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Lessons Learned – Strategic Partnerships and Infinite Capacity!

I am not a partnering kind of guy; I want control, 100% equity and to call all the shots. However, when it came time to satisfy our customers, I was willing to do quite a lot with strategic partners to give them what they wanted, when they wanted it.

In our business, lead times for the mechanical components our customers bought from us were critical to them for their final assembly. They had MRP computer systems that relied on our lead times to schedule their orders with us. The only problem was, we built parts to order, could not afford to keep finished goods inventory and could get very little in the way of accurate forecasts for their demand. Of course, this was a huge TOM problem because we received orders from customers that did not take into account our capacity to produce. Late deliveries of our $20 part would cost a $5,000 circuit board to be late.totally unacceptable to them.

We solved this with an “infinite capacity” production model. For every operation in our factory, we developed strategic partners who had similar capabilities. We would source 25% to 500% of our base capacity with these partners. We set the pricing for these “make vs. buy” items, paid them in 7 days, gave them support and fixtures and forbade them from going directly to our customers. We never put anything in writing. Most were small shops, entrepreneurs within 30 miles of our business. We had nothing in writing, just a good understanding of how we did business.

The benefit for us was significant cash savings by reducing investment in equipment and process capacity. We did beef up our incoming inspection process and pushed down the ordering, purchasing and scheduling to the department level so each manager could “flex” their own schedules and be fully responsible for their own partners. Our customers were aware of the system and reviewed our quality systems carefully for how we measured our vendors, inspected their work, trained them and got them updated documentation. In turn, they never heard us say we were out of capacity!

During downturns in demand, we just sent less to the outside. First time, critical quality or fast turn jobs we tended to keep in house, outsourcing higher volume repetitive jobs. We kitted materials and arranged for daily pickup and delivery and communicated with automatic daily emails of open orders and 1-2 week out forecasts. We tried to be sure that our partners never had more than 25% of their business with us to avoid concentration and brought them all together every year to thank them. This was not done for cost reduction; in fact, it may have cost us a bit more, but we never had to say “no” to our customers on delivery requests, and they rewarded us with more business.

We tried a different kind of partnering with our component suppliers. Since they called on the same customer base to get their parts on the “Bill of Material,” there was a lot of crossover, and we regularly selected one primary supplier in a category to endorse, provide samples, take with us on sales calls and share prospecting and leads. In the four instances we did this, it generated additional business, and our customer appreciated the joint effort from us. However, after 3-5 years of this, each began to offer its own products to compete with us – stabbing us in the back! We had to become much more careful about who we selected in the future. Since I don’t believe in using lawyers, we just moved on, considering it a good lesson learned.

Finally, when our largest customer “demanded” that we support their Asian operations, they recommended a vendor in Singapore that they were pleased with for us to partner with. Everything went smoothly until they changed the rules – we must have a presence in China; Singapore was not sufficient. Upon careful reflection and our experience with component supplier partners, we decided to form our own company – no partners and not a joint venture – which proved to be a great decision supported by all our Asian customers.

Always being flexible, customer-focused and willing to adapt to conditions gave us an edge over our competition with the support of our strategic partners.

If you have comments…website or letters to editor.ÿÿThe Harbus and Jim would love to hear from you at letters@harbus.org, or comment online at www.harbus.org.ÿ

AUTHOR’S BIOGRAPHYÿ
Jim Sharpe (MBA `76) is one of theÿHBS Entrepreneurs-in-Residence for the 2009-2010 academic year, who ran an aluminum manufacturing business for 21 years while working with his wife, Debby Stein Sharpe (MBA `81) after both left careers at GE and large companies and sold the business in late 2008.ÿ Jim can be reached at: jsharpe@hbs.edu,ÿ310 Rock Center, 617-496-6285 or sign up on his wiki for office hours or Brown Bag lunches at //wiki.hbs.edu/confluence/display/Shapre/Home.

April 20, 2010
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