Prof.dr.ir. Bart Vos NEVI Chair Purchasing Management Department Organization & Strategy

1. Establishing & developing buyer-supplier partnershipsGuest Lecture Innovation Networks and Alliance FormationEindhoven, October 30, 2007 Prof.dr.ir. Bart Vos NEVI Chair Purchasing Management Department Organization & Strategy Tilburg University

2. Lecture Structure • Collaboration with key suppliers: Why & how? • DSM Agro case: intra-firm • KPN-Atos Origin case: inter-firm

3. Why Supply Chain Collaboration? • Increasing emphasis on supply chain optimization relay race as a metaphor • Outsourcing requires professional selection, management and development of suppliers professional purchasing management “must” • More pressure on performance: faster, better, cheaper • Also puts more pressure on supplier performance: suppliers as “partner”?!?!

4. Supplier Development Results(Krause, 1997, Survey of 527 firms, NAPM members) Before Supplier After Supplier Development Development Incoming defects 11.65 % 5.45 % % on - time delivery 79.85 % 91.02 % Cycle time 35.74 days 23.44 days (from order placement to receipt) % orders received complete 85.47 % 93.33 %

5. Special, vertical form of alliance Supplier collaboration: with whom? Portfolio model Bensaou Strategic Partnership Buyer Captive Specific investments customer Supplier Captive Market Specific investments supplier

6. Examples of specific investments Tangible • Buildings • Machinery/equipment • Information systems Less tangible • Exchange of employees (e.g. engineers) • Training programs/workshops • Informal relations

7. TOOLS + TRAVAIL + + Supply chain collaboration: How? Information transparency + + + + Openness communication Quality SCM decision-making - - + Gaming - + Firm performance + + Intensity communication Trust + + + History of successful collaboration + + Habituation

8. Bumpy road to closer supply chain links • It is not only about the content of supplier involvement (e.g. in terms of technological and organizational capabilities) • Quality of the relationship and the way that it is managed are crucial as well • And on top of all that perceptual differences on the functioning of a buyer supplier relationship further complicate the story!!

9. DSM Case Buyer-Supplier Relationships • Introduction • Case setting • Main case results • Managerial implications

10. Introduction DSM Case Process industry: specific characteristics • Relatively low level of product variety • High capital investments implying a focus on maximising capacity utilisation • Prevailing use of inventories as coordination mechanism • Geographic clustering of related processes PUSH as “logical” Supply Chain planning strategy Research method • Delphi workshops (“travail”) • Pilot projects: action research

11. DSM Case Setting:Intra-firm collaboration • Aim was to investigate the potential for improvedcollaboration between 2 DSM Business Units (intra-firm)  DSM Agro and DSM Fibre Intermediates • Ammonium Sulfate (AS) is a residual product in the production of Caprolactam (FI), sold by the Agro unit • Financial responsibility (FI) versus operational responsibility (Agro);logistics “in between” area • Centrally “enforced” buyer-supplier relationship

12. Buyer Buyer Buyer Strategic Strategic Strategic Captive Captive Captive Partnership Partnership Partnership PAgro PAgro PAgro Agro Agro Agro Buyer’s specific investments Buyer’s specific investments Buyer’s specific investments P DFI P DFI P DFI Market Market Market Supplier Supplier Supplier Exchange Exchange Exchange Captive Captive Captive Supplier’s specific investments Supplier’s specific investments Supplier’s specific investments Agro = Agro = reality reality DSM FI DSM FI – – DSM Agro DSM Agro relationship relationship P Agro = P Agro = Perception Perception Agro Agro P DFI = P DFI = Perception Perception DSM FI DSM FI Joint workshops in DSM Case:Night versus day • Night • Tense atmosphere due to misfit in perceptions • Lots of “travail” needed to change this • Day • After “partnership notion” more positive sessions • Need to demonstrate savings

13. Base case Fluctuation within 'lung' Reduced sales volume 'lung' Revenues 1000 978 1061 Logistics costs 344 292 334 Inventory costs - - 2 Working capital costs - - 2 Payment term advantage - - 10 ( + ) Result 656 686 736 Closer Ties Between Agro & DFITools to demonstrate potential gains “Lung function”: sales of AS fertilisers on southern hemisphere (e.g. Brazil, South Africa, Australia)

14. Managerial implications DSM Case • “Travail” results in both alignment of perceptions vs. reality and mutual commitment to SCC • Appropriate (quantitative) tools are vital to increase transparency • Travail and tools are catalysts in reinforcing trust loop • Improved mutual trust ultimately leads to increased supply chain performance

15. KPN Atos Origin Case:Inter-firm collaboration

16. KPN In-sourcing capabilities gone Cost only drive, invoking penalties No demand organization in place Revenue Guarantee leads to complacency Current contract form ineffective Continued asset utilization drive at Atos (P&L) What went wrong Effects • KPN Cost down drive in conflict with Atos’s Revenue aspirations • Complacency at Atos creates major irritation at KPN • No incentive to Atos to enhance asset productivity • KPN Businesses not committed to overall deal

17. October 2003: Initiated turnaround • Bend or bust message to Atos • From Penalty to Incentive: • Remove Revenue Guarantee/ Penalty Exposure • Joint Key Performance Indicators (KPIs), closely connected to KPN’s Leading Business Indicators • KPIs linked to process outputs/”deliverables” • Advantages KPN: • Better customer service • Steering/incentive mechanism • Improved decision making • Advantages Atos: • Maintain KPN as customer • Road to new business • Achieve “strategic ambitions”

18. Concluding Root-Cause analysis Delivery Process: March 2004 • Customer interaction takes place through processes, yet current way of working is stove-piped (“functional silos”) • Little prevention, rather “fire fighting” symptoms • No feedback to Atos on KPN’s customer complaints • KNP & Atos account managers did not align regularly • Need to define Process KPIs, i.e. % “Aftercare needs”

19. Main conclusion: The (customer) delivery process should be managed as a whole New approach • Manage the process as a whole from joint (‘smart’) office • KPN and Atos cooperate to improve customer satisfaction • Atos accepts ‘partner in business’ position in this process Improvement KPI’s: • % Aftercare needs down from +/- 15% to 9 % in 4 months • In May 2007 further reduced to about 5 %

20. Lessons learned • Outsourcing a mess leads to in-sourcing a mess • In these complex settings, there is no clear distinction between buyer (who delegates) and supplier (who engages) • Complexity of processes and systems inhibit allocating the burden of non performance towards a single party • In fact buyer & supplier are co-producing • Joint development of joint KPIs assures commitment • Rewarding both parties (win-win) is key in this concept • Process cannot be managed from helicopter • Ultimately, people (at both sides!) make the difference

21. Concluding remarks • True SC improvements start at operational (process) level, yet alignment with higher management levels is key • Travail (e.g. dedicated workshops) and tools (e.g. collaborative KPIs) enablers to make change happen • Be aware of indirect functions “sabotaging” such improvements cross-functional approach essential • External, trusted parties may act as “catalyst” in developing collaborative buyer-supplier relationships, especially in cases with “perceptual differences”