Supply Chain Relationships: A Multi-lens Approach through a Case Study from POME by Gautam Koppala

 

Supply Chain Relationships: A Multi-lens Approach through a Case Study:

The last few decades have witnessed the rise of research into supply chain management and relationships within it. However, in many cases previous research has taken a single-lens approach to understanding and explaining what is happening as well as in subsequently developing solutions. The research reported here seeks to take a multi-lens approach to relationships in the supply chain using a complete farm to retail food supply chain as an instrumental case.

Several authors have recently argued that, although supply chain management (SCM) has received a good deal of attention in the literature since the early 1980s, the concept is still not particularly well understood.

A case in point is integration through buyer–supplier or supply chain relationships. Specifically, the majority of current approaches tend to address the subject from a single perspective or lens.

A number of different perspectives have been taken in the literature, including power , trust and risk. Each of these variables has merit, but they are, on an individual basis, rarely the only variable that is at play. A few authors have attempted to link two of these three variables together, for example power and trust or risk and trust.

Building on this perspective, POME propose a more pluralist multi-lens research view where a single instrumental case is viewed from a range of explanatory perspectives. In addition, it is our belief that, in some cases, there may be other variables at play that have not yet been sufficiently explored in the supply chain literature.

Our first research aim is, therefore, to understand how these different variables impinge and to explain the actions of actors within a supply chain. Linked to this, our second aim is to explore which of these might be more important in shaping the actions of each actor. Our third question seeks to understand whether there are any other important variables in addition to power, trust and risk. If indeed there is a more complex set of explanatory variables at play, our fourth research aim will investigate how such a level of understanding might be used to help the actors to improve their supply chain through better relationships.

The vehicle for exploring these aims is a longitudinal case centred on an Australian food processing firm.

 

A review of the existing literature

The idea of forming cooperative rather than adversarial relationships with suppliers made an appearance in the literature several decades ago . Since then the idea has re-emerged under a variety of names including: co-makership reverse marketing ; supplier alliances and partnership sourcing. Variations have also appeared within the marketing domain under the title of relational or relationship marketing as well as within the strategic management field as strategic alliances. At the same time, the idea of cooperative relationships has been extended from immediate suppliers to encompass the wider supply chain and coupled with ideas borrowed from Japanese automotive and lean production literature.

One author called Ramsay (1996) argues that the majority of the academic literature emerged from an outright attack on the traditional, adversarial approach to supplier relationships with the assumption that collaboration and partnerships are the sine qua non of successful supplier relationship management. This latter view of relationship management has been supported by influential bodies in the UK such as the Confederation of British Industry (CBI) and the Department of Trade and Industry, which provided the initial support funding for Partnership Sourcing Ltd (PSL). However, evidence from many practitioners is that the term ‘partnership’ has been somewhat overused, often inappropriately where little real change has occurred .

The traditional purchasing-based view of SCM was to leverage the supply chain to achieve the lowest initial purchase prices whilst assuring supply, and was characterized by: multiple suppliers; supplier selection based primarily on purchase price; arm’s length negotiations; formal short-term contracts; and centralized purchasing. A more contemporary view of SCM, heralded by some as the ‘new paradigm’, redefines SCM as a process for designing, developing, optimizing and managing the internal and external components of the supply system, including material supply, transforming materials and distributing finished products or services to customers, that is consistent with overall objectives and strategies.

The essence of SCM is as a strategic weapon to develop a sustainable competitive advantage by reducing investment without sacrificing customer satisfaction. While managers have long acknowledged the importance of getting closer to their key customers, the logic has now been extended to the upstream supply chain so that close ties with key suppliers are also seen as important conceptualize the transition from traditional open-market negotiations to collaboration as a continuum

Collaboration, then, is seen by many as an integral facet of an SCM strategy. This popular view is not without its critics, and a balanced approach to collaboration gives a picture of the determinants of successful SCM. Speckman, Kamauff and Myhr (1998) note that the road from open-market negotiations to collaboration is a long one and should not by travelled by every buyer–seller relationship.

Many authors have advocated a portfolio approach to supplier relationships management. Whilst the arm’s length approach is now subject to criticism because of its focus on short-term cost reduction, it is often proposed under certain conditions: in commodity markets, with multiple suppliers, low asset specificity and little market uncertainty where the market serves as a control mechanism to ensure competitive prices

However, much industrial purchasing does not meet these market characteristics, and here collaboration is usually presented as the obvious alternative. SCM demands a business transformation in which managers attempt to mitigate uncertainty and exploit opportunity through the creative use of both suppliers and customers by evaluating who best supplies value and then leveraging that expertise or capability through the entire supply chain. Few analysts note that this requires sharing what once might have been considered proprietary information, relinquishing control to others in the supply chain and trusting that your supply chain partners will act in your best interest. Trust clearly emerges throughout the literature as a key issue determining the success or otherwise of supply chain collaboration efforts.

However, trust is an ambiguous and complex phenomenon. Depending on their discipline and the problems they have been studying, many researchers have concentrated on the diverse aspects of trust and the process of trust development. Rousseau et al (1998) define it in this way: ‘Trust is a psychological state comprising the intention to accept vulnerability based upon positive expectations of the intentions or behaviour of another.’ Therefore trust is a psychological state, not a behaviour.

Economists have also recognized the nebulous nature of trust:

Trust and similar values, loyalty or truth telling are examples of what an economist would call ‘externalities’. They are goods; they are commodities; they have real practical value; they increase the efficiency of the system, enable you to produce more goods or more of whatever values you hold in high esteem. But they are not commodities for which trade on the open market is technically possible or even meaningful.

In recent years a number of authors have suggested classifications of trust but few commented that it is doubtful whether these classification schemes lead very far in coming to grips with the phenomenon.

for example, distinguishes between arm’s length contractual relations (dominant in the West) and obligational contractual relations (dominant in the East) and conceptualizes three forms of trust: contractual trust (the mutual expectation that promises of a written or verbal nature will be kept), competence trust (the confidence that a trading partner is competent to carry out a specific task) and goodwill trust (commitments from both parties that they will do more than is formally required). He observes that goodwill trust is far more prevalent in Japanese buyer–supplier relationships and that it cannot be achieved without the presence of the other two types first. Few  identify the absence of trust as a key inhibitor to supply chain collaboration in the food industry. Few  suggest that relationships benefit from increasing trust. few argues that trust is an outcome (rather than a cause) of successful supply chain collaboration in Japan and that it is a set of other variables that lead to high-trust supplier relations. Similarly, few others state that both risk and interdependence are necessary conditions for trust.

Many authors have identified that the primary role of trust in inter-Project relationships is to mitigate risk. Trust and control are two principal antecedents of risk. few argue that varying levels of risk and reliance on trust will explain the governance structures of transactions.

In accordance with other studies investigating risk definitions, finds that supply risk is a multifaceted concept that differs according to industry (aerospace firms, for example, are more likely to understand risk in terms of threats to customer life and safety) but that the most widely held definition of supply risk focuses on understanding how risk affects a purchasing firm’s ability to meet its customer requirements.

Critical of previous efforts to address risk management in the absence of a grounded definition of risk, offers the definition, ‘Supply risk is defined as the probability of an incident associated with inbound supply from individual supplier failures of the supply market occurring, in which its outcomes result in the inability of the purchasing firm to meet customer demand or cause threats to customer life and safety.’

Other authors argue that trust within buyer–supplier relations can be explained by another underlying factor, specifically power. Few  says that partnership formation involves a process of give and take. The supplier may expect increased order security, improved forward order cover and reduced uncertainty, whilst the buyer hopes to achieve improved supply continuity and a better match between the supplier’s sale specification and the buyer’s own specification, as well as reduced long-term costs. Ramsay (1996), an author says that ‘In a genuine partnership, each party makes a commitment to the other and modifies its behaviour to more closely match the other’s requirements. Each also becomes more dependent on the other – and thus both loses and gains power.’ He also adds that for the majority of smaller projects the effort to form partnerships will frequently be met by supplier indifference or resistance – and the strategy itself is high-risk, high-cost and necessarily involves purchasers in an undesirable net loss of power. Cox (2001c) also argues that there will be only some power conditions that will be conducive to collaboration and that they will be in situations of buyer dominance or where power is equally distributed between buyer and seller to create interdependence.

Cox (2001a, 2001b) suggests that practitioners map the dominant power regimes in which they are located in order to formulate an understanding of which strategy – either proactive supplier selection (or traditional arm’s length approaches) or proactive supplier development (more contemporary collaborative approaches) – is most suitable. However, any attempt to do so will reveal that power is itself a multifaceted concept and therefore subject to various interpretations. Power, most commonly viewed as market leverage, forms another determinant factor to effective supply chain collaboration.

 

Methodology

The choice of research methodology is dependent upon the set of research questions under consideration and the state of knowledge in deciding the most appropriate approach, consideration was made of:

The focus, which was the process of improving a given supply chain and the relationships within it, particularly between a food processor and seven single or group entities. The study of processes is best served using longitudinal research
The fact that the study concerned change and adoption of new relationship sets. It was best to study this as it happened in their natural field settings as it is hard to establish cause and effect from retrospective research .
The fact that longitudinal cases of change are rare and as such the research was of an exploratory character.

It was necessary to spend a significant amount of time in field research to provide the depth of understanding necessary for subsequent theory building.As such it was only possible to study a single supply chain – and this choice does limit the ability to generalize from this research.

The study began with the focal company’s commitment to a lean supply chain initiative. The case study was undertaken from August 2003 (before the start of the initiative) until May 2005 (when the initiative developed past its original scope).

Instrumental case: the Perfect Pineapple Supply Chain Programme

Background

The Perfect Pineapple Supply Chain Programme was initiated in late 2003 and involved an Australian canned pineapple supply chain stretching from growers, through transport links and a processing plant, to a major retailer . The supply chain also involved three key suppliers of cans, cartons and pallets.

 

The programme centred on a company processing 110,000 tonnes of fresh pineapple every year through a single facility. The majority of processed fruit is canned either in slices (or rings), pieces, cut (small pieces), crush, or pulp for juice.

The company was set up as a cooperative in 1946, and is owned by about 700 fruit and vegetable growers – with the majority of shares held by 171 pineapple growers. The company is Australia’s largest grower-owned fruit and vegetable processor, with pineapple products representing 20 per cent of turnover. The market for these products is largely domestic and is dominated by Australia’s two major supermarkets, who control 80 per cent of the market – one of whom took part in this study. The recent history of Australian supermarkets has been one of consolidation and emulation of overseas best practice and, in common with other markets, power in the Australian food industry seems to reside at the retailer, with relationships in the supply chain generally exhibiting low levels of trust.

The retailer involved in the work was in the process of establishing a new supply chain strategy including:

the development of a primary freight system, which is an Australian version of factory gate pricing involving retailer-controlled collection, cross-docking and revised distribution centre configuration;
store-friendly one-touch replenishment involving a streamlined material and information flow in the supply chain with the ideal of touching product only once between point of manufacture and checkout .
vendor to store shelf end-to-end process efficiency and integration;
the development of supplier relationships;
delivery of cultural change and breakdown of functional silos.

At the start of the programme, there was limited evidence that the retailer had succeeded in implementing this new strategy.

The programme

In late 2002 the processor started a programme of manufacturing change under the a newly appointed general manager. The first year  involved a series of improvement initiatives at the main manufacturing site. This included value stream mapping and a series of smaller improvements to internal and external information flows.

 

During this period it became apparent that many of the issues and problems faced by the company were the result either of actions taken by other Projects or of a lack of complete supply chain coordination. In addition, the company was suffering rapidly declining profits, reporting its first ever loss in 2003. At the same time, its major customers were increasing shelf space to imported product, including canned pineapple from the Philippines. As a result it was decided to widen the scope of the programme to encompass the wider supply chain. Focusing on canned pineapples, the programme was christened the Perfect Pineapple Supply Chain Programme.

Step 2 of the programme brought together senior executives from the different firms involved to establish what the supply chain looked like and what the programme could achieve, and to gain a commitment from the projects to take part in the programme. During this meeting the major issues facing the supply chain became clear. The managing director of the processor commented on the pressure exerted by retailers, particularly in terms of costs. This was particularly relevant as the company was losing market share to overseas competitors whose product retailed at 30 per cent lower prices. It would be difficult for the company to absorb these reduced margins – so they put pressure on growers, who had not received an increase in price for their pineapples for nearly 10 years. The managing director concluded with the view that the only way forward was to work together as a team for everyone’s mutual benefit. This view was generally accepted, but there was concern that some – primarily the retailer – would gain more than others, or even at the expense of the other participants.

The meeting included an exercise to map the whole supply chain. This showed that no one had a good picture of the complete supply chain, and few could describe the operations within their own business in great detail. The meeting also developed an ideal future state – as well as the barriers to getting there. These barriers included capital shortages, problems in changing culture, skilled people to make the change, the older age of growers, the lack of integrated IT, and the processor’s lack of an explicit strategy.

Step 3 was to bring together the supply chain’s process owners, or operational staff. This was done shortly after step 2, with meetings following a similar path to those of the executive group, except that less time was spent discussing what was required and more on how it might be done. A far more detailed map of the supply chain was developed, and with it the real problems began to emerge. Agreement was reached to undertake a more detailed analysis of the supply chain in five loops involving cross-company groups. The loops were a downstream loop (post-manufacture), a canning loop, an upstream fruit loop (up to delivery of pineapples) and two loops for the cans and cartons respectively. The result of this step was an agreed outline plan for each loop. These plans were presented back to the executive group.

Step 5 had discussions among the executive group of the findings and recommended projects – and how these could be developed into a workable plan. The view of the retailer was that they were keen to develop a new, closer relationship with suppliers – but would do so only in a step-by-step approach and only with like-minded firms.

The discussions quickly identified short-term gains of A–4 million, although further analysis showed that the true benefits could be of the order of A million. However, two areas of concern emerged. The first was that it was difficult to plan a supply chain transition, as a new strategic plan for the processor was being finalized over the next three months. The second was the fact that all the firms were actively taking part, but not all seemed to be fully committed. In particular, concerns were raised about the can and carton makers who were only able to identify savings of less than A0,000 each. However, they soon changed their stance and agreed a strategic review involving an analysis of the type of packaging used and how this might be changed – for example, from cardboard boxes to plastic bins.

As a result of these discussions, various uncomfortable issues were brought to the surface, and hidden and unspoken concerns were shared. The result was that the atmosphere changed from being unsure to very positive. This positive feeling was reinforced by a strong plan involving all the respective firms in its delivery.  Since this point the group has continued implementing the plan and has already gained benefit of several million dollars. As a result, the processor has decided to extend the scope of the work to include a further loop – namely a beetroot loop, which represents a further 15 per cent of turnover. This step is a prelude to the development of further loops (for example, for baby food raw material ingredients, and fruit or fruit concentrate for fruit juice). It was also decided that once these further loops were in place (in late 2005) the extended group of projects (ie members of the Perfect Pineapple group and members of the new loops) would come together periodically and take on the shape and dynamics of a true supplier association (Hines, 1994).

Specifically, they were creating an open forum for exchange of views and information. This process involved identifying common (or not common) issues, concerns and visions for the supply chain, as well as the mapping of the complete chain by cross-company groups. This mapping also increased the individual and collective competence of the group, both in their own area and in the remainder of the supply chain. As a result, various individuals could see the bigger picture and the roles of others in improvement projects. In addition, this increase in individual and collective competence was likely to increase costs for new supply chain entrants, increasing barriers to entry and reducing risk for the present firms.

In this phase, senior staff from the processor went out of their way to develop a sense of common destiny, both by working to develop common measures across the supply chain and by creating an environment where mutually beneficial plans could be developed by teams from across the supply chain. Further commitment was sought with the full involvement of the retailer, but it was not yet possible to achieve the full commitment of all – particularly the packaging firms.

 

Phase 2 explanation

During the second phase of activity (steps 6 and 7), the processor was attempting to increase trust, having gone a significant way to reducing risk for all those involved. This second phase involved the development of learning effects, withholding power, and the removal of opportunistic behaviour – and ultimately was leading towards increased asset specificity. In terms of the explanatory model, the processor was seeking to move beyond competence trust to achieve goodwill trust, with firms doing more than their explicitly stated commitments

Staff at the processor worked hard to ensure that a place in the improvement work could be found for all of the firms. In addition, they developed an approach that was sustainable, as it was not focused on quick wins, but a longer approach of at least three years’ duration. Even at the early stages of the work they held informal discussions about developing the programme into a supplier association programme.

The second phase also involved the development of withheld power with a common set of metrics and attention paid to the fact that all the firms involved needed to see some benefit from the work. An example of the withheld power was the ‘quiet word’ to packaging firms when they appeared not to be giving their full commitment. They got reassurance that their involvement would benefit their firms and lead to a longer-term relationship with greater profit potential to all involved.

The second phase of activity moved the relationship set from a competence-based trust to the start of a goodwill trust where individual actors are starting to do things for the common good of the group rather than their individual benefit. This type of two-phase development has proved to be beneficial to the firms involved, but it may not be suitable in all other environments. It was appropriate here because the environment involved:

regular repeated transactions (with daily or weekly orders);
the willingness to hold back from explicit power relationships and the use of ‘withheld power’;
an agreed common benefit in working together;
a specific non-commodity product;

appropriate outside facilitation to make concerns explicit.

 

to illustrate the point, we will take the example of a single power lens as advocated by Cox (2001a, 2001b, 2001c).

Using a development of Cox’s power regime approach we can develop a power map for the physical movement of product , with the width of the arrows proportional to the cash flows, and the figures in circles representing the total business turnover of each firm. Following Cox (2001a), the symbols represent:

<

buyer having power over supplier

>

supplier having power over buyer

=

interdependence

0

independence

 

The retailer holds power over the processor, primarily owing to size and ability to switch to cheaper imported product. The processor holds power over the can and carton maker as well as its inbound transporter. The processor has a relatively interdependent relationship with the outbound transporter and, owing to their low reliance on each other, a relatively independent relationship with the pallet supplier. The processor appears to hold power over the growers, but the governance structures between the two mean that the processor is owned largely by the pineapple growers.

It should be possible to interpret where successful supply chain relationships and development are possible, and where existing power regimes would preclude their effectiveness. According to Cox, a supply chain approach will only work where there is buyer dominance or buyer–supplier interdependence. So we can predict that the processor will be able to encourage the transport firms and packaging suppliers actively to take part, but find it very hard to engage the other firms. However, a different picture emerged. In gaining agreement and commitment to the programme, various difficulties appeared, which could not completely, or even largely, be explained by existing power regimes.

As the programme of activities aligned closely with the retailer’s strategic objective, the retailer was enthusiastic about the programme. In addition, the growers were enthusiastic because it was ultimately to their benefit for the processor to produce a better financial result. The other company that showed the greatest enthusiasm was the outbound transporter. However, this owed little to the interdependence it enjoyed with the processor, and more to the perceived threat and risk that it felt in potentially losing business.

In addition, the inbound freight firm was not brought fully into the initiative in the early stages – but this was more to do with the commitment levels of the individuals involved, and once the discussions became more operational there was a much higher level of personal engagement. The pallet firm similarly did not take a very active part – but the reason appeared to be that improvements to the supply chain would probably reduce the number of pallets required. It also seemed that the packaging suppliers were only paying lip service to the work and were offering only marginal benefits. Their lack of involvement can be explained in two ways: firstly, the individuals involved saw little in the work in terms of career development; secondly, and more importantly, they did not trust the processor because of a history of adversarial price reduction demands.

The reactions and involvement of the different projects were sensible and indeed logical from their perspective. However, their responses cannot adequately be explained simply through a power lens. By viewing each company through each of the five lenses – power and dependency, risk, trust, ownership and governance structures, commitment – their behaviour can be both understood and explained  but in each case one variable was pre-eminent in shaping the behaviour. The pre-eminent variable for each firm is shown by a black box against the relevant variable. During the study it was possible to:

1) see how each less engaged firm could be brought on-side more readily and quickly; and

2) understand what was motivating the highly engaged firms and try to ensure that this factor was built upon to sustain the firm’s positive role. In addition, it should be possible to repeat the multi-lens assessment periodically, as inevitably some of the variables will change in importance and weighting.

 

Conclusion

Returning to the research questions

We have attempted to address four questions. The first sought to understand how three well-established variables (power and dependency, trust and risk) impinge and explain the actions of actors within a supply chain. It has been shown that each of these lenses has proved helpful in understanding the motivation of behaviour. However, we have demonstrated that none of them, on their own, can adequately explain the behaviour of any one of the actors.

Linked to this first question, the second question was to explore which of the three variables might be more important in shaping the actions of each actor. The analysis presented  above shows that each of these variables was the single most important factor in explaining some behaviour. Power and dependency was most important for the pallet supplier, risk was most important for the outbound transporter and the canner, and trust (or lack of it) was most important for both can and carton suppliers.

Our third question sought to understand whether there are any other important variables in addition to power, trust and risk. It was clearly established that it was not possible – in this particular case – to explain the behaviour of the firms using the three variables. We found two additional factors that were pre-eminent in explaining behaviour in at least one of the firms involved. These were the ownership and governance structures (most important for the growers) and personal commitment (most important for the retailer).

The last research question was contingent on there being a complex set of explanatory variables at play – which there did indeed prove to be. Gaining a more detailed understanding of the different variables at play might improve supply chain management through better relationships and more effective improvement activities. This was achieved in two ways. First, an explanatory model was developed to supplement our description of what was happening within the case; second, a framework was constructed that summarizes the impact of the different variables on each of the actors, and shows which was most important in influencing behaviour. We found that only a deep understanding of the actors would yield a full picture of all the different causes and effects.

Managerial lessons

This research has perhaps three important managerial lessons. The first is that taking a simple ‘everything can be explained by one variable’ approach was not appropriate in this study. This was highlighted by showing how using a single lens – power – led to a poor understanding of what might be occurring. Although this may be appropriate in rare examples, we believe that such a single-lens approach is very limited – and quite dangerous, as inappropriate solutions may be generated.

The second managerial lesson is that a multi-lens approach helps ensure that a better understanding is developed, which can lead to further stages of analysis and solution development. In this case the most appropriate five lenses were power and dependency, risk, trust, ownership and governance structures, and commitment.

As a result an explanatory model was presented, which may prove a useful framework for establishing closer long-term relations within a supply chain setting, particularly where:

there are regularly repeated transactions;
there are (or could be) common goals;
stronger actors are willing to withhold power for the good of the whole supply chain;
products or services are in some way bespoke or unique; •there is appropriate outside facilitation to make concerns explicit.

However, a caveat is that the five variables used here may not be the most important variables in all other cases – although they may provide a useful starting place for a discussion.

Gautam Koppala,

POME Author

The final managerial lesson is that, either on a one-off occasion or better still on a periodic basis, using a framework to help understand and explain the behaviour of actors is likely to be the first step in developing a better and more sustainable set of relationships, which will result in a more effective supply chain.