Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

2.3.6 Managing a Strategic Partnership Relationship — A Practical Application

Intended learning outcomes: Present the ALP phases in the case of a high-tech Swiss machine tool manufacturer with a world market presence who wanted to introduce an intensive partnership relationship with suppliers of important assemblies.

Agie-Charmilles SA, a high-tech Swiss machine tool manufacturer with a world market presence (, wanted to introduce an intensive partnership relationship with suppliers of important assemblies. Its objective was to reduce the number of partners while improving quality, keeping costs the same, receiving reliable delivery, and gaining more flexibility in terms of quantity and delivery date. Even more important to the company, however, was the creation of conditions that would allow it to focus on its core competencies in developing and assembling its products.

The various suppliers differed in terms of degree of independence and depth of value added. For example, the circuit board manufacturers were all pure subcontractors for performing single operations: The machine tool manu­facturer provided not only design and engineering of the circuit boards, but also the production materials required. The manufacturers of metal casing for the encasement of the benches for workpiece processing, while they procured their own materials, did not do their own development. At the foreground stood local suppliers, in most cases small firms with 50 or so employees and individual departments of medium-sized companies. The following outlines the relevant phases of the project.

Intention phase:

The firm’s management met for several rounds of discussion with the mana­gement of each supplier. Some of the meetings included various employees from affected offices and shopfloors. Emphasis was placed on the win–win principle. A strategic gain for the supplier was greater competitive advantage achieved through taking on additional competencies. Clearly, each supplier was free not to participate. However, it had to reckon with the possibility that it would lose its client to a competitor willing to cooperate.

The circuit board manufacturer, in addition to building its own purchasing de­partment, was to achieve delivery quality of virtually 100% while meet­ing delivery quantity and delivery timing demands. Successive steps toward reaching these objectives were planned out. The machine tool manufacturer promised full assistance in transferring know-how in these areas.

For the metal casing manufacturer, the objective was to build up an R&D department having “time to market” priorities that matched those of the machine tool manufacturer. Prerequisites with regard to quality, cost, and delivery were defined more precisely.

Officials met four times a year to examine strategies and objectives. Mana­gement of the firms met once a year in order to monitor progress. A serious difficulty arose when the production manager of the machine tool manufac­tu­rer, who had lent strong ideological support to the project, left his firm. Serious doubts about the continuity of the project made them­selves felt among the suppliers. Things only calmed down once a successor to the pro­duction manager was chosen — who was known to support the chosen policy. It quickly became apparent that such demanding forms of cooperation do not generally just continue to run at the operational level. Repeated confir­mation by responsible officials at the participating companies is essential.

Definition phase:

During this phase, products and processes are developed and introduced. This is the level where it becomes clear whether the trust-building measures were just talk or were instituted solidly. Let’s look at subsequent steps by taking as an example one particular circuit board manufacturer and one metal casing manufacturer.

The metal casing manufacturer insisted on a minimum sales quantity, set in advance for a period of several years, to have some measure of security in the face of the large investment in CAD. The machine tool manufacturer was not prepared to agree, as this did not accord with its own view of the meaning of a balanced partner­ship. He argued that it was also incurring an associated risk: namely, potential abuse of the knowledge on the part of the supplier, gained from cooperation with the machine tool manufacturer, used to enter into business relationships with the competitors of the latter. Finally, the attempt at close cooperation had to be abandoned. The supplier had reckoned with this result. This was not a problem, because its volume of business with the machine tool manufacturer made up only 4% of its turnover, and its main business was booming. The machine tool manu­facturer soon found other metal casing manufacturers with which it realized its partner­ship satisfactorily.

The circuit board manufacturer saw the requirement to build up its own purchasing department as an opportunity to acquire know-how in qualified office work. Even though, or perhaps because, 80% of its turnover fell to the machine tool manufacturer, it became convinced by the idea that new know-how could in the future be used with other clients as well. Finally, the machine tool manufacturer made up only 20% of its turn­over, proving the success of the strategy for the supplier. Yet the requi­red investment in employees who were only indirectly productive was not without risk. Through­out the entire design phase, officials of the two companies paid each other visits to better understand the processes of shared production, procurement, delivery, calculation and associated problems. This led the supplier to initiate a complete redesign of its procedures and the layout of its production infrastructure. But the machine tool manu­facturer also had to modify some of its procedures.

Execution phase:

For planning and execution of the machine tool manufacturer’s orders to the circuit board manu­facturer, they chose a supplier scheduling system, that is, a system of long-, middle-, and short-term blanket orders as well as blanket releases with quantities and time periods. This was a method previously unfamiliar to the supplier. But it soon recognized that only improved planning on both sides would allow adherence to the drastically reduced delivery lead times that were now demanded. And only in this way could the supplier, for its part, procure the necessary electronic components from its own supplier in time. A system like this, with continuous planning of ever-more-precise blanket orders and blanket releases, demanded significant investments in rapid and efficient communication techniques of both the com­pany and its supplier.

In the example, the machine manufacturer orders the exact required quantity only for the next month, by placing a short-range blanket order. The exact points in time for individual blanket releases during the next month result in this case from a Kanban control principle. In the course of the monthly period, requirements arise unpredictably, so that if the company has not given precise dates for probable delivery, the supplier will have to ready the entire quantity of the short-range blanket order at the start of the month.

The Advanced Logistic Partnership Model at Agie-Charmilles, a high-tech Swiss machine tool manufacturer.

Course section 2.3: Subsections and their intended learning outcomes

  • 2.3.7 The Virtual Enterprise and Other Forms of Coordination among Companies

    Intended learning outcomes: Produce an overview on the virtual enterprise and underlying long-term network of potential partners. Present target area strategies for a virtual enterprise and disclose possible supply chain risks entailed. Describe some other forms of cooperation in relation to the virtual enterprise.