Supplier alliances to broaden the product portfolio

Transcription

1 Supplier s 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 s. Issues regarding situations suitable for strategic supplier s and how s 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, is one way. This is the case within several of Alfa Laval s market segments. By engaging in close s and s 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 bought through these collaborations are fully Alfa Laval custom designed to be sold without further processing. Through the s 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 s may seem similar to regular wholesale dealing. In this case the s are however much closer. Cooperation stretches beyond the trading and the involved parties strive to coordinate business efforts in different ways. Within the s are developed jointly, common goals are set-up for marketing and sales efforts and different levels of specific investments are made. Purpose Although often perceived as a fast and profitable venture, many s fail. Also within Alfa Laval the results of attempts make up a job lot. In order to avoid further costly and potentially damaging failures, the requirements for a successful 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 must be handled. Secondly, when an 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 s and to give answers to questions on how to maintain competitiveness within an, once it is set up. Methodology As is the case with most logistics and supply chain studies [1], this investigation was

2 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 s. However, almost all available literature handles s concerning and components of great strategic importance to the buying company. This study focuses on s involving the trading of less critical. Nevertheless, most relevant aspects seem mutual and the theory is therefore applicable also on these types of supplier s. To ensure applicability, the theoretical frame of reference includes characteristics and definitions of several different levels of interorganizational s [2]. Once properly framed in the scale of supplier types, strategic supplier s 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. Once these situations for s have been established, the most critical success factors [3] for s are discussed and an extensive implementation model [5] is employed. Definition of an at Alfa Laval For the purpose of the investigation and prior to the empirical part of the study, a strategic supplier must be carefully defined. The definition employed in this study is based on Monzcka (1998). A strategic supplier is therefore defined as a long-term, cooperative 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 s included in this study. Cooperations are long-term, typically more than four years, and include benefits for both parties unavailable without a closer. Although different in purchasing volume and levels of 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 s. The following characteristics are therefore described as the most critical success factors in strategic supplier s [3]: Both parties need to be committed to the and thereby willing to dedicate sufficient time and resources. Mutual trust needs to be present in the 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. The case studies 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.

3 Terminated Zorzini Nissens Trading product SKF Roplan Core component 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 s, 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 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 s, managed according to the established purchasing strategy within Alfa Laval. The cross case analysis As described above, Alfa Laval sees s with trading product suppliers as a fast and resource efficient way to bring new 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. In Table 1 the key aspects of the studied s are presented and the main differences between purchasing and portfolio management driven s are highlighted. Table 1 key case findings with type differences marked Supplier Aspects Nissens Zorzini Roplan SKF Product type Trading product Trading product Component Component Relationship type Product category Supplier selection Benefits for Alfa Laval Match between required and existing strengths Supplier's value of offered benefits Relationship Attributes Bottleneck product (initially) Few suppliers evaluated Access to new technology Long term Long term Non-critical Bottleneck Bottleneck Cost reduction, assortment expansion Technology, product development Medium/High High High Technology, product development High Medium Medium Commitment Medium/High High /Medium Trust and coordination Dependency (Al / Supplier) Medium Medium/High /Medium Medium / / Medium High / Medium/High High / None Information sharing Medium/High High /Medium Medium

4 As seen in Table 1 there are several interesting differences between the component supplier s and the market driven trading product supplier s. A primary difference is of course the management of the, where trading product supplier s are managed by market driven functions and component supplier s are managed by the purchasing function. As a result, the levels of commitment and information sharing are much lower in the component supplier s, and the level of trust and coordination is slightly lower. Although this gives the impression that close s 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 s 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 in trading product s is superior to supply risk and dependency management in establishing commitment and trust within the s. Alfa Laval s commitment to component supplier s is further limited by the current, strongly price and cost focused purchasing strategy. With such focus, many of the benefits traditionally sought through s 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 s, as indicated in Table 1. Yet another aspect is the differences seen between the two different trading product supplier s studied. The characteristics of these s 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 Relationship type Product category Supplier selection Benefits for Alfa Laval Match between required and existing strengths Supplier's value of offered benefits Relationship Attributes Bottleneck product (initially) Few suppliers evaluated Access to new technology Non-critical Cost reduction, assortment expansion Medium/High High Commitment Medium/High High Trust and coordination Medium Medium/High Dependency (Al / Supplier) / / Medium Information sharing Medium/High High

5 As can be seen in Table 2, there are some important differences between the two trading product s which may explain the success of the Zorzini and the failure of the Nissens 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 Alfa Laval however wanted to add a standard range of to the portfolio. Consequently Alfa Laval had to pay for flexibility and customization abilities that were of little value to the. 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. The mismatch was further enhanced by Nissens relatively little value of the benefits offered by Alfa Laval through the. 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 s with trading product suppliers, the supplier selection process seems to have been performed in a non-structured manner. However in the Zorzini case the stretches far back in time as an arm s length, component supplier. 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. Although similar between the two trading product supplier cases, it is of great interest to discuss the characteristics of the traded within these s. In Figure 2 below the different are placed in Kraljic s product classification matrix. Importance of purchasing High Leverage Non-critical Supply risk Strategic Bottleneck High Figure 2 Nissens and Zorzinis classified in Kraljic s matrix [4]. Although the bought from Nissens will initially be classified as bottleneck 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 s, with trading product suppliers, offer Alfa Laval a fast and resource efficient way to add new to the current portfolio and thus lifting the entire product range by offering complete solutions. It is also an option associated with low risk

6 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. 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 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 attempt between Alfa Laval and Nissens. Finally, Alfa Laval needs to acknowledge that the low financial importance of the complementary traded must lead to a limitation of the resources spent on building s and close s. If to much resources are allocated to the collaborations, the 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 [2] Seppälä, Tero (2003), Three perspectives on buyer supplier s: A assessment model for investigating buyer-supplier s 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 s: the buying company perspective, Decision Sciences 1998;29,3, pp [4] Kraljic, Peter (1983), Purchasing Must Become Supply Management, Harvard Business Review, September-October [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