Logistics and Supply Chain Management, 4th Edition

LOGISTIC S & SUPPLY CHAIN MANAGEMENT

214

In the past it was more often the case that organisations were structured and

managed on the basis of optimising their own operations with little regard for the

way in which they interfaced with suppliers or, indeed, customers. The business

model was essentially ‘transactional’, meaning that products and services were

bought and sold on an arm’s-length basis and that there was little enthusiasm for

the concept of longer-term, mutually dependent relationships. The end result was

often a high-cost, low-quality solution for the final customer in the chain.

This emerging competitive paradigm is in stark contrast to the conventional

model. It suggests that in today’s challenging global markets, the route to sustain-

able advantage lies in managing the complex web of relationships that link highly

focused providers of specific elements of the final offer in a cost-effective, value-

adding chain.

The key to success in this new competitive framework, it can be argued, is the

way in which this network of alliances and suppliers are welded together in partner-

ship to achieve mutually beneficial goals.

Collaboration in the supply chain

It will be clear that one of the key ingredients of supply chain management excel-

lence is a high level of collaboration across the network.

The benefits of collaboration are well illustrated by the often quoted example

of the ‘prisoner’s dilemma’. The scenario is that you and your partner have been

arrested on suspicion of robbing a bank. You are both put in separate cells and not

allowed to communicate with each other. The police officer tells you both independ-

ently that you will be leniently treated if you confess, but less well if you do not!

In fact the precise penalties are given to you as follows:

Option 1: You confess but your partner doesn’t.

Outcome: You get one year in jail for co-operating but your partner gets five

years.

Option 2: You don’t confess but your partner does.

Outcome: You get five years in jail and your partner gets only one year for

co-operating.

Option 3: Both of you confess.

Outcome: You get two years each.

Option 4: Neither of you confess.

Outcome: You both go free.

These options and outcomes can be summarised in the matrix in Figure 11.1.

What is the most likely outcome? If neither you nor your partner really trusts the

other, particularly if previous experience has taught you to be wary of each other,

then both of you will confess. Obviously the best strategy is one based on trust

and hence for neither party to confess!

THE ERA O F NET W O R K CO M P E T ITION

215

This simple example provides a good analogy with the real world. The conven-

tional wisdom of purchasing has tended towards the view that multiple sources of

supply for a single item are to be preferred. In such situations, it is argued, one is

unlikely to become too reliant upon a single source of supply. Furthermore we can

play one supplier off against another and reduce the cost of purchases. However,

such relationships tend to be adversarial and, in fact, sub-optimal.

One of the first things to suffer when the relationship is based only upon nego-

tiations about price is quality. The supplier seeks to minimise his costs and to

provide only the basic specification. In situations like this the buyer will incur addi-

tional costs on in-bound inspection and rework. Quality in respect of service is also

likely to suffer when the supplier does not put any particular priority on the cus-

tomer’s order.

At a more tangible level those customers who have moved over to synchro-

nous supply with the consequent need for JIT deliveries have found that it is simply

impractical to manage in-bound shipments from multiple suppliers. Similarly the

communication of orders and replenishment instructions is so much more difficult

with multiple suppliers.

The closer the relationship between buyer and supplier the more likely it is that

the expertise of both parties can be applied to mutual benefit. For example, many

companies have found that by close co-operation with suppliers they can improve

product design, value-engineer components, and generally find more efficient

ways of working together.

This is the logic that underlines the emergence of the concept of ‘co-makership’

or ‘partnership sourcing’. Co-makership may be defined as:

The development of a long-term relationship with a limited number of suppli-

ers on the basis of mutual confidence.

2,2

5,1

1,5

0,0

Confess

Don’t confess

Confess

Don’t confess

Partner

You

Figure 11.1 The prisoner’s dilemma: penalty options (years in jail)