Supplier collaboration. Add it to procurement transformation and category management as popular procurement phrases that are successfully implemented less often than they are clearly defined. As procurement professionals, we know we are supposed to collaborate more. We are actively looking for opportunities to collaborate with our suppliers. But having the desire to collaborate is not enough to make it happen. There must also be a measurable benefit or daunting obstacle for both sides that can only be addressed by joining forces with a supply partner.
We are watching such a scenario play out between Tesla, the electric car company, and Panasonic, their battery supplier. The two parties announced on July 31st that they will collaborate to build and operate a battery ‘Gigafactory’. The factory will most likely be in the Reno, Nevada area (although Texas and California are fighting to keep their chances alive) and is being hailed as the solution to Tesla’s lithium-ion battery supply constraints. According to current plans, the factory will be completely operational by 2020, will cost $5B to build and equip, and will employ as many as 6,500 workers.
Although the factory’s scale is interesting, the more captivating angle on this story is the collaboration that will need to take place between buyer and supplier in order to make it a reality. The factory is a joint effort in every sense. According to the July 31st press release, “Tesla will prepare, provide and manage the land, buildings and utilities. Panasonic will manufacture and supply cylindrical lithium-ion cells and invest in the associated equipment, machinery, and other manufacturing tools based on their mutual approval.” In this relationship, Tesla will become Panasonic’s landlord as well as their primary customer. Panasonic will become a tenant as well as a strategic supplier.
According to an August 1st USA Today article about the factory, “Tesla is going to pick up about half of the cost of the factory, with Panasonic contributing about 30%, the state chipping in 10% and the rest shouldered by suppliers.” The suppliers referenced in the remaining 10% of the cost breakdown are part of a network that will supply the materials required by the factory’s production. With the hefty $5B price tag for the factory, the decision to invest cannot have been taken lightly by any of the parties. As intimidating as figures such as $2.5B and $1.5B are, the potential benefits are significant enough to make the associated risk worthwhile.
The high levels of planned investment also serve as evidence that the promised benefits of mutual collaboration must not based on operational efficiencies or streamlined transaction processing. Instead they must fuel growth and create a sustainable market leadership position. Tesla and Panasonic are able to tackle this immense project, not because they are at the beginning of their journey together, but because they have already addressed all of the manual issues and discrepancies holding their relationship back. As Nipendo’s Assaf Stern stated in a recent post on the company’s blog, “If you are spending the bulk of your time chasing bad invoices or other such process discrepancies, you have less time to focus your attention on medium to long-term objectives. This means that you will likely end up in a reactive cycle that keeps your vision locked on what has already happened.”
Rather than deciding collaboration is important, and jointly clearing up the niceties of invoicing and payment processing, Tesla and Panasonic each looked a growth-killing problem in the face and realized that the best response was to join forces with a supply partner. As Kate Vitasek wrote about the “Economics of Innovation” in Vested Outsourcing (2010), Innovations can be risky, but doing nothing is more so. As economist Joseph Schumpeter put it, “companies that resist change are, ‘standing on ground that is crumbling beneath their feet.” (p. 74) Rather than being an argument against collaboration, the precarious nature of the circumstances in which each company found themselves was the motivator. Only such high stakes can induce two companies to work as one.
Supplier collaboration is far from being a soft, relationship oriented approach to procurement. It is a highly strategic effort that will only be the right answer in a small fraction of situations. When it is possible and successful, supplier collaboration indicates the point at which a company understands the true value of their supply chain. Perhaps more importantly to procurement, when executive leadership embraces supplier collaboration as the answer to a corporate problem they are also ready to see the competitive advantage made possible through a strong, enabled procurement function.