Power games

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For many practitioners, supply chain management (SCM) is seen as ‘best practice’. Increasingly the argument has been developed that companies will only be able to maintain competitive advantage if they are able to create more efficient and effective supply chains, based on close collaborative and trusting relationships with all of the suppliers in the chain.

The Centre for Business Strategy and Procurement at Birmingham Business School has taken something of a contrary view. Much of our criticism of the SCM bandwagon is based on two arguments. First, in a world characterised by bounded rationality, uncertainty and opportunism, relying on trust as the basis for the effective and efficient management of buyer and supplier relationships is, unless the circumstances are appropriate, likely to be a recipe for failure rather than success. Second, SCM is only one of four available sourcing choices that firms can choose from when they think about how to manage relationships appropriately. And this leads us to ask: ‘When is SCM best practice?’

Inefficient relationships
SCM is seen by many as best practice sourcing because, in the past, too many transactions between buyers and suppliers have been short-term, adversarial and non-trusting, and this has led to wasteful and inefficient relationships for both parties. Taking their lead from the experiences of Japanese automotive assembly companies, proponents of the SCM approach have argued therefore that there is clear evidence that win-win outcomes are achievable for buyers and suppliers at all points in the supply chain, especially if more long-term, collaborative and trusting relationships are created.

We do not doubt the truth of this argument. There is clear evidence that, in certain industries, it is possible for a focal company in the supply chain to be able to create sustainable long-term collaborative relationships with suppliers throughout the chain, and that these relationships have provided value to both buyers and suppliers. The retail, automotive, aluminium and process chemicals and some sectors of the construction industry all demonstrate these characteristics.

That said it is important to make two points. First, just because it is possible for SCM be developed by firms in some supply chains does not mean that it can be done by all firms in all supply chains. Second, just because one supplier has a long-term contract and collaborates extensively with a buyer does not mean that the relationship is based on trust. The key is to understand who is trusting whom, and who benefits most from the collaboration between a buyer and supplier.

The problem of using trust as the basis for any relationship (which SCM advocates always insist upon) is that trust is rarely properly defined. Trust in a relationship normally refers to situation where one party knows that the other side has resources that they could use opportunistically against them, but they believe that they will not do so. Trust can therefore be one-sided or apply equally to both parties to an exchange. This is because either the buyer or the supplier could be trusting the other, or both could be doing so. Given this, there must be different forms of buyer and supplier collaboration based on trust.

Who is forced to trust?
It seems clear, therefore, that arguing for more trust in relationships is somewhat misleading. What we really need to know is who has to trust whom – and why – in any relationship. In other words who has the resources to behave opportunistically against others in relationships and who is forced to trust that they will not be used against them? To think in these terms is to think about the power in buyer and supplier relationships as the basic building block of appropriateness in relationship management.

It follows from this that all supply chains must be made up of extended networks of buyer and supplier relationships, each one of which must constitute an objective circumstance of power. The way to think about this is described in Figure 1, which shows that there are four types of power circumstance for buyers and suppliers.

Thus, when we talk about learning from the Japanese automotive example, the first thing to look at is not that they have developed long-term collaborative relationships with their supply chain partners, but rather the objective power circumstances between buyers and suppliers in the supply chain, and who is trusting whom? If we ask this question of the case studies that many people point to as examples of best practice in SCM it is clear that all of them operate with similar power and trust circumstances.

Toyota, Wal-Mart, Tesco, Sainsbury, MacDonald and Alcoa would be on most lists of companies that are ‘excellent’ at SCM. Each of these companies is a dominant player in a global market that has fierce competitive rivalry for customers. Each commands huge power resources over its supply chains through its market share and volume spend.

Furthermore, each is normally buying standardised products or services via a regular process that is highly predictable. Given this, plus the fact that most of the suppliers in the extended supply chain through which these companies source are dependent on the buying company, it follows that the power structures which operate tend to be buyer-dominant. Additionally, it is normally the supplier who has to trust the buyer not to behave opportunistically.

Given this, when suppliers enter into long-term open and trusting collaborative relationships with a high level of commercial and operational informationsharing with dominant buyers, this may provide more benefits for leverage to one side than the othe.

There is clear evidence that, although SCM approaches have allowed suppliers to win larger shares of a buyer’s business and for longer guaranteed periods, this is not without penalties as well. Thus, dominant buyers normally require transparency in return for longer-term commitments. This can thereby provide opportunities for them to leverage more of the value from the relationship for themselves.

One need look no further than the multiple food/retail supply chain to understand the strength of this argument. In this supply chain it is normal for the profit margins of suppliers to be under constant pressure, while those of the retail multiples are consistently higher. This tells us something about the relative power in many of the supply chains that are touted as examples of SCM ‘best practice’ – they are buyer-dominated supply chains in which the supplier may receive regular orders but they must also trust the buyer who controls the relationship.

There is nothing necessarily wrong with this type of relationship, either for buyer or supplier. On the contrary if the buyer can create extended networks of buyer dominance (with most of the value passing to them) then they should do so. Similarly, if the best deal that a supplier can get is to be transparently collaborative with a buyer in return for guaranteed margins and orders then they should willingly accept it.

What is critical in managing relationships appropriately is therefore not the degree to which trust can be created but an understanding of the resources available to buyers and suppliers to achieve valued outcomes, and which types of relationship management approaches (short term or long term, arm’s length or collaborative, trust or non trust-based) are the most appropriate to employ for any given power circumstance.

Extended network
When we talk about supply chains for particular goods and services we are in fact also describing an extended network of buyer and supplier power relationships. This extended network is referred to as a power regime. Supply chains therefore have very different power properties within them that make certain styles of relationship management more or less appropriate for effective governance of the chain. It is clear therefore that the ability to undertake SCM is only possible in certain circumstances; it is also only one of the options available to buyers when they manage power relationships with suppliers in the supply chains that deliver goods and services to the buyer.

To manage relationships appropriately firms need to understand the four major sourcing choices available to a buyer, as well as the supply chain power regimes they are in (and whether or not these are conducive to a particular sourcing approach).

Our research has demonstrated that it is possible to define four basic sourcing approaches that are always available for buyers to select from when they seek to manage their supply relationships. These are demonstrated in Figure 2, with some examples provided of companies that are (in our view) world class in their performance of these four basic sourcing competencies.

Managers have two basic choices about the ways they can work with suppliers. They can either be proactive or reactive. If they are proactive they will be heavily involved in designing and specifying, as well as working to develop supplier competence on a long-term collaborative basis. If they are reactive they will source at arm’s length and relationship management will be short-term. Mangers also have to make decisions about the scope of their involvement within a supply chain. They can choose to work only with the first-tier supplier or they can work with all of the tiers of suppliers in the supply chain.

These four basic variables provide managers with four basic sourcing options. These are supplier selection; supply chain sourcing; supplier development; and, supply chain management. Interestingly enough, despite the view that SCM is ‘best practice’, the evidence demonstrates that this is not the case.

Many firms do not appear to do very much supply chain management at all. Most of the sourcing activity undertaken by the participants in our latest research study was within the supplier selection category (68 per cent), with 12 per cent in supplier development and 13 per cent in supply chain sourcing. Only 7 per cent of the activity was in the SCM category.

Relationship management
The main reason for this is that few buying organisations have either the internal resource or the external power relationships that are conducive to long-term and continuous collaborative buyer and supplier relationship management. As a result they are either not in position to do SCM, or the gains achievable are not worth the efforts that would be required to implement such a strategy. Thus, while supply chain management is a most effective and appropriate thing to do if a company is in circumstances that are conducive, it is not the sourcing approach that is best for every firm.

Given this, it is obvious that attempting to move all of a company’s sourcing activities towards SCM is likely to be a misguided activity. Companies must recognise that true competence comes from an ability to undertake all of the four types of sourcing activity, as well as knowing under which circumstances they should be using one approach rather than another.

This understanding is critically important for the competence development of buyers because the empirical evidence we have amassed clearly demonstrates that competence in supplier selection, supplier development and supply chain sourcing will be required in more companies and public sector organisations than supply chain management approaches ever will. This conclusion is arrived at because in the real world most firms appear only to have the resource and power opportunities to undertake reactive rather than proactive sourcing options, whether they are managing their first-tier relationships with suppliers or trying to manage within the power regimes that exist in complex supply chain networks.

Andrew Cox is professor and director of the Centre for Business Strategy and Procurement at Birmingham Business School, and chairman of consultancy Robertson Cox.

The development of the thinking in this article has been based on research funded by the Engineering and Physical Science Research Council in the UK and has led to the publication of two recent volumes: Cox A et al., Supply Chains, Market and Power (Routledge: 2002) and Cox A et al, Supply Chain Management: A Guide to Best Practice (FT/Pearson, 2003).

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