Insights and Best Practice
A supply chain is by definition a network of organizations working together to create value and produce and deliver products and services to consumers. In this process, businesses interact in many ways with each other. In this blog post, we touch upon the distinct types of relationships in supply chains, and the trends that we see in this regard. We discover why and when organizations engage in relationships. Finally, we conclude with some critical success factors in building long-lasting successful relationships.
Why and when to engage in a relationship
At Chronion, we firmly advocate that for any organization to thrive, it must prioritize its customer needs above all else. Knowing when and how to build successful relationships, can contribute significantly to the creation of extra customer value through better customer service levels or a better customer experience. Alternatively, forging mutually beneficial partnerships with your collaborators can help maintain existing service standards while mitigating costs and risks, whether by streamlining processes, minimizing inventory duplication, or mitigating issues like the bullwhip effect.
Interactions with other organizations in the supply chain manifest in diverse forms. One can procure specific products or materials from external sources, or outsource services such as manufacturing, transportation, warehousing. The key is to know when and what to in- or outsource, a decision often guided by a thorough make-or-buy analysis.
In a make-or-buy analysis, the first question you need to ask yourself is: “is the activity a core competency, and if not, should it be?”. If the answer to the previous question is ‘yes’, it is rarely a good idea to contract out the activity at hand.
“Core competencies are skills or knowledge sets that enable an organization to provide the greatest level of value to its customers through the creation of a competitive advantage”
When outsourcing a capability seems favorable from a strategic point of view, it is crucial to consider the cost impact by considering the total cost of ownership. Additionally, it is important to also consider:
Once the decision is made to outsource, you’ll need to find the right supplier. It is best to follow a formal and structured process to do this, as the expenses associated with switching suppliers can be substantial.
A schematic overview of the step-by-step actions
Types of relationships in a supply chain
There are many different types of relationships in a supply chain. It's crucial to understand that not all relationships need to operate at a high level of integration maturity. Depending on the significance of the activity involved, varying degrees of relationship maturity may be appropriate or desirable.
Transactional relationship
In a transactional relationship, both parties recognize that the arrangement has a definite end date, and there's no assurance of continuation beyond that point. Typically formalized with a contract, these relationships often restrict information sharing to a "need-to-know" basis.
Recurring relationship
A contract set up for an extended duration may be essential for service providers serving you or your customers (such as 3PL providers). While some information exchange occurs at this stage, it stays confined to operational information and performance feedback. Relationship management starts to be necessary from this point on.
Strategic alliance
Strategic alliances differentiate themselves from recurring relationships through the fact that both parties are sharing best practices and start collaborating on strategy. Since these alliances are more long-term, trust and information sharing are critical at this stage.
Business extension
These types of relationships are the most extreme examples of collaboration and are characterized by two separate organizations that operate as one for all intents and purposes. They extensively share culture, processes, and information to the fullest extent achievable.
How to build successful relationships
As in any context, the key to making a relationship successful is active engagement and effort from both parties. Make sure that you focus specifically on the following success factors:
About the author
Bert Appels is manager at Chronion, focusing on Supply Chain Excellence.
Do you want to know more about Supply Chain Optimization, contact us.