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September 4, 1998

6 Min Read
Forming strategic alliances: Beyond partnerships

ArticleImage1357.gifThe idea of molders partnering with suppliers and customers has taken a while to catch on; it has even gone through several iterations as molders seek to understand what a partnership entails. Perhaps the term "partner" has been used much too loosely, leaving large gaps in the relationship that often cause the partnership to misfire.

Robert P. Lynch, president and CEO of The Warren Co., a Providence, RI-based consulting firm specializing in strategic alliances, joint ventures, mergers, acquisitions, strategic sourcing, and supply management, says that business is moving beyond partnerships.

"We're changing the whole way we put a relationship together," says Lynch, author of the book Business Alliance Guide: The Hidden Competitive Weapon. "We're creating value networks in which the supplier, the manufacturer, and the end customer are now inextricably linked together in a network formation rather than a linear chain. We use strategic alliances as the fundamental bonding agent for this new molecular structure."

Driving this molecular-type interconnectivity are shortened product-design and time-to-market cycles. There's no time anymore to pass the various processes along a linear chain. Companies must be linked together in a way that enables them to work concurrently and simultaneously to achieve established goals, Lynch believes.

Another factor driving strategic alliances is a change in the role of suppliers. Typically, molders have been "piece" makers, says Lynch. "Now power in most industries is going to the systems integrators. This is how the automotive industry reduced its costs, by turning suppliers into systems integrators."

Holding Costs
Many OEMs, not just those in the automotive industry, are recognizing the value of strategic alliances in helping hold the line on costs to manufacture. A Hewlett-Packard division matched its custom molder Puget Corp. in Tualatin, OR, and Solectron Corp., a contract electronics manufacturer in Milpitas, CA that provides assembly services for H-P. Jerry Schmidt, vice president and general manager of Puget, says cutting costs was a primary factor in H-P's decision to subcontract assembly of a printer to Solectron. The three-way partnership held subsequent discussions looking at ways to get costs out of the product, but it required openly sharing information on such costs, something many molders might be reluctant to do.

Lynch says that "alliance oriented companies are working very closely with suppliers to get costs down in a collaborative way," rather than just beating them up over price, because they want their suppliers to be around long-term. Schmidt adds that when companies share openly their costing goals, it allows suppliers to help identify areas where cost cutting is a viable optionÑ such as transportation logistics, packaging, and communications.

These meetings led H-P to suggest that further cost reduction could be obtained through molding the parts for the product in Solectron's facility.

But rather than turning Solectron into a custom molder, H-P suggested that Puget develop a strategic alliance with Solectron. H-P, Puget, and Solectron moved quickly to iron out the details of the alliance in less than six months. Establishing the alliance meant overcoming many hurdles. Schmidt explains that some employees of Solectron feared the plastics molding operations. "Molding is a totally different environment than assembly operations," he says.

To address these issues and alleviate the fears, employees of both companies met together so that Puget could answer all of Solectron's employees' questions about the molding operations. "We wanted to coexist as a team," notes Schmidt, "and we achieved that by meeting with all the players and putting all the issues out in the open."

Moving In
Puget moved several presses from its Tualatin plant to an area in Solectron's plant, which operates as a business unit of Puget. Molding in Solectron's facility, Schmidt says, greatly reduced the distance parts had to travel from Puget's plant to Solectron's. In turn, it virtually eliminated shipping costs and reduced packaging requirements. Because the pipeline is so much shorter, communication between the companies has also been improved. Puget employees operate the molding unit, but share space with Solectron's employees, and have shared services, such as maintenance.

Alliance Benefits
Not only has H-P benefited from the alliance, but Puget and Solectron have also realized significant benefits. Puget has a strategic supply agreement that covers molding work not only from H-P but from Solectron's other customers as well. When Solectron works with each customer to select the best plastic molder for its particular project, Puget is clearly a preferred alternative.

Solectron benefits from having in-house molding capabilities. "When Solectron conducts tours of its facility, customers see the molding machines adjacent to the assembly operations and are excited about it," says Schmidt. Changes in production schedules, quality issues, and other glitches can be addressed quickly.

In addition to the "hard" issues of the contract, such as financial terms of the space leased in Solectron's building and other business arrangements, the contract defines how the companies operate as business partners. Schmidt says this was an important aspect of establishing the alliance. "We don't want either of us to be so locked into something that we forget that what really matters is meeting each other's requirements," he says.

Determining the Fit
Lynch confirms that this is the key to a successful strategic alliance. He calls it the "three-dimensional fit" and stresses that companies really need to assess each of these areas before entering into a strategic alliance. First, is there a good strategic fit? Do the companies have the same strategic drivers, for example, business goals, financial needs, and expectations? Do they serve the same basic customers? Does the competitive advantage they are trying to create meet both company's needs?

Secondly, there's the operational fit. Are the company's corporate cultures similar? Lynch points out that a company that is team-oriented might clash with a company that's hierarchical in its management culture.

Third, and perhaps most important, is the chemistry fit. "The quality of the relationships between the key players in the alliance game is critical to its success," says Lynch. "Do you trust each other? Do you both keep commitments? Is there integrity among the players?"

It appears that H-P, Solectron, and Puget all did their homework with regard to Lynch's three-dimensional fit criteria. After nearly a year, the success is evident in the alliance's most recent expansion: a 40,000-sq-ft building being constructed adjacent to Solectron's facility. Puget will be moving approximately 10 presses into the new building this quarter, with plans to add more as the work increases.

Lynch says that understanding why you want a strategic alliance, i.e., identifying the driving forces behind the alliance, is crucial. "You want to be sure both companies are on a parallel course over the next three to five years, not just two ships passing in the night," he says.

It's also important to recognize that these driving forces that brought the alliance together will change over time. Recognizing these forces is crucial to adapting to the changes that occur. The alliance needs to be flexible to adapt to change in the forces that brought the companies together. Also, it's critical to remember that the driving forces must be ones that keep the companies in alignment long-term. "A good alliance is a good alignment," says Lynch.

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