Knowledge sharing between partners has more upsides than downsides, provided that the right kind of knowledge goes back and forth.

There are two categories of supply chain partners: those that buy and those that sell. Depending on which group they identify with, managers have different perspectives on the value of sharing critical knowledge resources with their supply chain partners. Both groups agree that sharing knowledge makes for more efficient supply chains (with lower costs and quicker speeds) and more effective organizations (with higher quality outputs and enhanced customer service). But the benefits of knowledge sharing don’t always accrue equally or simultaneously to all participants.

In addition, some managers think that knowledge sharing between buyers and suppliers has an underappreciated “dark side” that can outweigh the benefits.1 A common worry is that divulged information regarding technologies, pricing schedules, client bases and processes can be copied or shared with competitors. Another worry is that relying on knowledge flows from other organizations can undermine a company’s flexibility and leave it vulnerable to changes in its partners’ priorities. Despite these concerns, knowledge sharing between supply chain partners offers more positives than negatives, provided that the right kind of knowledge goes back and forth.

What type of information or knowledge should suppliers and buyers share with each other? How does knowledge sharing provide value to buyers and suppliers, and under what circumstances can it help both? How do cross-cultural differences between global buyers and suppliers influence the value of sharing information? To answer these questions, we studied more than 100 cross-national supply chain partnerships in the industrial chemicals, consumer durables, industrial packaging, toy and apparel industries in 19 country locations.(See “About the Research.”) We examined how different types of knowledge sharing can benefit buyers or sellers individually. But more importantly, we studied how knowledge sharing can enhance the performance of partnerships and build stronger supply chains in the global marketplace. We sought to understand not only which companies benefit from cross-border knowledge sharing but also the conditions that lead to knowledge sharing in global supply chains. Many people see knowledge sharing as the result of customer or supplier needs when in fact it is more likely to be influenced by market structures or organizational similarities and dissimilarities between buyers and suppliers. (See “What Makes Knowledge Sharing Possible?”)

About the Research »

What Makes Knowledge Sharing Possible?

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The Value of Knowledge in Global Supply Chains

In a 2004 study, Hau Lee, a professor of operations, information and technology at Stanford University, found that topperforming supply chains had three distinct qualities.2 First, they are agile enough to react readily to sudden changes in demand or supply. Second, they adapt over time as market structures and environmental conditions change. And third, they align the interests of all members of the supply chain network in order to optimize performance. These characteristics — agility, adaptability and alignment — are possible only when partners promote knowledge flow between supply chain nodes. In other words, the flow of knowledge is what enables a supply chain to come together in a way that creates a true value chain for all stakeholders.

This is a critical point. As global supply chains become less push-oriented and more demand-driven, organizations can come together more closely in demand-driven supply networks. These networks focus on understanding customer needs (present and future) and building supply chains based on actual demand levels as opposed to demand forecasts or production schedules. This permits a higher level of service to customers — more on-time deliveries and more accurate order placement — which, in turn, leads to increased levels of customer loyalty. Higher service levels actually help supply chains become more efficient, thanks to fewer product returns, less need for overnight deliveries to compensate for slow turnarounds and fewer dissatisfied customers.

Knowledge flow creates value by making the supply chain more transparent and by giving everyone a better look at customer needs and value propositions. According to AMR Research Inc., a business research company located in Boston, increased demand visibility (that is, more knowledge about real-time customer needs and demands throughout the entire supply chain) increases perfect order rates dramatically.3 What’s more, broad knowledge about customers and the overall market, as opposed to just information from order points, can provide other benefits, including a better understanding of market trends, resulting in better planning and product development.

Toyota Motor Corp., for example, increasingly involves its Tier 1 suppliers in major market-oriented decisions. According to Vikram Kirloskar, vice-chairman of Toyota Kirloskar Motor, a joint venture between India’s Kirloskar Group and Toyota, this input would not have much value if Toyota and its suppliers didn’t also share knowledge about markets.4 In several industries, including chemicals and packaged goods, initiatives are underway to facilitate knowledge flows between partners and to enhance customer value. For example, the European chemical industry estimates that it can save up to 2% of total industry sales through increased collaboration, including more knowledge sharing, between its supply chain members.5 Moreover, research consistently shows that the most common contributors to supply chain failures — out-of-stocks, excess inventories, new product failure rates, increased product markdowns and wasted time in engineering and research and development — are all addressable by increasing knowledge flows between supply chain partners.6 Still, some supply chain members are reluctant to participate in knowledge-sharing activities.

Why Knowledge Sharing Is Controversial

There is a saying that, in the global marketplace, companies don’t compete — supply chains do. This is particularly true for industries in which there is a high degree of vertical integration and for specific markets, such as Japan, where long-term relationships between buyers and suppliers can trump competitive offerings from new players. Strong, cross-national supply chain relationships can create innovative environments that provide competitive advantages for member companies. Interorganizational learning and adaptation to volatile environments can facilitate symbiotic relationships between partners. It can help both suppliers and buyers adjust to diverse demand levels in multiple marketplaces (including new product launches with no historical demand levels), increasingly complex trade regulations, risk pooling and process developments. Recent research shows that best-in-class companies in supply chain management were three times more likely than laggard companies to apply “visible technologies” that offer real-time customer and demand data; these technologies allow buyers and sellers to share knowledge more easily across borders.7 These applications, which go beyond radio-frequency identification and early replenishment programs, enable supply chain partners to maximize operational efficiencies and enhance customer value creation.

But intercompany knowledge sharing can have harmful competitive consequences. Many supply chain members we interviewed had an aversion to participating in activities that could provide more benefit to partners than to their own company. Increasingly, supply chain partners see themselves as competing among themselves for revenue. The CEO of a major global freight carrier expressed this concern: “We hear a lot about cooperation in global supply chains. And while I’m sure we benefit from close relationships with our partners, we feel there are two reasons why knowledge sharing in the supply chain can work against us. First, whenever we share knowledge with partners, it seems to leak to competitors, or potential competitors. Second, as the markets become more intense, we feel profits are in turn limited, and we compete with our partners for profit shares. So we want to be careful what we share. We want our partners to win, but not at our expense.” 8

Managers want to know that they can build equity through collaborative activities. At a minimum, they want an equitable piece of the “margin pie” relative to the resources they commit.

Given increasing levels of competition and customer expectations, many companies believe there is a fundamental conflict of interest among supply chain members. Players located between raw materials suppliers and retailers or e-tailers, in particular, see themselves competing with one another for profits. As a result, they are less likely to view supply chain partners as allies in improving operational efficiency or market effectiveness than as competitors for margins. When margins are thin, knowledge sharing and true partnership can revert to a more traditional (and more adversarial) vendor-buyer relationship. As David Yeh, honorary president of the Toy Manufacturers’ Association of Hong Kong, noted, “Many toy OEMs are now competing directly with toy marketing companies such as Mattel and Hasbro in the same market. The competition has become more intense. Everybody is fighting over the same piece of pie.”

Although the concept of “pie sharing” is not new, it is important to clarify the different ways that knowledge sharing helps suppliers and buyers and how the supply chain as a whole benefits from these activities.

Different Types of Knowledge

Knowledge sharing encompasses the sharing of information, but it doesn’t stop there. Much of the information that companies share — data on inventory levels, sales, production schedules and prices — is easy to codify and transmit. But other types of knowledge are just as important to exchange and more difficult to codify: know-how, managerial and communication skills and organizational memory. Intercompany knowledge sharing is a joint activity between supply chain partners; the parties share knowledge and then jointly interpret and integrate it into a relationship-domain-specific memory that influences relationship-specific behavior.9 We found three types of knowledge sharing within the supply chain, each offering distinct benefits to buyers and suppliers: information sharing, joint sense making and knowledge integration (see “Types of Knowledge Sharing”):

Types of Knowledge Sharing

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  • Information sharing takes place when companies exchange important data about sales, customer needs, market structures and demand levels.
  • Joint sense making occurs when supply chain partners work together to solve operational problems, analyze and discuss strategic issues and facilitate communication about the relationship. Since individual partners often interpret the same information differently, intercompany teams can help create a common understanding.
  • Knowledge integration occurs when supply chain partners develop relationship-specific memories, providing everyone with a common understanding of idiosyncratic routines and procedures governing the relationship. This often results in collective problem solving that benefits both the companies and the relationship as a whole.

These knowledge-sharing activities constitute mechanisms that can make or break supply chain partnerships.

Effective Knowledge Sharing in the Supply Chain

The greater the disparity between the market environments of buyers and suppliers, the greater the likelihood that partners will share knowledge. For example, in settings where customer preferences are changing or local regulations or supply sources are in a state of flux, cross-border partners rely on each other to serve as knowledge conduits. In general, market volatility makes companies more open to sharing knowledge; among other things, companies want to reduce bullwhip effects up the supply chain and the resulting stock-outs or overstocks. K.C. Lo, CEO of Smart Union (Hong Kong) Ltd., a toy manufacturer in Hong Kong with a global customer base, commented: “As manufacturers, we are also faced with the marketing challenge downstream. Our customers’ sales and marketing problems directly affect our bottom line. Our interests are intertwined with everybody along the supply chain. If the products do not sell well and the buyers have to resort to markdowns, it is not uncommon in our industry to see buyers coming back to us and ask for a rebate. To overcome problems like this, we need inputs from the buyers along the value creation process to do a better job in meeting market demand. None of us can operate in isolation.”

Companies with similar philosophies and goals have greater tendencies to share knowledge. Although this may seem intuitive, companies often partner with organizations that do not share the same business philosophies; subsequently, they are reluctant to share critical knowledge with each other. Again, while this may seem logical, it goes against the findings about the importance of knowledge sharing in achieving competitive positions. A company’s commitment to knowledge sharing is greatly influenced by whether it has made investments (for example, in special equipment, tools, machines or facilities) to support the buyer-seller relationship. Such investments tend to make a company more vested in the relationship and encourage knowledge sharing between partners.

The Role of Cultural Differences

One of the more interesting findings is that cross-cultural differences between buyers and sellers rarely matter when it comes to sharing knowledge. We had assumed that culture and all of its nuances (such as differences in perceptions of trust, time and risk taking) would play a major role in whether cross-border partners shared knowledge and other valuable resources: A Japanese buyer of industrial chemicals, for example, would have perceptions radically different from his American supplier about how a partnership should work and what knowledge can be shared safely. However, cultural differences between buyer and supplier companies had no impact on their propensity to share knowledge. Interviews with managers revealed the reasons. First, cross-cultural differences have always mattered less in business-to-business relationships than they have in business-to-consumer exchanges. Second, the nature of the businesses themselves is changing, becoming increasingly diverse both in terms of the employee base and in the number of markets businesses operate in. For example, one of the purchasing managers we interviewed was a Ukrainian working for a French company in Brazil. Identifying which cultural characteristics might influence his decision to share knowledge (Ukrainian, French or Brazilian?) would be impossible, and in reality this way of looking at culture proved irrelevant. Instead, there was an emergent global culture of business; decisions about whether to share knowledge — and how to do it — were driven less by cultural norms than by more objective decision making and market demands. As Yeh of TMHK conceded, “Businesses are looking for best practice and best thinking. We have to put our cultural differences aside. I am seeing a converging trend in the last 30 years.”

The Benefits of Knowledge Sharing

In measuring the performance of supply chain partners, it is important to recognize that businesses often have to make tradeoffs between market share/sales and profits. Therefore, we combined four indicators to create an index to measure company performance: increases in market share, sales, return on sales and return on investment. Research on how much value buyers and sellers get from knowledge sharing has been confusing; some studies show benefits, while others have shown dangerous repercussions.10 We found that, for both buyers and sellers, certain dimensions of knowledge sharing are critical for improved performance outcomes. Further, although all members of the supply chain need to participate in knowledge sharing, buyers and sellers do not always benefit equally. (See “Who Benefits From Sharing Knowledge?”)

Who Benefits From Sharing Knowledge?

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Both buyers and sellers indicated that information sharing and knowledge integration enhanced performance. They said that sharing information contributed to profitability and operating efficiency, benefiting both members in cross-national collaborations; they noted as well that frequent process adjustments and evaluations between partners also led to improved performance. In particular, knowledge sharing about market structures (for example, about mergers and acquisitions or regulatory changes), end-user preferences and profiles, technological innovations and financial resources helped everyone’s bottom line. This was especially important for supply chain partners operating globally, due to the complexity of overseas markets and the difficulty of obtaining reliable information on their own. For example, the toy industry constantly faces regulatory changes and new safety requirements in overseas markets, as recent events involving Chinese imports in the United States illustrate.11 Without cooperation and knowledge sharing from their overseas customers, manufacturers would have difficulty responding to these kinds of challenges in a timely manner.

However, the advantages for buyers and sellers are not always equal: Suppliers receive significantly greater benefit than buyers from two types of knowledge sharing — information sharing and knowledge integration — no matter which partner actually shares the resources. Indeed, the outcomes are the same whether it is the buyers who do the information sharing or make the efforts to integrate knowledge bases into the operational protocols, or the suppliers. Both partners win — but suppliers win more.

In contrast to information sharing and knowledge integration, joint sense making appears to have different effects. When suppliers developed teams to work with partners, increase face-to-face communication and evaluate routines and processes, both buyers and sellers benefited. More than half of the 132 suppliers surveyed indicated high levels of joint sense-making activity; for their specific partnerships, both buyers and suppliers averaged significantly higher performance ratings than other partnerships. But when buyers promoted the same activities, suppliers were the ones that reaped most of the benefits. Half of the buyers indicated high levels of joint sense-making activity, yet in these partnerships suppliers enjoyed 6% higher performance ratings than their buyers. The disparity may be due to the significant time and other resources needed to build intercompany teams: Buyers tended to see this as an investment with few benefits for them; suppliers saw the potential benefits as well worth the expense. These findings reinforce the view that when suppliers are willing to dedicate time and resources to share their knowledge, the supply chain as a whole benefits.

Knowledge sharing between supply chain partners occurs with the expectation that both buyers and sellers will see benefits. And both parties do gain — just not equally. Not surprisingly, problems can emerge when one party feels it is not benefiting as much as its partners. Henry Liu, vice president of Starlight Industrial Ltd., a Hong Kong toy manufacturer, commented, “Very often when we ask the customers [buyers] for information, we feel like we are talking to the wall. We have difficulties getting their commitment to do more knowledge sharing. The knowledge and information flow along our supply chain needs to be more effective.” This imbalance — where managers see relative gains as more important than absolute gains — can undermine long-term cooperation within supply chains. In general, however, both buyers and suppliers felt that their collective knowledge-sharing efforts enhanced the value of their relationships with partner companies. They felt that knowledge-sharing activities helped reduce costs, increase product quality, enhance delivery performance and increase the overall quality of communication between companies. In short, whatever the disparities in bottom-line benefits between buyers and suppliers, both groups felt that intercompany knowledge sharing was a valuable aspect of their global supply chain relationships. As Yeh of the TMHK noted, “Knowledge sharing between buyers and sellers is critical in a supply chain, even though it is often hard to quantify the actual size of the pie gained by each individual party. Both sides have to look at the ultimate picture and be more in sync.”

One question that emerges from the research is: Why do suppliers generally benefit more than buyers? There are two factors: the predominance of demand-driven supply chains in today’s global marketplace and the fact that suppliers have more room for improvement than buyers, who already tend to be quite lean. Increased competition has forced supply chain managers to become more agile and to tie their global models more closely to real-time consumption (as opposed to capacity or speculative sales forecasts). As a result, the knowledge that buyers share with suppliers is more valuable.

Demand-driven supply networks have been implemented by some of the best supply chains worldwide, including Toyota and Dell Inc.12 Moreover, many successful suppliers, such as those supplying the automotive and aerospace industries, are becoming system integrators, producing components and whole systems for leading manufacturers.13 In the meantime, manufacturers (buyers) have had to simplify their approaches to lean manufacturing processes and become less rigid. A number of industries have already taken big steps in this direction, including U.S. aerospace and defense companies.14 Several major players, including Boeing, Lockheed Martin and United Technologies, recently formed the Supplier Excellence Alliance, comprising original equipment manufacturers and suppliers working together to accelerate supply chain performance. One of its primary initiatives is to help companies become effective participants in demand-driven supply networks.

Sharing Knowledge Across Borders

Several important lessons emerge from this. First, while suppliers may benefit the most from knowledge sharing, buyers also come out ahead. Frequently, supply chain partners focus too much on their own share of the benefits pie, forgetting that unless knowledge resources are shared, no one benefits. A company may not benefit as much from knowledge-sharing activities as its partners. But in absolute terms, its performance will be enhanced significantly. Without participation, knowledge sharing doesn’t occur, and no one wins.

Second, dividing the benefits equally between suppliers and buyers may sound appealing, but in reality it may not be possible: One partner will always have more to learn than the other and thereby have a bigger upside. In most industries, suppliers have the advantage as global supply chains move toward more demand-driven models, giving buyers the upper hand. However, buyers have already seized many efficiencies. Suppliers, who are furthest removed from the point of final sale (and thus have the most room for improvement), have the next opportunity.

Suppliers need to realize that any real or perceived disproportional benefits on their part may cause tension in the relationship, and they need to be willing to address this problem. Among other things, they can show good will in the form of more generous division of profits, support for customers’ R&D programs, discounts or preferred customer status. This would go a long way toward ensuring future knowledge-sharing benefits.

Third, in order to benefit from their partners’ knowledge, companies need to participate in the sharing process. Even if a company feels that sharing certain information or knowledge resources is more of a potential liability than a benefit, it must recognize that there is a quid pro quo: A partner’s participation in the sharing process will likely depend on the original company’s willingness to do its part.

Finally, cross-cultural differences rarely matter, at least in the context of knowledge-sharing value. Managers repeatedly have heard that the greater the cultural distances between buyers and their suppliers, the less effective knowledge sharing can be. Our research found the opposite.

IN THE COMPETITIVE LANDSCAPE of global supply chains, knowledge sharing between buyers and suppliers has never been more critical. Although there is still a significant amount of hesitancy on the part of supply chain managers to share critical knowledge resources, experience shows that knowledge sharing can benefit both buyers and suppliers. If managers can come to terms with the often-disproportionate gains for suppliers and understand that some gain is better than no gain at all, both parties will benefit. Simultaneously, there may be room for suppliers to address the benefit disparities in order to reduce tensions among supply chain partners. If companies approach global knowledge sharing constructively, supply chains will become more competitive — and everyone can win.

References

1. E. Anderson and S.D. Jap, “The Dark Side of Close Relationships,” MIT Sloan Management Review 46, no. 3 (spring 2005): 75–82.

2. H.L. Lee, “The Triple-A Supply Chain,” Harvard Business Review (October 2004): 102–112.

3. B. Swanton and D. Hofman, “DDSN: Who Says Reducing Forecast Error Requires Predicting Further Into the Future?” (Boston: AMR Research, 2004). An increase in demand visibility was also found to increase on-time delivery performance by 27.5% and yield an average margin improvement of 3.7%, according to AMR; see C. Saran, “Supply Chain Optimisation Can Deliver ROI Within Four Months, Finds AMR Research,” Computer Weekly, April 25, 2006.

4. K. Giriprakash, “Toyota’s Small Car Likely to Be Ready by 2010–11,” Hindu Business Line, Feb. 15, 2007.

5. I. Young, “Industry Eyes Big Savings From Supply Chain Collaboration,” Chemical Week, Nov. 2, 2005; S. Monahan and R. Nardone, “How Unilever Aligned Its Supply Chain and Business Strategies,” Supply Chain Management Review 11, no. 8 (November 2007): 44–50.

6. Many industries besides the chemical industry can benefit from increased supply chain collaboration and knowledge sharing. According to AMR Research, increased knowledge flows and more visible supply chains (meaning more information on customer demand for all supply chain members) lead to a significant reduction in supply chain problems. The combined annual returns for companies in AMR Research’s 2007 top 25 supply chains, an annual ranking that identifies large manufacturers and retailers that display superior supply chain performance, capabilities and leadership, was 17.89%, significantly higher than the Dow Jones or S&P 500 returns for the same period. The top companies include Nokia, Apple, Procter & Gamble and IBM. See K. O’Marah, “The Top 25 Supply Chains 2007,” Supply Chain Management Review 11, no. 6 (September 2007): 16–22.

7. “Best-In-Class Firms 2.7 Times More Likely to Use Global Supply Chain Visibility Platforms to Improve Global Trade Management,” Asia Pulse News, June 15, 2007.

8. Author’s interview with U.S. freight company executive, Aug. 26–27, 2007.

9. F. Selnes and J. Sallis, “Promoting Relationship Learning,” Journal of Marketing 67, no. 3 (July 2003): 80–95.

10. For more detailed descriptions regarding how knowledge sharing works and who benefits, see D. Apostolou, N. Sakkas and G. Mentzas, “Knowledge Networking in Supply Chains: A Case Study in the Wood/Furniture Sector,” Information Knowledge Systems Management 1, no. 3–4 (1999): 267–281; for excellent reviews of the dangerous repercussions, see Anderson and Jap, “The Dark Side.”

11. “Chinese Toys: No Fun and Games,” Economist, Jan. 12, 2008.

12. R. Kisiel, “Automaker, Supplier Win Supply-Chain Honor,” Automotive News, Dec. 12, 2005.

13. J. Ott, “Chain Reaction: The Supplier Excellence Alliance Is Spreading the Gospel of Lean Manufacturing and the Mechanics of Survival,” Aviation Week, Sept. 19, 2005, 51; for more on the Supplier Excellence Alliance, see www.seaonline.org.

14. “Chain Reaction.”