Not too long ago, the ISM ran a cover story on “Collaborating with the Competition”. In this article, they addressed horizontal collaboration, which is the sharing of supply chain assets for mutual benefits, and which is becoming common among some manufacturing groups. This typically occurs between companies in the same industry that, while not direct competitors, market and sell to similar customers and consumers. As an example, if one manufacturer made HDTVs and another made Blu Ray players, which do require similar raw materials and even chipsets for encoding and decoding, they could cooperate in sourcing because, while they are selling to the same consumer, they are not selling the same product. However, this is now occurring between companies that, at least in some product categories, often directly compete with each other. The case of Hershey Co. and the Ferraro Group, as pointed out in the article, is one example. “Higher-end” hershey bars and “lower-end” Ferraro chocolates are in the same price category and target the exact same consumer that will likely only buy one of these products during a trip to the store. This is an example of co-opetition in the supply chain.

According to the “North American Horizontal Collaboration in the Supply Chain Report”, published by EyeForTransport, while still in its early stages, the benefits [of horizontal collaboration] are clearly recognized and there are companies already optimizing their supply chains with this cutting-edge strategy. This is especially true if the collaboration is deep, and extends into sharing warehousing, distribution and even manufacturing capabilities. And of course, the collaboration is going to achieve efficiencies and savings beyond what either company can achieve on its own if you collaboratively optimize everything, as the article recommends. [This echos what the doctor has been saying for years. No other technology or process delivers the returns that optimization delivers, and the maximum effectiveness is always in a collaborative application.] But the real question is, what is the value that is going to be delivered? When you optimize everything within your organization, you maximize the value to your bottom line. But this isn’t necessarily the case when you optimize a joint supply chain.

Why? To understand the rationale, we need to take a step back to the predecessor of horizontal collaboration — the Group Purchasing Organization. The idea behind the group purchasing organization was that if a bunch of companies came together and pooled their total purchasing volume, they could get a better deal from a single supplier than each could on their own. (In simple terms, they are the enterprise version of today’s consumer GroupOn or TeamBuy.) This was true for each company if they all had volume requirements in the same order of magnitude and there was enough companies in the group to take the volume to the next order of magnitude (which, in manufacturing terms, is defined based on the throughput of a production run and the threshold at which manufacturing the product becomes cheaper). If one company had an order of magnitude more demand than the others in the GPO, then the reality is that it could get just as good of a deal if it had a good negotiator, and if a company had an order of magnitude less demand, then it was getting a way better deal than everyone else.

In addition, a deal is only a better deal if it doesn’t help a competitor more than it helps you. So if the GPO contained direct competitors, typically it was only used for buying indirect or non-essential products or services (like office suppliers, maintenance parts, and temporary labour services), and never for components or raw materials used in direct manufacturing. So the organization never saw the full value of what a GPO could deliver unless it joined a smaller GPO that prohibited direct competitors from belonging to the GPO. And then it still didn’t get the best possible deals across the board because smaller GPOs generally had smaller volumes, especially since not all companies were buying the same products or services, or they were not all ready to buy the same categories at the same time.

Co-opetition is taking the concept of a GPO to the next level. It’s essentially saying “why stop at products and basic services when you can also collaborate on warehousing, transportation, and manufacturing asset purchases and take GPOs to the next level”. And while this sounds good in theory, the reality is that you can really only collaborate this deeply with an organization in the same space as you making similar products, and maximum benefit (from an optimization viewpoint) will only be achieved when they are making the same category of products. And if the other companies are making the same categories of products, even if they are not directly competing (like tablets and laptops), they are probably close enough that they are vying for the same consumer dollars (as many consumers have limited disposable income these days), and if the products are that close, and your competitor ends up getting more efficiency gains then you, with the indirect knowledge of your products that they are going to acquire, what’s to stop them from creating a product that directly competes with yours, at a lower production price, using the supply chain you helped them build?

And yes, there are always legal precautions you can take, but first of all, you have to think of every eventuality and then, if the competitor is determined, be prepared for a lengthy, and costly, court case. In other words, the greater the savings are for you, the greater the value your competitor is likely to see. Is it worth it? the doctor doesn’t have the answer, but thinks it is very important that you ask the question!