The Future of Purchasing and Supply: Align to be Strategic

By Roberta J. Duffy, editor of Purchasing Today®. Additional information provided by Joseph L. Cavinato, Ph.D., senior vice president and NAPM distinguished professor of supply chain management for NAPM.
September 2000 Purchasing Today®, page 37.

#16: Take the Initiative: Continuing coverage of the trends shaping the profession

Due to increased competition and a required focus on core competencies, many supply managers' attention turns to strategic supplier alliances. Does this integrated relationship model deliver the best value for your organization?

Consider the supply manager who works closely with his or her organization's research and development department. In the works is a new electrical device that will use a specialized computer chip. As ideas about the new product are presented, questions about the chip arise. Thankfully, there is someone on the team who is an expert in this area. It's none other than a developer from the chip manufacturer. This is not someone who has just happened to sit in on a few meetings and answer questions. This person is actually helping to design the product from start to finish.

This person has had unprecedented access to internal processes, and while that may sound risky, it's encouraged because the benefit of his or her presence is immense. Not only does this individual provide insight into his or her employer's capabilities, allowing the supply manager to make more educated decisions, but as this product or service is being jointly developed, the supplier is actually able to better prepare for the work ahead, reducing time to market. Why would a supplier be so agreeable to this type of arrangement? Is it solely due to the promise of increased business? No, in addition to the added volume, the supplier benefits because it is concentrating its efforts on the goods, services, or processes that are more likely to manifest, since they are developed in conjunction with the customer. It may sound like a rare gem of a situation, but it's becoming increasingly common, as strategic supplier alliances are developed. This, according to a recent study that examines the future of the supply management function. In such relationships, mutual benefits are always the objective.

The above scenario is just one example of how strategic supplier alliances "look." Other possible scripts include outsourcing, joint investments, and marketing to the consumer. The supply manager with an interest in the future will have to examine the possibilities, benefits, and risks of strategic supplier alliances, in order to stay knowledgeable and competitive within the field.

Driving the Process As the study, "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," indicates, increased competition and a focus on core competencies have driven the need for strategic supplier alliances. (See box below.) The ability to outsource manufacturing, operations, or a particular service to a firm that excels in that area allows the supply manager to focus on those activities that can provide a competitive advantage. However, as these outsourced activities increase in magnitude, the potential for risk can also increase, particularly if a limited number of suppliers are used. Therefore, a more integrated, high-trust, mutually beneficially relationship is required.

What advantage does this model give an organization? It allows it - and the entire supply chain - to keep chasing the downward curve of prices that has been the trend in the last 20 years, all the while incorporating more innovation, higher quality, and improved processes. There is a definite progression or evolution of relationship possibilities that can characterize an alliance. In its Glossary of Key Supply Management Terms, NAPM defines a strategic alliance as "the systematic leveraging of purchasing's resources and capabilities through mutually beneficial relationships with other internal and external players to strengthen the organization's competitive advantage," but even before the term was formalized, distinct characteristics had evolved.

An Alliance Evolution
Consider the following degrees of activities that can characterize the purchasing-supplier alliance. All of these phases or models have the goal of lower total costs.

  1. Increased volume. The purchasing organization is able to direct more volume to a given supplier. This is usually driven by the fact that the supply manager has chosen to reduce the number of suppliers with whom to conduct business.
  2. Increased internal economies. Also a result of a reduced number of suppliers, a purchasing organization will find that purchasing goods or services from the same supplier will streamline some processes, such as receiving.
  3. Increased logistical economies. As a relationship becomes increasingly strategic in nature, transportation and warehousing efficiencies are realized. Firms make accommodations, geographically, that will streamline the movement of goods.
  4. Reduced administrative costs. Fewer contracts, fewer invoices, streamlined billing, and automated payments are all examples of administrative efficiencies.
  5. Improved processes. At this stage, the parties are asking each other, "What do I do that costs you money?" Changes might be made by either firm in terms of delivery schedules, forecasting, or the use of alternate materials.
  6. Further cost reductions. Here, the parties aggressively ask, "What can we both do to take more cost out of the process?" Activities include total cost of ownership modeling and business process reengineering.
  7. Seeking innovation. At this, the most strategic point, alliance firms ask each other, "In what can we jointly invest that will allow us to compete more effectively?" Solutions can include joint investment in capital structure or designing completely new products or services together.

Notice how the factors progress: the first four reflect primarily internal concerns. The last three require a more combined effort to see results. Among the last three models, there is a distinction between reactionary actions (numbers five and six) and proactive steps, as in number seven. Clearly, in the most advanced examples, sharing confidential information and creating long-term commitments are essential. This alignment means that organizations rarely compete against each other alone; it's one supply chain versus another supply chain with equally strategic links.

If, as the nature of a relationship becomes more strategic, benefits increase, why don't all supply chains progress to the point where organizations become one? If the integration is going to be so thorough, why don't organizations just merge? While there is much attention paid to mergers and acquisitions, some industries are finding that bigger isn't always better. More often, a lack of compatible systems, and, especially, competing corporate cultures prevent such events. Instead, the result is a strategic supplier alliance, where the organizational boundaries can be blurred in the eyes of the customer. The alliance allows consumers to see one large supply entity - standardized processes and benefits, as in the case of code sharing by the airlines - while the supply chain firms retain identity and reap benefits.

Is It for Everyone?

Though the NAPM/CAPS study predicts a prevalence of strategic supplier alliances, it remains to be seen if this model will continue to dominate at the same rate. Will there be a "swing," whereby this concept prevails over the next several years, but then returns to more moderate usage? How will the emergence of e-procurement tools, such as online auctions, impact the strategic alliance? Does the Internet provide a better marketplace or just a larger one? How can anyone predict the impact of business-to-business e-commerce players when that industry is in such an infancy stage? All other considerations aside, is it necessarily appropriate for all purchasing organizations to consolidate spend with a reduced number of suppliers and increase risk of non-performance? Remember the individual in the opening scenario? Can the supplier organization justify having that person devoted exclusively to a single customer? In some cases, "yes," in others, perhaps "no."

Also, if any strategic supplier alliance relationship is to be successful, a certain level of trust and commitment must be maintained. The supply manager must trust the supplier to underwrite the sourcing risk and the supplier must trust the customer to provide information to facilitate the material or service support commitment. While senior management and the supply management department may already trust the supplier, others in the organization must also be comfortable with the release of such information. Oftentimes, this is easier said than done. Engrained corporate cultures, which may have established an "us versus them" mentality, can be an obstacle. In the traditional, less strategic experience, written contracts provide a number of controls that are a substitute for trust. These controls may not exist in an alliance contract. Not every organization is equipped or willing to rise to this challenge, nor would it always be appropriate.

As many questions remain open, it's clear that the task ahead for the supply manager is to stay aware of his or her options and be prepared to educate leaders and others in the organization. Supply management is at the funnel point to seek and receive information about the supply base, potential suppliers, and the appropriateness of a strategic alliance. Its expertise - its responsibility - in this area will guide organizations to make decisions for success.

Initiative #16: Strategic Supplier Alliances
"Box page 38"

The 1998 study, "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," by NAPM, the Center for Advanced Purchasing Studies (CAPS), A.T. Kearney, Arizona State University, and Michigan State University, details 18 future initiatives that will shape the supply management function in coming years. The entire study is available on the CAPS Web site at www.capsresearch.org. From the home page, select Research, then Studies Completed. You'll see a link to "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast." This month, Purchasing Today® provides commentary on Initiative #16: Strategic Supplier Alliances. The study offers the following predictions:

  • Global competition will require a continuing focus on core competencies.
  • Expansion of access (internal and external) to product and process technologies will escalate.
  • Organizations will continue to outsource manufacturing, operations, services, logistics, design, and development on a selective basis.
  • The success of many firms will depend on their ability to clearly establish external resources and competency needs.
  • Organizations in the supply chain will develop two-way business and technical exchanges that benefit both parties.
  • Continuing needs for flexibility and asset management will require that firms establish alliances to maximize leverage and synergy of resources.
  • Strategic supplier alliances will grow in importance and number.
  • Strategic supplier alliances will provide the basis for competitive advantage.

18 Initiatives
18 Opportunities
"Box page 40"

In May 1998, NAPM and the Center for Advanced Purchasing Studies (CAPS), in conjunction with A.T. Kearney, Arizona State University, and Michigan State University, released "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast." This comprehensive study, which included interviews with and surveys of CEOs and hundreds of supply management professionals, outlined 18 key initiatives that will affect the supply management function in the coming years.

Purchasing Today® presents this ongoing series, each month examining a portion of the study. The articles offer viewpoints of industry leaders in each field, as well as commentary on how supply management professionals can best prepare for the trend predicted. Below is a list of the initiatives and the articles that have appeared thus far in the magazine.

August 1999, page 33 - Electronic Commerce
September 1999, page 33 - Strategic Cost Management
October 1999, page 43 - Strategic Sourcing
November 1999, page 41 - Supply Chain Partner Selection and Contribution
December 1999, page 41 - Purchasing Strategy and Development
January 2000, page 48 - Demand-Pull Purchasing
February 2000, page 31 - Relationship Management
March 2000, page 41 - Process Uncoupling
April 2000, page 43 - Global Supplier Development
May 2000, page 47 - Virtual Supply Chain
June 2000, page 64 - Source Development
August 2000, page 43 - Competitive Bidding/Negotiations Strategy
September 2000, page 37 - Strategic Supplier Alliances

Coming soon …

The following are trends that have also been identified in the study and will be examined in upcoming issues of Purchasing Today®. The final installment of this series, appearing in the December 2000 issue, will include a wrap-up of the series and discussion about future research studies.

  • Complexity Management
  • Performance Measurement

Are You Prepared?
"Box page 40"

While strategic supplier alliances receive a great deal of media coverage and discussion within the supply management community, are they for everyone? Will the benefits of an alliance outweigh the effort, risk, and resources required? For those supply management professionals and organizations that are investigating the possibility of strategic supplier alliances, it can be helpful to ponder the following questions:

  • Do electronic systems at the purchasing and supplier organizations allow for optimum communication and sharing of information?
  • Is the potential strategic alliance supplier well equipped, in terms of knowledge, expertise, and resources, to stay current in the industry?
  • Are both the purchasing and supplier organizations willing to keep attention focused on the joint customer, in order to set supply chain objectives and goals?
  • Are there other suppliers in the marketplace, perhaps now more accessible due to e-procurement, that are worth investigating before committing to a strategic alliance?
  • Has the supply manager been thoroughly trained in managing an outsourced relationship?
  • Is the purchasing organization proud to be aligned and associated with the supplier organization, as they present a joint marketing front for the links further downstream in the supply chain?
  • Is the purchasing organization comfortable with the level of risk associated with reducing the supply base?