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Establishing & developing buyer-supplier partnerships

Guest Lecture Innovation Networks and Alliance Formation

Eindhoven, October 30, 2007 

Prof.dr.ir. Bart VosNEVI Chair Purchasing Management

 Department Organization & Strategy

Tilburg University

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Lecture Structure

• Collaboration with key suppliers: Why & how?

• DSM Agro case: intra-firm

• KPN-Atos Origin case: inter-firm

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Why Supply Chain Collaboration?• Increasing emphasis on supply chain optimization

relay race as a metaphor

• Outsourcing requires professional selection, management and development of suppliers

professional purchasing management “must”

• More pressure on performance: faster, better, cheaper

• Also puts more pressure on supplier performance: suppliers as “partner”?!?!

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Supplier Development Results(Krause, 1997, Survey of 527 firms, NAPM members)

Before Supplier Development

After Supplier Development

Incoming defects

11.65 %

5.45 %

% on-time delivery

79.85 %

91.02 %

Cycle time (from order placement to receipt)

35.74 days

23.44 days

% orders received complete

85.47 %

93.33 %

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Buyer Captive

Strategic Partnership

Market Supplier Captive

Specific investments customer

Specific investments supplier

Supplier collaboration: with whom? Portfolio model Bensaou

Special, vertical form of alliance

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Examples of specific investmentsTangible• Buildings• Machinery/equipment• Information systems

Less tangible• Exchange of employees (e.g. engineers)• Training programs/workshops• Informal relations

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Supply chain collaboration: How?

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Information transparency

Quality SCM decision-making

Firm performance

History of successful

collaboration

Trust

Habituation

Intensity communication

Openness communication

Gaming

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--TRAVAIL

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TOOLS+

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Bumpy road to closer supply chain links

• It is not only about the content of supplier involvement (e.g. in terms of technological and organizational capabilities)

• Quality of the relationship and the way that it is managed are crucial as well

• And on top of all that perceptual differences on the functioning of a buyer supplier relationship further complicate the story!!

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DSM Case Buyer-Supplier Relationships

• Introduction• Case setting• Main case results• Managerial implications

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Introduction DSM Case

Process industry: specific characteristics• Relatively low level of product variety• High capital investments implying a focus on maximising capacity

utilisation• Prevailing use of inventories as coordination mechanism• Geographic clustering of related processes

PUSH as “logical” Supply Chain planning strategy

Research method• Delphi workshops (“travail”)• Pilot projects: action research

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DSM Case Setting:Intra-firm collaboration

• Aim was to investigate the potential for improved collaboration between 2 DSM Business Units (intra-firm) DSM Agro and DSM Fibre Intermediates

• Ammonium Sulfate (AS) is a residual product in the production of Caprolactam (FI), sold by the Agro unit

• Financial responsibility (FI) versus operational responsibility (Agro);logistics “in between” area

• Centrally “enforced” buyer-supplier relationship

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Joint workshops in DSM Case:Night versus day

Buyer Captive

Strategic Partnership

Supplier Captive

Market Exchange

Supplier’s specific investments

Bu

yer’s

sp

eci

fic in

vest

me

nts

Agro

P DFI

PAgro

Agro = reality DSM FI – DSM Agro relationshipP Agro = Perception AgroP DFI = Perception DSM FI

Agro = reality DSM FI – DSM Agro relationshipP Agro = Perception AgroP DFI = Perception DSM FI

Buyer Captive

Strategic Partnership

Supplier Captive

Market Exchange

Supplier’s specific investments

Bu

yer’s

sp

eci

fic in

vest

me

nts

Agro

P DFI

PAgro

Buyer Captive

Strategic Partnership

Supplier Captive

Market Exchange

Supplier’s specific investments

Bu

yer’s

sp

eci

fic in

vest

me

nts

Agro

P DFI

PAgro

Night

•Tense atmosphere due to misfit in perceptions

•Lots of “travail” needed to change this

Day

•After “partnership notion” more positive sessions

•Need to demonstrate savings

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Closer Ties Between Agro & DFITools to demonstrate potential gains

Base case Fluctuation within 'lung' Reduced sales volume 'lung'

Revenues 1000 978 1061Logistics costs 344 292 334Inventory costs - - 2Working capital costs - - 2Payment term advantage - - 10 ( + )Result 656 686 736

“Lung function”: sales of AS fertilisers on southern hemisphere (e.g. Brazil, South Africa, Australia)

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Managerial implications DSM Case

• “Travail” results in both alignment of perceptions vs. reality and mutual commitment to SCC

• Appropriate (quantitative) tools are vital to increase transparency

• Travail and tools are catalysts in reinforcing trust loop

• Improved mutual trust ultimately leads to increased supply chain performance

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KPN Atos Origin Case:Inter-firm collaboration

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What went wrong • KPN In-sourcing capabilities gone

• Cost only drive, invoking penalties

• No demand organization in place

• Revenue Guarantee leads to complacency

• Current contract form ineffective

• Continued asset utilization drive at Atos (P&L)

Effects• KPN Cost down drive in conflict with Atos’s Revenue aspirations• Complacency at Atos creates major irritation at KPN• No incentive to Atos to enhance asset productivity• KPN Businesses not committed to overall deal

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October 2003: Initiated turnaround• Bend or bust message to Atos• From Penalty to Incentive:

– Remove Revenue Guarantee/ Penalty Exposure– Joint Key Performance Indicators (KPIs), closely connected to KPN’s

Leading Business Indicators– KPIs linked to process outputs/”deliverables”

• Advantages KPN:

─ Better customer service─ Steering/incentive

mechanism─ Improved decision making

• Advantages Atos:

─ Maintain KPN as customer─ Road to new business─ Achieve “strategic

ambitions”

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Concluding Root-Cause analysis Delivery Process: March 2004

• Customer interaction takes place through processes, yet

current way of working is stove-piped (“functional silos”)

• Little prevention, rather “fire fighting” symptoms

• No feedback to Atos on KPN’s customer complaints

• KNP & Atos account managers did not align regularly

• Need to define Process KPIs, i.e. % “Aftercare needs”

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Main conclusion: The (customer) delivery process should be managed as a whole

New approach• Manage the process as a whole from joint (‘smart’) office• KPN and Atos cooperate to improve customer satisfaction • Atos accepts ‘partner in business’ position in this process

Improvement KPI’s:• % Aftercare needs down from +/- 15% to 9 % in 4 months• In May 2007 further reduced to about 5 %

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Lessons learned

• Outsourcing a mess leads to in-sourcing a mess • In these complex settings, there is no clear distinction between

buyer (who delegates) and supplier (who engages)• Complexity of processes and systems inhibit allocating

the burden of non performance towards a single party • In fact buyer & supplier are co-producing

• Joint development of joint KPIs assures commitment • Rewarding both parties (win-win) is key in this concept• Process cannot be managed from helicopter• Ultimately, people (at both sides!) make the difference

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Concluding remarks

• True SC improvements start at operational (process) level, yet alignment with higher management levels is key

• Travail (e.g. dedicated workshops) and tools (e.g. collaborative KPIs) enablers to make change happen

• Be aware of indirect functions “sabotaging” such improvements cross-functional approach essential

• External, trusted parties may act as “catalyst” in developing collaborative buyer-supplier relationships, especially in cases with “perceptual differences”