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Reprint R0412H
HBR Spotlight
senior managers now and will continue A superresponsive network and profit margins that are the envy of the industry.
to do so for years to come. With this Reprint R0411G
special series of articles, Harvard Business
Review examines how corporations’ Building Deep Supplier Relationships
strategies and structures are changing by Jeffrey K. Liker and Thomas Y. Choi
and how those changes are manifest in December 2004
their supply chains. Two Japanese automakers have had stunning success building relationships with North
American suppliers—often the same supplier companies that have had contentious dealings
with Detroit’s Big Three. What are Toyota and Honda doing right that their American
counterparts are missing?
Reprint R0412G
When managers from Wendy’s International someone it could work with at Tyson.
and Tyson Foods sat down together in Decem- One other thing had changed, too. The
ber 2003 to craft a supply chain partnership, companies had a new tool, called the partner-
COPYRIGHT © 2004 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.
each side arrived at the table with misgivings. ship model, to help start the relationship off
There were those on the Wendy’s side who re- on the right foot. Developed under the aus-
membered all too well the disagreements pices of Ohio State University’s Global Supply
they’d had with Tyson in the past. In fact, just Chain Forum, the model incorporated lessons
a few years earlier, Wendy’s had made a for- learned from the best partnering experiences
mal decision not to buy from Tyson again. On of that group’s 15 member companies. It of-
the Tyson side, some people were wary of a fered a process for aligning expectations and
customer whose demands had prevented the determining the level of cooperation that
business from meeting its profit goals. would be most productive.
A few things had changed in the meantime, With this article, we put that tool in your
or the companies wouldn’t have been at the hands. We’ll explain how, over the course of a
table at all. First, the menu at Wendy’s had day and a half, it illuminates the drivers behind
shifted with consumer tastes—chicken had be- each company’s desire for partnership, allows
come just as important as beef. The restaurant managers to examine the conditions that facili-
chain had a large-volume chicken supplier, but tate or hamper cooperation, and specifies
it wanted to find yet another. Second, Tyson which activities managers in the two compa-
had acquired leading beef supplier IBP, with nies must perform, and at what level, to imple-
which Wendy’s had a strong relationship. IBP’s ment the partnership. The model—proven at
president and COO, Richard Bond, now held Wendy’s and in dozens of other partnership ef-
the positions of president and COO of the com- forts—rapidly establishes the mutual under-
bined organization, so Wendy’s felt it had standing and commitment required for suc-
cess and provides a structure for measuring potential relationships and aligning expecta-
outcomes. tions around them. This is what the partner-
ship model is designed to do. It is not designed
No Partnership for Its Own Sake to be a supplier-selection tool. At Wendy’s, for
Why do so many partnerships fail to deliver instance, the model was employed only after
value? Often it’s because they shouldn’t have the company’s senior vice president of supply
existed in the first place. Partnerships are chain management, Judy Hollis, had reduced
costly to implement—they require extra com- the company’s supplier base, consolidating to
munication, coordination, and risk sharing. 225 suppliers. At that point, Wendy’s could say:
They are justified only if they stand to yield “Now the decision’s been made. You’re a sup-
substantially better results than the firms plier. Your business isn’t at risk. What we’re try-
could achieve without partnering. ing to do here is structure the relationship so
This point was driven home for us early in we get the most out of it for the least amount
our research with the Global Supply Chain of effort.” That assurance helped people to
Forum when its members identified successful speak more frankly about their hopes for the
partnerships for study. One was an arrange- partnership—an absolute necessity for the
ment between a package delivery company partnership-building process to succeed.
and a manufacturer. The delivery company got
the revenue it had been promised, and the A Forum for Frank Discussion
manufacturer got the cost and service levels Under the model, key representatives of two
that had been stipulated. But it wasn’t a part- potential partners come together for a day
nership; it was a single-source contract with and a half to focus solely on the partnership.
volume guaranteed. The point is that it’s often Little preparatory work is required of them,
possible to get the results you want without a but the same can’t be said for the meeting’s or-
partnership. If that’s the case, don’t create one. ganizers (usually staff people from the com-
Just write a good contract. You simply don’t pany that has initiated the process). The orga-
have enough human resources to form tight re- nizers face a number of important tasks before
lationships with every supplier or customer. the session. First, they must find a suitable lo-
At Wendy’s, managers distinguish between cation, preferably off-site for both parties. Sec-
high- and low-value partnership opportunities ond, they must engage a session leader. It
using a two-by-two matrix with axes labeled doesn’t work to have someone who is associ-
“complexity to Wendy’s” and “volume of the ated with one of the companies, as we know
buy.” Supplies such as drinking straws might be from the experience of forum members. We
purchased in huge volumes, but they present recall one session in particular run by Don
no complexities in terms of taste, texture, or Jablonski of Masterfoods USA’s purchasing op-
safety. Only if both volume and complexity are eration. Don is an all-around good guy, is very
high—as with key ingredients—does Wendy’s able at running sessions, and was familiar with
seek a partnership. Colgate-Palmolive similarly the model, but the supplier’s people clammed
plots suppliers on a matrix according to “po- up and the session went nowhere. They
tential for cost reductions” and “potential for needed an outsider.
innovation” and explores partnering opportu- Third, the organizers must do some calen-
nities with those that rank high in both. dar juggling to ensure that the right people
Reserving partnerships for situations where attend on both sides. Though there is no
they’re justified is one way to ensure they de- magic number of representatives, each team
liver value. Even then, however, they can fail if should include a broad mix of managers and
Douglas M. Lambert (lambert.119@ partners enter into them with mismatched ex- individuals with functional expertise. The
osu.edu) holds the Raymond E. Mason pectations. Like the word “commitment” in a presence of high-level executives ensures that
Chair in Transportation and Logistics at marriage, “partnership” can be interpreted the work won’t be second-guessed, and mid-
Ohio State University’s Fisher College of quite differently by the parties involved—and dle managers, operations people, and staff
Business in Columbus and directs the both sides often are so certain that their inter- personnel from departments such as HR, fi-
Global Supply Chain Forum there. pretations are shared that their assumptions nance, and marketing can provide valuable
A. Michael Knemeyer (knemeyer.4@ are never articulated or questioned. perspectives on the companies’ expected day-
osu.edu) is an assistant professor of lo- What’s needed, then, for supply chain part- to-day interactions.
gistics at Fisher College of Business. nerships to succeed is a way of targeting high-
Goals in the Cold Light of Day The partnership drivers fall into four catego-
After introductions and an overview, the ries—asset and cost efficiencies, customer ser-
morning of the first day is consumed by the vice enhancements, marketing advantages,
“drivers session,” in which each side’s team and profit growth or stability. The session
considers a potential partnership in terms of leader and the provided forms ensure that
“What’s in it for us?” (See the sidebar “How to each of these categories is explicitly addressed.
Commit in 28 Hours.”) For example, under asset and cost efficiencies,
The teams are separated in two rooms, and a team might specify desired savings in prod-
each is asked to discuss and then list the com- uct costs, distribution, packaging, or informa-
pelling reasons, from its point of view, for a tion handling. The goal is for the participants
partnership. It’s vital that participants feel free to build specific bullet-point descriptions for
to speak frankly about whether and how their each driver category with metrics and targets.
own company could benefit from such a rela- For the session leader, whose job is to get the
tionship. What are the potential payoffs? For teams to articulate measurable goals, this may
some teams, there aren’t many. Other teams be the toughest part of the day. It isn’t enough
fill page after page of flip charts. for a team to say that the company is looking
for “improved asset utilization” or “product
cost savings.” The goals must be specific, such
as improving utilization from 80% to 98% or
cutting product costs by 7% per year.
Next, the teams use a five-point scale (1
being “no chance” and 5 being “certain”) to
rate the likelihood that the partnership will de-
liver the desired results in each of the four
Supportive
Decision to environmental major categories. An extra point is awarded
Compelling create or adjust
reasons to partner factors that (raising the score to as high as 6) if the result
partnership enhance partner-
ship growth would yield a sustainable competitive advan-
tage by matching or exceeding the industry
benchmark in that area. The scores are added
Joint activities and (the highest possible score is 24) to produce a
Drivers set processes that total driver score for each side.
expectations of build and sustain
outcomes the partnership This is the point at which the day gets inter-
esting. The teams reassemble in one room and
Copyright © 2004 Harvard Business School Publishing Corporation. All rights reserved.
room will often counter it by saying, “Yeah, but locations than McDonald’s). Physical proxim-
they also do this…” ity certainly adds a dimension to the partner-
A sense of mutuality—of shared purpose ship Wendy’s has with sauce supplier T.
and perspective—is vital. It helps the organi- Marzetti. With both headquarters in Colum-
zations move beyond a zero-sum mentality bus, Ohio, the two companies’ R&D staffs can
and respect the spirit of partnership, even if collaborate easily. We saw the benefits of prox-
the earnings of one partner are under pres- imity, too, in 3M and Target’s partnership.
sure. It may extend to a willingness to inte- Twin Cities–based managers accustomed to in-
grate systems or share certain financial infor- teracting through local charities, arts organiza-
mation. Symmetry often means comparable tions, and community-building efforts found it
scale, industry position, or brand image. But easy to collaborate in their work.
even if two companies are quite dissimilar in Assessing these issues carefully and accurately
these respects, they might assign themselves a is worth the sometimes considerable effort, be-
high score on symmetry if they hold equal cause the scores on facilitators and on drivers in
power over each other’s marketplace suc- the first session yield a prescription for partner-
cess—perhaps because the smaller company ing. The exhibit “The Propensity-to-Partner Ma-
supplies a component that is unique, in scarce trix” shows how the scores indicate which type
supply, or critical to the larger company’s of association would be best—a Type I, II, or III
competitive advantage. partnership or simply an arm’s-length relation-
Beyond these four major facilitators, five ship. The types entail varying levels of manage-
others remain to be assessed: shared competi- rial complexity and resource use. In Type I, the
tors, physical proximity, potential for exclusiv- organizations recognize each other as partners
ity, prior relationship experience, and shared and coordinate activities and planning on a lim-
end users. Each can add one point to the total, ited basis. In Type II, the companies integrate ac-
for a maximum facilitator score of 25. These tivities involving multiple divisions and func-
factors won’t cripple a partnership if they are tions. In Type III, they share a significant level of
absent, but where they are present, they integration, with each viewing the other as an
deepen the connection. Think of the extra extension of itself. Type III partnerships are
closeness it must have given the McDonald’s equivalent, in alliance terminology, to strategic
and Coke partnership in the 1990s that both alliances, but we are careful to avoid such value-
companies loved to hate Pepsi (which at the laden language because there should be no im-
time owned Kentucky Fried Chicken, Taco plication that more integration is better than
Bell, and Pizza Hut franchises, giving it more less integration.
What type of partnership would be best? Once they have measured their desire to partner and determined how easily
they could coordinate activities, companies considering working together can use this matrix to decide whether to form
a partnership and, if so, at what level.
Companies’ desire for partnership (measured by “driver points”)
Copyright © 2004 Harvard Business School
Publishing Corporation. All rights reserved.
Ease of coordination
“facilitator points”)
> Style > on ad hoc basis > regularly scheduled > systematic: both scheduled
and ad hoc
> Level > focus is on projects or tasks > focus is on process > focus is on relationship
> Content > sharing of existing > performed jointly, > performed jointly and
plans eliminating conflicts in at multiple levels,
strategies including top manage-
ment; each party partici-
pates in other’s business
planning
> Measurement > performance measures > measures are jointly > measures are jointly
are developed developed and shared; developed and shared;
independently, but focus is on individual focus is on relationship
results might be shared firms’ performance and joint performance
> Ability to > parties may suggest > parties may make > parties may make
make changes changes to other’s changes to other’s system changes to other’s system
system after getting approval without getting approval
NONROUTINE > very limited, usually just > conducted more regularly, > planned as part of the
critical issues at the task done at multiple levels; relationship; occurs at all
or project level generally open and honest levels; sharing of praise and
criticism; parties “speak the
same language”
Copyright © 2004 Harvard Business School Publishing Corporation. All rights reserved.
DAY-TO-DAY
> Organization > conducted on ad hoc > limited number of > systematized method
basis, between individuals scheduled communica- of communication;
tions; some routinization communication systems
are linked
> Balance > primarily one-way > two-way but unbalanced > balanced two-way
communication flow
> Electronic > use of individual systems > joint modification of > joint development of
individual systems customized electronic
communications
> Loss tolerance > very low tolerance for loss > some tolerance for > high tolerance for
short-term loss short-term loss
> Gain commitment > limited willingness to help > willingness to help the > desire to help other
the other gain other gain party gain
> Commitment to fairness > fairness is evaluated > fairness is tracked > fairness is measured over
by transaction year to year life of relationship
In general, Type III partnerships require high levels of most of these components, Type II partnerships require medium levels, and Type I relationships require low levels.
(This is just a partial list of managerial components.)
To put this in perspective, recall that Type II, and a low level for Type I.
Wendy’s began by consolidating its buying to Under the heading of joint operating con-
225 suppliers. Of these, only the top 40 are trols, for example, a Type III partnership would
being taken through the partnership-model call for developing performance measures
process. And it appears that only a few of the jointly and focusing those measures on the
partnerships will end up being Type III. Per- companies’ combined performance. A Type II
haps 12 or 15 will be Type II, and about 20 will partnership, by contrast, would involve perfor-
be Type I. This feels like an appropriate distri- mance measures that focus on each company’s
bution. We don’t want participants aspiring to individual performance, regardless of how well
Type III partnerships. We simply want them to the partner performs. In a Type I partnership,
fit the type of relationship to the business situ- the companies would not work together to de-
ation and the organizational environment. velop mutually satisfactory performance mea-
Naturally, the managers in the room do not sures, though they might share their results.
have to simply accept the prescription. If the For each management component, the
outcome surprises them in any way, it may group must outline what, if anything, needs to
well be time for a reality check. They should be done to move from the current state to the
ask themselves: “Is it reasonable to commit the capability level required by the partnership.
resources for this type of partnership, given Here, it is helpful to refocus on the drivers
what we know of our drivers and the facilita- agreed to in session one and start developing
tors?” If the answer is in doubt, the final ses- action plans around each of them. It is in these
sion of the process, focusing on the managerial action plans that the deficiencies of the cur-
requirements of the partnership, will clarify rent management components become appar-
matters. ent. It may be, for instance, that achieving a
particular goal depends on systematic joint
Action Items and Time Frames planning, but the group has just said planning
In the third session, the group reconvenes as a is being performed at a low level. Clearly, plan-
whole to focus on management compo- ning must be ratcheted up.
nents—the joint activities and processes re- One of the needs that became clear in the
quired to launch and sustain the partnership. Tyson-Wendy’s session was for increased com-
While drivers and facilitators determine which munication at the upper levels. People at the
type of relationship would be best, manage- operational level in the two companies were
ment components are the building blocks of communicating regularly and effectively, but
partnership. They include capabilities for there was no parallel for that at the top. Joe
planning, joint operating controls, communi- Gordon, a commodity manager at Wendy’s, ex-
cation, and risk/reward sharing. They are uni- plained why this was a problem: “All of us
versal across firms and across business envi- worker bees sometimes come to a point where
ronments and, unlike drivers and facilitators, we have obstacles in our day-to-day relation-
are under the direct control of the managers ship, and in the past we might have given up
involved. on trying to overcome them.” After an action
The two teams jointly develop action plans plan was outlined for getting the top manage-
to put these components in place at a level that ment teams together to talk, those problems
is appropriate for the partnership type. Partici- became easier to address.
pants are provided with a table of components, When the participants leave, they leave
listed in order of importance (a portion of such with action items, time frames for carrying
a table is shown in the exhibit “Management them out, and a designation of responsible par-
Components for Partnerships”). The first task ties. The fact that so much is accomplished in
is for the teams to determine the degree to such a brief period is a source of continued mo-
which the components are already in place. tivation. Donnie King, who heads Tyson’s poul-
This is a quick process; the participants run try operations, admitted that he had been
through the components in the table, noting skeptical going into the meeting. “You tend to
whether each type of activity is performed at a believe it is going to be a process where you sit
high, medium, or low level. Generally speak- around the campfire and hold hands and sing
ing, the components should be at a high level ‘Kumbaya’ and nothing changes,” he said. But
for Type III partnerships, a medium level for when he left the meeting, he knew there
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