Introduction
Supply chain
collaboration: the key
to value creation
B.S. Sahay
The author
B.S. Sahay is Professor of Operations Management at the
Management Development Institute, Gurgaon, India.
Keywords
Demand management, Inventory control,
Product development, Partnering,
Supply chain management, Collaboration
Abstract
As global markets grow increasingly efficient, competition
no longer takes place between individual businesses, but
between entire supply chains. Collaboration can provide
the competitive edge that enables all the business
partners in a supply chain to prevail and grow. This paper
presents a framework for customer-supplier collaboration
that facilitates effective and efficient supply chain
operation. The paper reveals that the level of involvement
of customers and suppliers differs across different supply
chain processes and also across different sectors. While
the involvement of customers is high in demand
management and product development, the involvement
of suppliers is high in transportation and inventory
management processes. The paper also reveals that about
50 percent of the organizations surveyed indicate that
suppliers and customers have little or virtually no role in
the demand management, inventory management, and
product development processes.
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Work Study
Volume 52 . Number 2 . 2003 . pp. 76-83
# MCB UP Limited . ISSN 0043-8022
DOI 10.1108/00438020310462872
76
Supply chain management (SCM) capabilities
are already delivering major economic benefits
to businesses as diverse as manufacturers,
retailers, and service providers. Benefits
include such classic supply chain functions as
inventory control, purchasing, and order
fulfillment. But it is a mistake for businesses to
think of SCM as limited to these functions
alone. Enhanced SCM capabilities can create
efficiencies and cost savings across a wide
range of business processes. Properly
implemented, SCM is a strategic activity that
must be conducted across the entire
enterprise, from marketing and product
design groups all the way through to the
accounts receivable department. Ultimately,
SCM must be conducted between enterprises,
since optimizing entire supply chains will
require a level of information sharing and
collaboration among enterprises previously
unknown in most businesses.
Traditionally, the focus of companies has
been on the flows within the organisation or
flows over which the organisation has direct
control. But, successful supply chain
management requires the recognition that the
firm is simply one player in the long chain that
starts with suppliers and includes
transporters, distributors and customers.
Close relationships between suppliers,
manufacturers, transporters, distributors and
customers are going to be the key to success in
times to come. Organisations must interact
co-operatively with their channel partners for
the mutual benefit of the channel as well as
the gain of each player. In order to adopt this
external perspective, organisations should not
only consider the impact of any business
decision on their own performance but also
on the bottom line of their suppliers,
distributors and transporters. Companies are
recognising that supply chain innovations can
be not only a driver of cost reduction, but
importantly, a catalyst for revenue growth by
achieving greater levels of customer
satisfaction. Anderson and Lee (1999) call the
new generation of supply chain strategy a
``synchronised supply chain''.
There is increasing interest in inter-firm
relationships as more firms rely on resources
outside their own firm to compete
successfully (Harland, 1996). Companies
look at their supply chains the upstream part
of the value-chain from the company's
 Supply chain collaboration: the key to value creation
B.S. Sahay
perspective as a means of focusing on their
own core competencies, of leveraging those of
vendors, of lowering their costs, and, thus,
becoming more responsive to customers.
Each link in the chain must add competitive
advantage. However, this is not adequate
enough. The basis of competition between
organizations is shifting to how effectively
these supply chains are managed.
As a supply chain perspective entails
looking at the supply chain partners, it is
important to have a trusting relationship
between them, where each party has mutual
confidence in the other members' capabilities
and actions (Handfield and Nichols, 1999).
As organizations enter the era of network
competition, the winners will be those
organizations who can better structure,
coordinate and manage the relationships with
their partners in a network committed to
better, faster and closer relationships with
their final customers (Christopher, 1999).
The relationship between the partners,
instead of being restricted to coordination
only, should transform to a more
collaborative one. Failing to collaborate
would result in the distortion of information
(bullwhip effect) as it moves through the
supply chain, which, in turn, can lead to
costly inefficiencies, excess inventories, slow
response, and lost profits (Lee et al., 1997).
As organizations look beyond their own
firms, it becomes important for them to
involve their suppliers and customers in the
various processes. Successful involvement
yields major benefits: increased market share,
inventory reductions, improved delivery
service, improved quality, and shorter product
development cycles (Corbett et al., 1999).
Proper management of customer-supplier
involvement offers significant opportunities for
firms to create strategic advantage and achieve
extraordinary financial performance. In other
words, a collaborative process of creating
mutually beneficial strategic outcomes results
in ``pie expansion'' (Jap, 1999).
It is important to use this alliance
strategically. Earlier, large organizations
experimented with customer-supplier
alliances as a cost-cutting device. But
recently, companies have been using
partnerships, not as a money saver, but as a
sales strategy also (Useem, 1997).
Although it has numerous benefits,
involving and maintaining involvement of
supply chain partners is a tricky business
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(Fenn, 1997). The involvement of customers
and suppliers is on the rise; however, failure
rates also seem to remain high (Arino and
Doz, 2000).
Supply chain collaboration
Opportunities for collaboration among
business partners will vary depending upon
the organisations' prospective role in the
supply chain. Collaboration enables partners
to jointly gain a better understanding of future
product demand and implement more
realistic programmes to satisfy that demand.
The three major types of collaborative
relationships are depicted in Figure 1 and
discussed below (Lapide, 1999).
Manufacturing/supplier collaboration
Close collaboration among supply chain
partners can be to align the parties and then
enhance the value of the network's combined
activities. Collaborating with suppliers,
manufacturers will derive benefits in such key
activities as new product development, order
fulfilment, and capacity planning.
Collaborative product development enabled
by sharing and modifying design documents
will help manufacturers develop products
better and faster. Similarly, co-ordinating all
tier-supplier production schedules will help
ensure that future material needs are satisfied.
This, in turn, results in improved order
fulfilment and increased capacity utilisation.
Manufacturer/customer collaboration
The collaborative opportunities between
manufacturers and customers (such as
wholesale-distributors and retailers) center on
demand planning and inventory
replenishment. The focus is on jointly
developing an understanding of demand at
the point of consumption, followed by
creation of a mutually agreed replenishment
plan. This approach helps to ensure that
consumer requirements are met efficiently.
To collaborate on demand planning
successfully, business partners need to share
and modify each other's demand plans and
forecasts electronically. Importantly, each
partner needs to understand and
electronically share its promotional plans.
Once demand plans and forecasts are in
place, replenishment plans designed to
 Supply chain collaboration: the key to value creation
B.S. Sahay
Figure 1 Supply chain collaboration opportunities
assume adequate product availability would
be jointly developed.
Collaboration with third party and fourth
party logistics providers
Collaboration between companies and third
party logistics (3PL) providers will focus on
joint planning of logistics activities. With
regard to transportation services,
collaboration will improve equipment
utilisation by enabling the consolidation of
inbound, interfacility, and outbound
shipments among business partners. This can
be accomplished through electronic sharing of
information on shipment plans and
availability of transportation resources.
Packaging is another potential area for
logistics collaboration. Collaboration with
3PLs providing distribution centre (DC)
services would focus on the productive use of
facilities, labour and equipment. This
involves electronic sharing of inventory
replenishment plan so that receipts do not
overload a DC's receiving function or storage
capacity. Electronic visibility into the
availability of distribution centre resources
would support this type of collaboration.
While outsourcing 3PL is now accepted
business practice, fourth party logistics (4PL)
is emerging as a breakthrough solution to
modern supply chain challenges. The 4PL
organisation is one of the intermediate stages
along the logistics spectrum that combines the
benefits of outsourcing and insourcing. It is
usually established as a joint venture or long-
term contract between at least two parties,
consisting of the primary client(s) and at least
one other partner, which contributes the
start-up capital for the venture and also
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provide assets and expertise for ongoing
operations (Gattorna, 1998).
In view of the growing importance of
collaboration, of increased level of
involvement, and of the associated risks, this
research paper is an attempt to understand
three aspects of customer-supplier
involvement in Indian organizations:
(1) Does the involvement vary across
different supply chain processes. Is this
involvement a function of the sector?
(2) How do Indian organizations compare
with the rest of the world in terms of
customer-supplier involvement?
(3) How do organizations decide on the
degree of involvement of the partners?
In an attempt to understand the above, this
paper focuses on examining the customer-
supplier involvement existing in the different
organizations with respect to two variables
process and sector.
The research: customer-supplier
collaboration
This paper is based on the feedback received
from over 160 organizations spread across the
geography of India and including
organizations from sectors that were as varied
as FMCG (fast moving consumer goods) to
automotive to chemical to engineering.
Instead of viewing the supply chain
collaboration at a macro level, it was broken
down into 12 different processes. The
respondents were asked to indicate the
involvement of both customers and suppliers,
in different processes on a scale of 1 to 5, with
1 indicating low involvement and 5 high. This
 Supply chain collaboration: the key to value creation
B.S. Sahay
gave comprehensive information about the
various aspects of customer-supplier
involvement. Unique to this study was the
administering of the same set of 12 processes
for both the customer as well as the supplier.
An analysis of the data revealed some very
interesting insights into this collaborative
relationship. Not all the processes were
viewed of equal involvement for the customer
and supplier they sometimes varied quite
significantly. For the data collected, a
weighted score was calculated for each of the
processes. These processes were then ranked
on the basis of the weighted scores. The
results are shown in Figure 2.
. The processes that were important to the
suppliers were not necessarily important
to the customers. For instance, consider
the process of inventory management.
This process is ranked as high as 2 as far
as supplier involvement is concerned but
as low as 10 for customer involvement.
Manufacturing, planning and scheduling
is ranked 3 for the suppliers, but a lowly 8
for the customers.
. The poor involvement of both customers
and suppliers in the extremely important
activity of warehouse management is a
cause of great concern. By increasing
their involvement, firms can plan their
location effectively and can even share
warehouse space with suppliers, making
effective usage of space according to
customer requirements and improving
Figure 2 Customer-supplier involvement matrix
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order despatch efficiency.
. Higher involvement of the customers is a
necessary but not a sufficient condition
for effective management of the demand
variabilities. Knowledge of changing
customer preferences definitely helps, but
to enhance the flexibility of the chain, it is
essential that the suppliers also be made
aware of these variabilities. This would
increase the preparedness of the chain to
respond to customizations.
Overall, the involvement is low for both
customers and suppliers in the case of 58
percent of the respondents (Figure 3). This is
a big impediment in the successful
implementation of supply chain management,
which calls for strategic partnerships between
the different players in the chain. It is
interesting to note that the next bigger group
of respondents belongs to the category of high
involvement of both the entities. Thus, the
involvement is either very high or very low.
This implies that the organizations either do
not attach or attach considerable significance
to these entities.
A study of the collaboration between
suppliers and customers across different
sectors and processes brings to light some
very interesting results (Figures 4 and 5).
Automobile
Although 40 percent of the respondents
within the automobile sector have indicated a
low level of involvement in their processes,
the other 60 percent is divided equally
between the other three quadrants. This
shows that within this sector, not much
differentiation is made as regards the level of
involvement. However, a careful analysis of
the data reveals that the involvement is higher
in the case of demand management (64
percent) and order fulfilment (54 percent)
and the involvement of supplier is higher but
that of customer is lower in the case of
inventory management (50 percent). The
Figure 3 Overall customer-supplier involvement
 Supply chain collaboration: the key to value creation
B.S. Sahay
Figure 4 Sector-based customer supplier involvement
Figure 5 Process-related customer supplier inolvement
total capital blocked in raw material and
finished goods inventory is Rs.15,000 crore,
which can be reduced by having greater
customer involvement.
FMCG
Within this sector, the level of customer
involvement is higher than that of the
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suppliers, with over three-quarters of the total
respondents indicating a low level of supplier
involvement. Here, however, the customer is
more involved in 64 percent of the cases, and
the supplier more involved in 55 percent of
the cases. Only in 27 percent of the cases is
there a higher involvement by both the
entities. This sector is characterised by
 Supply chain collaboration: the key to value creation
B.S. Sahay
intense competition and such a low level of
participation by the suppliers and customers
is bound to be catastrophic. As expected, the
customer is more involved in distribution
management (60 percent), and product
development (64 percent) and has no
involvement in export-import.
Consumer durables
Very interesting results have been observed in
this sector. The participation is either very
low (50 percent) or very high (50 percent).
This sector is characterised by cut-throat
competition. In the recent past, there is a
growing dominance of the MNCs, and the
input costs in general are on the rise. In such a
situation, it is important for organizations to
realise that participation is dependent on the
complexity and criticality of the various
processes. Using the portfolio approach to
decide this would not only result in
considerable savings, but also improve sales.
Engineering
This sector is characterised by heavy basic
industries, which are more into engineer to
order type of products. This calls for a great
degree of flexibility of operations. However,
only 26 percent of the respondents have
indicated that there is a high customer
involvement in different processes. This is
even lower than that of the suppliers (32
percent). Also, the low involvement of
suppliers in demand management (63
percent) is difficult to fathom. Since these
industries are either located close to the
source of inputs or consumption,
transportation becomes a very critical aspect
of the supply chain. However, it is surprising
to note that transportation is a low priority
process for supplier involvement (61 percent).
Chemical
This sector has the highest percentage of
respondents (75 percent) in the low
involvement category, and just about 19
percent fall in the high involvement category.
Transportation is the only process that has a
slightly greater number of respondents (30
percent) in the high involvement category.
An analysis of the responses according to
the different processes gives useful insights
into what processes are perceived to be critical
by the organizations. Some of the interesting
results have been highlighted below.
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. There is a higher degree of customer
involvement (65 percent) as compared to
that of the suppliers (42 percent) in the
demand management process. However,
there is no clear division between the
different quadrants, indicating that more
or less, there is an equal participation of
customers and suppliers.
. The customers are relatively less involved
in the process of manufacturing
management 61 percent have low
involvement and 39 percent have high
involvement. As against this, the
suppliers' involvement is equally spread
out.
. A total of 69 percent of the respondents
have indicated a high level of customer
involvement in the product development
process.
. Inventory management is seen more as an
internal process with little customer
participation. However, in their attempt
to lower their inventories, organizations
have involved more suppliers (57
percent).
It is evident that the success of customer-
supplier relationships depends on the
frequency of interaction between the partners.
Once firms realise the importance of involving
their customers and suppliers, the level of
commitment can also be determined. This
involves the level of dependence that one
party perceives that they have on other, and
the amount of investment that they make in
the relationship in time and resources.
However, it is difficult for firms to determine
how frequently they should interact. There is
no ``one-size-fits-all'' rule applicable to
determine this.
Figure 6 proposes a matrix-based
framework, on the two dimensions of
Figure 6 Portfolio matrix
 Supply chain collaboration: the key to value creation
B.S. Sahay
criticality and complexity of processes.
Criticality and complexity exist on a
continuum in varying degrees. Since all the
processes are not of equal significance, the
involvement level should also not be equal for
all the processes.
Portfolio matrix
This matrix divides the supply chain
processes/activities into different categories
based on complexity and criticality.
Complexity refers to the difficulty in
performing the operations because of
interlinkages with the other processes.
Criticality is the importance of the particular
process to the overall supply chain.
Based on these two parameters, four
customer-supplier involvement zones have
been identified. These are:
(1) strategic involvement;
(2) outsourcing involvement;
(3) in-house involvement; and
(4) convenience involvement.
Each of these zones has a different level of
customer-supplier involvement in the various
activities.
Strategic involvement
For activities which involve a higher degree of
complexity of operations and are critical for
the attainment of supply chain objectives,
there should be strategic involvement. The
suppliers with whom the strategic
partnerships are to be formed should be
chosen after careful consideration. These
suppliers would provide the requisite
flexibility to the operations so that the supply
chain becomes more responsive to changing
customer preferences. By involving
customers, trends can be studied and used to
help the organization in focusing on what
products to continue and what additional
features to incorporate.
Outsourcing involvement
This kind of involvement is advised when the
complexity of the operations makes it
unprofitable for the organization to carry
them out on its own. This leaves the
organization to focus on its core processes,
leaving the complex supply chain activities to
firms which specialize in those processes.
Since the criticality is low, by outsourcing, the
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firms can better utilize their resources. This
calls for a higher involvement of suppliers.
The involvement of customers need not be as
high as the products are functional products.
In-house involvement
This kind of involvement is suitable for
processes that are high on criticality but low
on complexity. With the lower degree of
complexity, the supplier involvement need
not be high, as the process is performed in-
house. However, since this process is critical,
the customer preferences should be taken care
of. This calls for higher customer
involvement.
Convenience involvement
For a less critical and complex process, the
involvement should be ``convenient''. This is
applicable to secondary processes, which do
not directly affect the supply chain
performance. These processes are mostly
internal to the organization and hence,
require little involvement from the customer
or supplier.
A drawback of this framework is the
subjectivity involved in determining the
criticality and complexity of the processes.
However, to deal with this, a list of processes
with priorities can be made, which can then
be standardized across the organization. This
would, however, be specific to the
organization only.
Conclusion
Although there has been a growing awareness
about the importance of supply chain
collaboration as a strategic tool, and
organizations have already made some
progress, a lot of work remains to be done.
The driving force of effective SCM is
collaboration. Strategic SCM demands
collaboration among all participants in the
value chain, whatever their size, function, or
relative position. Suppliers and customers are
two very crucial components of the chain.
Customer-supplier involvement calls for
commitment and trust over an extended time
period and includes the sharing of
information, risks and rewards. Their
effective involvement in the supply chain is a
must. However, not all the processes require
same amount of involvement.
 Supply chain collaboration: the key to value creation
B.S. Sahay
The survey results suggest that the degree
of involvement varies across different
processes and sectors. One reason for this
could be that organizations are wary of
committing their resources for not-so-critical
activities. It could also be because the
complexity of the processes varies depending
on the structure of the particular industry
sector. This holds true for both the customers
and supplier.
The customer-supplier portfolio matrix
developed as a part of this work is an effective
tool to decide how to decide this involvement
from the customers and suppliers. It
demonstrates that as the complexity and
criticality of the various processes differs, the
participation also should differ. While using
this matrix, it should be noted that the
importance of processes varies across sectors
and also across organizations. To that effect,
this matrix has to be customized and adapted
by an organization for its own use.
The results of the survey have implications
for both customers and suppliers. To reap the
benefits of closer working relationships, their
involvement must reflect a cooperative spirit.
This can be accomplished by joint problem
solving and investment in the relationship. It
is also essential that both have the same
expectations.
In conclusion, this article has shown that
customers and suppliers are increasingly
being involved by various Indian firms in their
supply chain processes. Benefits can be
enjoyed mutually if all participate on an open
and involving basis accepting that a ``win-
win'' basis is a likely outcome.
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