Supply chain partners that collaborate drive continuous improvement and innovation. But getting there takes a new approach, writes Steven Bowen and Kate Vitasek.
Today’s supply chain practitioners are under constant pressure to add value to their organisations. Two of the biggest supply chain challenges are exponential growth in supply chain complexity and cost-savings fatigue driven by a relentless and unsustainable pursuit of achieving bottom-line growth by constantly cutting costs.
Companies are responding to these challenges with a renewed approach to their supply chains. A University of Tennessee (UT) white paper, End-to-end Supply Chain Collaboration Best Practices, shows a highly-collaborative, end-to-end focus on the supply chain, which enables organisations to achieve greater levels of optimisation as supply chain partners collaborate to drive continuous improvement and innovation.
But end-to-end optimisation is not easy. It demands that supply chain partners shift from traditional transactional business models with a focus on cost savings to models that shift the focus to value creation. To make this shift, organisations must first understand the fundamental differences in value extraction, value exchange and value creation.
Value extraction occurs when an enterprise attempts to shift value from one player in the supply chain to itself (a classic win-lose scenario), extracting profit and value from one member of the supply chain and transferring that value to a leading player. This is often done using highly-competitive bids and power-based negotiation approaches.
Value exchange is a better approach, but still falls short. In a fair and balanced value exchange, organisations check their power at the door and instead focus on getting to a fair price vs. value trade-off (such as quality/service). While definitely better than value extraction, value exchange still falls short because the parties’ focus remains on optimising within their own four walls.
The winners of today’s supply chains have made the shift to focusing on value creation, enabled by true end-to-end collaboration and win-win pricing models. By working as true partners with a more transparent, win-win mindset, parties can identify opportunities that they simply cannot see by working within their own four walls. The longer-term strategic focus, coupled with transparency and a win-win approach, motivates suppliers to invest in solutions that they would likely not feel comfortable with.
Strategic sourcing best practices drive collaboration
Collaboration is a key to unlocking supply chain optimisation. Unfortunately, far too many organisations rely on conventional arms-length procurement methods and commercial models that disincentivise true collaboration and value creation. Traditional buy decisions tend to be based on transactional models, which, at their most basic level, rely on a competitive environment to drive lower costs and create an arms-length buyer-supplier relationship.
Progressive companies are shifting along a sourcing continuum to more sophisticated and collaborative sourcing business models that are purpose-built for making the shift towards value creation.
As suggested by the diagram, transactional contracts work best to drive general market improvements. Market-based improvements are, typically, incremental in nature as suppliers seek to improve products/services and lower prices to beat out their competitors.
Organisations seeking productivity-driven improvements should shift to a preferred-provider model or a performance-based/managed-services model. When an organisation shifts along the sourcing continuum to a preferred-provider model or performance-based model they are making a commitment to the supplier, who then commits to driving productivity improvements. Often, these productivity improvements come from working in a collaborative manner and investing in continuous improvement programmes.
As organisations move even further along the sourcing continuum they shift from a mindset of a buyer-supplier relationship to a highly-strategic partner. An investment-based model encourages investment in innovation because there is an equal partnership between the buyer and the supplier. Structured properly, investment-based models rely on win-win economics where all parties ‘win’ when improvements are made.
Win-win economics makes sense when you think about an equity partnership (e.g. a joint venture) because both parties are investing with the hope to drive value for the partnership. An investment-based model operates in a similar manner as an equity partnership – but unlike an equity partnership, an investment model uses a buyer-supplier relational contract instead of a shareholders’ agreement.
Investment-based models work because they create win-win outcomes-based economic models that align the interests of both the buyer and supplier partners. In short, the parties shift from a buyer-supplier mindset to strategic business partners focused on a common end in mind – to drive business outcomes that will create value for both the buyer and the supplier.
Total Value Optimisation (TVO)
A second enabler for success outlined in the UT white paper is a focus on end-to-end total value creation that focuses on breaking through silos and building value from across the supply base, through the four walls of the organisation right through to the customer’s customer.
Maine Pointe’s Total Value Optimisation™ (TVO) is a best-practice method for value optimisation that allows an organisation to dynamically anticipate and meet demand by synchronising its buy-make-move-fulfil supply chain to deliver the greatest value to customers and investors, while still achieving the lowest costs for the business.
Senior executives are universally interested in meaningful tools to help communicate where and how opportunities can be realised in their businesses to achieve high performance and competitive advantage. TVO is an easily-communicated maturity scale of how any firm is performing in the critical buy-make-move-fulfil supply chain across the critical dimensions of Procurement, Logistics, Operations, Data Analytics, Leadership and Organisation.
Using the methods outlined in TVO, it becomes more realistic to add a true level of competitive differentiation through the supply chain – ultimately transforming the supply chain into a competitive weapon. The TVO approach looks beyond the basic metrics, such as cost of ownership and purchase price variance, and adds an increased focus on the total added-value characteristics of the relationship with each supplier.
TVO ranks added-value in a maturity scale of zero to five, with the higher levels incorporating that value-added consideration and allowing a firm a more sustainable process that permits themselves as well as their supply chain to continue to grow and improve.
The bottom line
The bottom line? It is the bottom line. Creating an end-to-end collaboration culture is never easy and takes considerable time and resources.
Steven Bowen is the Chairman and CEO of Maine Pointe, and the author of Total Value Optimisation: Transforming Your Global Supply Chain into a Competitive Weapon. He can be reached at sbowen@MainePointe.com.
Kate Vitasek is recognised for the Vested® business model for highly-collaborative relationships. She is the author of six books and a Faculty Member at the University of Tennessee (UT). She can be reached at firstname.lastname@example.org.
Article adapted from Supply Chain Management Review