Collaboration or Contraction? Lessons in supply chain development

As customers cut supplier numbers, do you want to be one of the winners? In his seminar at Southern Manufacturing in June 2010, Clive Lewis told manufacturers how teaming could help them to win more business, the common pitfalls to avoid in partnerships and how to make it work.

In 2006, Achieving the Difference worked with Imcron Management to deliver a research project for the Midlands Aerospace Alliance. The research showed that the vast majority of aerospace tier 1 and prime customers were actively reducing the number of direct suppliers that they had and wanted suppliers with broader capability. The motivation for these developments in their supply chain was cost reduction.

Basically, every supplier has a cost associated with it to manage it, pay the bills and so on. So, the theory goes, less suppliers: less cost.

Teaming with other suppliers can reduce the number of suppliers that the customer needs to contract with and offer them a broader capability. Hence, teaming can be a means to increase competitiveness and lead to greater revenues.

Team members and customers identified a number of common pitfalls that can cause supplier teams to fail. These included:

• the customer fails to see the value for them
• the initial leader of the team moves on
• seed funding runs out
• disputes

Fortunately, none of these is particularly difficult to mitigate against. Being forewarned allows those formings teams to implement some obvious mitigations like:

• involving the customer early on in the team development
• leader succession planning
• planning to fund the teaming arrangement post seed funding
• having an clear and agreed structure and process for dealing with disagreements in place

Making it work
Consider the well-known Prisoners' Dilemma. The police are certain that Peter and Paul have committed burglary. The evidence is flimsy and they need a confession to send them down for a long stretch. Peter and Paul are placed in separate interview rooms and offered a deal if they grass. If one grasses and the other does not, he will go scott free while the convicted criminal gets a 10 year stretch.

If they both grass, each will receive a five year sentence. If they both keep quiet, each will receive a two-year stretch.

If both follow strategies with only self-interest in mind, they will both inform and receive a five-year sentence. They would have been better off if they had cooperated, both kept quiet and received just two-year sentences. But there is a problem with the latter, cooperative strategy. If one keeps quiet and his trust is betrayed, he will get 10 years. Hence the dilemma! This is not unlike the situation in business collaboration where both have something to gain if they cooperate but there is the risk of being taken advantage of.

AXELROD, R., 1984 was so intrigued by the Prisoners' Dilemma that he set up a competition where computer programmes were pitted against each other in the Prisoners' Dilemma. The programme that won the contest (received the least years of sentence) was called Tit-For-Tat. It was extremely simple and started by assuming its counterpart was cooperative. From then on, it copied the opponent's last move. The experiment has been repeated more than once with more elaborate learning programmes but Tit-For-Tat still won. It was concluded that this approach combined with repetition, encourages cooperation and the win-win outcome.

To make Axelrod's findings more relevant to us in business, JARILLO, J.C., 1993 summarised the qualities of Tit-For-Tat as:

'nice'
'provocable' and
'forgiving'
How can we turn this into how we work with strategic partners?

Rapport, trust and common values
The first thing is to develop a rapport and find common values. This engenders trust. Have you ever noticed the alignment of cultures and trades like Jewish jewellers? A common culture leads to low transactional costs because of shared values, trust and risk of social disgrace if they behave with pure self-interest [JARILLO, J.C., 1993].

Take the long-term view

From Axelrod's conclusions about repetition, it is important that both parties take a long-term view [LORANGE, P. & ROOS, J., 1992] and that the long-term benefits are always stressed [JARILLO, J.C., 1993].

Ensure a non-zero game

Both parties must invest something and have something at stake. They must lose something if they pull out or behave in a non-cooperative manner. Kings of collaborating states used to swap offspring to ensure that they could rely on each other.

Equally, each must have something to gain from the relationship. In other words, both must be better off with the relationship than without it. A clear example is that of a manufacturer whose customer is demanding stock to be delivered to the production line 'just in time' instead of infrequent deliveries to stores. To gain specialist expertise in logistics they set up a long-term teaming with a logistics company. The logistics company benefits from economies of scale, which are shared. Everybody is better off, including the customer.

Be 'nice', 'provocable' and 'forgiving'

For the benefits of the collaboration to be realised, both sides need to follow the cooperative strategy. For this to happen, you have to be cooperative. Once trust and rapport have been established one has to enter the collaboration with the assumption that both parties will behave in a cooperative way. Otherwise the benefits will not be realised and there is no point.

Should the other party behave in a non-cooperative way, it must be shown that this does not pay by being provoked into a similar non-cooperative strategy. In the Prisoners' Dilemma, both lose.

If the partner reverts to cooperative behaviour, reward it with your cooperative behaviour. Both sides receive the rewards of cooperation again and it becomes obvious that this is the best long-term strategy.

Conclusions
There are growing pressures for collaboration between organisations, including some that would consider each other competitors.

• The deal must offer benefit for both parties and there must be something at stake.
• Develop a rapport and trust.
• It is important to stress the long-term benefits and take the long-term view.
• Like the programme Tit-For-Tat, partners should be 'nice', 'provocable' and 'forgiving'.

Bibliography
AXELROD, R., 1984, "The Evolution of Cooperation", Basic Books, NY
BENNET, R. and McCoshan, A, 1993, " Enterprise and Human Resource Development Local Capacity Building", Paul Chapman, London, UK
ERNST, D. & HALEVY, T., 2004, "Not by M&A alone", The McKinsey Quarterly, 20 th August 2004, McKinsey & Company, Inc.
HUGGINS, R. 2000, "The Business of Networks", Ashgate Publishing Limited, Aldershot, UK
JARILLO, J.C., 1993, "Strategic Networks. Creating the Borderless Organization", Butterworth-Heinemann Ltd, Oxford, UK.
LORANGE, P. & ROOS, J., 1992, "Strategic Alliances", Blackwell Publishers, Cambridge, MA
REUER, J.J., 2004, "Strategic Alliances. Theory and Evidence", Oxford University Press, Oxford, UK