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Achieving Competitive Advantage through Collaboration with Key Customers and Suppliers
An Evolving Operational Focus
In the past when companies pondered corporate strategy,
operations had been peripheral to the discussion. Operations
were considered a technical matter with one way of doing things
and therefore not, strategic. Strategy is about products,
markets, and competitive advantage with divergent possibilities.
Operations were seen as a series of puzzles with single best
solutions. The realization that optimization of parts did not
optimize the whole led to new focus - operational management
went up a level from looking at individual tasks to looking at
whole processes. During the 1960s, Japanese manufactures
obtained competitive advantage by optimizing operational
efficiency, which meant lower prices, flexible production
capabilities and a reduction in lead times. Operational
considerations became a key theme in strategic discussions.
During the 1990s, companies like Dell took this further. The
computer market was changing faster than any other market had
done in history. Dell began managing operations by synchronizing
functional activity into a single corporate heartbeat. An order
instantly drove procurement, which drove production and then
distribution. The result was a further drop in lead times,
inventory requirements, and operating costs along with
flexibility. Operational efficiency was Dell's sole source of
competitive advantage and it reaped enormous market share gains.
Collaboration - The Next Step
The historical trend is clear. The impact that one activity has
on the next means they cannot be optimized in isolation. The
result is that operations have become the key corporate
strategic consideration. Yet the nature of competitive advantage
is to elapse as competitors replicate it, which places a
continual onus on companies to find new differentials. This begs
the question - what next?
The answer lies in another step up in the way we view corporate
operation. We need to look beyond the borders of the firm in our
search for operational efficiency. Optimized company operations
can only be achieved through alignment and coordination with the
agents up and down stream. Collaboration with suppliers and
customers is the essential vehicle of the 21st century for
achieving competitive advantage from operations.
The benefits of Collaboration
1. Sharing demand signals
The first step to collaboration comes through information
sharing. Across nearly all industries, companies play a guessing
game (called forecasting) to estimate the products and
quantities that their customers will demand across different
markets. Even if a company gets it just right it still needs
large inventory buffers to cope with demand variability, thus
dramatically reducing its capital efficiency. It is imperative
to compress lead times to meet demand rapidly and lessen these
negative effects - this can negate the production-cost benefits
of today's off-shoring vogue in China. The butterfly's wing
effect on forecasting and ordering means the end demand signal
gets wildly distorted as it echoes up the supply chain being
reinterpreted and exaggerated at each turn. Inaccuracies are
amplified at each stage, leaving suppliers facing high-stake
production gambles.
The answer is simple - relaying end user demand signals and
likely future order quantities to suppliers up the chain. This
is the single biggest benefit of collaboration and it comes at
virtually no cost reducing much of the variability from the
forecasting calculation. A supplier's response will be a much
closer fit to market demand if information about likely order
quantities is shared. Typically, inventory levels can be reduced
by two thirds, service levels sky-rocket while lost revenues
evaporate, and supply costs are cut by a quarter when demand
information sharing is implemented correctly.
2. Efficiency through alignment
The next step is operational coordination. Working capital
naturally collects at the borders of the firm. Finished Goods
nearly always account for much more inventory than Work in
Process, mainly because of the typical inadequacy in
coordination between supply chain entities. Accounts receivable
tend to be swelled by disputes and billing problems, which would
be ironed out instantly if they were internal issues. Most
companies currently allow working capital to accumulate at the
point where their processes meet those of their customers and
suppliers, which provides a great opportunity for freed cash
flow and
increased capital efficiency.
Costs can also be reduced dramatically through simple
operational coordination between suppliers and customers.
Systems, processes, and organizations can be joined up much more
effectively to eliminate unnecessary duplication and increase
the through-put and flexibility of both supplier and customer
organizations.
The interfaces of goods delivery/goods-receipt,
invoicing/invoice-processing and collection/payment all exhibit
the same misalignment and duplication. The painstaking effort
spent on internal efficiency is negated by a clumsy operational
weld between suppliers and customers. Functions get managed to
performance metrics, which encourage activity that runs, counter
to the efficiency of the organization, let alone the total
supply mechanism. Firms should optimise their impact on their
key customers' total cost of supply. Configuring and managing
the organization to better align with key customers and
suppliers facilitates a more fluid transfer of goods, cash and
information up and down the supply chain. This provides a
win/win of capital and cost reduction at the same time as
enhanced revenue levers for all organizations involved.
3. Joint exploration of strategic options
The final step is a strategic coordination-unlocking new market
development and product development possibilities based on
co-exploring avenues to competitive advantage. This is only
attainable once trust has been built through information share
and some steps in operational integration. With the foundation
of operational collaboration set, customers and suppliers can
combine in entering new markets, coordinated off-shoring and
shared selected R&D to explore exciting product development
opportunities and condense launch times.
Overcoming the Zero Sum Mindset
The greatest barrier to successful collaboration is the
conventional mindset of a combative relationship with suppliers.
Negotiations are perceived as a zero-sum margin tug-of-war, with
the relative power balance determining the result. This
precludes a focus on win-win value driving activity. Suppliers
and customers end up perpetually wasting and reworking because
they see opening a constructive dialogue as weakness or even as
surrender. Many executives fear a loss of flexibility through
higher switching costs from greater collaboration. The truth is
that most firms' key supplier base has not changed dramatically
over the last 2 years, so collaborative activity would have been
massively beneficial as the payback period can be. Still, this
does not irreversibly affix firms together - competitive
pressures still work to drive down prices and provide the
incentive to offer the best value.
Another fear is that companies would give away their competitive
advantage to customers or suppliers if they collaborate. The
reality is that core competencies do not vanish through sharing
demand information, or through bridging operational rifts. The
reason that there are few truly vertically integrated industries
is testament to this - core competencies dilute and effective
organization is impossible over too lengthy a chain. Such
anxiety may be unfounded, but the fear is real and debilitating.
This is why companies should commit progressively and in
parallel, reaching a point acceptable to both parties; from
information share, to operational alignment, through to
symbiotic strategic planning. As a further development,
(depending on the concentration of the end user markets for a
product), a company can then extend its collaborative
relationships further up and down the supply chain to suppliers'
suppliers, customers' customers and beyond.
As with preceding operational evolutions, collaboration will
doubtless be pioneered by some companies and shunned by others.
Far from the micro/technical operational thinking of the past,
collaboration offers a strategic perspective, divergent options
and colossal profit, and capital efficiency benefits. Until it
becomes universally adopted, collaboration is the most promising
source of competitive advantage from operations available today.
About the author:
Don Johnston is a consultant with the REL Consultancy Group. REL's
financial consulting services are all about generating
improvements in cashflow. As experts in working capital
management REL has been associated with some of the world's most
successful companies for over 30 years, focusing on all of the
three key areas of payables, receivables, and inventory.
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