Chain Reactions

Some myths about horizontal collaboration
As Europe's first and still premier forum for the promotion and facilitation of "horizontal collaboration" across supply chains, ELUPEG has the advantage of a great deal of knowledge about what does—and just as importantly, what does not—work in this area.

There is a great deal of "noise" around collaboration right now, and hence ELUPEG has decided to share its vast knowledge in order to "explode" a few of the myths regarding collaboration:

Collaboration is a "strategy." It is not a strategy, per se, but it can add value to a strategy. The only sense in which a company can adopt horizontal collaboration as a strategy would be tactically or as a guiding principle. Collaboration is the output of a culture based on trust and openness, where individual requirements are, overall, met better in concert with others than by striving to make it on one's own capabilities and resources.

Collaboration is dangerous and could lead to a fine of 10 percent of revenue under European Union (EU) anti-competition law. Provided companies adopt horizontal collaboration based on sharing of assets or non-commercially sensitive information with a view to reducing overall costs, reducing congestion, and improving customer service, they will not fall afoul of the European Union's anti-competition authorities. Utilizing an independent, trusted third party such as ELUPEG to hold and analyze confidential or commercially sensitive data for the purpose of evaluating collaboration potential without risk is a well-tried and proven process.

Companies with inefficient supply chains will benefit from collaboration the most. Wrong! We have categorically proved that companies that have the most efficient supply chains get more from horizontal collaboration. They know their costs to the last cent; indeed, such efficient companies have squeezed out all possible costs internally and need to look outside the business for future big savings. They have overcome the problem of internal collaboration, and they have secured significant benefits from vertical collaboration with suppliers and customers. Most importantly, they have the time as well as senior management endorsement, which is vital to making horizontal collaboration work.

Companies always fall out over how to share the savings. We would not say this never happens. But this can be avoided by benchmarking the respective supply chain costs of each collaborating party before commencing the project, and then agreeing on a fair formula for the distribution of the savings that are achieved. It is also interesting to note that "reinvesting" some of the first savings in order to drive deeper collaboration can ultimately lead to even better results. ELUPEG can facilitate any of these services if required.

Businesses and products change, and hence any strategic investment in horizontal collaboration is doomed to end in tears. If you treat the collaboration project as you would any other significant investment and include the costs of winding up the collaboration and replacing it with an alternative solution, then you will soon see whether the benefits outweigh the risks. If they don't, you will not proceed—just as would happen with any investment opportunity. This is not "planning to fail," but rather recognition that in the real business world only really viable projects get implemented. An agreement on the arrangements for sharing the benefits, and for ending the collaborative operation before the operation starts, is just as important as the methodology for dispute resolution. By agreeing on the difficult issues beforehand the venture stands a far greater chance of success and management of both companies will not sit there worried about how to deal with future changes.

Collaboration leads to loss of control and reduction in customer service. If collaboration is done properly, then the opposite can be true. Collaboration enables more economic and more frequent shipments, which can increase delivery frequency to customers. This is precisely what retailers are looking for. For suppliers, the benefits of higher on-shelf availability or in-stock availability can lead to fewer lost sales.

Collaboration takes work. It is not like flipping a switch. It's work, not talking, that will make collaboration happen.

Brian Bolam
Vice Chairman, ELUPEG Ltd.
brianbolam@omprompt.com

Editor's note: ELUPEG is an organization that promotes supply chain collaboration in Europe, as described in "Sharing supply chains for mutual gain" (Quarter 2/2011).