AGENDA

KEY ISSUES IN CREATING VALUE IN
SUPPLIER-BUYER PARTNERSHIPS
Wharton School
Professor Jeff Dyer
HISTORICAL VISION
PARTNERSHIP VISION
TOTAL SYSTEM
ECONOMICS
100%
INTERNAL FOCUS
80%
CUSTOMER
ECONOMICS
50%
MY
ECONOMICS
20%
SUPPLIER
ECONOMICS
30%
60%
MY
40%
ECONOMICS
20%
0%
Wharton School
Professor Jeff Dyer
CREATING VALUE BY FOCUSING
ON THE SYSTEM
TRADITIONAL
RELATIONSHIP
VALUE
TO
CUSTOMER
VALUE
TO
CUSTOMER
VALUE
TO
SUPPLIER
Wharton School
STRATEGIC
PARTNERSHIP
VALUE
TO
SUPPLIER
Professor Jeff Dyer
KEY TO SUCCESS:
EXPAND THE PIE

Leverage the full resources of partners
to create value for the end customer

Work jointly with partners to lower total
systems costs (optimize the system)
Wharton School
Professor Jeff Dyer
LEVERAGING THE RESOURCES OF PARTNERS
Toyota
Engineering
(7,000 Engineers)
Top 35
Affiliated Suppliers
(5-6,000 Engineers)
Remaining 250
Tier I Suppliers
(10-15,000 Engineers
Toyota can leverage its value creation resources by 5-15x
by involving suppliers in the Extended Enterprise
Wharton School
Professor Jeff Dyer
Types of Costs that Vertical Alliances are
Designed to Reduce
Transaction costs
 Quality costs
 Product development costs
 Logistics costs (warehousing and
transportation)
 Inventory costs

Wharton School
Professor Jeff Dyer
Three Key Sources of Inter-firm
Competitive Advantage
Dedicated
Asset
Investments
Knowledge
- Sharing
Routines
Inter-firm
Trust
Wharton School
Professor Jeff Dyer
“Just stay in the cab, Vern… maybe
that bear’s hurt, and maybe he ain’t.”
Wharton School
Professor Jeff Dyer
Wharton School
Professor Jeff Dyer
CREATING EFFECTIVE
PARTNERSHIPS
Build trust
 Create multiple functional interfaces to
facilitate system learning
 Make dedicated/customized
investments

Wharton School
Professor Jeff Dyer
BUILDING TRUST



Formal Mechanisms such as long term contracts, stock
ownership, collateral bonds, are often necessary to signal a
credible long term commitment to a partner.
Interorganizational Trust is often built on processes, not
people. A partner is trustworthy if its interorganizational
processes are understandable and predictable.
Informal Mechanisms such as reputation, personal trust,
relational norms, are key to creating value over the long
term. Formal mechanisms alone do not produce
information sharing which is critical to partnering success.
Wharton School
Professor Jeff Dyer
THE VALUE OF TRUST
Increases learning (greater information
sharing)
 Increases customized investments
(willingness to risk tailored investments)
 Increases speed to quickly respond to
market changes
 Lowers transaction costs

Wharton School
Professor Jeff Dyer
THE COST OF MISTRUST
50%
47%
40%
Percent of faceto-face contact
time with suppliers
28%
30%
21%
21%
Chrysler
Toyota
20%
10%
0%
GM
Ford
Negotiating price/contract
W
harton School
Assigning blame for problems
Professor Jeff Dyer
CREATING EFFECTIVE
PARTNERSHIPS
Build trust
 Create multiple interfaces to facilitate
learning throughout the network
 Make dedicated/customized
investments

Wharton School
Professor Jeff Dyer
Toyota’s Supplier - Customer Interface
Surface Contact vs. Multiple-Point Contact
(Correct)
Top
Executives
R&D
R&D
Manufacturing
Manufacturing
Quality Assurance
Quality Control
Quality Assurance
Quality Control
Sales
Purchasing
Customer
Wharton School
Top
Executives
Point Contact
(Wrong)
Supplier
Professor Jeff Dyer
Effective Partnerships at P&G/Wal-Mart
Merchandising
Sales
Forecasting
Forecasting
Inventory Management
Inventory Management
Warehousing
Warehousing
Transportation
Transportation
Systems
Systems
Marketing
Marketing
Accounting/Finance
Accounting/Finance
Wharton School
Professor Jeff Dyer
CREATING EFFECTIVE
PARTNERSHIPS
Build trust
 Create multiple functional interfaces to
facilitate system learning
 Make dedicated/customized asset
investments

Wharton School
Professor Jeff Dyer
Wharton School
Professor Jeff Dyer
TYPES OF DEDICATED ASSETS



Dedicated Site Investments (locating plants
in close proximity to economize on inventory,
transportation, coordination costs).
Dedicated Physical/Process Investments
(making relation-specific capital investments
in machinery, tools, processes)
Dedicated Human Investments (dedicating
personnel to develop relation-specific knowhow and improve communication/
coordination)
Wharton School
Professor Jeff Dyer
Toyota Plant Configuration in Japan*
Motamachi, TC
Honsha, TC
3 miles
1 mile
Tahara, Nagoya
Headquarters &
Technical Center
Takaoka, TC
Tsutsumi, TC
6 miles
3 miles
Affiliated Supplier Plants
• Avg. distance of 30 miles
• 43.5 weekly deliveries
• 10,635 man days of face-to-face contact
• 12.5 guest engineers
* 1992 All plants are in Toyota City (TC) or Nagoya
Wharton School
Independent Supplier Plants
• Avg. distance of 87 miles
• 40.5 weekly deliveries
• 3,764 mandays of face-toface contact
• 2.6 guest engineers
Professor Jeff Dyer
GM Plant Configuration in the United States*
Flint, MI
51 miles
55 miles
Lansing, MI
Hamtramck, MI
North
Tarrytown, NY
650 miles
2400 miles
Fremont, CA
(Nummi)
Ypsilanti, MI
200 miles
Linden, NJ
Internal Supplier Plants
• Avg. distance of 350 miles
387 miles
Van Nuys, CA
External Supplier Plants
•Avg. distance of 427 miles
•7.5 Weekly deliveries
•1,107 man days of face-toface contact
•.17 guest engineers
Lordstown, OH
Wilmington,
DE
Bowling Green,
KY
Kansas City, KS
900 miles
Wentzville, MO
Spring Hill, TN
1400 miles
455 miles
* 1991Passenger car plants only
(Mileage from 1990 Rand McNally Road Atlas)
harton School
W
Arlington, TX
Professor Jeff Dyer
Total Inventory as a Percentage of Sales
The Relationship Between Plant Distance
and Automaker Inventory Costs
Chrysler
0.1
0.09
0.08
0.07
0.06
0.05
0.04
0.03
0.02
0.01
0
GM
Ford
Nissan
Toyota
0
100
200
300
400
500
600
Average Distance Between Supplier and Automaker Plants (In Miles)
Wharton School
Professor Jeff Dyer
STRATEGIC SUPPLIER
SEGMENTATION
•
•
Creating partnerships takes considerable time and
resources on the part of both parties
Not all purchased products offer the potential to lower
systems costs, offer new technologies, or speed
products to market
The optimal strategy requires different
approaches with different types/ groups of
suppliers/customers
Wharton School
Professor Jeff Dyer
THE FUTURE….




Partnerships will become increasingly
important for competitive advantage
Teams of companies will increasingly
compete with other teams (extended
enterprise); lean teams will win
Leveraging the full resources of the
extended team will be critical
Leading companies will increasingly use
partnerships--though not with all
suppliers/customers
Wharton School
Professor Jeff Dyer