THE PARTNERSHIP MODEL: A TYPE OF BUYER−SUPPLIER RELATION When talking about inbound logistics, there are different ways to establish a relationship between the buyer and the supplier. The partnership model is only one type of buyer−supplier relation. This model was conceived inside the Japanese system of manufacturing, what is known today as Lean manufacturing. What we will analyse in this project is how does the partnership model work, its advantages and its disadvantages and how will it work far from the Japanese method of manufacturing, that is, in the Western manufacturing system. RELATIONSHIPS IN BUSINESS LOGISTICS As we can see in the following graph, there are four main different types of relationships between the buyer and the supplier. We can have an Arm's Length relationship, a Partnership, a Joint Venture or we can vertically integrate with our supplier. These four types of relationships imply different degrees of implication or co−operation between the two companies involved. The Arm's Length relationship is the one that implies the least co−operation while Vertical integration is the one that implies the highest level of co−operation. • ARM'S LENGTH RELATIONSHIP Arm's Length is the most used relationship used by companies. It is the relationship that implies the lowest level of implication. Two firms do business involving high number of transactions for a long period of time exchanging standard products or services in standard terms and conditions, when the exchanges end, the relationship ends. As we deal with standard products, terms and conditions, the relationship is rigid, not flexible. • JOINT VENTURES AND VERTICAL INTEGRATION A Joint Venture normally requires shared ownership across the two firms. In Vertical integration, the buyer acquires the supplier or vice−versa. Even knowing that these kinds of relationships are very flexible, they carry tremendous costs for the companies in terms of stock. The point is that a well−managed partnership provides the same benefits without involving the high costs of Joint ventures and Vertical integration. A good example can be found in the fast food − soda market. Pepsi, in order to assure the distribution of its products to the final customer, acquired Taco bell, Kentucky Fried Chicken and Pizza Hut. These acquisitions were highly expensive for Pepsi. The Coca−Cola Company just made a partnership with McDonalds, which provided them the same benefits without any costs. • PARTNERSHIPS A partnership is a tailored business relationship based on mutual trust, openness, shared risk and shared rewards that yields a competitive advantage, resulting in business performance greater that would be achieved by the firms individually. This definition of partnership is telling us that a partnership is highly flexible (tailored business) and that requires efficient information exchange between the buyer and the supplier. However, Which are the essential elements of a partnership? Four main points: • Partnerships are based on value and respect. Each company has to value and respect the other. • It is a solid, long−term relationship that implies continuos improvement. • The security of remaining a supplier is not by right but by fulfilling expectations. The supplier 1

knows that he must provide better service than competitors at a reasonable price and achieve goals in order to remain a supplier. • Unlike what most people might think, competition under the partnership model is dynamic and fierce. We can see in the following flow chart the way in which the partnership model increases efficiency. In the search for true Just in Time, both companies obtain cost reductions which can lead to price reduction and in this way, increase market share and/or the profit margin. Which leads to competitive advantage and an increase in efficiency. Now that we have explained how companies in the partnership model increase efficiency trough co−operation, we will have a further look to this co−operation, I mean, How do companies exactly co−operate to reach this competitive advantage? The answer to this question can be found in the following graph: There is a need for an efficient buyer − supplier information exchange and also between suppliers when shared sourcing is used inside the model. This efficient information exchange is very hard to obtain in the western manufacturing system where companies are not used to share strategic information. The supplier has to have an open attitude not only with the assembler but also with other suppliers involved in the model. The buyer has to be able and competent to help the supplier in his continuous improvement. He also has to learn not to dictate terms but to make suggestions. In the partnership model it is forbidden the use of bids when talking about price strategies or quality strategies, there are better ways to achieve the same goals. We have to take into account that the partnership model was born in the Japanese manufacturing system, which is based in harmony wa rather than conflict. The table below shows the advantages and disadvantages of the application of the partnership model in a buyer − supplier relationship: ADVANTAGES • Increase efficiency

DISADVANTAGES • Hard to obtain • Costly in terms of:

• Competitive advantage

• Time • Effort

This table clearly shows that a firm should not partner with every supplier, maybe the disadvantages are greater than the advantages that we expect to gain from the partnership. We have first to analyse the advantages and the disadvantages and afterwards make the decision. TYPES OF PARTNERSHIPS We have already explained the different kinds of relationships between two companies in business logistics. We know what Arm's Length, Joint Ventures, Vertical Integration and partnerships are. We will now explain in further detail the different types of partnerships that we can find. Most partnerships share common characteristics. However, there is no ideal relationship that is appropriate in all situations. Each partnership has its own Motivating factors, its own environment, its own duration and its own strength, this is why there is not a magic partnership for every situation. We can introduce now three main types of partnerships:

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• TYPE I It is the most used kind of partnership. Firms involved recognise each other as partners. They co−ordinate activities and planning usually in a short−term focus. It involves only one division within each organisation. • TYPE II It implies integration of activities rather than co−ordination of activities. Multiple divisions are involved in a long−term horizon. • TYPE III It is the least used kind of partnership. Firms share high level of operational integration. Each firm views the other as an extension of their own firm. There is no end date to this kind of partnerships. THE PARTNERSHIP MODEL The partnership model has three major elements: drivers, facilitators and components, which lead to outcomes. We can represent it in the following diagram: • DRIVERS Drivers must exist for each party and they must be strong enough to provide each party with a realistic expectation of significant benefits through a strengthening of the relationship. The presence of strong drivers is necessary for successful partnerships buy they by themselves do not ensure success. The benefits derived from the drivers must be sustainable over the long term. The most important benefits which drive the desire to partner include: COST EFFICIENCIES • Joint activities may lead to reductions in transportation costs, packaging costs or information cost and these are potential reasons to partner. • These also may increase managerial efficiencies. MARKETING ADVANTAGE

• Closer integration between two organisations can provide better access to new markets. • They can get more competitive prices and gain creative promotional and product strategies to increase profitability.

CUSTOMER SERVICE • Integrating activities in supply chain through partnerships can often lead to service improvements for customers in the form of reduced inventory, shorter cycle times, and more timely and accurate information. PROFIT STABILITY • A potential for profit growth provides the stronger reason to partner. • Successful partnerships will receive significant benefits in different areas that often leads to long−term volume commitments, reduced variability in sales and joint use of assets and other improvements.

• FACILITATORS Once we have achieved the motivation to partner its necessary to have a good environment to support the 3

relationship. Facilitators can not be developed in the short run and the degree to which they exist often determines whether a partnership succeeds or fails. A good example can be when the partners are demographically similar. For instance McDonald's and Coca−Cola, their partnership is enhanced by the fact that both have strong brand images and each is the number one firm in its industry. Further, McDonald's is Coca−Cola's largest customer and Coca−Cola is McDonald's largest supplier, adding more symmetry to the relationship. Facilitators include: CORPORATE COMPATIBILITY • The cultures and business objectives of the two firms must mesh. They do not have to be identical, but they can not clash.

MUTUALITY • Both firms must feel themselves into the same team, thinking and playing together.

MANAGERIAL PHILOSOPHY SYMETRY & TECHNIQUES • This is the compatibility of management philosophy and techniques between the two firms. • For example, the relation between managers and employees of both firms must be similar to avoid uncomfortable situations.

• When firms are relatively symmetrical, there is no junior partner and therefore none of the insecurity defensiveness and fear which is often found in an unequal relationship. • Symmetrical in terms of market share, financial strength, and brand image.

There are other facilitators that increase the probability of success but their absence does not mean failure. Their additional facilitators include exclusivity, shared competitors, physical proximity, a prior history of working with the partner, and a shared high value end user. To explain what is shared competitors and shared end user we will also use the McDonald's and Coca−Cola relationship. Both have a stronger relationship and both rely on each other in order to succeed. These partners face Pepsi as a common competitor and both partners are serving the same end user, placing emphasis on the young consumer market. The partnership between them is likely to have a stronger foundation. An example of exclusivity in the McDonald's − Coke partnership is the agreement that McDonald's can not sell Pepsi and that Coke can not offer its products to Burger King. Besides, if both firms are located near each other and partners have a prior history of positive interaction, having worked closely and successfully with a partner in the past, the possibility of success is broadened. • COMPONENTS The components are the factors involved on the partnership that can be controlled by management. The amount of components shows us the strength of the partnership. If you need a type 3 partnership, you need a high level of components, while if you only need a type 1 partnership, the amount of components needed is lower. There are eight types of components: PLANNING

JOINT OPERATING CONTROLS 4

• Joint planning strength relationship and also ads flexibility to the partnership. A clear definition of both aims is needed in order to define the required relationship. COMMUNICATIONS • Frequent communications between both partners is a key component in order to achieve partnership goals. An integrated E−mail system is an example of how both companies can improve their communications. • It will be a good idea to spread communications between all staff in companies and not only between management. TRUST AND COMMITMENT

• Again focused in a long−term view, without trust and commitment a partnership can not exist.

SCOPE • Reefers to the number of economic activities involved in the partnership. There will be more if you need a closer partnership. A type 1 partnership needs less scope than a type 3 partnership

• Reefers to the possibility of change the operations of the partner without first obtaining approval or even notifying the partner. This can be a key factor in order to save time and in consequence money. RISK/REWARD SHARING

• Based on the idea of shared destiny. A partnership is developed in a long−term view, if one company fails, both companies loose. The benefits and rewards are shared, but also the risks and costs.

CONTRACT STYLE • There is no need of a long and specific contract, in fact is better one short and clear in the basic philosophy of the partnership. As an example Mc Donald's and Coca−Cola have nothing signed, they trust each other. FINANCIAL INVESTMENT

• The idea is to achieve financial interdependence through shared assets, staff and investments.

When implementing the components, both companies must agree, not always a type 3 partnership is needed, so a strength level of components is not always the best way because you will waste time and resources maintaining components that you do not need. • OUTCOMES The outcomes are the benefits that the companies involved on a partnership achieve from their relation. A cost reduction or service improvements are examples of outcomes for the companies. A partnership is not required to achieve outcomes, and the presence of outcomes does not mean the existence of a partnership. APPLICATIONS OF THE MODEL The partnership model was designed in order to help in the developing of new partnerships, but nowadays there are four main applications of the model. • ESTABLISHING A NEW PARTNERSHIP

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The model can be used as a guide to establish a new partnership. • DIAGNOSING AN EXISTING RELATIONSHIP The model can be used in order to check a partnership, as a medical revision, this can, for example, confirm if the current type of partnership is the most appropriate or if it is necessary to change some aspects of the relationship. • STRENGTHENING A KEY RELATIONSHIP The aim is to expand the relationship between the two companies. • IMPLEMENTING RELATIONSHIP MANAGEMENT The objective now is to improve the relationship, but this application, contrary to the latest is used inside each company. INSTITUTIONALISING THE PARTNERSHIP PROCESS Both companies need to train their staff in order to make them understand the idea of partnership. There is a need for teaching management how to use the model. It is imperative to make the partnership part of your company, remember that when talking about partnerships we are always thinking in a long−term basis. CONCLUSIONS • A partnership can be used to achieve a leadership position against your competitors; it can be decisive in order to make your company grow. • It is not always useful to establish a partnership, having one without needing is a waste of resources and time, but not having one when it is the best option makes you loose the opportunity of gaining competitive advantage. • One of the most important ideas of the model (and the idea that makes the partnership model different) is the shared destiny, if your partner looses, you lose, so when you establish a partnership you have to apply the model in order to use it in the most beneficial way for both it has to be the most beneficial agreement not only for your company, but also for the other company. 1

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