Due to economies of scale, large companies almost always have a cost advantage over small-and-medium enterprises (SMEs). Working alone, SMEs have a difficult time reducing costs. But SMEs can tip the competitive edge back in their favor by looking beyond short-term cost-reduction tactics. They can embrace vertical partnerships to get the most value out of their supply chain. In this article, we explain how you can successfully implement vertical partnership with your suppliers.
What does it mean to be in a vertical partnership?
Vertical partnership means working closely together with other companies along your supply chain — your suppliers, distributors, and retailers — to achieve a common goal. You are vertically integrated into the same flow and aligned behind common values. Typically, you and your supply chain partners will share resources, know-how, and commercial intelligence to achieve mutually beneficial outcomes.
What you can gain from successful partnerships
Partnership across the supply chain can result in benefits ranging from increased efficiency, improved quality to more innovation. All of these will result in lower costs and/or higher revenues for all partners in the supply chain. How?
1. More responsive and efficient supply chain translates to lower costs As partners, your suppliers don’t need to estimate or forecast your upcoming orders. You can give them access to your demand forecast or preempt them about any planned cutback or surge in production. Consequently, they don’t need to hold as much buffer stock or set aside extra production resources, so they can reduce costs. They can also respond more quickly, helping you capture more revenue opportunities.
2. Improved compliance and quality means lower risks With a long-term perspective in mind, suppliers will be motivated to deliver the best quality and comply with any regulatory requirement. They know that cutting corners to enjoy short-term cost savings will only come back to hurt them. This translates to lower risks to your reputation and lower non-compliance costs.
3. Innovation leads to new revenue streams and cost-savings You may even be able to innovate better when you collaborate. You may think of innovative product ideas you may never have thought of on your own, bringing in new revenue streams. Or maybe you could revamp your manufacturing process together, making it more efficient and saving costs as a result. Large companies, such as Philips, have been benefiting from supplier-enabled innovation for a while now. There’s no reason why your company can’t — albeit at a smaller scale.
How to achieve vertical partnership success
Trust is a basic requirement in partnership. Your partners must believe that your success is their success. But trust alone is not enough — the magic is in the execution. If you can’t get your partners to act in a way that supports your company, you will get nowhere. The key is aligning your supply chain partners with your company’s vision, values, and objectives. Top executives like yourselves invest a lot of time and energy into formulating your best strategy and into building a healthy, meaningful, and positive corporate culture. That’s because you know that these are crucial underlying values that guide your employees towards a common goal. To get the best results out of your partnership, it’s ideal that these guiding values also inform your supply chain partners’ behavior. Consider sharing the following with your business partners — suppliers, subcontractors, consultants, and more — and you’ll be well on your way to a well-executed vertical partnership: – Vision. Your company’s vision is a vivid mental image of what you want your business to be at some point in the future. Sharing your vision lets your partners know what success looks like to you, so they can work towards helping you achieve it. – Objectives. Break down your vision into achievable milestones and measurable objectives. Connect the KPIs of your business partners to your company’s objectives. This way, you and your partners can get a clear indication as to how much progress is being made. – Strategy. Synchronizing with your business partners on your strategy lets them know what you are trying to achieve with your actions. Sharing your strategy means your partners don’t have to guess — it eliminates doubt and builds trust. – Culture. Are your companies on the same wavelength? Poor alignment of culture breeds negativity and mistrust. So, let your own positive work culture spill over to how you interact with your business partners. Help people from partner organizations get to know each other better, so they can work better together. – Business practices. Letting your business partners know about your organization’s business processes helps smooth things along. Being transparent with small things — like when they can expect payment — can make a difference. In our experience, few companies align their core values to their suppliers — and it’s a pity! Why are we ready to let someone sell our products, build our products, talk to our customers, design our new processes but we don’t even take the time to align our company’s core values? The more aligned your business is with others, the more powerful it becomes. So, start taking action today. Identify key players in your supply chain and start a vertical partnership. Communicate your vision, strategies, and objectives to build a solid partnership, so you can start reaping the rewards: higher revenues and lower costs. Do you need some ideas to put this into practice in your organization? We are happy to help — and we’re just one email away!