Using Simplification and Relationships to Manage Risk

A lesson for those designing contingency and mitigation responses to risk events is that too much complexity can lead to its own problems.  Sometimes our efforts to provide iron-clad guarantees that our supply chain won’t suffer loss result in systems that can protect against the risk events we can foresee, but mask our ability to respond to the unexpected or “black swan” events.

Good research shows that where we have protections in place, this alters our risk appetite.  An everyday example is the more we are required to use seatbelts and vehicle safety systems are improved, the more risks we take on the road.  An extreme example comes from skydiving where Booth’s second law states “the safer skydiving gear becomes the more chances skydivers will take in order to keep the fatality rate constant”.  So it would appear that having risk mitigations in place that are too robust can provide a false sense of security!

It has also been shown that we transfer this risk appetite “adjustment” to others in the system.  For example, it is common for car drivers to pass closer and faster to cyclists that are wearing helmets, assuming they are safer than they actually are.  In a supply chain context this might result in decisions to hold less safety stock on the assumption that your partners have got this covered.

The challenge with complex risk management actions is that they both provide a false sense of security and because they are complex they contain multiple opportunities for failure.  John Doyle of Cal-tech has coined the term “robust yet fragile” to describe such systems.  Charles Perrow in his work on the space shuttle disaster/s noted that “in complex and tightly coupled systems” failures are inevitable!

So part of the solution is certainly to maintain a risk management approach that stresses the need for simple solutions.  Allied to this is a need to combat the false sense of security that mitigation actions can provide.  This means never assuming that your “fix” will work and never pulling back from your monitoring activities and environment scanning.  You will rarely be able to predict a “black swan” event, but being the first to see it provides some advantages.

The key to reducing risk in a system like a supply chain is to treat the system as a whole, rather than harden up an individual node.  The node may be protected but the overall system can still fail.  No single firm can usually impose solutions on the whole supply chain, therefore they must collaborate with their supply chain partners to manage risk.

Yossi Sheffi in his book “The Resilient Enterprise” notes two benefits of collaborating with supply chain partners to reduce risk.  Firstly, it pools the combined experience of all the partners so that they can learn from each other.  Secondly, it increases the number of “eyes on the job”.  The more people there are scanning the environment, the more likely an emerging event will be observed.  Critical supply chain events are not perceived in the same way by all partners according to Holmlund-Rytkönen and Strandvik (2005).  Therefore these different perspectives not only mean events are not missed, but also the consequences of the events will be better understood.  The combination of views will also act to normalise the risk appetite for the group.  No one party will see the metaphoric “bicycle helmet” on their partners’ heads and therefore pass on more risk.

So to deliver risk management solutions that won’t let you down, consider the following:

  1. Keep countermeasures simple.
  2. Don’t assume countermeasures guarantee the risk is eliminated.
  3. Keep scanning the environment even after countermeasures are in place.
  4. Monitor your risk appetite and ensure you are not taking on more risk because you have countermeasures in place.
  5. Collaborate with supply chain partners on risk management – you will learn more and increased eyes on the environment will help.

If you would like to know more about how to use collaboration to help you manage risk, please feel free to contact us at andrew.downard@adsupplychain.com.au or call +61 (0)419 581 705.

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How Collaborative Commerce Works

The idea that collaboration with business partners is a successful and profitable approach is well accepted.  This concept is also well supported by numerous case studies and research.  Despite this support, many businesses struggle to move beyond lip service to the idea of collaboration.  Many believe collaboration puts them in a position of weakness versus their partners.  Others believe that a failure to use “market power” is a form of waste.  Both these perspectives are missing the point of collaboration and how it generates benefits to both parties.

The theories supporting how collaboration works have been around since the 1700’s and the writings of Jean-Jacques Rousseau with his illustration of the concept using a stag hunt.  Three hunters by collaborating can bring down a stag; however if one of them is distracted by chasing a rabbit they will end up with nothing.  The mathematical proof of Rousseau’s proposition was provided in more recent times by John Nash (of “A Beautiful Mind” fame).  Also weighing into the fray was Nobel laureate Oliver Williamson with his theories around transaction economics and how collaborative relationships involve lower costs versus more “arm’s length” ones.

All of the above perspectives have been updated and made more accessible by groups such as the Vested Outsourcing team at Tennessee University, or Professor Stuart Diamond from Wharton.  They provide excellent “how to” models for setting up and negotiating collaborative business relationships.  The 5 Steps from the Vested Outsourcing model are a good place to start to understand the concept in practice.

  1. Develop an outcome based rather than a transaction based model.
  2. Focus on the what, not the how.
  3. Clearly define measurable desired outcomes.
  4. Set up pricing model incentives to optimise cost/service performance.
  5. Have a governance structure that is focused on insight rather than oversight.

Stuart Diamond weighs in with advice on how you can do better than win/win in a deal.  A key issue according to Diamond is to exchange things that the parties value differently.  The goal here is to offer the other party something that they value highly but you do not.  In return, if they provide you with something that is not valued highly by them, but of high value to you, then you have jointly increased the value of the deal.  Thus a better than win/win result has been achieved.  The principle put forward by Stuart Diamond can be considered as the micro version of the macroeconomic principle of Comparative Advantage, where a country can produce goods at a lower opportunity cost than their trading partner.  They could perhaps still produce the item more cheaply than the trading partner but they recognise they get more value by using their resources for a more productive purpose.

A working example comes from the resources industry where a pump manufacturer was under pressure to provide unit cost reductions to a major client.  There was little spare margin and warranty costs also made the deal marginal for the supplier.  The exchange that created more value (than a cost reduction would achieve) was the supplier offered to have their technicians fit the pumps at the customers’ facilities.  This both saved the customer labour hours to fit the units, and reduced the capital equipment downtime because the suppliers technicians were more experienced and skilled in the fitment process.  In return, the supplier maintained unit pricing and gained a reduction in warranty costs because of the more expert installation process.  Both parties gained from the new arrangement and experienced better outcomes.

So, to deliver business arrangements that beat win/win collaboration, follow the Vested Outsourcing 5 Steps model and take Stuart Diamond’s advice and exchange things you value differently.  Remember it’s not what you pay that is important it’s what you get!

If you would like to know more about Collaborative Commerce, or need help setting up a better than win/win deal, feel free to contact us at andrew.downard@adsupplychain.com.au or call +61 (0)419 581 705.

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Collaborative Negotiation, You Can Both Do Better Than “Win/Win”!

All too often business people charged with negotiating on behalf of their organisation find it hard to believe that a win/win solution can be achieved without leaving some of “their” money on the table to meet this goal.  This zero sum thinking is quite common with the perception being that every deal has a fixed amount of “treasure’ to be spread between the parties involved.  This widely held view is at odds with both independent research and reported results of those that take a less combative approach to their negotiations.

Being more collaborative in negotiation style does not mean soft, or compliant; you can still hold firm on issues that are important to you.  What successful collaborative negotiators are doing is focusing on outcomes rather than the division of a fixed pie.  This concept has been well described by the Vested Outsourcing team from the University of Tennessee in their “5 Rules”:

  1. Focus on Outcomes, not Transactions.
  2. Focus on the What, not the How.
  3. Agree on clearly defined and measurable Outcomes.
  4. Optimise pricing model Incentives.
  5. Governance Structures should provide Insight, not merely Oversight.

By focusing heavily on outcomes, the Vested Outsourcing model breaks out of the confines of the fixed sum thinking.  Each participant is able to think about and strive for the things that are important to them from the agreement.  Gaining these outcomes need not be at the loss of the other party.  This is because a deal can often be structured to provide both parties’ outcomes in a way that both can live with.  This latter point is important because people engage in “satisficing” behaviour; in other words they recognise that perfection is rarely attainable, at least in one step.  They are therefore willing to accept a result that meets their core demands and the majority of their “like-to-haves” and consider this a good result.

So how does this work in a real negotiation?  We can perhaps take advice from Professor Stuart Diamond, the author of the negotiation text “Getting More”.  Amongst the points he makes are two that deliver strong support for our approach.  Firstly, he suggests making “emotional payments” to the other party.  The more important a negotiation is to another party, the less rational they are able to remain.  By meeting their perhaps non-logical but strongly held emotional needs, you will be able to break through, and be heard.  This is important – if you aren’t being listened to, you can’t negotiate.  Often these emotional payments are not a big deal and won’t involve you giving up on one of your core goals. The second supporting point made by Stuart Diamond is to trade things you value unequally.  This is the engine room of two parties getting a better than win/win result through collaboration.  If you give up something which you don’t value highly to a partner that does value it highly then you have grown the size of the pie.  All of a sudden the value of the deal in the eyes of both parties has increased, particularly if in exchange you receive something that you value highly but the other party does not.  A final point from Stuart Diamond is to be transparent and constructive in negotiations, not manipulative.  People quickly see through manipulative behaviour and once trust has been eroded, it is hard to recover.

While this is a very large subject, the following key points will help the reader think about how to negotiate a better than win/win outcome:

  1. Be clear on your goals and your negotiation partner’s goals.  Make sure they are stated as “Outcomes” and don’t be afraid to get them out in the open early.
  2. Be a problem solver and focus on opportunity.
  3. Deal with the other party as a person and make “emotional payments”.
  4. Have an exit strategy if the deal or other party is not going to meet your needs, you can’t collaborate with everyone.
  5. Be sure to agree on how the deal will be measured and managed and incentivise for higher performance.
  6. Find out what the other party values and work hard to deliver it to them.

(And don’t forget Preparation & Planning is the “secret sauce” for a successful negotiation outcome.)

The above points are an amalgam of several sources and are not of course the whole story.  We might end with a quote from Bob Woolf, the sports management agent.  His opening remarks in a negotiation were:  “I demand that we meet your goals!”  Because he recognised this was the best way to meet his own goals.  So be brave, tell the other party in your next negotiation you won’t budge on the issue of meeting their outcomes!

 

If you want to increase your knowledge of Collaborative Negotiation or need help planning for a specific negotiation then contact us at andrew.downard@adsupplychain.com.au or call +61 (0)419 581 705.

 

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Selecting Your “Business best friends forever”!

In selecting which supply chain partners we will form a close and collaborative relationship with, the tendency is to apply the Pareto principle using expenditure or turnover.  The top 20% of suppliers or customers it is opinioned will provide 80% of the firm’s income or expenditure.  A logical approach to selecting your Bbff (Business best friends forever) you might say.  By keeping close to these significant few, the idea is that you will gain the growth you are looking for and protect your business.

There is nothing wrong with this approach in principle.  With most firms dealing with hundreds if not thousands of supply chain partners, it is not possible to form a deep and meaningful relationship with all the partners.  The Purchasing and Sales functions have long followed a categorisation approach which groups suppliers or customers into segments.  An example of a categorisation model is shown below.

Where the traditional models might be open to challenge is in the area of selection.  Just using turnover or expenditure is too simplistic.  Certainly the largest suppliers or customers have a good argument to be included in the Bbff, but firms also need to consider the risk that their supply chain partners might present to growth or profit.  Yossi Sheffi in his book “The Resilient Enterprise” points out that collaborating with supply chain partners is one of the best protections against risk events.  It also enables firms to respond quickly to events and get their supply chain back on track in the shortest possible time frame should they be hit with a disruption.

So it would seem sensible to bring risk potential into play when allocating supply chain partners into categories.  The following matrix, which is based on the Kraljic Purchasing Portfolio model, provides a simple tool for deciding where a partner might fit.

As mentioned, the matrix is a very broad brush tool and more precise methods are available, but it does nicely combine spend or turnover with risk.  Using scores out of 10 rather than just Hi and Lo can provide the appearance of accuracy, but probably does not add greatly to the usefulness of this particular tool.

The end result is that an organisation using this tool might find that some smaller, but critical, suppliers or customers may find their way into the top of the pyramid.  Forming a closer collaborative relationship with these players will both protect and grow the business bottom line.  A caution at this stage would be to remind readers that the final attribute for a partner to be in the top part of the pyramid is that they themselves wish to be there.  You can’t force someone to collaborate.  So how does your organisation select its strategic partners (or Business best friends forever)?

 

If you would like help setting up your process for selecting strategic partners or would like more information on this subject then please contact us andrew.downard@adsupplychain.com.au or call +61(0)419581705.

 

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Measuring Relationships: Which Model should I Use?

The old adage that to manage something you have to be able to measure it has been around since at least Lord Kelvin in the 1800’s.  Likewise in business we all recognise that if something is important, then it should certainly be managed.  We have discussed on a number of occasions that relationships are a key factor in successful supply chains.  So, how to measure relationships!

A straw poll of supply chain practitioners will usually throw up a majority that do not measure their supply chain relationships.  A further smaller group will claim they do measure their relationships but on examination it turns out they are measuring the results or outputs of the relationship (DIFOT, inventory turns etc) rather than the relationship itself.  The analogy we use is that they are “counting the golden eggs, rather than worrying about the health of the goose!”

A supply chain relationship is a complex thing.  It is made up of a raft of interactions, perceptions and beliefs by the parties involved.  As such it is extremely hard for managers to get a handle on what is going on.  In striving to get control it is important to measure all these elements; so out of the complexity clear indications of where to focus attention can be found.  This will benefit the bottom line now and in the future.  This measurement need (or can) only be done with those partners that are the critical few.  The principle being that improving these strategic relationships will impact on all relationships across the board, a variation on the principle that “a rising tide raises all boats!”

In looking at models that allow you to measure relationships there are a number of choices.  Some are quite superficial while others are more comprehensive.  Some make the mistake of only measuring one side of the relationship; usually the powerful party telling the other weaker party “where they are going wrong and what they need to correct”! –  Hardly a recipe for building a better relationship.  Other models only concentrate on a narrow element of the relationship such as “trust” or “collaboration”.  Even some models with grand titles that claim to have a wide focus, on investigation can be found to be quite narrow.

Our investigations have found three models with a focus on all the elements of the relationship and which also ensure the process includes both sides of the partnership.  These are the Relationship Management Matrix (RMM), PartnerLink (www.sccindex.com ), and the Interpretive Structural Modeling (ISM – a purely academic model).  Each has between 20 and 38 questions which are grouped into broad elements and produce either a graphical or numeric result that allows the user to begin to understand what is happening in the relationship. All look for factors such as very low scores for a relationship element (or high scores), large differentials in scores (one high, one low) or particular questions that show these same issues.  The results from PartnerLink and RMM provide easily read summaries using traffic lights or heat maps to draw attention to issues.

Which model is best?  To reach a conclusion here we drilled down into the detailed questions in each model to see what degree of similarity there might be in the factors being assessed.  Pleasingly there was not a great deal of divergence between the models.  Some interpretation was required; for instance questions on “fairness” and “justice” were seen as attempting to get down to the same under-lying factor.  There was divergence or differences between the RMM and ISM models.  Interestingly with the exception of a few factors such as size of firms or contractual relationship, the PartnerLink model had the greatest degree of commonality with the other two models.  This is illustrated in the chart below:

Relationship Element

RMM

PartnerLink

ISM

Communication

X

X

X

Information Exchange

X

X

Risk & Opportunity Sharing

X

X

X

Trust

X

Performance Management

X

X

Process & Continuous Improvement

X

X

Innovation

X

X

Value

X

X

Future Intentions/Strategic Alignment

X

X

X

Fairness/Justice

X

X

Commercial Relationship

X

X

Commitment

X

X

Mutuality/Interdependence

X

X

Responsiveness

X

X

X

The PartnerLink approach is certainly a rigorous approach to measuring and improving your supply chain relationships.

So what are you doing to manage the important relationships with your key supply chain partners?  Do you just employ “megaphone” collaboration aimed at enforcing compliance?  Do you sit down with these key partners on a regular basis and discuss the relationship and not the outputs?  Or do you take the big step of jointly measuring that relationship?

 

If you would like help setting up a supply chain relationship management program or in measuring your supply chain relationships, don’t hesitate to contact us at andrew.downard@adsupplychain.com.au or call +61 (0)419 581 705.

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Using “5 Why’s” & Proportional Investment to Fix Problems

One of the most useful and widely applicable tools to come out of the Toyota Production System is “Ask Why 5 Times”.  This tool is aimed at finding (and fixing) the root cause of problems; the assumption being that most of the impacts on operations we see are just symptoms of a root cause.  If only the symptoms are addressed and the root cause remains, then the symptoms will recur because we haven’t corrected the driving force creating the problems.

This tool is commonly applied in problem solving in manufacturing and similar operational activities.  It can however be applied more widely.  In the case of relationship failure with a supply chain partner it can be very useful in getting down to the fundamental reason for the failure.  The following flow of “Ask Why 5 Times” illustrates the point:

“Supply Chain partner A is not meeting our requirements, they are a bad partner.”

Q1.      Why are they not meeting our requirements?

A1.    They are not completing paperwork correctly.

Q2.      Why are they not completing paperwork correctly?

A2.    The need to fill our paperwork is not included in their process.

Q3.      Why is filling out paperwork not included in their process?

A3.    It was not included in the contract.

Q4.      Why was it not included in the contract?

A4.    We don’t have a list of all our requirements.

Q5.      Why don’t we have a list of all our requirements?

A5.    We don’t allocate enough importance to contract generation.

Somewhat typically the final root cause for an external problem turns out to be a problem within our own organisation.  The above example also highlights that asking why 5 times is an arbitrary number.  In the above example you might be able to go for several more rounds before you found the true root cause.  In other cases you might find it in 3 rounds.

One criticism of the “Ask Why 5 Times” tool is that it prompts the user to spend time fixing deeply embedded failures while the symptoms continue to plague the organisation.  This is a fair criticism, and can be fixed by applying a proportional investment in fixing each layer in the 5 Whys responses.  You have spent time in generating each layer so it makes sense to make use of these.  Ford, for example, in the 8D problem solving tool had “Protect the Customer” as Step 1 in the process.  By proportional investment we mean taking quick action to address each layer in the 5 Whys so that harm to the organisation is prevented or minimised.  The root cause can then be tackled at a more thoughtful and logical pace.

In the example above, time would be spent explaining the problem to supply chain partner A, renegotiating the contract with partner A, halting and correcting current live negotiations with new contracts, fixing the contract creation checklists and finally  initiating a review of all existing contracts to see if they need any additions or corrective action.  Some of the actions are “quick fixes” admittedly but their aim is to protect against further loss.  In other words a proportional investment against the potential losses that might occur.  A big symptom in the middle of the 5 whys might need to have a large investment made in recognition of the impact it might have.

So to summarise, the “Ask Why 5 Times” is a tool for identifying and fixing the root cause of problems.  It can be enhanced by adding proportional investment in addressing each layer in the 5 Whys.  Finally it can be applied widely, including fixing failures in supply chain relationships or other “soft” problems.

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Why is Collaborating with Customers so Hard?

We have all been to seminars, read articles or books recommending that to remove uncertainty and risk from your supply chain you should collaborate with your customers.  Likewise, the recipe for improving customer service levels is to improve forecasts by collaboration with customers.  Laudable goals but how often are these efforts successful?  Recent newspaper articles about the difficulties experienced by suppliers to the large supermarkets in getting meaningful collaboration (The Age “It’s war, but how low can they go?” November 26, 2011) and other anecdotal evidence points to a distinct lack of success.

There is ample proof of the value of collaborative relationships with supply chain partners.  Dyer & Chu (2000) identified that the untrusting buyer in the automotive industry spends six times the cost to source new components versus the trusting buyer.  The result of this extra effort according to Jimmy Anklesaria ( 2008) is the trusting buyer – who does not use complex tendering, tough contract terms and other mechanisms to “increase competition between suppliers” – still has an advantage of US$1500 per vehicle lower cost per parts over the untrusting buyer (you know who you are USA.)  In the IT outsourcing industry Willcocks & Cullen (2005) found that basing the business relationship on trust rather than stringent contract terms and conditions resulted in a benefit worth 40% of the value of the contract.  So, given this evidence, why can’t we get customers to collaborate?

Part of the answer lies in a comment made in a recent Gartner webinar (Supply Chain and Logistics: Trends and Challenges in Asia Pacific for 2012, 29 November 2011 ) “customers are focused on their issues”.  So it’s not about you!  It can certainly be hard to get customers on the same page (or to get yourself on the same page as the customer).  This is partly explained by Holmlund-Rykönen and Strandvik (2005) in their work on “Negative Critical Incidents”.  They showed that customers and suppliers could have a very different view of the same incident even when the same facts about the incident (a quality failure or shortage for example) are shared by both parties.  As with many things in life, we tend to measure ourselves by intentions and others by outcomes or results!

So how do we get those important customers to truly collaborate?  Firstly, to paraphrase an old shampoo ad, “It won’t happen overnight, but it will happen!”  These things take time and effort, so choose the parties you plan to collaborate with very carefully.  Step one is a strategic review from your perspective AND their perspective.  Are you both long term partners (or with the potential to be)?  If there are insufficient drivers for a long term relationship on either side it is probably not one you want to invest in.  If on the other hand it does qualify as a long term strategic relationship then it is worth spending time and effort on the following stages.

The next phase is to get a clear idea of the value you provide to the customer, again from their perspective.  Is there value you provide that the customer does not know about?  If so, look to your marketing communications and interactions with the customer.  Spell it out, but nicely!  How can you increase or improve the value you provide.  Also, start to identify how, by collaborating, this value will be enhanced.  Before moving on also define what you plan to gain from the arrangement, both tangible and intangible benefits. There does need to be something in it for you!

Next, move onto the nature of the relationship.  Remember, while you might think you are in a Business to Business (B2B) relationship, in the end it comes down to P2P (People to People).  So who in your organisation has a relationship with whom at the customer?  If it is just the salesperson and the buyer, then this is a very narrow channel to force collaboration through.  It is also opening you up for commercial game playing if you try.  Better to have multiple relationships with different functions and management levels.  Consider using processes such as touchpoint mapping to see who talks to whom and how often (who talks to their MD, who do we know in Engineering?)

You are probably now in a position to introduce the subject to the customer.  Don’t hit them up with the full story on day one.  Start with some simple wins to build credibility.  These don’t need to be price or service related; consider providing value to other stakeholders and influencers in the business’  get a good reputation going with their engineering group or finance area.  In time, move into a deeper collaborative relationship.

Finally as Lord Kelvin (1889) pointed out, if you want to improve something you must be able to measure it.  Therefore seriously consider measuring the relationship.  Tools such as the Supply Chain Collaboration Index (Partnerlink www.sccindex.com) provide an objective and repeatable measurement system.  Because it is a measure of both sides view of the relationship, it avoids the problems identified earlier in the discussion of critical incidents.

So getting customers to collaborate is hard, but if you carry out the following steps you will succeed, so to misuse a line from Mick Jagger: “You can’t always get the collaboration you want, but if you try sometimes you’ll get the collaboration you need”!

 

  1. Carry out a long term strategic review of the relationship from both parties’ perspectives.
  2. Identify the value you provide to the customer and how you might improve this (as well as you goals for a return.)
  3. Understand the nature and depth of the relationship you have with the customer.
  4. Start to collaborate in small steps.
  5. Measure and improve the relationship over time.

If you would like help carrying out the steps above, work on collaboration with supply chain partners or in measuring relationships, don’t hesitate to contact us at andrew.downard@adsupplychain.com.au or call +61 (0)419 581 705.

 

Anklesaria J, (2008), “Supply Chain Cost Management”, AMACOM, New York, USA
Dyer J, Wujin Chu, (1997), “The Economic Value of Trust in Supplier-Buyer Relations”, Academy of Management, Boston, MA, USA
Holmlund-Rytkőnen M., Strandvik T, (2005), “Stress in business relationships”, Journal of Business & Industrial Marketing, Volume 20, Issue 1, Page 12-22.
Lord Kelvin, ‘Electrical Units of Measurement’, a lecture delivered at the Institution of Civil Engineers, London (3 May 1883), Popular Lectures and Addresses (1889), Volume 1, 73.
Willcocks L., Cullen S, (2005), “The Outsourcing Enterprise 2: The Power of Relationships” Logicacmg London.
http://www.theage.com.au/business/its-war-but-how-low-can-they-go-20111125-1nz6h.html#ixzz1fG3gPKvD

 

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Dealing with a Lack of Trust or Poor Relationships in Negotiations

In an ideal world we would be dealing with people we trusted and had achieved collaborative business relationships with.  We would have measured and improved this relationship so that both parties were getting the value they needed – certainly an aspiration that practitioners who are interested in the subject of Supply Chain Relationships can be aiming for.  The real world, we would have to admit, is less perfect.

Most supply chains have participants in them that don’t elicit trust.  These may be monopolies who feel they don’t need to care about relationships, or just powerful companies who have cultures that cause them to have an inflated sense of entitlement versus their less powerful supply chain partners.  As John Gattorna has suggested, there are some people you just shouldn’t collaborate with!

But again, is the last point another perfect world scenario?  In many supply chains there are organisations you just can’t avoid, possibly because they are a monopoly or because of their unique position in that supply chain.  So what to do?  How can you seek to form a relationship and do business with these people in the absence of trust and with apparently opposite views about the sharing of benefits?

It was with this thought in mind that I stumbled across a Harvard Business Review article about negotiating “In Extremis” [1] The article is based on the challenges facing military officers in locations like Afghanistan where there is little trust, doubt about intentions and pressure to resolve issues quickly, very quickly, all this happening in an environment of extreme risk and danger.  While nothing in business can compare with the stress of combat, the current business environment can present considerable pressure on participants in negotiations.

The basic proposition in the article is that it is possible to successfully achieve good outcomes in the absence of trust and with conflicting objectives.  The steps are simple (but not necessarily easy under pressure).

Step 1 – “Get the big picture” – start by soliciting the other person or group’s point of view.  This will help shape the objectives for the negotiation and how they might be achieved.

Step 2 – “Uncover and Collaborate” – learn the other party’s motivations and concerns.  This enables you to propose multiple solutions and ask your counterparts to improve on them.

Step 3 – “Elicit Genuine Buy-In” – use facts and the principle of fairness rather than brute force or stubbornness.  Part of this stage is to use the knowledge gained earlier to help the other party address the critics or stakeholders that they may have to deal with on their own side.

Step 4 – “Build Trust first” – this involves addressing the relationship before trying to reach an agreement on the subject in question.  This step recognises that although the temptation is to negotiate a quick resolution when under pressure, there is a need to ensure the negotiated settlement sticks.  This is such an important step because trust and the existence of a workable relationship are so fundamental to successful outcomes.

Step 5 – “Focus on Process” – when under pressure seek to drain the emotion from the situation and seek to manage the negotiation process as well as the outcome.  Again, this is about not giving in to the pressure of the situation and making immediate concessions, but rather slowing down to ensure undue haste does not leave the negotiator having given too much away.

While the strategies above were developed to train military officers, they can be applied to commercial negotiations just as easily.  The basis of these strategies goes back to some of the texts on negotiation written some 30 years ago, such as “Getting to Yes”[2].  Vantage Partners, an offshoot of the HBR researchers, have also developed some interesting case studies of the application in the commercial world.

There are also others that provide support for the general approach.  Stuart Diamond, in his book “Getting More” [3] makes very similar recommendations.  One of his key questions to ask yourself before entering the negotiations is, “who are they?”  It is this last point that should be of interest to those focused on Supply Chain Relationship management.  A key point to remember is that it is not about B2B (Business to Business) but rather P2P (People to People).  So in the absence of trust, remember you are dealing with people and use the tools suggested above to uncover opportunities to build trust and get the necessary buy in.

 

Do you need help in developing relationships with ‘difficult’ supply chain partners or negotiating with people you don’t trust or have a poor relationship with?  If so, please contact us at andrew.downard@adsupplychain.com.au or call +61(0)419 581 705.

 

 



[1] Jeff Weiss, Aram Donigian, Jonathan Hughes, “Extreme Negotiations”,  Harvard Business Review, 2010.

[2] Roger Fisher, Ury Williams “Getting to Yes – Negotiating Agreement without Giving In”, Penguin, 1991.

[3] Stuart Diamond “Getting More – How You Can Negotiate to Succeed in Work and Life”,  Portfolio Penguin, 2010.

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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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Are there only two Supply Chain Strategies?

A bold statement certainly, but if you rise up out of the daily wrestle with execution, it does seem there are only two broad strategies relevant to Supply Chain.  At this high level overview all Supply Chain strategies fall under either the “Lean” or “Agile” category.

In reaching this conclusion I have looked at the leading Supply Chain strategy models.  The first of these is the product focused model proposed by Marshall Fisher (Harvard Business Review March/April 1997 – What is the right supply chain for your product?).  He suggested that products fall into two broad categories, ‘Functional’ and ‘Innovative’.  Examples of Functional products might include automotive parts, and Innovative products might include fashion items such as sunglasses.  Fisher then went on to propose that the best match strategy for Functional products was an “efficient” supply chain and for Innovative products, the best match was a “responsive” supply chain.   It does not take a great leap to suggest than an efficient supply chain could also be called Lean and that a responsive supply chain could be called Agile.

The next model reviewed was the competition based approach put forward by Dr Michael Porter.  His suggestion was that to be successful, firms needed to adopt either a ‘cost leadership’ or ‘differentiation’ model.  In terms of profitability, Porter indicates that the worst position to be in is “stuck in the middle” between cost leadership and differentiation.  Again, as suggested by Vivek Sehgal in “Supply Chain as a Strategic Asset”, it is not too controversial to define cost leadership as Lean, and differentiation as an Agile strategy.

A supply chain strategy model with an Australian flavor comes from Dr John Gattorna with his demand based view as put forward in his books “Living Supply Chains” and “Dynamic Supply Chains”.  In his model Gattorna proposes four categories of supply chain strategy ‘Fully Flexible’, ‘Agile’, ‘Lean’ and ‘Continuous Replenishment’.  Clearly the middle two meet the proposition for Lean and Agile.  I would suggest that Fully Flexible and Continuous Replenishment are more extreme versions of the Lean and Agile strategies and this therefore supports my two strategy contention.

Other strategic approaches such as ‘Mass Customisation’, ‘Long Tail’ and ‘InsideOut-OutsideIn’ can all be easily categorised as Lean or Agile.  Interestingly, the more the environment changes through forces such as the internet, the more strategies bias towards Agility.

The only ‘fly-in-the-ointment’ might be the approach put together by researchers at Cardiff University (Mason-Jones, Naylor & Towill – “Lean, Agile or Leagile, matching your supply chain to the marketplace”) who suggested an approach that they titled “Leagile”.  This model suggests an inbound supply chain that is Lean, and an articulation point where the process changes from Lean/push to Agile/pull based upon how far the customer’s specific demand penetrates the organisation.  I am happy to claim this as a combination of the two strategies and not as a stand-alone approach in its own right.

So what are your thoughts?  Do you agree that fundamentally there are only two Supply Chain strategies at this high level or do you believe that you can identify others?

If you would like help in developing your own organisations Supply Chain strategy, then please feel free to contact us at andrew.downard@adsupplychain.com.au or call  +61(0)419 581 705.

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