The term “relationship contracting” describes an approach to supply relationships that attempt to achieve mutually acceptable outcomes for all parties involved in the supply chain process.
It builds upon establishing and managing the relationships between the parties with the goal of removing all barriers; encouraging maximum contribution and allowing all parties to achieve success in their respective operations.
Alliances may also be formed between suppliers in related fields as well as between suppliers who produce distinct yet linkable products or who operate at different stages of a production cycle.
Some common types of alliance include:
- Two (or more) software developers may work together to develop a technical interface that allows their software to inter-operate and exchange data. By doing so, the marketability of each separate product is enhanced. They may also exploit the interface technology as a method of certifying products produced by other suppliers (e.g., by certifying it is compatible with the common interface).
- The parties may create joint training service centres to increase the availability of trained consultants in the marketplace who can support customers in implementing software. Comparable alliances are often formed with respect to all aspects of sales, service and finance to improve overall product delivery.
- A strategic marketing alliance may be created by separate entities that are planning to enter into the same new market. Provided their respective products are not in direct competition such a co-operative arrangement may help them to co-ordinate, plan and budget for the higher costs associated with the start-up activity.
In each case, the goal is to achieve an economy of scale by capitalizing on the efficiencies that can be attained through co-operative effort.
Alliances can also act as a substitute for vertical integration within the supply chain. The parties may wish to spread the cost of product development, with the “buyer” being sure of a source of supply that meets a high-level product specification, while the “seller” is sure of a market for a good that is at the forefront of technology.
In recent years, supplier-customer alliances have also begun to emerge in the construction industry as a means of spreading the risks associated with complex construction projects. Studies have consistently shown most construction disputes arise from a narrow band of causes, particularly architect/engineer error and omissions and excessive change orders.
Frequently, these arise from lack of understanding. Traditional methods of contracting (e.g., design-bid-build or turnkey construction) allocate most of the risk of project completion cost and performance onto the contractor’s shoulders. This leads to an adversarial relationship. Disputes between the parties undermine the project’s viability. Problems are often worsened when such methods of contracting are combined with a tender approach, in which the contract is awarded to the lowest bid lump sum price.
To protect themselves against project risk, contractors begin incorporating a price premium into their bid prices. In response to these escalating prices, and growing contractor resistance evidenced in a lower number of bids received, some owners have begun to share project risks. Alliance contracting aligns the interests of the owner and the contractor to build the project in a collaborative way in the hope of reducing disputes.
Alliance contracting and other methods of risk sharing are not for everyone. It requires a sophisticated owner who is able to appreciate the magnitude of the risk that a given project will entail. It also requires an owner that has sufficient worker resources to allow it to manage the construction program aggressively.
Ideally, each party assumes only the risks it is in a position to manage. A typical project will incorporate financial incentives (e.g., bonus and penalty provisions) to achieve designated project goals, based on predetermined project target costs agreed to by all members of the alliance team.
