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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