provider or the buyer that momentarily appears to have the
upper hand. Other agreements may have advantages for
one or the other that take longer to surface, but are still
deadly when discovered.
In a distressing number of cases, the parties include gain-sharing language in their agreements but fail to include
enough specificity for effective implementation—or mutual motivation. Over the years, the consequent neglect of the
potential leads to abandonment.
In one case we know of, the language was a little too specific—and difficult to change. The service provider figured
out that it could easily hit the target order fill rate by making a modest over-investment in “C” SKUs (in order to
eliminate stockouts) and then under-investing in “A” SKUs
to offset the added cost. While these moves saved a lot of
money and brought stockouts within the contractually
acceptable percentage range, they also led to supply crises
with the very items most critical to the client’s business.
In a very few cases, and over a long period of time, both
parties conclude that there’s no longer any meaningful
opportunity for improvement. To be candid, too many
providers and customers use this as a cop-out for early
abandonment when a little creativity and energy might
lead to a better-constructed agreement and/or service
arrangement.
The biggest problem, in our view? It’s that not enough
service providers and customers are building the kind of
high-trust, high-communications, high-collaboration relationships that will support free and open examinations of
the incentives, the disincentives, and their bases. In a notorious case of which we have first-hand knowledge, a customer refused to implement process changes that would
save $100 per transaction because it would mean a $50 pay-out to the service provider’s team, for which the customer
had developed a visceral hatred. This scenario is played out
in less-dramatic fashion every day in many “gain sharing”
relationships.
Strong, fast and highly resilient
WHAT NEEDS TO GO RIGHT?
As you might imagine, success factors in the various forms
of gain sharing are largely the opposite of the things that go
wrong.
Foremost is the mandate to build the right kind of business relationship. If a company’s DNA compels it to seek
adversarial, transactional business relationships, gain sharing should not even be contemplated.
Next is the requirement to be thoughtful about how to
build an equitable, two-way-street gain-sharing/pain-sharing agreement, with specifics that are mutually
understood—and defined in writing. It follows logically,
but seldom does in practice, that the bases and specifics
need to be reviewed regularly—maybe annually—for fairness (still equitable?) and currency (what should the new
targets be?).
Finally, the joint recognition that the parties are in the
game—together—for the long haul is vital. When the low-hanging fruit has been picked is not the time to go looking
for another provider. When performance nears optimized
steady-state levels is not the signal to go out for a low-price
commoditized bid from strangers.
High energy
efficient Synchronous
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BOTTOM LINE
The good news is that our collective interest in high performance and continuous improvement has been sharpened by the challenges of survival in a tough economic climate. More good news is that our information systems are
better than they’ve ever been in terms of providing timely
and accurate performance data. So, foundational elements
to support gain sharing are—in general—solid.
Gain sharing, under any name, doesn’t have to wax and
wane, and doesn’t deserve abandonment. Done wrong,
and/or with the wrong motivations, it will disappoint at
best. Done right, by companies in the right kind of business
relationship, it can pay off for decades. ;
TYPE EL - CLASS I
APRIL 2010
INTERROLL
CORPORATION
+ 1 910 799 1100
US.SALES@INTERROLL.COM
INTERROLL.US
Art van Bodegraven, practice leader at S4 Consulting, may be reached at (614)
336-0346 or avan@columbus.rr.com. You can read his blog at http://blogs.dcve-locity.com/the_art_of_art/. Kenneth B. Ackerman, president of The Ackerman
Company, can be reached at (614) 488-3165 or ken@warehousing-forum.com.
