Supply Chain Management: An International Journal

Establishing supply chain partnerships: lessons from Australian agribusiness

Michael OKeeffe,
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 Introduction
Insights from industry
One of the key elements of supply chain
Establishing supply management (SCM) is the notion of
chain partnerships: co-operating to compete. As the focus of
competition shifts from firm versus firm to
lessons from Australian chain (or system) versus chain, firms within a
agribusiness system can be better off by working together
or co-operating. As agricultural industries
become de-regulated and more competitive
the importance of co-operating increases to
be an effective competitor you need to be a
Michael OKeeffe good co-operator. Of course it is not easy
that is the secret! If it was easy, everyone
would be doing it and it would not be a source
of advantage.
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The author The Australian agribusiness context

Michael OKeeffe is Chief Manager of Rabo Australia Ltd,
Sydney, Australia.
Abstract
Many agribusiness firms in Australia are buying into the
concept of SCM but are not sure how to apply it. Provides
some guidance for firms who are considering following the
SCM track. Presents a checklist for auditing potential
supply chain partners which has proved useful in focusing
the minds of potential partners on the key issues of trust
and relationship management.
The characteristics of Australian agribusiness
mean that SCM is often introduced in a low
trust environment. This makes the task more
difficult and the process longer, especially in
the early days of the trust-building process.
Consider the following reasons:
In commodity markets the sum of value
created is fixed and the major issue is how
it is divided among channel participants.
This is a win-lose game and leads to adver-
sarial relationships.
Auction systems and regulated markets
isolate farmers from the rest of the food
system and farmers do not gain any insight
into their customers, and why they act the
way they do. Likewise processors have not
needed to, or had the opportunity to,
develop relationships with growers.
SCM does not remove the volatile nature
of prices and supply both quantity and
quality characteristic of agriculture. Price
volatility puts pressure on the relationship.
Interdependence is difficult to achieve
owing to size imbalance between proces-
sors and farmers.

The relationship audit checklist

Supply Chain Management
Volume 3 Number 1 1998 pp. 59
MCB University Press ISSN 1359-8546
The three key questions facing managers
considering the SCM track are:
(1) How close a relationship should we
develop with specific customers and/or
suppliers?
(2) What are the key issues when two com-
panies get closer together?
(3) How do we monitor and manage the
relationship development process?
5
 Establishing supply chain partnerships: lessons from Australia
Michael OKeeffe
One of the challenges we found as consultants
working across a range of industries was how
best to integrate insights from a number of
academic theories into a format relevant to
our clients. For example, transaction cost
economics provides powerful lessons on the
fundamental importance of transaction
specific investments for the development of
closer relationships. Agency theory com-
plements transaction cost economics by
highlighting the importance of uncertainty
and information in the context of a principal-
agent framework. Business-to-business rela-
tionship marketing emphasises dimensions
such as compatible goals, value creation,
alternatives and commitment. Finally, the
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resource based view of the firm, with its
emphasis on intangible and non-tradable
assets that are difficult to imitate, provides a
strategy framework on the potential of supply
chain relationships as a source of sustainable
competitive advantage.
Our challenge was to extract the relevant
insights from these diverse streams of thinking
into an operational framework. A checklist
proved to be an appropriate mechanism.
The checklist outlined (see Appendix) was
developed by the Agribusiness Advisory
Group of Rabo, Australia, who conduct
consulting projects for clients in a range of
industries such as grain, meat, dairy, wool and
horticulture. The checklist was developed
over a three year period and was found to be a
valuable mechanism for:
(1) communicating the concepts to practi-
tioners;
(2) assisting firms in determining how close a
relationship they should develop with a
specific customer and/or supplier; and
(3) auditing a current relationship.
The aim of the checklist is to assist practi-
tioners in coming to grips with the complex
competitive issues involved in their own par-
ticular situation. The whole process is really
about operationalising trust. We are all
aware that alliances and partnerships are built
on trust, but trust is not an easy concept to
put into practice. The following checklists aim
to break trust down into more manageable
chunks, and to highlight when trust is likely to
develop, the trust building process, and how
best to manage the constraints.
One thing is clear. You cannot have your
cake and eat it. Building trust relies on the
willingness to relinquish some independence.
6
Supply Chain Management
Volume 3 Number 1 1998 59
Developing mutual dependence means both
parties must play the game.
The checklist provides a framework and
guide and should be used with caution as
there are no weightings and a low score on
one dimension, such as goal compatibility,
may seriously limit a closer relationship.
Conversely, a low score on a dimension such
as understanding each others business can
be relatively easily rectified.
Figure 1 shows that the nine relationship
dimensions can be aggregated into three
groups:
(1) The foundation. Value creation, alignment,
history and alternatives these four
dimensions assist managers in coming to
grips with the important question of
whether an alliance makes strategic sense
or, whether we are better off maintaining
a (closer) buyer/seller relationship.
In essence, as two firms develop closer
relationships, the underlying logic shifts
from a buyer/seller choice decision to an
investment decision. The question
changes from: do we choose the other
firm as a customer/supplier and retain our
independence? to are we prepared to
invest in this customer/supplier and lose
some independence?
Closer relationships result in a loss of
independence, and the secret is to evolve
from independence to interdependence;
not from independence to dependence.
(2) The investment. The second set of dimen-
sions in the middle of the diagram
helps us come to grips with the investment
cycle that leads to a competitive advan-
tage. This is the trust building process.
These dimensions focus on the nature
of the investments made by each partner,
the development of interdependence, risk
management and sharing the rewards.
The questions on opportunism and
reward sharing are probably the closest to
the question of do we trust this firm?
Figure 1 Supply chain investments
Value Creation
Rewards
Core
Alignment Capabilities
Strategic INVESTMENTS
Commitment
History Management
Risk
Alternatives
 Establishing supply chain partnerships: lessons from Australia
Michael OKeeffe
(3) Relationship management. The third set of
dimensions relate to managing the
relationship, building on the history
between the two firms, and developing
the appropriate internal reward
systems.
This side of the diagram emphasises
the fundamental importance of core
capabilities of your firm, as well as the
other firms in the supply chain. The
emphasis on core capabilities also high-
lights the need to establish the boundaries
of the alliance, and in which areas the
firm is free to act independently.
The question for each firm considering
the welfare of its partner is also closely
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related to our normal use of the word
trust.
Compatible goals and alternatives
A major grain trader and wheat user in
Australia conducted a survey of wheat farmer
suppliers in an effort to manage the customer-
supplier relationship better. The two key
findings were:
(1) Compatible goals. Australian grains indus-
try organisations such as bulk handling
authorities, users, traders and marketing
authorities, are all continually evolving in
a climate of ongoing de-regulation, and
many growers are unsure of the strategic
direction of the client company. In this
climate of uncertainty surrounding long
term objectives and goals, the farmers
were unsure about developing a closer
relationship with any firm in the grain
industry.
(2) Alternatives. Wheat farmers with substan-
tial on-farm storage have more marketing
alternatives compared with growers with
little storage. The presence of storage was
closely correlated with arms-length
trading relationships: growers without
storage were predisposed towards devel-
oping closer relationships with other
organisations.
Investment and the quest for
interdependence
Strawberry Wholesalers, a small group of
Western Australian strawberry growers, was
seeking to develop a closer relationship with
its two agents in the export market. The main
challenge was to develop an interdependent
7
Supply Chain Management
Volume 3 Number 1 1998 59
relationship with the agents and not simply to
become dependent on them.
Discussions with the agents suggested that
the best way to achieve this was through the
agents willingness not only to reveal the
identity of the export customers, but to
encourage direct communication and feed-
back. Product and service improvement
would also be enhanced.
Over the season one agent encouraged
such interaction but the other agent could not
come to terms with the new realities. He
could only think in terms of short-term
trading transactions and power, and
isolated the growers from their customers.
Understanding each others business
A group of beef producers in southern Aus-
tralia was considering developing a closer
SCM relationship with a processor. The
group worked through the checklist and it was
clear that the current arms-length adversarial
relationships were adding to the friction costs
of doing business. But there were two major
hurdles that had to be addressed before a
closer relationship made sense.
First, it was unclear how additional con-
sumer value could be created without the
active participation of a retailer. Effective
supply chains need to involve the whole chain.
The second problem revolved around the
question are we confident that the rewards
will be shared equitably? This dimension
probably comes closest to the question of do
we trust the other party, without actually
using the word trust.
Further discussion revealed that, largely as
a result of auction systems forming a barrier
between producers and the rest of the chain,
the producers did not understand the produc-
ers and retailers business and vice versa.
Considerable time and effort would be
required to develop this understanding and
provide a solid foundation for a closer
relationship.
Conclusions
The work we have done in this area highlights
the relevance of good theory on important
challenges facing managers, and the
importance of academic-industry
interchange. Further work is being conducted
in conjunction with Professor David Wilson
 Establishing supply chain partnerships: lessons from Australia Supply Chain Management
Michael OKeeffe Volume 3 Number 1 1998 59

from Pennsylvania State University in two (2) providing richer insights and additional
areas: items in the relationship management
(1) developing weightings for the various area, especially for clients who are well
dimensions of the checklist; and down the SCM path.

Appendix: The relationship audit checklist

The foundation Score
1. Value creation (1-10)
1.1 Vision We have a vision of creating more value for our customers by
working together
1.2 Partnering We are better off working together than working independently
1.3 Competitiveness Working together gives us an edge in the marketplace through:
lower costs;
better products; and
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better service
Total
Score
2. Alignment (1-10)
2.1 Goals Our goals are well aligned and compatible, and are likely to
remain so
2.2 Capabilities Our capabilities are complementary, and relevant to our
target market
Total
Score
3. History (1-10)
3.1 Understanding The history is such that we understand each others business
3.2 Levels Roughly how many people at different levels in the organisation,
interact with each other on a regular basis?
Total
Score
4. Alternatives (1-10)
4.1 Alternatives The number and quality of alternatives
Total

The investments Score

5. Investments (1-10)
5.1 Nature The types and extent of investments currently made specifically
into the relationship:
people and time;
capital;
processes and systems;
brand and reputation.
5.2 Balance The degree to which investment has made one party more
dependent (score low) or both interdependent (score high)
Total
Score
6. Investment risks and uncertainty (1-10)
6.1 Uncertainty The level of risk as a result of supply uncertainty
6.2 Observed The ease of evaluating quality along the supply chain, and
quality ability to trace back and track down problems
6.3 Perishability The magnitude of the risks associated with the storability or
perishability of the product
Total
8
 Establishing supply chain partnerships: lessons from Australia Supply Chain Management
Michael OKeeffe Volume 3 Number 1 1998 59

Score
7. Investment rewards (1-10)
7.1 Sharing We are comfortable that the relationship benefits are being, and
will continue to be, shared equitably
7.2 Costing systems We have the appropriate costing systems to help us locate our
share of the profits
7.3 Opportunism The other party is unlikely to act opportunistically even if they
had the chance to do so
Total
Score
8. Core capabilities (1-10)
8.1 Satisfaction The level of satisfaction with the performance of our partner
8.2 Performance Each partys performance is best or near best in its class
8.3 Future Each party is prepared to invest in their core capabilities, to
performance remain best in their class
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8.4 Boundaries We understand the boundaries of this partnership

Total
Score
9. Relationship management (1-10)
9.1 Consideration Our partner will not act without considering the impact on us
9.2 Understanding We understand each others business and why we act the way
we do
9.3 Stability We can predict how the other party will react to changes in
circumstances
9.4 Cultural fit We have similar values as to how customer value can be created
9.5 Internal systems Our internal reward systems encourage the development of this
relationship
Total

9
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