SUPPLY CHAIN MANAGEMENT

RESEARCH PAPER ON

STRATEGIC PARTNERSHIPS IN SUPPLY CHAINS: PROS AND CONS

Submitted to: Prof. Sergei Teryokhin

Submitted by: Amna Mahmood

Student # 170456

Abstract

Successful firms always set a benchmark to not only meet the

customers’ satisfaction but also to step ahead from their

competitors. In this benchmarking process, a strong integrated

network among all the key partners is involved that in

combination makes a supply chain process. The focus of this paper

is on the favorable factors elaborating strategic partnerships in

supply chain as well as the situations where companies prefer

arm’s length relationship. Nowadays most of the companies and

corporations try to get a competitive edge in the market and rely

more on partnerships but there are some conditions where they

prefer an arm’s length relationship. This paper illustrates the

important factors about the issues regarding partnerships in

supply chain management (SCM), the reason for selecting arm’s-

length relationship and also the difference between the two. This

study provides an overview for making correct and reliable

decision regarding partnership.

Keywords: Supply chain management, Partnerships, Arm’s length relationship,

Competitive edge.

1.Introduction

Different strategies have been adopted by various firms to

maintain their competitive edge and also to not only survive but

excel in today’s dynamic environment. Strategies adopted by the

companies are set towards a particular goal that needs to be met.

For a long lasting relationship with partners, it is important to

smoothly run the internal business processes. To deliver the

final product to the end consumers, a firm needs to focus on its

entire Supply Chain Management (SCM) as a core competence. This

also needs to maintain good interrelationship among information,

material and all the business processes within the firm to create

optimum value to the end user (Lambert, Cooper, & Pagh, 1998;

Sahay, 2003). Companies must broaden their area of analysis and

decision making to encompass no single business units but whole

supply chains (Cox, 2004). Effective SCM requires a powerful

decision making, control and link of material, information and

finances.

On some occasions, the relationship between the supplier and the

buyer is best described as “dependency” rather than partnership.

For this reason, Van Weele & Rozemeijer, (1996) states these

partnership relationships as to be misleading. This clearly

requires a need to understand the specific conditions for

establishing partnerships such as a clear definition of mutual

responsibilities and specific, measurable milestones for improved

performance (Parker & Hartley, 1997). If not critically

evaluated, supply chain partnership can be a failure.

2.Theoretical Framework

2.1 Supply Chain Management

La Londe & Pohlen, (1998) has defined SCM as “the delivery of

enhanced customer and economic value through synchronized

management of the flow of physical goods and associated

information from sourcing through consumption”(p.5). According to

Johnston (1995) SCM is the process of strategically managing the

movement and storage of materials, parts and finished inventory

from suppliers, through the firm and to customers.

2.2 Collaboration In Alliances

It is said that “it’s easier and beneficial if companies work

collectively for attaining a competitive edge in the market

rather than working as an individual party”(Simatupang, Wright, &

Sridharan, 2002). Sonderegger, Barrett, & Creed, (2004) has

suggested two ways of collaboration: “Vertical” (i.e.

collaboration with customers, internally and with suppliers) and

second, “Horizontal” (i.e. collaboration with competitors,

internally and with non-competitors).

2.3 Arm’s-Length Relationships:

An arms-length relationship is one between unrelated persons each

acting in their own self-interest. This is best characterized by

Lenoble, (2003) as:

“…little investment, hardly any information sharing and limited interaction

between companies. Also on the low side are trust and commitment.

Relationships at this stage are short-term, contract-based and adversarial, with

several suppliers competing where price is the overriding factor. At this level,

companies can easily change partners and efficiently perform routine tasks.

From this starting point, companies can eventually develop a collaborative

supply chain relationship if they invest a great deal of resources, cultivate trust

and commitment, and share long-term strategic goals” (Lenoble, 2003).

3.Searching For The Right Partner

Choosing the right partner is the critical part of this research.

It needs a lot of time and planning as well as proper information

gathering about where the costs of manufacturers and equipment is

low, the suitable environment to fix a business or a subsidy, and

the knowledge where legislations and rules are easy to establish

a partnership for the development of business. Competition in the

market is arising day by day and to gain a competitive edge over

the competitors, a supply chain partnership has to keep its focus

on different aspects:

Cost reduction

Product quality

Service quality

Improved level of technology and equipment

At the end, delivering the best product to the end user in order

to retain the customers for a long term relationship, which in

future helps the company to build its goodwill.

Source: SCMI (2013)

4.Benefits Of Strategic Partnerships

There are a lot of benefits if companies choose the right

partners for their businesses. Gaining competitive advantage in

the market is the most important thing. A company must maintain a

strong control over its product development and its strategic

techniques for enhancing the supply chain procurement. Benefits

are not only for the purchasers but we also need to look at a

win-win situation where benefits arise for both of the partners

i.e. purchaser and the supplier. The most considerable benefits

are mentioned below with detail (Ross, 1998).

4.1 Balanced Supply And demand

Balanced and secure demand and supply is one of the critical

issues a company should take care of. Equal benefits can be

attained if correct decision in choosing the right partner for

business is made, and the benefits associated with this part are

“product safety”, “inventory management”, “supply chain

visibility”, “product handling”, “process and speed”, “problem

identification time”.

4.2 Efficiency In Product And Service Development

In partnership, both the partners are depending upon each other

for several key factors which are prerequisites for a good

business. Therefore, we can say that partners are working for

each other in order to fulfill the business requirements for

personal benefits. And as a result, benefits such as faster

engineering changes, reduced assembly time, improved

productivity, improved responsiveness and faster product

development can be easily gained in a business.

4.3 On Time Delivery

Partnership sourcing usually increases the efficiency of JIT

(Just in time) purchasing. According to (Gélinas, Jacob, &

Drolet, 1996), while choosing a partner in supply chain,

controlled and efficient delivery process is a business

requirement which needs to be met. If partners are working

together for a same goal then they must collaborate in each

sector in order to maintain a long term relationship.

4.4 Resource Allocation

This is also a very important aspect from which a company can

derive a lot of benefits. Choosing the right partner makes a

better allocation of resources which allows the company to reduce

its cost and invest more in its product and service development.

This leads to the benefits of generating more and more revenue

which every company desires to have at maximum.

4.5 Quality Control

If companies keep control over all the above mentioned factors

then it leads to quality control. Controlling the level of

quality is an aspect that requires continuous improvement.

Quality control can be achieved if proper time is given to the

experiments and changes that need to bring in a particular

product which is possible if a company selects right partner for

its business. Conducting regular product tests can make a company

able to control its parameters in quality improvements.

4.6 Increased Cash Flows

Controlling and managing all things properly leads to the

increased revenue which is considerable for both supplier and

purchaser. But revenue can only be generated if all other things

are done carefully and effectively.

5.Risks And Limitations In Partnerships

Partnership sourcing may not always work as there are many

reasons for failure when implementing or after the implementation

phase of the activity. The necessary commitment and involvement

from the purchaser and supplier to successfully partner-up are

not often accomplished from the beginning. Even when everything

seems to be in order regarding the implementation process of

partnership, there is a possibility that one partner or some

third party organization can stop the progress of partnership

sourcing.

Partnership is not a one way relationship. Both the purchaser and

the supplier has to contribute completely and equally, to

maintain a steady relationship. If one of the partners try to

attain a relationship with another organization, for instance for

the sake of accessing new technologies, the partnership

relationship will not turn out to be successful.

A partnership in which only one of the organizations contributes

is not likely to succeed.

Good partnerships take time to develop. During the process of

development, there are some specific behaviors both parties would

want to avoid such as impatience, arrogance, complacency and

over-dependency. Bellow follow some common causes of failure in

partnership sourcing.

5.1 Lack Of Trust:

Trust exists when one party has confidence in an exchange

partner’s reliability and integrity (Morgan & Hunt, 1994). The

degree of trust should be high in supplier and buyer

relationship. A purchaser should be trustable in terms of paying

accordingly and defining business needs properly. Whereas, a

supplier must be trustable in terms of completing the order in

time and must utilize the resources properly in making the right

thing for its buyer. But when these things do not meet the

required standards, partnership collapse and business suffers.

Therefore, if parties lack trust, there will be no success in

partnership and it will end up at a failure.

5.2 Lack Of Commitment:

“An exchange partner believing that an ongoing relationship with

another is as important as to warrant maximum efforts at

maintaining it; that is, the committed party believes the

relationship endures indefinitely”, and commitment is central to

all the relational exchanges between the firm and its various

patterns (Morgan and Hunt, 1994, p. 23).

Commitment is a great demand of a successful partnership because

efforts are required from both of the parties to meet the mutual

goal.

5.3 Lack Of Resources And Planning

If the resources required for the establishment and growth of

business are not enough then the business would be in loss.

Secondly, planning for what needs to be done and how supply chain

should initially run must be done appropriately. Planning is the

most important part of starting any business or any particular

project. Therefore, if both things are lacking, a supply chain

partnership can never succeed in fulfilling its targets.

5.4 Poor Communication

To have a strong partner bonding, it’s important to have good and

effective communication. It’s important that partners understand

each other’s view point and respective goal. Communication either

verbal or nonverbal plays an important role in effective and

profit gaining business.

According to (Prahinski & Benton, 2004), the purchasing

organizations can influence the supplier’s commitment through

improved communication and relationship development. They further

indicate that this development comprises of improving

cooperation, problem solving, and reflecting commitment, loyalty

and aspiration to proceed with the partnership for a significant

amount of time.

5.5 Unrealistic And Arbitrary Targets

Targets set by the partners must be realistic and possible to

achieve. Unrealistic and immeasurable targets cause barriers. If

goal is not fulfilled, disappointment and dissatisfaction

stresses the minds. As a result, business suffers and losses need

a long time to get recovered.

5.6 Behavioral Changes Or Conflicts In The Key Personnel Within

Two Parties

Parties must understand each other well in order to reach and

achieve a common goal. Otherwise, if conflicts and misconceptions

arise in partners, business gets affected and parties have to

bear losses.

6.Comparing partnership with Arm’s length relationship:

ARM’S LENGTH RELATIONSHIP PARTNERSHIPS

Short term orientation Long term orientation Simple buyer/seller

relationship

Closeness

No innovation Complex integration Less information sharing Emphasis on quality and

innovation Emphasis on personal

benefit (price etc.)

High level of information

sharing

Figure 2

Source: Aad et al. (2013)

In this paper the focus is also on situations where arm’s length

relationship is preferred. Companies or an individual may prefer

to have an arm’s length relationship because of independent

dealing and its short term project based nature. In my opinion

collaboration/arm’s length relationship both can play a more

powerful role. This can be explained with the help of example:

Arm’s length: if Party A has to sell a Food Restaurant and

Party B is buying it, both the parties are independent like

two strangers and have equal right of bargaining and

negotiating then they will come up with a result that will

be beneficial for both of the parties.

Collaboration: Now, if we change the situation where Party A

is selling the same restaurant but the buyer (party B) is

now his own son, then definitely Party B would like to buy

the restaurant in some discount which would not be

beneficial for Party A (father).If we look in collaboration

it might not be beneficial.

So in this situation a company must go for an arm’s length

relationship. Therefore, depending upon a situation a company or

an individual can decide whether to choose a partnership

(collaboration) or an arm’s length relationship in order to

fulfill its goal and achieve the maximum benefit.

Figure 3

Source: Stahl & Voigt (2008)

7.Conclusion

Managing buyer and supplier relationships in this highly

competitive and dynamic economy requires a tactful management. To

add value and competitive advantage in supply chain

relationships, it is required to adopt a new cooperative, values-

based approach of management. Almost a decade ago, most supply

chain relationships were arms-length and based on short and rigid

contracts. However, in today's era, supply chain relationships

are more likely to be based on long-term and trust-based

contracts that are negotiated and adjusted with the change in

demands and opportunities.

A firm must take time to understand its needs and expectations

from a particular business. It must be willing to share

information and work to keep its promises. The benefits arising

from these kinds of relationships are significant. In this paper,

the advantages and limitations for partnerships are considered

important and have discussed by taking into account all the

aspects of a business. To analyze if partnership is beneficial to

the parties concerns, both the parties must meet-up and discuss

the pros and cons, costs and the consequences.

During the past century, businesses operated in the age of Mass

Markets. At that time, companies attempted economies of scale

through mass production and distributed their products as widely

as possible through arm’s-length relationships. Most of our

current management processes were developed in that era. During

that period, managers correctly focused on aggregate revenues and

aggregate costs.

Today, all the former processes are changing. We are in a new

era, which is called the “Age of Precision Markets.” In this new

era, companies form relationships with different groups of

customers, and these characteristics bestow different degrees of

supply chain integration and coordination, with enormously

different profitability.

By avoiding and changing adversarial behaviors such as

impatience, arrogance, complacency, hastiness and over-

dependency, both organizations can take advantage of the benefits

associated with partnerships in supply chains.

Now, it is concluded that if organizations thoroughly analyze the

risks of success and failure by looking at the business

requirements of both the concerned parties, there are no real

impediments for success.

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