Is your business that of a VAR (value-added reseller) whose strength lies in how it manages large amounts of inventory? As a supplier of time-critical parts, are you looking to enter into a strategic partnership with your market’s largest OEM (original equipment manufacturer)? Or, are you an integrator servicing the equipment manufacturer’s end-user customer base, a customer base that forces you to rely upon the VAR for spare parts, and the equipment manufacturer for technical expertise?
Regardless of whether you find yourself in the middle as the integrator, as the VAR servicing the OEM’s customers, or as the equipment manufacturer itself, there are opportunities for each party to enter into a strategic partnership. So, what would one of these partnerships entail? More importantly, what must you do to ensure your partnership addresses your company's specific needs?
What Are Strategic Partnerships?
In the post, “How Can a Strategic Partnership Increase Market Share?” I outlined how strategic partnerships are aligned between two or more enterprises who look to benefit from collaborative efforts in order to reduce costs, grow market share and increase revenue. The idea is to benefit from each party’s unique attributes and competencies without each company having to develop them internally, as the costs to develop these competencies often include a substantial amount of time, capital and resources.
When thinking of a strategic partnership, think in terms of “trade-offs”. Think of how the resources of one company can be used to upgrade the service capabilities of another and how they can help to reduce costs for all. Some partnerships take it a step further and include shared costs as part of their overall strategic plan. This typically involves combining design and engineering costs, marketing and advertising costs, technical support and expertise costs and finally, manufacturing and distribution costs.
- Design & Engineering Costs
- Marketing & Advertising Costs
- Technical Support & Expertise Costs
- Manufacturing & Distribution Costs
The above video explains how to use the SWOT and TOWS analysis to improve your supply chain. You can access this post by going to: Assessing the Company’s Supply Chain with a SWOT Analysis
What Kind of Strategic Partnership is Needed?
Depending upon whether your business is that of the equipment manufacturer, the integrator or the VAR, your reasons for entering into a strategic partnership will vary greatly. I’ve provided an outline (below) of some of the possible benefits and reasons why a each of these business models would need to enter into a strategic partnership. Remember, a strategic partnership could be between two or more parties. Therefore, it's not inconceivable that a three-way partnership could be established.
The Benefits of Selling to Original Equipment Manufacturers (OEM)
The OEM provides excellent product and is recognized as a market leader and innovator. However, this equipment manufacturer also has high service costs and its holding costs on inventory and spare parts are far too high for its end-user customer base. Customers have a hard time purchasing spare parts and each time the equipment manufacturer sends out a field service technician, the fees are simply too much for customers to absorb. In this case, a strategic partnership could reduce the equipment manufacturer's costs to service and lower their costs to hold inventory. Fewer inventory skews means lower financing costs for the equipment manufacturer. To read more about lowering your inventory holding costs, please read: Understanding Inventory Holding Costs: Lower Your Part & Material Costs
The Integrator has technical knowledge that goes beyond the specifications provided through the OEM. They have tremendous experience managing multiple installations and are able to trouble shoot various issues, issues that not only pertain to the equipment manufacturer, but also to parts and materials further on downstream. The integrator's cost to service are far less than the equipment manufacturer. This is better for the end-user customer base and allows the equipment manufacturer to concentrate on allocating engineering resources to future designs and upgrades. This increases the integrator's revenue by allowing them to take over the responsibility of providing field service technicians on service calls.
The Value-Added Reseller's (VAR) business model is similar to that of a distributor. They have low margins with lower overhead and are therefore much better at holding inventory of OEM specified spare parts. This ability to turn around parts quickly is a value-add for the integrator, the equipment manufacturer and the end-user customer base. Lower spare part costs means customers are more likely to come back to the original equipment manufacturer on future purchases of machinery. More orders means the VAR has more sales on spares and the Integrator has increased revenue on service calls.
Defining strategic partnerships between VARS, Integrators & equipment manufacturers must first start with an honest assessment of where your particular company fits within this value chain. Are you the OEM whose product offering is the choice of the market, but whose cost to serve is too high? Are you the integrator who is able to provide a full turnkey solution for your customer base but have issues securing service contracts? Are you the VAR whose inventory of OEM specified parts is available when needed, and at a price everyone can benefit from, but who is unable to secure consistent orders?
Regardless of how you answer these aforementioned questions, you'll find a reason to enter into a strategic partnership. The onus must be on you to define what you bring to the table and what you need to make that partnership work.For more information on selling and servicing OEMs and Integrators, please read: Sales Strategies When Selling to OEM’s, Integrators & End-Users
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