It’s a hot topic in publications and business settings, but the definition of supply chain collaboration continues to elude many. We pin it down.

We’ve all heard the term “supply chain collaboration.” Its buzz quotient has been on the rise because rapid technological advances and mounting competitive pressures have been urging supply chain participants to work with each other.

But with all of the recent articles on this topic and the growing number of companies choosing the collaborative route to manage their supply chains, there still remains a great deal of confusion. Not only are people using many terms to refer to supply chain collaboration, but they’re also unaware of its essential elements. And few know how to classify the different types of collaboration.

So what is supply chain collaboration? It represents the highest level of commitment between/among supply chain participants, short of joint venture or vertical integration.

Many use “collaboration” interchangeably with “cooperation” and “coordination,” but based on organizational studies and marketing related text, these terms actually describe different levels of supply chain relationships, leading up to supply chain collaboration.

There are four levels in all. The most basic level is the “arm-length” relationship, which can grow into the second level (“cooperation”) and later, “coordination.” “Collaboration” is fourth on the continuum.

Here’s a quick description of the three levels preceding collaboration. Remember that general guidelines, not hard and fast rules, differentiate each level:

Also called “open market negotiations,” this is the most common type of relationship in supply chain environments. This level is characterized by little investment, hardly any information sharing and limited interaction between companies. Also on the low side are trust and commitment. Relationships at this stage are short-term, contract-based and adversarial, with several suppliers competing where price is the overriding factor. At this level, companies can easily change partners and efficiently perform routine tasks. From this starting point, companies can eventually develop a collaborative supply chain relationship if they invest a great deal of resources, cultivate trust and commitment, and share long-term strategic goals.

This type of relationship emerged from firms’ need to manage the increasingly complicated flow of information and material between organizations. At this stage, companies are more tightly tied together, sharing more information, than they would be in an extended arm-length relationship. What distinguishes this level from the previous one is fewer suppliers and longer-term supplier-customer relationships. But this relationship stage involves a shorter-term perspective and less commitment than higher levels. Also, the two key elements present at this stage—integration and interdependency—are more moderate than in coordinated or collaborative supply chain relationships.

As information technology is getting cheaper to deploy, it is becoming a defining factor in supply chain relationships. In particular, the degree of information infrastructure and sharing determines if companies are in coordinated supply chain relationships. At this level, firms’ information systems are more strongly linked, and there is more emphasis on strategy. At this stage, firms engage in more joint initiatives, such as Collaborative Planning, Forecasting and Replenishment (CPRF) and Vendor Managed Inventories (VMI) to get a better handle on demand information.

Defining Collaboration

Now, we get to collaboration. We are seeing this term used more often because of two major trends. First, supply chain management strategy has changed priority from mass production and quality to customer satisfaction, increasing the need for collaboration on important business processes, not limited to logistics. Second, information technology has advanced rapidly and become more affordable to apply, allowing companies to embark on sophisticated supply chain partnerships.

Right now, much of the confusion about the definition of supply chain collaboration results from using “collaboration” as a general term describing different levels of cooperation. Collaboration actually refers to the most committed relationship between separate organizations without involving an equity relationship. At this stage, the link between companies in a supply chain setting is as strong as it can be before joint venture or vertical integration.

Two essential characteristics separate collaboration from preceding relationship levels. First, the elements that are present in cooperation and coordination are stronger in collaboration. For example, there is greater trust, commitment and information sharing in collaboration, allowing companies to share a vision and employ sophisticated processes such as joint planning and operation in the service of that vision. Second, unlike in cooperation and coordination types of relationships, there is a greater diversity of non-logistics activities and functions jointly undertaken in some collaborations.

Two Types of Collaboration

But not all collaborations include a lot of non-logistics activities, leading to two distinct classifications. Type 1 supply chain collaboration involves companies working together in logistics and manufacturing related activities in a supply chain. This classification comes from the narrow definition of supply chain management, which involves traditional logistics management. Using this definition, the structure of supply chain collaboration is that of a virtual network, wherein independent organizations such as manufacturers, suppliers and customers are connected by information technology.

Type 2 supply chain collaboration, in comparison, involves more non-logistics activities and functions. It comes from a broader definition of supply chain management, which supports the collaborative approach in a wider range of business processes, beyond logistics and across firms. This type of relationship is considered a “strategic alliance”—bringing together buyers and suppliers in separate industries or different supply chain stages and creating a single system.

Another big difference between these two types of collaboration is the motive for forming the relationship. While type 1 collaborations are built on skill substitution, type 2 collaborations incorporate another motive—organizational learning.

Other Elements of Collaboration

We can measure the degree of collaboration in relationships by looking at 1) how companies interact with each other and 2) the means by which they interact. Under the first category are elements like trust and commitment, the balance of power and how cultural differences among partners are worked out. Under the second category are information systems and a collaborative controlling system, which includes a “reward and risk sharing structure,” a “joint decision making system” and a “conflict management system.” The degree of collaboration hinges on how balanced and developed such elements are.

Armed with this basic knowledge, you can now answer essential questions about supply chain collaboration…whether you and your partners are really collaborating, what your fundamental motives are and how collaborative the relationship truly is.

Source: The Truth About Collaboration
David A. Menachof, Ph.D. and Byung-Gak Son
CLO/Chief Logistics Officer, Feb. 2003
http://www.totalsupplychain.com