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.


1. H.L. Lee, V. Padmanabhan, and S. Whang, “The Bullwhip Effect in Supply Chains,” Sloan Management Review, volume 38, Spring 1997, pp. 93–102.

2. J.L.S. Byrnes, “Baxter’s Stockless System: Redefining the Business,” unpublished manuscript, 1993.

3. J.H. Dyer, “How Chrysler Created an American Keiretsu,” Harvard Business Review, volume 74, July–August 1996, pp. 42–56.

4. E. Anderson and B. Weitz, “The Use of Pledges to Build and Sustain Commitment in Distribution Channels,” Journal of Marketing Research, volume 29, February 1992, pp. 18–34; and

A.J. Magrath and K.G. Hardy, “Building Customer Partnerships,” Business Horizons, volume 37, January–February 1994, pp. 24–28.

5. S.R. Helper, “How Much Has Really Changed between U.S. Automakers and Their Suppliers?”Sloan Management Review, volume 32, Summer 1991, pp. 15–28;

S.R. Helper and M. Sako, “Supplier Relations in Japan and the United States: Are They Converging?” Sloan Management Review, volume 36, Spring 1995, pp. 77–84; and

Dyer (1996).

6. Ibid, p. 42.

7. Dyer (1996);

J.P. MacDuffie and S. Helper, “Creating Lean Suppliers: Diffusing Lean Production Throughout the Supply Chain,” California Management Review, volume 39, Summer 1997, pp. 118–151; and

J.L.S. Byrnes and R.D. Shapiro, “Intercompany Operating Ties: Unlocking the Value in Channel Restructuring” (Boston: Harvard Business School, working paper 92-058, 1991).

8. Company names and various other details have been disguised for reasons of confidentiality. More detailed versions of this study are available as teaching cases from INSEAD, titled “Pellton International: Partnerships or Tug of War?” (Parts A, B, and C).

9. M.L. Fisher, “What Is the Right Supply Chain for Your Product?” Harvard Business Review, volume 75, March–April 1997, pp. 105–116.

10. Byrnes and Shapiro (1991);

Institute of Industrial Engineers, “Beyond the Basics of Reengineering: Survival Tactics for the ‘90s,” 1994; and

R.L. Manganelli and M.M. Klein, The Reengineering Handbook: A Step-by-Step Guide to Business Transformation (New York: American Management Association, 1994).

Institute of Industrial Engineers, “Beyond the Basics of Reengineering: Survival Tactics for the ‘90s,” 1994; and

R.L. Manganelli and M.M. Klein, The Reengineering Handbook: A Step-by-Step Guide to Business Transformation (New York: American Management Association, 1994).

11. Byrnes and Shapiro (1991), p. 21.

12. T.H. Davenport, Process Innovation: Reengineering Work Through Information Technology (Boston: Harvard Business School Press, 1993).

13. Byrnes and Shapiro (1991); and

Institute of Industrial Engineers (1994).

14. A key message in:

P.M. Senge, The Fifth Discipline: The Art and Practice of the Learning Organization (New York: Doubleday, 1990).

15. Byrnes and Shapiro (1991).

16. Ibid.; and

Institute of Industrial Engineers (1994).

17. T.J. Allen, Managing the Flow of Technology: Technology Transfer and the Dissemination of Technological Information Within the R&D Organization (Cambridge, Massachusetts: MIT Press, 1977).

18. R.F. Lynch and T.J. Werner, Continuous Improvement: Teams & Tools (Atlanta, Georgia: QualTeam, Inc., 1992).

19. D.J. Bowersox and P.J. Daugherty, “Logistics Paradigms: The Impact of Information Technology,” Journal of Business Logistics, volume 16, number 1, 1995, pp. 65–80; and

M. Hammer and J. Champy, Reengineering the Corporation (A Manifesto for Business Revolution) (London: Nicholas Brealey Publishing, 1993).

20. For discussions of mapping with examples, see:

Lynch and Werner (1992); and

Manganelli and Klein (1994).

21. Lynch and Werner (1992); and

H.J. Harrington, Business Process Improvement: The Breakthrough Strategy for Total Quality, Productivity, and Competitiveness (New York: McGraw-Hill, 1991).

22. General redesign principles can be found in:

Hammer and Champy (1993); and

Davenport (1993).

23. See Allen (1977).

24. For discussions of change management and project management, see, for example:

J.R. Meredith and S.J. Mantel, Jr., Project Management: A Managerial Approach (New York: Wiley, 1985); or

D.I. Cleland and W.R. King, eds., Project Management Handbook, second edition (New York: Van Nostrand Rheinhold, 1988).

25. Senge (1990).

26. K.B. Clark and S.C. Wheelwright, Managing New Product and Process Development: Text and Cases (New York: Free Press, 1993).


We are grateful to Pellton International and its customers and to Christian Terwiesch and two anonymous referees for their helpful suggestions.