Supplier alliances to broaden the product portfolio - a buying company perspective Pontus Sonesson & Peter Röckert June 2006 Lund’s University Faculty of Engineering Department of Industrial Management and Logistics Alliances between suppliers and industrial customers offers many advantages, if employed in the right situations This article is based on a master thesis study conducted at Alfa Laval AB in Lund. The aim of the study was to give Alfa Laval recommendations on how to successfully work with supplier alliances. Issues regarding situations suitable for strategic supplier alliances and how alliances should be managed to ensure success are therefore handled.
Introduction Today’s business environment is rapidly changing and the technological development is swift. This result in constantly tougher customer demands and persistently shorter product life-cycles, making it difficult for any business to keep the required pace. Contemporary businesses are therefore required to find ways to differentiate and niche themselves. To broaden the product portfolio in the industrial market, beyond traditional in-house developed products, is one way. This is the case within several of Alfa Laval’s market segments. By engaging in close relationships and alliances with different suppliers Alfa Laval seeks to broaden the product portfolio with relevant applications in order to be acknowledged as a leading supplier on the market. The products bought through these collaborations are fully Alfa Laval custom designed products to be sold without further processing. Through the relationships the suppliers gain access to Alfa Laval’s worldwide market presence and are thus able to reach markets otherwise unavailable. At a first glance such alliances may seem similar to regular wholesale dealing. In this case the relationships are however much
closer. Cooperation stretches beyond the trading and the involved parties strive to coordinate business efforts in different ways. Within the alliances products are developed jointly, common goals are set-up for marketing and sales efforts and different levels of relationship specific investments are made. Purpose Although often perceived as a fast and profitable venture, many alliances fail. Also within Alfa Laval the results of alliance attempts make up a job lot. In order to avoid further costly and potentially damaging failures, the requirements for a successful alliance needed to be investigated. First and foremost, the issue concerning when it should be of interest for Alfa Laval to engage in a strategic supplier alliance must be handled. Secondly, when an alliance is sought, questions regarding supplier evaluation and selection are raised. Furthermore there was a need to identify the main factors crucial for success in strategic supplier alliances and to give answers to questions on how to maintain competitiveness within an alliance, once it is set up. Methodology As is the case with most logistics and supply chain studies [1], this investigation was
conducted using a systems approach to research. The study was conducted partly as a literature study, to build a theoretical frame of reference, and partly as an empirical investigation to illuminate the problems from an Alfa Laval perspective. The empirical part is based on a multiple case study, where four cases were studied. A cross-case analysis was thereafter conducted identifying patterns and differences used for the conclusions finally drawn. Theoretical frame of reference Substantial literature can be found on the subject of strategic supplier alliances. However, almost all available literature handles alliances concerning products and components of great strategic importance to the buying company. This study focuses on alliances involving the trading of less critical products. Nevertheless, most relevant aspects seem mutual and the theory is therefore applicable also on these types of supplier alliances. To ensure applicability, the theoretical frame of reference includes characteristics and definitions of several different levels of interorganizational relationships [2]. Once properly framed in the scale of supplier relationship types, strategic supplier alliances can be more specifically described and defined [3]. In addition, portfolio purchasing strategies [4] have been studied, to facilitate conclusion on allowed levels of resources allocated to a specific relationship. Once these situations for alliances have been established, the most critical success factors [3] for alliances are discussed and an extensive alliance implementation model [5] is employed.
“a long-term, cooperative relationship designed to leverage the strategic and operational capabilities of individual participating companies to achieve significant ongoing benefits to each party.” The definition is well suited for the types of supplier relationships included in this study. Cooperations are long-term, typically more than four years, and include benefits for both parties unavailable without a closer relationship. Although different in purchasing volume and levels of relationship specific investments, the cooperations all include joint activities within at least one strategic area and have the potential to offer great value to all participating companies. Critical success factors Available theory presents a clear picture of some key characteristics mutual to successful alliances. The following characteristics are therefore described as the most critical success factors in strategic supplier alliances [3]: •
Both parties need to be committed to the alliance and thereby willing to dedicate sufficient time and resources.
•
Mutual trust needs to be present in the relationship to facilitate necessary coordination between firms.
•
A certain level of interdependence between parties builds the basis for stability and long-term focus
•
An open flow of information, sufficient in both quantity and quality, is inevitable for successfully conducting activities within strategic areas included in the alliance.
Definition of an alliance at Alfa Laval
The case studies
For the purpose of the investigation and prior to the empirical part of the study, a strategic supplier alliance must be carefully defined. The definition employed in this study is based on Monzcka (1998). A strategic supplier alliance is therefore defined as
The empirical data included in this research derives from the study of four different cases of close supplier cooperations with Alfa Laval as the buying party. These cases share many characteristics, but also differ in a few aspects. In Figure 1 below the different cases are placed in a matrix to illustrate the key differences.
SKF are added to expand the study to also include suppliers of product components. Both Roplan and SKF are identified by Alfa Laval as strategic suppliers but are strictly purchasing driven relationships, managed according to the established purchasing strategy within Alfa Laval.
SKF Ongoing
Zorzini
Terminated
Nissens
Roplan
The cross case analysis Trading product
Core component
As described above, Alfa Laval sees alliances with trading product suppliers as a fast and resource efficient way to bring new products to the market, with low risk exposure. The suppliers are offered access to new markets and increased sales volume through access to Alfa Laval’s global sales network.
Figure 1 Matrix of key differences between selected cases
As seen in Figure 1, the selected the cases reflect, not only successful as well as failed alliances, but also different types of suppliers. While Zorzini and Nissens are market driven collaborations aimed to support Alfa Laval’s portfolio strategy and broaden the product portfolio in ways described in the introduction, Roplan and
In Table 1 the key aspects of the studied relationships are presented and the main differences between purchasing and portfolio management driven alliances are highlighted.
Table 1 key case findings with relationship type differences marked Supplier Aspects Product type Relationship type Product category Supplier selection
Nissens Trading product
Zorzini Trading product
Roplan Component
SKF Component
Strategic supplier alliance Bottleneck product (initially) Few suppliers evaluated
Strategic supplier alliance
Long term relationship
Long term relationship
Non-critical
Bottleneck
Bottleneck
Ongoing relationship Cost reduction, assortment expansion
Ongoing relationship Technology, product development
Ongoing relationship Technology, product development
Benefits for Alfa Laval
Access to new technology
Match between required and existing strengths
Low
Medium/High
High
High
Supplier's value of offered benefits
Low
High
Medium
Medium
Medium/High
High
Low
Low/Medium
Medium
Medium/High
Low/Medium
Medium
Low / Low
Low / Medium
High / Medium/High
High / None
Medium/High
High
Low/Medium
Medium
Relationship Attributes
Commitment Trust and coordination Dependency (Al / Supplier) Information sharing
in trading product alliances is superior to supply risk and dependency management in establishing commitment and trust within the relationships.
As seen in Table 1 there are several interesting differences between the component supplier relationships and the market driven trading product supplier relationships. A primary difference is of course the management of the relationship, where trading product supplier relationships are managed by market driven functions and component supplier relationships are managed by the purchasing function. As a result, the levels of commitment and information sharing are much lower in the component supplier relationships, and the level of trust and coordination is slightly lower. Although this gives the impression that close relationships with component suppliers is undesired, it has to be seen as a natural result of the underlying benefits seen as basis for closer collaborations with trading product suppliers. The underlying motive for closer component supplier relationships seems to be exclusively longterm management of an undesired and unfavourable dependency on the suppliers. One conclusion to be drawn from this is therefore that the perceived value involved
Alfa Laval’s commitment to component supplier relationships is further limited by the current, strongly price and cost focused purchasing strategy. With such focus, many of the benefits traditionally sought through alliances become of no immediate interest, since they typically result in savings within production or R&D functions, or benefits for sales, but may not lead to decreased purchasing prices. Although suitable for a vast majority of the components bought by Alfa Laval, the price focused sourcing strategy seems incompatible with closer alliances, as indicated in Table 1. Yet another aspect is the differences seen between the two different trading product supplier relationships studied. The characteristics of these relationships are set up for comparison in Table 2 below, and the main differences are highlighted.
Table 2 Key differences between Nissens and Zorzini cases. Supplier Aspects
Nissens
Zorzini
Product type
Trading product
Trading product
Strategic supplier alliance Bottleneck product (initially) Few suppliers evaluated
Strategic supplier alliance
Relationship type Product category Supplier selection
Non-critical Ongoing relationship Cost reduction, assortment expansion
Access to new technology
Match between required and existing strengths
Low
Medium/High
Supplier's value of offered benefits
Low
High
Medium/High
High
Medium
Medium/High
Low / Low
Low / Medium
Medium/High
High
Relationship Attributes
Benefits for Alfa Laval
Commitment Trust and coordination Dependency (Al / Supplier) Information sharing
The mismatch was further enhanced by Nissens relatively little value of the benefits offered by Alfa Laval through the alliance. Although superior in sales and distribution structure, the forecasted sales volume offered by Alfa Laval, amounting to 5 % of Nissens OEM turnover, only represent a mere three months of organic growth for Nissens. Such rapid growth is strenuous to Nissens capacity, making the low margin volume offered by Alfa Laval less attractive. This is in great contrast to the Zorzini case, where Zorzini had substantial excess capacity along with an inferior distribution structure. Worth mentioning is also that in both alliances with trading product suppliers, the supplier selection process seems to have been performed in a non-structured manner. However in the Zorzini case the relationship stretches far back in time as an arm’s length, component supplier relationship. The previous experiences therefore successfully served as evaluation, while the lack of a
proper evaluation and selection process in the Nissens case, caused Alfa Laval to fail to see the mismatch described above.
High
Importance of purchasing
Although similar between the two trading product supplier cases, it is of great interest to discuss the characteristics of the products traded within these relationships. In Figure 2 below the different products are placed in Kraljic’s product classification matrix.
Leverage products
Strategic products
Non-critical products
Bottleneck products
Low
As can be seen in Table 2, there are some important differences between the two trading product alliances which may explain the success of the Zorzini alliance and the failure of the Nissens alliance attempt. While the critical success factors seem present in both cases, the main difference is found in the match between the supplier’s strengths and Alfa Laval’s requirements. While Zorzini offers capabilities of great value for Alfa Laval in this particular situation, there seems to be a mismatch in the Nissens case. Nissens is specialized in producing customized applications of high quality. Through the alliance Alfa Laval however wanted to add a standard range of products to the portfolio. Consequently Alfa Laval had to pay for flexibility and customization abilities that were of little value to the alliance. The hydraulic market is relatively mature with quite fierce competition making price the all overriding issue for Alfa Laval and rendering a price agreement, offering sufficient benefits to both allied parties, impossible.
Low
High
Supply risk
Figure 2 Nissens and Zorzinis products classified in Kraljic’s matrix [4].
Although the products bought from Nissens will initially be classified as bottleneck products due to the new addition to Alfa Laval’s product range and Alfa Laval’s lack of related technological competence (the right black mark), it will soon, as the product is developed and launched on the market, drift into the non-critical product category (the left black mark). Since the manhole covers traded with Zorzini are already part of Alfa Laval’s portfolio and there are many potential suppliers on the market, these are found within the noncritical product category (the white mark). Conclusions Based on what is presented above, one could reach several conclusions. Primarily the data support the conclusion that strategic supplier alliances, with trading product suppliers, offer Alfa Laval a fast and resource efficient way to add new products to the current portfolio and thus lifting the entire product range by offering complete solutions. It is also an option associated with low risk
exposure in comparison to internal development of new unfamiliar technology or acquisition of external companies. However, one also has to draw the conclusion that it is imperative to find the most appropriate supplier as a partner in order to establish a successful alliance. In addition to regular evaluation criteria, a clear match between the supplier’s strengths and capabilities needs to be ensured. In the same sense, the supplier must also perceive the alliance to be of value and the benefits offered by having Alfa Laval as a partner must therefore be evaluated from a supplier perspective. This was not the case in the failed alliance attempt between Alfa Laval and Nissens. Finally, Alfa Laval needs to acknowledge that the low financial importance of the complementary products traded must lead to a limitation of the resources spent on building alliances and close relationships. If to much resources are allocated to the collaborations, the relationship will, although prosperous, be unprofitable and thereby have a negative effect on Alfa Laval’s overall result.
References [1] Gammelgaard, B (2003) Schools in logistics research? A methodological framework for analysis of the discipline, International Journal of Physical Distribution and Management, vol 34, no 6, pp. 479-491. [2] Seppälä, Tero (2003), Three perspectives on buyer supplier relationships: A relationship assessment model for investigating buyer-supplier relationships in inter-organizational, Inter-functional and intra-functional perspectives, Turku School of Economics and Administration, Turku [3] Monczka, Robert M; Petersen, Kenneth J; Handfield, Robert B; Ragatz, Gary L (1998), Success factors in strategic supplier alliances: the buying company perspective, Decision Sciences 1998;29,3, pp. 553 – 577. [4] Kraljic, Peter (1983), Purchasing Must Become Supply Management, Harvard Business Review, September-October 1983. [5] Ellram, Lisa M (1991), A Managerial Guideline for the Development and Implementation of Purchasing Partnerships, International Journal of Purchasing and Materials Management, 1991:27:3