The partnership model: a type of buyer-supplier relation

THE PARTNERSHIP MODEL: A TYPE OF BUYER−SUPPLIER RELATION
When talking about inbound logistics, there are different ways to establish a relationship between the buyer
and the supplier. The partnership model is only one type of buyer−supplier relation. This model was
conceived inside the Japanese system of manufacturing, what is known today as Lean manufacturing. What
we will analyse in this project is how does the partnership model work, its advantages and its disadvantages
and how will it work far from the Japanese method of manufacturing, that is, in the Western manufacturing
system.
RELATIONSHIPS IN BUSINESS LOGISTICS
As we can see in the following graph, there are four main different types of relationships between the buyer
and the supplier.
We can have an Arm's Length relationship, a Partnership, a Joint Venture or we can vertically integrate with
our supplier. These four types of relationships imply different degrees of implication or co−operation between
the two companies involved. The Arm's Length relationship is the one that implies the least co−operation
while Vertical integration is the one that implies the highest level of co−operation.
• ARM'S LENGTH RELATIONSHIP
Arm's Length is the most used relationship used by companies. It is the relationship that implies the lowest
level of implication. Two firms do business involving high number of transactions for a long period of time
exchanging standard products or services in standard terms and conditions, when the exchanges end, the
relationship ends. As we deal with standard products, terms and conditions, the relationship is rigid, not
flexible.
• JOINT VENTURES AND VERTICAL INTEGRATION
A Joint Venture normally requires shared ownership across the two firms. In Vertical integration, the buyer
acquires the supplier or vice−versa. Even knowing that these kinds of relationships are very flexible, they
carry tremendous costs for the companies in terms of stock. The point is that a well−managed partnership
provides the same benefits without involving the high costs of Joint ventures and Vertical integration.
A good example can be found in the fast food − soda market. Pepsi, in order to assure the distribution of its
products to the final customer, acquired Taco bell, Kentucky Fried Chicken and Pizza Hut. These acquisitions
were highly expensive for Pepsi. The Coca−Cola Company just made a partnership with McDonalds, which
provided them the same benefits without any costs.
• PARTNERSHIPS
A partnership is a tailored business relationship based on mutual trust, openness, shared risk and shared
rewards that yields a competitive advantage, resulting in business performance greater that would be
achieved by the firms individually. This definition of partnership is telling us that a partnership is highly
flexible (tailored business) and that requires efficient information exchange between the buyer and the
supplier. However, Which are the essential elements of a partnership? Four main points:
• Partnerships are based on value and respect. Each company has to value and respect the other.
• It is a solid, long−term relationship that implies continuos improvement.
• The security of remaining a supplier is not by right but by fulfilling expectations. The supplier
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knows that he must provide better service than competitors at a reasonable price and achieve goals in
order to remain a supplier.
• Unlike what most people might think, competition under the partnership model is dynamic and
fierce.
We can see in the following flow chart the way in which the partnership model increases efficiency. In the
search for true Just in Time, both companies obtain cost reductions which can lead to price reduction and in
this way, increase market share and/or the profit margin. Which leads to competitive advantage and an
increase in efficiency.
Now that we have explained how companies in the partnership model increase efficiency trough
co−operation, we will have a further look to this co−operation, I mean, How do companies exactly co−operate
to reach this competitive advantage? The answer to this question can be found in the following graph:
There is a need for an efficient buyer − supplier information exchange and also between suppliers when
shared sourcing is used inside the model. This efficient information exchange is very hard to obtain in the
western manufacturing system where companies are not used to share strategic information. The supplier has
to have an open attitude not only with the assembler but also with other suppliers involved in the model.
The buyer has to be able and competent to help the supplier in his continuous improvement. He also has to
learn not to dictate terms but to make suggestions. In the partnership model it is forbidden the use of bids
when talking about price strategies or quality strategies, there are better ways to achieve the same goals. We
have to take into account that the partnership model was born in the Japanese manufacturing system, which is
based in harmony wa rather than conflict.
The table below shows the advantages and disadvantages of the application of the partnership model in a
buyer − supplier relationship:
ADVANTAGES
• Increase efficiency
DISADVANTAGES
• Hard to obtain
• Costly in terms of:
• Competitive advantage
• Time
• Effort
This table clearly shows that a firm should not partner with every supplier, maybe the disadvantages are
greater than the advantages that we expect to gain from the partnership. We have first to analyse the
advantages and the disadvantages and afterwards make the decision.
TYPES OF PARTNERSHIPS
We have already explained the different kinds of relationships between two companies in business logistics.
We know what Arm's Length, Joint Ventures, Vertical Integration and partnerships are. We will now explain
in further detail the different types of partnerships that we can find.
Most partnerships share common characteristics. However, there is no ideal relationship that is appropriate in
all situations. Each partnership has its own Motivating factors, its own environment, its own duration and its
own strength, this is why there is not a magic partnership for every situation. We can introduce now three
main types of partnerships:
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• TYPE I
It is the most used kind of partnership. Firms involved recognise each other as partners. They co−ordinate
activities and planning usually in a short−term focus. It involves only one division within each organisation.
• TYPE II
It implies integration of activities rather than co−ordination of activities. Multiple divisions are involved in a
long−term horizon.
• TYPE III
It is the least used kind of partnership. Firms share high level of operational integration. Each firm views the
other as an extension of their own firm. There is no end date to this kind of partnerships.
THE PARTNERSHIP MODEL
The partnership model has three major elements: drivers, facilitators and components, which lead to
outcomes. We can represent it in the following diagram:
• DRIVERS
Drivers must exist for each party and they must be strong enough to provide each party with a realistic
expectation of significant benefits through a strengthening of the relationship. The presence of strong drivers
is necessary for successful partnerships buy they by themselves do not ensure success. The benefits derived
from the drivers must be sustainable over the long term.
The most important benefits which drive the desire to partner include:
COST EFFICIENCIES
• Joint activities may lead to reductions in
transportation costs, packaging costs or
information cost and these are potential
reasons to partner.
• These also may increase managerial
efficiencies.
MARKETING ADVANTAGE
• Closer integration between two
organisations can provide better access to
new markets.
• They can get more competitive prices and
gain creative promotional and product
strategies to increase profitability.
CUSTOMER SERVICE
• Integrating activities in supply chain
through partnerships can often lead to
service improvements for customers in the
form of reduced inventory, shorter cycle
times, and more timely and accurate
information.
PROFIT STABILITY
• A potential for profit growth provides the
stronger reason to partner.
• Successful partnerships will receive
significant benefits in different areas that
often leads to long−term volume
commitments, reduced variability in sales
and joint use of assets and other
improvements.
• FACILITATORS
Once we have achieved the motivation to partner its necessary to have a good environment to support the
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relationship. Facilitators can not be developed in the short run and the degree to which they exist often
determines whether a partnership succeeds or fails.
A good example can be when the partners are demographically similar. For instance McDonald's and
Coca−Cola, their partnership is enhanced by the fact that both have strong brand images and each is the
number one firm in its industry. Further, McDonald's is Coca−Cola's largest customer and Coca−Cola is
McDonald's largest supplier, adding more symmetry to the relationship.
Facilitators include:
CORPORATE COMPATIBILITY
• The cultures and business objectives of the
two firms must mesh. They do not have to
be identical, but they can not clash.
MUTUALITY
• Both firms must feel themselves into the
same team, thinking and playing together.
MANAGERIAL PHILOSOPHY
SYMETRY
& TECHNIQUES
• This is the compatibility of management
philosophy and techniques between the two
firms.
• For example, the relation between
managers and employees of both firms
must be similar to avoid uncomfortable
situations.
• When firms are relatively symmetrical,
there is no junior partner and therefore none
of the insecurity defensiveness and fear
which is often found in an unequal
relationship.
• Symmetrical in terms of market share,
financial strength, and brand image.
There are other facilitators that increase the probability of success but their absence does not mean failure.
Their additional facilitators include exclusivity, shared competitors, physical proximity, a prior history of
working with the partner, and a shared high value end user.
To explain what is shared competitors and shared end user we will also use the McDonald's and Coca−Cola
relationship. Both have a stronger relationship and both rely on each other in order to succeed. These partners
face Pepsi as a common competitor and both partners are serving the same end user, placing emphasis on the
young consumer market. The partnership between them is likely to have a stronger foundation. An example of
exclusivity in the McDonald's − Coke partnership is the agreement that McDonald's can not sell Pepsi and that
Coke can not offer its products to Burger King.
Besides, if both firms are located near each other and partners have a prior history of positive interaction,
having worked closely and successfully with a partner in the past, the possibility of success is broadened.
• COMPONENTS
The components are the factors involved on the partnership that can be controlled by management. The
amount of components shows us the strength of the partnership. If you need a type 3 partnership, you need a
high level of components, while if you only need a type 1 partnership, the amount of components needed is
lower.
There are eight types of components:
PLANNING
JOINT OPERATING CONTROLS
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• Joint planning strength relationship and also
ads flexibility to the partnership. A clear
definition of both aims is needed in order to
define the required relationship.
COMMUNICATIONS
• Frequent communications between both
partners is a key component in order to
achieve partnership goals. An integrated
E−mail system is an example of how both
companies can improve their
communications.
• It will be a good idea to spread
communications between all staff in
companies and not only between
management.
TRUST AND COMMITMENT
• Again focused in a long−term view, without
trust and commitment a partnership can not
exist.
SCOPE
• Reefers to the number of economic
activities involved in the partnership. There
will be more if you need a closer
partnership. A type 1 partnership needs less
scope than a type 3 partnership
• Reefers to the possibility of change the
operations of the partner without first
obtaining approval or even notifying the
partner. This can be a key factor in order to
save time and in consequence money.
RISK/REWARD SHARING
• Based on the idea of shared destiny. A
partnership is developed in a long−term
view, if one company fails, both companies
loose. The benefits and rewards are shared,
but also the risks and costs.
CONTRACT STYLE
• There is no need of a long and specific
contract, in fact is better one short and clear
in the basic philosophy of the partnership.
As an example Mc Donald's and
Coca−Cola have nothing signed, they trust
each other.
FINANCIAL INVESTMENT
• The idea is to achieve financial
interdependence through shared assets, staff
and investments.
When implementing the components, both companies must agree, not always a type 3 partnership is needed,
so a strength level of components is not always the best way because you will waste time and resources
maintaining components that you do not need.
• OUTCOMES
The outcomes are the benefits that the companies involved on a partnership achieve from their relation. A cost
reduction or service improvements are examples of outcomes for the companies. A partnership is not required
to achieve outcomes, and the presence of outcomes does not mean the existence of a partnership.
APPLICATIONS OF THE MODEL
The partnership model was designed in order to help in the developing of new partnerships, but nowadays
there are four main applications of the model.
• ESTABLISHING A NEW PARTNERSHIP
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The model can be used as a guide to establish a new partnership.
• DIAGNOSING AN EXISTING RELATIONSHIP
The model can be used in order to check a partnership, as a medical revision, this can, for example, confirm if
the current type of partnership is the most appropriate or if it is necessary to change some aspects of the
relationship.
• STRENGTHENING A KEY RELATIONSHIP
The aim is to expand the relationship between the two companies.
• IMPLEMENTING RELATIONSHIP MANAGEMENT
The objective now is to improve the relationship, but this application, contrary to the latest is used inside each
company.
INSTITUTIONALISING THE PARTNERSHIP PROCESS
Both companies need to train their staff in order to make them understand the idea of partnership. There is a
need for teaching management how to use the model. It is imperative to make the partnership part of your
company, remember that when talking about partnerships we are always thinking in a long−term basis.
CONCLUSIONS
• A partnership can be used to achieve a leadership position against your competitors; it can be decisive
in order to make your company grow.
• It is not always useful to establish a partnership, having one without needing is a waste of resources
and time, but not having one when it is the best option makes you loose the opportunity of gaining
competitive advantage.
• One of the most important ideas of the model (and the idea that makes the partnership model
different) is the shared destiny, if your partner looses, you lose, so when you establish a partnership
you have to apply the model in order to use it in the most beneficial way for both it has to be the most
beneficial agreement not only for your company, but also for the other company.
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