Inside Sourcing newsletters \ No business is an island: How companies collaborate with trading partners and the opportunities for improvement
Today's businesses realize that they can no longer be competitive on their own. They have trimmed inventories, reduced costly infrastructure, outsourced processes, and stretched their supply chains around the globe. As a result, they are more dependent upon their external partners than ever before. This has made collaboration more critical - and complex.
Fortunately, technology has evolved to make collaborating with a global network of customers, suppliers and other partners easier. As consumers, we tap into personal networks like Facebook, Twitter and Amazon.com that help us learn, share and shop with more ease. Business networks provide an equally easy way for companies to link and coordinate a virtual 'extraprise' of partners into a shared community executing improved and coordinated processes in a more informed way than in the past.
Empowered by business networks, companies of all sizes, across industries and geographies can perform key processes such as buying, selling and invoicing with greater efficiency. They can also enhance and expand their relationships. Harnessing the connectivity and insights that business networks deliver, buyers can find the right partners and optimize their spend and supply chain. And sellers can engage with customers when, how and where they want to increase satisfaction and wallet share.
So if collaboration drives such significant benefits and is now so easily enabled, why aren't we seeing broad-based economic gains driven by a surge in enterprise productivity? Have companies truly embraced collaboration with their trading partners? What can individual companies do to accelerate the benefits to their organization and build a competitive advantage?
Ariba, an SAP company, has partnered with the Economist Intelligence Unit to better understand these issues through a comprehensive study in which nearly 300 executives, across functions at companies spanning 19 industries and 33 countries throughout Europe, the Middle East and Africa (EMEA), were surveyed. EMEA represents a fascinating case study, spanning many of the most advanced economies in the world as well as a broad range of emerging ones. It has also faced a broad range of challenges in recent years that could hinder or be addressed through collaboration. Where better to dive into the details of collaboration and try to answer the aforementioned questions?
The results of this effort, detailed in the following pages, are telling.
An overwhelming majority of respondents say that their organizations are creating value through collaboration and that it is viewed as a strategic capability. A clear, but smaller, majority have also started to invest by enabling staff and training to drive it. Businesses are indeed collaborating.
However, they are doing so in a limited, rigid manner. They are investing in people, but not in the enabling technology. They are collaborating, but in limited ways and with only a small portion of their trading partners. They are not adapting their collaboration strategies based on market conditions and events. They are concerned about the risks increased collaboration can expose them to, yet are not leveraging new insights available to mitigate risks. All of this is limiting the results that they achieve.
Without the right solutions and skills, it is simply not possible to extend collaboration to a broad base of trading partners. Nor is it possible to enable new insights and processes that are only possible in a networked environment and which can drive business advantage.
At the end of the day, many companies remain skeptical of the notion that technologies like those used to drive personal commerce can be applied in the business world. But business has gone social. And there's no going back. Companies that embrace technological advances such as cloud computing, mobile, and digital networks and communities can not only run their businesses more effectively today, but successfully prepare for tomorrow.
The global economy is a complex web of business relationships that no company can navigate alone. Whether it is through outsourcing, partnership or simple supplier-customer interactions, all businesses are reliant on the relationships they have with their peers.
It stands to reason, then, that perfecting collaboration with one's trading partners is a key success factor in business. But how can companies maximize the value of their trading partner relationships, and how can they mitigate the risks?
This report, written by The Economist Intelligence Unit and sponsored by Ariba, an SAP company, examines the value of collaboration between trading partners and explores how it can and should be done. It is based on a survey of executives and in-depth interviews with practitioners and experts.
The key findings are as follows:
There is a growing realization that businesses depend on value chains that include trading partners of all kinds. The value of collaborating with those partners effectively is almost universally recognized, with 93% of respondents saying they derive value from collaboration.
Companies with strong technology capabilities make for attractive trading partners. Technological capabilities, as they apply both to product and internal operations, are the number one selection criteria for trading partners.
Information sharing is the most common form of collaboration. Sharing information with trading partners helps to extend an organization's situational awareness and builds trust - although some companies might need encouragement before they share.
Collaboration does pose its own risks, with respondents identifying reputational damage as the gravest risk. However, companies can mitigate the risks inherent to working with third parties by adopting innovative approaches to collaboration.
Collaboration is widely recognized as a strategic capability. But while most organizations have adopted a 'formal' approach to collaboration, there was less evidence that they were pursuing innovation in the way they collaborate. Doing so is an untapped opportunity to identify cost savings and drive growth.
When working within a large organization it may seem like a world unto itself, but even the biggest businesses rely on an ecosystem of customers, suppliers, partners and even competitors to survive.
Much has been written about the art and science of internal collaboration, but the question of how organizations work with one another for mutual benefit is less explored. The purpose of this report, written by The Economist Intelligence Unit and sponsored by Ariba, an SAP company, is to evaluate how companies collaborate today, what value they derive from it and how that value might be increased.
Based on a survey of 281 business executives in Europe, the Middle East and Africa, who work for organizations with at least $500 million in annual revenue, the report finds that collaboration is highly valued. Indeed, 93% of organizations say they are creating value through collaboration.
Both information and technology play crucial roles in trading partner collaboration. Sharing information is the most common form of collaboration among respondents, and it is hard to imagine any successful collaboration that does not involve the exchange of information. Technology capabilities, meanwhile, are the number one selection criteria that respondents look for in potential partners.
It is unsurprising, then, that information technology is helping many organizations find innovative ways to collaborate with trading partners. Whether it is industrial distributor Brammer placing vending machines for tools in its customers' premises, or heavy duty vehicle maker Caterpillar helping suppliers find the working capital to ramp up production, there is ample opportunity for innovation in trading partner collaboration, and every reason to pursue it.
Businesses certainly acknowledge the importance of collaboration, and 86% of respondents say their organization considers it to be a strategic capability. There was little evidence, though, of respondents pursuing some of the more innovative approaches to collaboration.
This suggests that while companies understand the need to optimize their relationships with trading partners, they may not be aware how many ways there are to do it.
Why collaboration matters
No business is an island. The economy is an intricate network of business processes and value chains that cross organizational boundaries many times over.
This means that an organization's network trading partners - be they suppliers, distributors or even customers - are effectively an extension of the organization itself. To maximize their own potential, therefore, businesses need to know how to make the most of that network.
"These days, you cannot stop improving business processes when they reach your company's borders," says Heiko Rumpl, European e-business director at industrial parts distributer Brammer. "You need to improve the competitiveness of your value network if you want to improve the competitiveness of your own organization."
There are two ways to achieve this. The first, of course, is to select highly effective partners. The second is to perfect the art of collaboration.
Collaboration is now included in the curriculum of international accreditation body The Chartered Institute of Purchasing and Supply, the world's largest membership organization for procurement professionals. The reason for this, explains global president Craig Lardner, is that effectively collaborating with suppliers expands one's own capabilities.
"If I am a good procurement person, I'm not looking for cheaper products, I'm looking for a competitive edge that my sales and marketing colleagues can take advantage of when they face our customers," says Lardner, who has a 20-year history in the procurement profession, including a spell as CPO of global gases firm The BOC Group, now part of The Linde Group.
"A really good procurement person looks at the supplier's supplier and customer's customers," he adds. "Somewhere in that backward glance, there will be an edge for me to grab on to and pass to my colleagues in sales and marketing; a new way of doing something that is going to make it more streamlined for the organization or more quality assured for my organization."
David Loseby, chief procurement officer with transport group Arriva, says organizations are beginning to understand that suppliers possess knowledge about technology or processes they can no longer ignore.
"What people have to recognize is sometimes suppliers have access to market insight, knowledge and a trend. It is recognition that you cannot afford to be too arrogant no matter how big you are. You need to be able to listen to feeds from all sorts of angles and if you don't respond to that, then that is a very dangerous place to be. It will be part of helping deliver future business models."
To gain these insights, businesses need to be continually aware of the new technology and processes being developed in the upstream supply chain. "You need to know who is investing in what to give you competitive advantage, whether that is new technology, systems or processes."
Mr Loseby adds: "It doesn't matter whether it is science, technology or IT systems, they are all cumulative. You are trying to define the real ground-breaking ideas that makes that seismic shift from where we are today to where we need to be tomorrow."
Collaboration is imperative in high-tech industries where specialist technologies are embedded in products, for example use of information technology within cars, says Robert Fieten, part-time professor at Universidad Alcalá de Henares and board member of the German Association for Procurement and Material Management.
"This is the key issue right now, especially in industries like automotive and aerospace. It is an absolute must. Nobody has all the wisdom that is necessary to make high-tech products. It is driven by a need to cooperate and reap the rewards of synergies."
Access to technology is a key driver for collaboration. When asked to identify their priorities when selecting a business partner, 56% of respondents answer "the partner's technological capabilities", making it the most popular response.
This includes the technological input that partners can provide into products and services, but also the way in which partners use technology to run their own business.
Brammer, for example, has for the last decade been pursuing a strategy of using technology to become a more valuable trading partner to its customers. For example, it provides data analytics services that allow customers to analyses their expenditure with Brammer, and in some case with other suppliers too, and therefore optimize their procurement strategy.
With value-added services such as these, Brammer hopes to grow its share of Europe's €40 billion industrial parts market. "We've got about a 2.5% market share right now, but it's an extremely fractured market," Rumpl says. "We strongly believe the market will be consolidated and we want to be the main consolidator."
"We have identified services that allow us to collaborate much more effectively with our customers, such as data analytics and integration," he adds. "But we're not maximizing profit by charging customers for these value-added services, we use them to grow market share."
Growing market share is just one objective that can be pursued through collaboration. Among survey respondents, the most common priority when collaborating with trading partners is "increasing customer satisfaction", with 49% selecting this option. Interestingly, customer satisfaction topped the priority list not only among respondents from customer-facing departments such as sales and marketing, but also finance, IT and strategy and business development (Evidently, the message that all departments must focus on the customer is getting through).
Beyond customer satisfaction, however, different departments had different priorities. Respondents from IT, for example, priorities reducing process costs; in finance, they seek to improve cash flow. That serves to show the range of benefits on offer by collaborating effectively.
How companies collaborate
The spectrum of inter-company relationships ranges from deeply integrated, strategic partnerships to highly automated, transactional connections. Identifying which of these is appropriate for any given business function is part of the art of effective collaboration.
There are some common components, however, such as sharing information. Nearly two-thirds of respondents (63%) say they have shared information with a trading partner at least once in the past three years, more than any other available option.
It is perhaps surprising that this figure was not 100%, as sharing information is clearly vital for effective collaboration. Sharing the right information with trading partners is one way for organizations to extend their situational awareness, and allows both parties to provide greater value to one another.
CEVA Logistics, a large European supply chain operations company, encourages its customers to share as much information as possible. This serves two purposes: it allows CEVA to design the right solution for their customers' needs, and it gives CEVA advance warning of any operational issues that might be coming down the line.
For example, the company works with Primark, a UK clothes retailer, on achieving upstream visibility of its suppliers' performance so CEVA can priorities warehouse workloads and provide advance warning of any delays. This benefits the client too, as it may preclude the need to order new stock in the event of a last-minute spike in demand.
"We do a huge study to understand how their supply chain currently works, and work out in theory what the benefits would be of changing the process," explains Folkert Bergstra, finance director for container logistics at CEVA.
Not all customers are immediately comfortable with this level of information sharing, he says. "Very few are convinced straight away. Initially it may seem like additional work so we have to explain why it is beneficial to them," Mr Bergstra explains. "We can demonstrate with other customers what steps we made, how they deliver information and how we deliver it to them and what the benefits are.
"By doing those sorts of thing, we convince the customer to change to a certain way of working to get benefits on both sides."
Crucially, though, making sure the relationship is benefiting both parties is more than a matter of monitoring key performance indicators (KPIs). "We believe that relationship is crucial to retain business. KPIs may be on green but you can still lose the contract if the relationship is not as good as it should be."
"We have monthly and quarterly reviews with customers. You can go through all the formal checks and they seem fine, but you can also ask the customer, 'Tell me, if you had to renew today would you do it?' or 'Tell me what is keeping you awake? What else is of interest?'"
"We do quite a bit in order to make sure we understand what is driving the customer," Bergstra adds. For Brammer, information sharing engenders trust between trading partners. And trust, says Mr. Rumpl, is essential for valuable collaboration. It is not always easy to be completely transparent with customers, he admits, but it is worth it in the long run.
"We've developed tools that allow customers to analyses how much they spend with us, and sometimes that means they can see that we sell a product to one of their plants at a cheaper price than we do to another plant," he says.
"So the data might not always be easy to explain to customers, but we don't hide it from them because transparency builds trust," Humpl says. "And without trust, value cannot be released between trading partners."
The second most common form of collaboration among respondents is joint product development. This, again, is surprising as joint product development accentuates the inherent risk of relying on third parties to serve customers. However, as some companies are demonstrating, more innovative approaches to collaboration can help trading partners reduce the risk of working together.
Managing the risks of collaboration
Collaborating with trading partners effectively requires placing one's trust in a third party, and this can expose organizations to a certain degree of risk.
Among survey respondents, the number one risk associated with collaboration is "reputational damage". According to Dr Fieten, businesses' main reputational concern is that unethical behavior in their supply chain might damage their good name.
"If you look at the apparel or textile industry, they might have a problem if they have many suppliers in Bangladesh or Cambodia where working conditions are not good. You read about this sort of problem almost every day in the newspapers. It has a very strong impact on the firm's reputation and they are very concerned about this."
Meanwhile, the banking industry also is, at present, especially keen to avoid any reputational damage, says John Francis, a senior manager at Accenture Strategy. To be more precise, they are keen to avoid any legal difficulties that may in turn lead to reputational damage. The way they are handling this is to make sure their supplier selection process is as transparent and thorough as possible, Mr Francis explains.
The second highest risk was loss of product quality. This is linked to reputational damage as well, as demonstrated by the public backlash against General Motors after the company was forced to recall millions of cars in 2014 due to a technical fault.
Performance issues such as this are often caused by a lack of focus on quality after deals are struck, Dr Fieten says. "It can be due to neglecting the supplier relationship, without sufficient quality control. It is very important that after the relationship is established you have continual checks."
Another common concern is that suppliers might run into financial difficulty, leaving a business unable to manufacture its products or deliver its services.
This danger is keenly felt in the automotive industry, where car makers rely on a key supplier to bring new technology to market rapidly in order to gain consumers' attention. The proximity to their suppliers exposes automotive manufacturers to risk, says Emmanuel Walter, chief financial officer of sports car maker Caterham Alpine.
"For the eight-year lifecycle of a car, we have to ensure the supplier survives," Mr Walter explains. "If they go bankrupt, we do not have a plan B."
These concerns mean that supplier due diligence is a matter for the board. "They spend a huge amount of time going through the key suppliers to be sure of them. Typically, in a collaborative project, we will have worked with many of the suppliers for more than 20 years. It takes a long time to find decent suppliers and it is really not easy," Mr Walter says.
Some companies are so wary of this kind of supplier risk that they are reluctant to collaborate at all. According to Accenture's Mr Francis, a continued sense of economic volatility - and therefore the danger that suppliers might go under with little warning - is preventing some businesses from partnering altogether. "For some companies, this is a real barrier," he says. "They are not engaging, and they are keeping more things in-house."
However, by adopting innovative approaches to collaboration, companies can mitigate this supplier risk. Caterpillar, the industrial equipment manufacturer, is seen as an expert in this field.
In the wake of the economic downturn, Caterpillar expected demand to grow rapidly. However, it also predicted that some of its key suppliers would struggle to find the working capital required to ramp up production to meet that demand as it grew.
The company therefore introduced a number of measures to reduce the capital required by its suppliers, especially the small and medium businesses among them. It standardized its payment terms and offered suppliers the chance to receive early payment in exchange for discounts, and helped suppliers access a supply chain finance initiative by the US government. These measures were designed to help Caterpillar's suppliers pursue their own objectives - namely sell more products - in a way that clearly boosted its own cause.
This example shows how companies can manage trading partner relationships innovatively in order to reduce their strategic risks, and modify their approach to collaboration in response to market conditions. However, this style of collaboration does not appear to be popular among respondents, only 28% of whom have conducted "joint financing" with partners in the last year - fewer than any other option - and only 33% have offered early payment in exchange for discounts.
There is no question that respondents see collaboration as strategic. Indeed, 86% say their organization recognizes it as a strategic capability. But is there evidence that they are collaborating in a strategic fashion?
According to CIPS president Craig Lardner, truly strategic collaborators are those companies that consider the strategic objectives of their partners, as well as their own, when assessing their contribution to a partnership. "They do things differently, and one of those things is how they look at the strategy of an organization from board-level," he says. "They ask themselves and their team the question: 'what are we going to do, in our area of specialty, to help deliver on those strategic goals?' That behavior is called strategic alignment."
Shared objectives were identified by 48% respondents as the most critical component of a successful collaboration, more than any other factor. This was followed by communication (40%) and transparency (38%).
But few companies can really manage this level of harmony with their partners, Mr Lardner says. "Collaboration is beyond some customer organizations," he explains. "They cannot get out of the old conflict of procurement verses supplier sales. Once you get out of that old-fashioned paradigm then you can turn your attention to getting the supplier and your own organization in the right place."
The majority of respondents report that they their organizations have 'formalized' collaboration with their trading partners. When asked to describe their approach to collaboration, 39% of respondents say that "we have institutionalized collaboration with trading partners to maximize mutual benefit". A further 32% say "we have taken formal action to improve collaboration with some trading partners".
But formalizing processes is not the same as being strategic. Limited adoption of joint financing and early payments among respondents, at a time limited lending by the banks has led many small and medium-sized businesses to seek alternative sources of financing, indicates that few companies are pursuing innovative ways to manage supplier risk.
Brammer is pursuing its own strategic goal - growing market share - by finding innovative ways to help its customers pursue theirs, says Mr Rumpl. The company supplies parts for maintenance, repair and operations (or MRO) at production and manufacturing plants across Europe, and its customers include Unilever and Procter & Gamble. According to Mr Rumpl, manufacturers typically manage the supply chain for their raw materials effectively, but when it comes to MRO parts they are often in disarray.
"A senior procurement executive at one of our customers told us that MRO really stands for 'messy, random and out of control'," he explains. "However, companies are starting to realize that about
80% to 90% of the total cost of MRO does not come from the goods they purchase, but from the surrounding businesses processes."
The aim of its value-added services is to help customers rationalize those business processes, thereby saving them money. It offers technology-based solutions such as analytics, data services, integration and business networks, as well as project management to help deploy these, at no extra cost to customers.
Brammer is now even experimenting with vending machines for industrial parts situated on its customers' premises. "We are in the process of developing vending machines for tools and general maintenance products, which mean the customer does not have to stock products such as personal protection equipment," Rumpl explains. "Instead, employees can go up to the vending machine, enter their employee ID number and purchase the product. The customer does not worry about which products to stock, because we will make sure that the products that are needed on site all the time."
Brammer's vending machines for industrial parts demonstrate firstly that, although companies have been working together for centuries, there is still ample opportunity for trading partners to innovate in the way that they collaborate. Secondly, they show that strategic collaboration does not necessarily require high-touch relationships.
The case for collaborating with trading partners effectively is clear and, as the survey suggests, well understood. There appears to be a growing awareness of the importance of tending the financial and physical value chains that cross organizations.
And as the case studies described in this report reveal, there are many different approaches to collaboration that can be applied to many objectives or challenges.
However, on the evidence of the survey, few organizations are using the full range of collaboration options available to them. This could be a hangover from the economic downturn, during which
the fear of financial contagion reportedly made companies more reluctant to partner, or a sign that companies simply lack the process management or technological capabilities required to adapt collaboration in response to market conditions
But it may also suggest that collaborating with trading partners is not viewed as a focal point for innovation. If this is the case, it is good news for companies that wish to extract the maximum value from the organizations with which they surround themselves, because it means that there are untapped opportunities to be grasped.