Lifecycle Collaboration: Linking Strategy and Execution to Sustain Superior Performance
The Integration Mandate
Connecting effectively with customers and suppliers is essential to staying competitive. During the past 10 years, many organizations have reaped substantial benefits from ERP and supply chain planning initiatives. Consequently, the capability to strategically collaborate with customers and suppliers increasingly will be a key component of supply chain design. Of 105 companies surveyed by META Group, 51 percent are currently engaged in some type of collaboration, 19 percent are in the piloting stage, and 25 percent are either planning or interested.1
Despite this momentum, collaboration continues to be met with some reserve. While there are many reasons for this, two are predominant: There is a lack of trust between collaborating parties, and companies have not realized the full value from well-executed collaboration strategies.
Why has this happened? Businesses often get stalled transitioning to a collaborative culture because they are unable to tie mutual strategic objectives to actual inter-company execution. They have justifiably focused collaboration efforts one-dimensionally — between the buyer and seller. Integration in two dimensions, however, must be considered — between the buyer and seller and across the product lifecycle. Approaching collaboration in this manner will deliver a step-change improvement beyond existing inter-company initiatives. Collaboration must be extended beyond point solutions, such as sharing execution data, to synchronize strategy with execution for all partners in the product's lifecycle.
Collaboration's Evolution and the Need for Lifecycle Integration
In the late 1980s and early 1990s, collaboration efforts formally began with the advent of EDI and the sharing of execution data. This resulted in transaction efficiencies, such as fewer data entry mistakes, increased communication, and a reduction in both information exchange cycle time and order-processing costs. The information on the order remained the same, but the typical cost to process the order was reduced by up to 75 percent.
Although these efforts improved efficiency, process problems were still persistent. Buyers were surprising sellers with cancelled orders or with higher order quantities than forecasted. Sellers continued to surprise buyers with unmet delivery commitments or short quantities. This was evident in low fill rates (typically 70 percent to 85 percent) and high inventory levels (about four to 10 weeks of supply). In addition, frustration factors external to the replenishment process itself affected the operational outcome. For instance, efforts like EDI were never initiated in many companies because the cost of integrating through value-added networks (VANs) was prohibitively high.
An ongoing challenge has been that the process decisions made by each company in the supply chain are already on a predetermined path; hence, if there is an execution surprise, it cannot be resolved. Typically, root causes of execution surprises are inconsistent supply chain policies, such as inventory targets, replenishment, and order policies, across companies. Ideally, if a surprise arises and there is a common understanding of the order policies, trading partners can achieve a mutual resolution more easily.
The need to preempt execution surprises by setting replenishment policies led to the sharing of seasonal plans in the mid- to late-1990s. For example, buyers shared merchandising and promotional plans with their vendors, and sellers gained a better picture of anticipated demand. In turn, sellers shared their anticipated marketing campaigns, allocations, supply shortages, and supply availability with buyers. As seasonal plans were linked to replenishment policies, execution processes were tailored appropriately. Execution process managers were better able to gauge fill-rate success and then provide feedback to the seasonal planning processes.
All of this led to relatively fewer surprises, but fill rates remained low and significant supply/demand mismatches persisted. These discrepancies would be resolved when they were identified, but often without understanding the cause of the discrepancy or the full ramifications of the decisions. The overall context of the decision-making process — the strategic intention of each party — was unclear. As seasonal processes were executed, different points of view on the product portfolio mix, product lifecycle, or respective financial objectives were common. The gaps in strategic intent resulted in a seasonal collaboration process that often was not based in fact. Further improvement became necessary to establish and maintain visibility across companies during both strategy development and execution processes, with a strong link between the two.
Collaboration Connects Strategy with Execution
Effectively connecting strategy with execution means that actions, such as allocating product or calculating replenishment, can be traced back to an overall business strategy. The strategy should encompass service level, cost, and product lifecycle objectives. This is practiced by many organizations, but often is performed in isolation from the execution. The synthesis of strategy and execution is the driving principle in the lifecycle collaboration framework illustrated in Figure 1. This synthesis relies on two critical factors for success: integration and measurement.
Defining the processes and metrics that link strategy to execution is critical. Additionally, introducing lifecycle integration into the collaboration model involves synchronizing the strategic, seasonal, and execution time horizons described in Figure 2. In each time frame, collaborative intent must be mutually aligned so that the downstream processes operate in line with expectation, and there is a basis for measuring the effectiveness of the downstream process. The connectivity between the strategic processes and the seasonal processes is particularly important within the framework. Decisions made in the strategic arena provide critical information to the seasonal processes. Consider a product's lifecycle.
In the past, buyers and sellers made incompatible assumptions about the duration of a product's market availability. Consequently, if the buyer ordered a discontinued product, the seller may not have been able to deliver, since the parts to assemble may not have been available any longer.
An important outcome in the product lifecycle process is understanding the seller's intentions to modulate price, volume, and availability to maximize segment position. Sharing goals and jointly designing the product creates the right foundation for a fact-based collaborative forecast. For example, Cummins, Inc., a diesel engine manufacturer, began by sharing customer order information with their customers on their extranet. The process evolved into providing customers with visibility to future diesel engine prototypes. Customers can now recommend modifications to future prototypes. With this strategic collaboration in place, Cummins can expect to maintain a more loyal customer base, increase sales, and ultimately possess a better understanding of what their buyers want — making collaboration a more fact-based and predictable process.
When strategic decisions are aligned, cost-effective service results. Determining the success of strategic decisions requires appropriate operational metrics. If the seasonal plan is defined with the goal of increasing market share, it is a relatively simple process to measure results and tie success or failure back to specific seasonal plan elements and execution quality — both quantitative and qualitative. Just as the strategic processes are linked to the seasonal processes, the seasonal processes are linked to the execution processes to provide key policy information (Figure 1). To determine whether these execution policies are effective — and whether execution processes are aligned — a feedback channel is necessary from the execution processes to the seasonal processes.
For example, suppose a product's fill rate is sufficient, but fulfillment operational expense is uncompetitive. In this case, high fill rates are typically delivered at the price of increased expediting or higher inventory levels. Ideally, this discrepancy will be communicated back to the seasonal processes so that a more favorable fulfillment and inventory policy can be implemented.
In any collaborative relationship, the need for competitive privacy is a consideration. Companies may not want to share all metrics with trading partners — particularly cost structure items, such as profit margins and factory utilization. Examples of beneficial metrics to exchange include ending inventories and forecast accuracy. To get real value out of collaboration, the process must be open and subject to ongoing improvement. This is only possible through continuous measurement, as very few complex business processes realize their full potential when they are first implemented.
The Framework in Practice
If the model is executed well, both buyer and seller can anticipate higher than expected product success and margin management; in some industries, overall category success and increased market penetration can also result in a higher market share. This assumes that trading partners understand the benefits of collaboration and are willing to pursue it aggressively. Achieving process alignment within one company is an arduous task; achieving it across two companies is even more difficult.
If your company is one of many that have started down the collaboration path, consider your collaboration activities relative to the framework presented in Figure 1. Your company's efforts likely began with execution collaboration, and you have progressed to seasonal collaboration. Review the framework to ensure that elements of the execution collaboration process are exercised within your company. Once these are in place, review the seasonal decisions to ensure that your execution processes are governed by the right policy information.
Figure 1 - The total lifecycle collaboration framework.
If all of these processes are intact, move on to seasonal collaboration, ensuring that the elements of those processes are performed within your company. This is the area of collaboration that most companies are struggling with today.
Identify roadblocks that prevent true seasonal collaboration. Review the list of strategic decisions in the framework to determine if additional information should be communicated to the seasonal collaboration process. In addition, consider the factors for success mentioned earlier. Determine what strategic decisions are key for your company and let them serve as input for designing the collaboration process. Ultimately, one needs to measure success with the appropriate operating metrics. Measuring value requires establishing benchmarks for specific metrics and continuously adjusting to meet those goals. Ongoing measurement provides the opportunity for continuous improvement within and across the framework.
Table 1 - Collaborative intent by time frame
Conclusion
Lifecycle collaboration chips away at the barriers to trust by integrating strategic goods and execution actions across companies. Trust is rooted in establishing mutual objectives reinforced through ongoing communication. Collaboration on the strategic processes will, by definition, increase management's involvement and thereby help to break down cultural barriers and overcome the typical adversarial posturing that often takes place between trading partners.
Achieving inter-company, fact-based decision-making requires integration and measurement. By adhering to the drivers for success described in this paper, trading partners can establish joint strategic intent and lay the path for successful seasonal and execution collaboration.
Endnote
1 Market Study: The State of Collaboration, 2001.
