Page 167 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Production and Operations Management

Notes costs through VENA when they are involved in long-term relations. As was discussed earlier,
Maruti Udyog were able to reduce component costs on the Alto alone, from 2001 to 2005, by
29 percent.
Long-term performance agreements are an incentive to suppliers to reduce their costs. The
extended learning curve effects with both production and services allowing collaborative and
alliance suppliers to reduce their costs and share these savings with customers.

Disadvantages of Collaborative Relationships

The major disadvantage of collaborative relationships is the amount of human resources and
thought that is required to develop and manage such relationships.

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Caution It takes a lot of time and energy, judgment and managerial expertise to make
collaborative relationships successful.

8.4.3 Supply Alliances

Supply alliances go one step further. These relationships are based when there is institutional
trust between the buyer and the seller. A high level of recognized interdependence and
commitment is present in such relationships. There is a visible atmosphere of cooperation. The
buyer and the seller address potential conflicts and resolve them openly. When problems occur,
the focus is a search for the root cause, not to assign blame.
Alliances are not legal entities, but mutually beneficial and open relationships wherein the
needs of both, the buyer and the seller, are satisfied. They are similar to collaborative relationships,
but stronger. But, these are difficult to develop, because supply alliances only work when the
buyer and the seller are able to develop and manage institutional trust.

Properly configured, supply alliances reap incredible benefits. Sellers are willing to invest in
customized machinery, tools, information systems, delivery processes, etc., due to the long-
term relationship with the buyer. This gives the buyer faster throughput and allows for product
differentiation. It also leads to improved overall quality as the product integrity increases.
Sellers also accumulate specific know-how of the buyers market and requirements by working
together. This accumulated specialized information and language allows both the buyer and the
seller to communicate and coordinate effectively with each other. They are both less likely to
have communication breakdowns that result in errors. The final result is higher quality, faster
development times, and lower costs for the customer.

Notes The focus of most supplier alliances is achieving the simultaneous objectives of
continuous improvements along with squeezing cost out. Negotiations and re-negotiations
occur in a win-win manner.

Example: Supply alliance in India is between General Motors (GM) and H.P. Pelzer
(India) Ltd. Alliances are very difficult to establish; however, the Pelzer alliance was made
possible because a similar relationship existed between GM, Germany, and H.P. Pelzer, Germany.
For their plant at Hallol, GM developed all their automotive insulation parts from Pelzer. They
chose one supplier from the many who could make their parts. GM and Pelzer actively

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