I was asked to present at a supply chain conference held by a major university in Chicago and I titled my presentation “Going from Competitive to Collaborative Supply Chain Models” and I was quite surprised by the reaction as I thought this was not such a radical concept.
I started my discussion by pointing out some obvious facts on why collaboration is key in today’s world:
- Globalization is in turmoil and probably retracting
- Desire t enter new markets is even more critical now
- Suppliers drive revenue
- Customers drive costs
- Innovation is key and critical
- Technology is upending everything (we have gone from IOT to AI in a very short time)
And this is just the tip of the iceberg. Competitive supply chain models drive major inefficiencies and tremendous loss of value. It is estimated that the auto industry used to lose billions annually because of their supply chain models till they started to learn how to cooperate with their suppliers (they still have ways to go by the way). On the other side, companies like McDonalds, Nike, Apple etc. have enjoyed success because of the way they have embedded collaboration in their supply chains. According to a study by Booz Allen, collaborative supply chains have a significant impact on metrics like ROI, ROE, percent profitability etc. Here are some additional proof points(as a result of collaboration) to consider:
- Supply chain costs reduced significantly
- Increase in revenues
- Significant improvement in On Time Delivery
- Reduction in inventory costs, increase in turns
- Stock outs reduced
Most of you are probably too old to remember Theory Z(by William Ouchi) which was proposed as a counter to Taylor’s Theory X about how employees act and why. Theory X held that employees were inherently lazy and had to be watched and monitored constantly. Theory Z took the opposite approach and suggested that employees were self-motivated:
- Are motivated by long-term employment (commitment)
- Like collective decision making (collaboration)
- Have a moral obligation to work hard
- Like individual responsibility
- Like evaluation and promotion
- Like holistic concern for them as employees
The logic was that employees would behave based on the assumptions we make about them – it becomes a self-fulfilling prophecy. Similarly, the assumptions we make about our suppliers also drives the relationship that we have with them. Under X, we make the following assumptions:
- The suppliers has the leverage after the contract is signed and will exploit that leverage so I better get as much as I can before the contract
- If I tell the supplier about our decision process, they will exploit it and try to get around it
- Only thing supplier won’t exaggerate is the price
- They will try and squeeze as much money out of me as they can
On the other hand, the supplier is making the following assumptions under Theory X:
- Customer is going to beat me down on price so let me start high
- They will talk about quality but will make the decision on price
- They won’t share all their requirements
- They don’t care f I make a profit
- If I give them too much information, they will use it against me
You can easily see that if those assumptions are prevalent, they will drive sub-optimal behaviors on BOTH sides leading to a certain loss of value for both. For the customer it means:
- Longer buying cycles
- Grudging vs. willing cooperation from Provider
- Loss of Providers focus
- Unreliable support / increased response times
- Loss of trust
And for the seller it means:
- Loss of referral business
- Loss of repeat business
- Reduced purchase volumes
- Increased cost of bid / longer sales cycles
- Loss of Customer focus
- Loss of trust
So while Theory Z was introduced in the 80’s as a management philosophy, it has some very salient concepts that are very useful when applied to Category Management/Supply Chains.
