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Strategic Alliance-Need Of The Hour

In an age of cut-throat competition and shorter product life, many organisations strengthen their core competence in select critical areas of their operations through strategic alliances. On one hand this helps to block competitive threat and reduces significant risks to business. On the other hand, the firm gets innovative solutions to reduce its operating cost without increasing its resource cost or overheads significantly.

A study of spends of a firm reveals that some items bought by the company are significantly critical to its operations and are bought at a higher price to ensure competitiveness. This category of item is strategic for the firm to maintain its competitive edge. The company can either have its internal research team to continuously upgrade these products and enhance product life cycle, or resort to strategic alliance with a firm which has already invested on development of the item. Here a mere transactional relationship with the supplier would fail as other than the product, the buyer needs to pick up the expertise and best practices of the industry from that supplier. Procurement assistance also involves getting continuous supply of the item according to his need at the best possible price which simultaneously reduces his buying cost and increases margin of his final product.

A strategic alliance here gives the buyer both the product and technology to follow industry best practice at an optimum cost.

Good positioning

A buyer thus may get a lot of benefit from strategic alliance but also has to ensure that the vendor gets a maximum share of business and that the confidentiality of the technology involved is maintained.

This leads to a good balance and the buyer and seller both benefit equally. The seller increases his business volume substantially without much marketing effort and the buyer reduces administrative cost involved in chasing the item for delivery and checking the item after it arrives in store. The seller here, acting as a business partner, ensures availability of the material when it is needed and ensures that only correct material is supplied. This leads to just-in-time (JIT) receipt of goods and buyers do not have to maintain an inventory at all in such cases.

Leading auto manufacturers working with strategic partner vendors are often seen to maintain inventory, not in weeks or hours but in minutes and these vendors, in turn, are able to make very high inventory turnover getting faster payment from their buyers. Higher inventory turn ensures high growth in profitability without spending additional working capital.

The vendors here also constantly upgrade themselves through continuous research and that often leads to lower usage of items supplied by them. So buyers continue to buy these items at same price but as the quantity of the item required comes down, total cost of ownership (TCO) decreases and this directly impacts the bottomline of the company positively.

The strategic partner is also able to provide a different product altogether when the buyer organisation has to change his final product after the life of the earlier product has been exhausted. Thus getting a different design of engine for a Nano car was easier for Tata Motors from its strategic partner and it was available just when it was needed.

Alliance threats

During audit process, a strategic alliance may come across as being unfair as it amounts to putting all eggs in one basket or spending all company resources to a single party and losing out on the price advantage as deals here are not negotiated on an open platform. In case a strategic supplier becomes more powerful than the purchaser himself, he might try to extract more advantage in his favour and in that case, the buyer might turn out to be a loser.

Such threats are practical problems faced by practising professionals who use strategic alliance as a tool.

To tackle such problems, most companies have legal exit clauses to protect themselves in case of non-performance of a seller under strategic alliance. Some companies might have two similar products in two different lines and responsibility of supplies in one line is given to one supplier. So effectively if one supplier fails in one line, the other can immediately take charge of the other line.

Critical success factors

The critical success factors of a strategic alliance depend on how well the supplier delivers according to expectation and how well the purchaser looks after the needs of the supplier.

First and foremost, the purchaser should get a high level of performance and quality from the suppliers under alliance. Next, there should be a high degree of delivery compliance. In case the supplier under alliance is bringing the material from a different country altogether, he should have a local warehouse to serve the buyer promptly. The supplier also should extend technical support as and when needed by the users of the buying organisation.

This can happen if there are adequate visits by the technical team of the supplier to the production site of the buying organisation. The users and quality team of the buyer should also visit suppliers’ manufacturing processes so that the buyer can add more value in his own production process leading to supplier value management.

The buyer should reciprocate by making long term deals with the supplier and that should be done ethically and transparently with the supplier.

Lastly, the purchase team should work with the suppliers with empathy. They must understand that if the partner’s health is affected due to certain wrong moves from the buying organization such as reduce costs of procurement beyond feasible limits, the strategic relationship benefits would remain a distant dream.

Industry norms of Strategic alliance –

Pros –
Capacity –
• Capacity availability is ensured during uncertainty in demand and shorter lead time requirement.
• The long term business assurance helps suppliers to put up dedicated satellite infrastructure to assure the quality of the products and ensure just-in-time supply system.
Price –
• Pricing stability is assured over longer periods of time in an inflationary market.
Supply chain –
• Key suppliers work on optimising supply routes as well as improving productivity, thereby giving a cost competitive position to buyer.
• Multinational vendors allows buyers to avoid import formality in strategic alliance and these partners often save the buyer on additional logistics cost for importing smaller lots of materials.
Core competence –
• Strategic alliance helps the buyer to build on its core competence area, save on TCO and upgrade its performance.
• Strategic alliance also helps the buyer to maintain a lean procurement / commercial team while outsourcing most of the non-core activity of procurement.

Cons –
• Purchasers in some cases do not have much option and have to go with the available source of supply. These are commodities where the supplier has dominance in the industry.
• Risk of supply uncertainty looms during economic crisis.
• Strategic supplier over a period of time may become complacent and uncompetitive.

Authored by

RajKumar Mitra

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