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Core Discipline 4: Build the Right Collaborative Model
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ollaboration is the cornerstone of effective supply chain management. As companies continue to narrow their strategic focus to a smaller number of core competencies, the skills and talents of outside partners become more critical. This creates a growing reliance on resources that you may not control directly and on strategies that you may have no hand in developing. A recent survey of more than 100 international business leaders found that as companies migrate toward more extended supply chains, collaboration becomes their most strategic activity.1 Despite its importance, there is little consensus about what collaboration means. If you asked 100 supply chain executives for a definition, you d likely get 100 different answers. Certainly most would agree that collaboration is important, that technology and relationship building are critical components, and that companies with effective collaboration skills are likely to have a competitive edge. However, few executives would be able to offer a clear, unambiguous definition. Why is it so hard to define collaboration Because it can be many things and involve many types of partners. It can refer to a wide range of joint activities, from information sharing among business units to complex, long-term product development and marketing projects. We define collaboration as the means by which companies within the supply chain work
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together toward mutual objectives through the sharing of ideas, information, knowledge, risks, and rewards. Why collaborate Very simply, an effective collaborative relationship can have major strategic and financial benefits. It can accelerate entry into a new market, increase flexibility, and provide access to expertise not available within your own company. It can deliver cost savings or increased revenues or a combination of both. Collaboration is a business arrangement that changes the overall dynamics between two or more partners. Drivers of collaboration include the desire to access
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A technology owned by another company A technology that is too capital-intensive for one company to invest in alone A competency that is too costly to acquire, develop, or maintain A new market effectively closed off by high entry costs or preconditions (trade barriers, legislation, etc.)
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Collaboration changes the most fundamental of all economic models the relationship among cost, volume, and profit (C/V/P). For example, a company that needs specialized, capital-intensive equipment for production of a key component might have a C/V/P model with high fixed costs and low per-unit variable costs, as shown in Figure 4-1. This company needs a high volume of sales to be price-competitive and profitable. If an economic recession cuts into volume, the company could soon be operating at a loss.
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C/V/P model with high fixed costs.
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15,000 $ (000) 10,000 5,000 0
95 10 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Break-even point
Unit Volume x Var. Cost Fixed Cost Total Cost Revenue
CHAPTER 4 Core Discipline 4: Build the Right Collaborative Model
Collaborating with a partner that focuses on the production of specialized materials similar to the component might allow this company to offload some of its fixed costs, as shown in Figure 4-2, but with an accompanying increase in variable costs associated with the increase in the level of external sourcing. To make this approach pay off, the company must be willing to share any proprietary technology needed to manufacture the component, and its collaboration partner must be willing to invest in developing the additional capabilities needed to produce it. Since breakeven volume is lower, the company can compete across a wider range of volumes albeit at the expense of gross margin at high volume. Ongoing collaboration on product designs and production planning can make the company even more agile while continuing to add volume to the specialized manufacturer s business. Both collaboration partners will benefit economically. As you can see, collaboration is not an altruistic activity. While it may seem a best True collaboration is practice to provide seamless integration very difficult, and and extended visibility to your supply chain partners, the fact is that true collabora- there s no point in tion is very difficult, and there s no point in doing it unless you doing it unless you can achieve financial or strategic gain. For collaboration to be truly can achieve financial successful, therefore, it must deliver quan- or strategic gain. tifiable economic benefit to all partners.
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