By working closely together, companies and their suppliers can create highly competitive supply chains. Failing to collaborate results in the distortion of information as it moves through a supply chain, which, in turn, can lead to costly inefficiencies. Lee et al. described this “bullwhip effect,” which results in excess inventories, slow response, and lost profits.1 Through the more open, frequent, and accurate exchange of information typical of a long-term supply-chain partnership, companies can eliminate many of these problems and ensure ongoing improvement. Examples of successful customer-supplier partnerships include those between Baxter Healthcare Corporation and American Hospital Supply Corporation or between Toyota and its first-tier suppliers.2
These partnerships yield major benefits: increased market share, inventory reductions, improved delivery service, improved quality, and shorter product development cycles. Chrysler Corporation, realizing that merely overhauling its supplier base was insufficient, successfully transformed its traditionally adversarial supplier relationships into partnerships.3 Even more modest partnerships lead to rapid improvements in logistics facilitated by candid information exchange and better coordination. Given the effort involved in creating and sustaining partnerships, clearly a firm must focus on the trading partners it considers most important in the long run. This type of partnership differs from a strategic alliance or project-based partnership in which two firms may work toward a common goal but later dissolve the association after achieving the goal. The more open-ended nature of supply-chain partnerships makes them more challenging. In this article, we point out potential pitfalls and provide practical guidelines for forming and managing supply-chain partnerships.
Characteristics of Successful Partnerships
Several studies of successful arm’s-length partnerships have noted their key recurring characteristics.4 Free exchange of information (e.g., sharing cost and demand data) and coordinated decision making reduce the inefficiencies inherent in less collaborative relationships. Mutual trust is crucial to reassuring firms that information shared with a partner will not be used against them. Longer-term commitment to the partnership encourages parties to invest in further improvement of the joint supply chain to mutual advantage. Helper and Sako distinguish between what they call “exit” and “voice” relationships; in the latter, firms and their suppliers cooperate to resolve problems rather than abandoning their partnerships. Although “voice” relationships function better, according to observations, they are relatively rare. Dyer has described the changes in supplier-management practices at Chrysler in some detail.<