More Discredited Purchasing Strategies

In an earlier blog post “Why do Purchasers persist with discredited strategies for Supplier Improvement” we talked about the weight of evidence that shows many strategies applied by purchasing to get improvements do not work (even in the eyes of those that use them).  In this post we explore the evidence that suggests far more organisations should be seeking collaborative relationships with their suppliers, rather than the obligatory “arms length”, low trust, on-line auction and adversarial approach that is the mainstay of many purchasing organisations.

To start our discussion we’ll first go to Hollywood!  While supply chain collaboration and movies is a stretch, the film “A Beautiful Mind” was based on the life of John Forbes Nash the mathematician (OK – perhaps the biggest stretch was the idea that Russell (Rusty) Crowe can add up!).  What did Nash do?  He provided mathematical proof of a concept developed by 16th Century Political Philosopher Jean-Jacques Rousseau[i]. The concept – collaboration helps grow the pie; that is by collaborating, people gain a greater return than if they just tried to divide up the existing pie by acting alone.  Rousseau illustrated his idea by telling the story of two hunters, alone they might secure a hare, but by collaborating, they can capture a stag.  A hare is a meager meal for one person – a stag is a feast for two families.  Similar to the better known concept “the prisoner’s dilemma” the hunters are faced with the opportunity to secure the hare versus an uncertain option to gain a stag.

Nash provided the mathematical model and provided a concept called the “Nash Equilibrium”[ii].  This describes the situation where players know the equilibrium strategy of the other players (catch a stag?).  This enables them to make rational decisions that benefit all, versus the unknown outcome if they follow a purely self-interest strategy.  The stag hunt offers two Nash Equilibriums – one “pay off” dominant, get a stag (the collaboration option) and one “risk” dominant, get a hare (the self interest option).

So how does this relate to the real world of running a supply chain and procuring goods and services?  The concept that collaboration provides superior results is widely promoted but do we have proof?  The list is actually quite long, so I have selected three that I think tell the story well.

The first research that supports our contention that “collaboration is superior” comes from the automotive industry.  In their study of 8 automotive manufactures and 70 suppliers across 3 countries, Jeffrey H. Dyer and Wujin Chu[iii]found that the least trusting and collaborative automaker (you know who you are Detroit) paid 6 times the cost to source and procure parts for their vehicles versus the most trusting and collaborative automaker (how’s the weather in Tokyo?).  Does this massive investment in procurement resources result in lower costs?  Not according to Jimmy Anklesaria[iv] who suggests US automakers pay $1500 more per vehicle for the parts they purchase.

The next study comes from the I.T. outsourcing industry. Again, research by Wilcox and Cullen[v] found that relationships based on trust and collaboration rather than on stringent and oppressive contract terms and conditions returned a benefit of up to 40% of the value of the contract.

Finally in his book “The Speed of Trust”, Stephen M.R. Covey explored a number of industries and found that trust and collaboration resulted in quicker reactions, faster cycle times and better responses to market changes and opportunities.  In today’s business environment these attributes deliver a significant competitive advantage.

So clearly developing trusting and collaborative relationships with your suppliers and trading partners will pay back with a couple of provisos:

  1. You can’t collaborate with everyone – it takes time and effort.
  2. There are some business partners you should not try to collaborate with.

How to proceed?  Firstly, identify the significant few partners with whom it makes sense to collaborate.  Sit down with them with a problem solving focus and decide how you can increase the opportunities for both businesses (catch a stag!).  This might not be in the traditional areas of sourcing and supply of goods or services – it might be in collaborating on other projects, or providing referrals to other customers. Whatever the result, the process will work to improve the relationship and make the existing business more productive and valuable to both parties.

What about the partners you can’t or choose not to collaborate with?  If nothing else, by being more trustworthy in your dealings with them you will see benefits.  Note that I used the term “trustworthy” rather than “trusting”.  By approaching the relationship in this way you will be able to identify those partners who reciprocate in kind, which will be a signal that you can be more trusting in your dealings with them.  Nothing in the model put forward here suggests you need to be a “patsy” in your dealing with others.

Does this take long?  Again, Dyer and Chu pointed out that the Japanese automakers went from an unknown quantity to twice as trustworthy as their US peers in the eyes of US parts suppliers in 5 to 6 years.  And they did this by “institutionalising” trustworthiness within their US businesses.  So it doesn’t have to take long from change to payback.

Finally, if you think you are already collaborative and trustworthy, then perhaps you should ask your suppliers what they think!  Better still, have an independent party ask on your behalf (see www.sccindex.com for example).

If you would like to discuss collaboration and trust as a competitive advantage, or would like independent help in setting up a collaborative/problem solving opportunity search then please get in touch with us at andrew.downard@adsupplychain.com.au or call +61 (0)419 581 705.


[i] Jean Jacques Rousseau “Discourse on the Origin and Basis of Inequality Among Men” (1755)

[ii] John Forbes Nash “Equilibrium Points in N-Person Games” (1950)

[iii] Dyer J & Chu W “The Economic Value of Trust in Buyer – Supplier Relations” (1997)

[iv] Anklesaria J “Supply Chain Cost Management” (2008)

[v] Wilcox L & Cullen S “The Power of Relationships” (2007)

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