The Importance of Supply Chain Collaboration
Why is supply chain collaboration essential?
However, some critical differentiators - like collaboration - justify the very existence of our profession!
The supply chain is the most collaborative function in the business.
We find peers everywhere, even behind enemy lines. We welcome any opportunity to form a cross-functional team with anyone who can bring business value through supply chain strategies, sales and operations planning, inventory management, BPO, alliances, etc.
The supply chain weaves and then sits inside the spider web of relationships. That way, we become brokers, advisors, and, ultimately - partners!
The definition of supply chain collaboration
Many definitions of Supply Chain Management incorporate or even require supply chain collaboration as a critical component.
In fact, supply chain collaboration assumes that independent firms collaborate in planning and execution to enable end-to-end supply chain strategy and rhythmic operations and achieve shared goals.
Transaction Cost Economics view on supply chain collaboration
We introduced Transactional Cost Economics (TCE) in this post, where we explained that the central question of TCE is whether a transaction is more efficiently performed
- inside a firm (hierarchical governance or insourcing)
- outside it (market governance or outsourcing)
- or by forming an alliance (relational governance.)
Supply chain collaboration can mitigate the opportunistic behaviors of individual suppliers and streamline market transactions.
A resource-based view of supply chain collaboration
The resource-based view finds the competitive advantage from utilizing the company's resources and capabilities more effectively than its rivals.
Furthermore, these resources may come from outside firm boundaries and be a part of inter-organizational processes.
Firms will be motivated to collaborate if their joint profitability exceeds that generated individually. Notably, the collaborating firms will achieve benefits they would not obtain working in isolation.
Supply chain collaboration occurs when partnering organizations find it more beneficial to work together than apart from a cost or revenue perspective.
Supply chain collaboration examplesCollaboration has many facets and ways of realization (e.g., integrated supply design, collaborative resource planning, demand forecasting, order fulfillment and replenishment, supply chain optimization, etc.). However, due to varying levels of trust, not all of them are sufficiently exploited.
Some proven models of supply chain collaboration are
- Service Parts Logistics
- Vendor-Managed Inventory (VMI)
- Consignment
- Quick Response (Q.R.)
- Efficient Consumer Response (ECR)
- Collaborate Planning, Forecasting and Replenishment (CPFR)
Collaborative Planning, Forecasting, and Replenishment (CPFR)
One of the most prominent examples of supply chain collaboration is the CPFR.
CPFR requires a structured approach, which is based primarily on business logic. Parties must enter a special agreement and craft a business plan to align on mutual roles, responsibilities, and benefits from such cooperation. One of the leaders in this field is Samsung mastering CPFR for two decades and already enhancing it with A.I. capabilities.
Benefits of supply chain collaboration
The benefits of supply chain collaboration are diverse:
- early detection of supply chain risks and constraints,
- faster mitigation of identified risks and emerging disruptions,
- mitigation of the bullwhip effect by aligning demand forecasting and inventory management,
- trust between partners (!)
Information Sharing
The latest point resonates with the theory of trust development we touched upon in this post. Information sharing stimulates prediction and intentionality processes, i.e., parties develop mutual trust by better understanding each other's incentives and anticipating further actions.
By sharing information, parties will align their critical planning and fulfillment decisions that influence the end-to-end supply chain performance.Shared incentives
The collaborating parties understand that their actions will affect their particular domains and the supply chain lifecycle as a whole.
Inevitably, they would start sharing incentives from the supply chain activities as long as those are aligned and intended for mutual efficiencies.
Such partnerships may evolve to mitigate risks and share benefits as long as all parties contribute to joint achievements by integrating individual business goals and performance metrics.
Obviously, shared incentives aren't widely used across supply-chain partnerships due to different levels of relationship maturity.
It is humanly natural to start exchanging information more straightforwardly than sharing benefits. Supply chain management by partnership and trust
The proposed collaboration framework should develop trust between supply chain partners. It implements the structure of their relationship, motivates feedback and transparency, and builds the basis for continuous improvement.
This will inevitably lead to the gradual development of relationship maturity, where parties exchange information across integrated management systems and work for profitable performance.
Our alliances have already become the synonym for "synergy." Our governance is clockwork, collaboration is precision, and relationship management is mind and heart work.
We bring the method and the system to what other guys are doing as amateurs with no plan, structure, or consistency.
That was my answer to the interview question. I was not selected for the job, but I still believe what I said.
P.S. Internal supply chain collaboration
While the definition suggests that supply chain collaboration is an interfirm affair, we should consider the importance of internal cross-functional cooperation. There won't be any external partnership and trust if corporate functions don't exercise such virtues. Design for Excellence (DfX) in Supply Chain
DfX or early product design affects the cost, quality, and product development cycle.
At least 75% of the product cost is committed during the design and planning activities. So, the earlier the supply chain function is involved in product development, the more value it adds.
A product can be developed to be supply chain efficient from the beginning. The idea is to design the new product and its supply chain simultaneously.
A variety of benefits will be unlocked- cost-efficient choice of materials,
- optimized supply chain costs and mitigated risks,
- efficient order management process,
- minimized inventory and service costs.
The actual value of DfX
Let's materialize our DfX carols. For that, we will refer to the 2021 Annual Report of Philips.
We copied critical financial results of the year and referred to the following quote on page 28: "Productivity programs delivered annual savings of approximately EUR 279 million. This included approximately EUR 140 million procurement savings, led by the Design for Excellence (DfX) program."
So, we assumed that DfX generated 100 million EUR worth of savings. We allocated 75% of that amount to the cost of materials.
Then we assumed the situation with no DfX savings and obtained an 18% decline in operating margin (from 3.2% to 2.6%.)
We also calculated what revenue needs to be generated to return to a DfX-enabled operating margin of 3.2%.
For that, revenue growth needs to be compensated by a prorated increase in the cost of materials, depreciation, manufacturing costs, selling, and G&A expenses. We assumed that the same headcount would deliver increased sales at the same R&D expenses—for these line items, there was no change.
Our calculations derived the revenue effect of 2.5%, i.e., Philips would've generated 429 mil EUR extra to compensate for the absence of DfX savings and remain at 3.2% operating income.
So, the material effect of the DfX program in 2021 will be around - 100 mil EUR worth of savings,
- 429 mil EUR worth of new sales or
- 111 mil EUR worth of additional operating income.
DfX isn't a novelty - Philips mastered it for years. Obviously, they're not mulling their seat at the executive table. They have work to do instead.
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Design for Excellence (DfX) in Supply Chain
DfX or early product design affects the cost, quality, and product development cycle.
- cost-efficient choice of materials,
- optimized supply chain costs and mitigated risks,
- efficient order management process,
- minimized inventory and service costs.
The actual value of DfX
- 100 mil EUR worth of savings,
- 429 mil EUR worth of new sales or
- 111 mil EUR worth of additional operating income.
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