improvement areas plans
• Assessing the current •Development of •Implementation of
level of attractivity detailed action plans attractivity metrics
• Identifying key •Develoment of •“5000 Mile check”
workshop challenges attractivity metrics


Several Counter-Intuitive Conclusions Were Obtained

 Perception is more important than reality
 At least 50% of problems were typically due to the
customer
 Alignment and perceptions varied within the firms
 Alignment is even more divergent between firms
 Misalignment had to be recognized and managed
 Classic confrontation was replaced by collaboration


A Concrete Example Demonstrates the Process & Results

Company A and B Business Relationship Before the Initiative

Commercial
• Single or multi-location enquires
• No standard for commercial requirements
• Variation of quantities
• Variation of demands
• Cost, quality and delivery difficulties
• No economies of scale
Result • Higher inventories
• Planning difficulties
• Conflict and misunderstanding
Technical
• Customer driven specifications – no standard
• Minimised chance to standardise
• Minimised chance to optimise
• “Over” specified


A Collaborative Agenda Yields Major Pay-Offs

Win / Win

Early Involvement in the Higher standardisation and
technical specification of the lower costs
Customer project

Long term supply agreements Economies of scale; reduction in
on the basis of catalogue time to market and working
solutions capital

General terms and conditions Reduction of administrative
costs and conflict potential

Clear commitment to a Long term trust
partnership by openness and
fairness


Collaboration Requires Major Joint Efforts


Creating Win-win Partnerships Between Customers and Suppliers

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